Women and Money Part 4
This week we'll talk about Living off of Your Wealth.
I’m positive everyone reading this has heard of CPP(QPP), because from the moment you received your first paycheque, a portion of it was automatically deducted and pooled into pension funds with every other working Canadian. CPP(QPP) is a government pension fund designed to assist Canadians during retirement by providing them with a monthly income. The amount you receive throughout your retirement is calculated based on your total contributions and the length of time during which you were a contributor and is fully taxable. One thing that many people fail to realize is that CPP(QPP) payments do not happen automatically – there is an application process that must occur before you can begin to benefit.
The Old Age Security program is financed from Government of Canada general tax revenues – you make no direct contributions to this program. The Old Age Security pension is a taxable monthly benefit available to most Canadians 65 years of age and older. The amount received is determined by how long you have lived in Canada and based on your income levels at the time of receipt. It is said to be an “income tested benefit”.
Some people have an employer-sponsored pension plan and that will be one of their most important sources of retirement income. It's easy to see why there is so much confusion about company pension plans. Employer-sponsored pension plans are as varied as the companies that offer them, with numerous choices and options – and lots of puzzling terms like “vesting” and “flex benefits.”
There are two basic types of registered employer-sponsored pension plans, regulated by government:
Defined Benefit (DB) pension plans "define" or guarantee a specific pension amount paid to you regularly from when you retire for the rest of your life. The amount of your DB pension benefit is set according to your age, length of service and your salary. Over 85 per cent of all Canadians enrolled in a pension plan are in a defined benefit plan.
Defined Contribution (DC) pension plans, also known as money purchase plans, do not guarantee the amount of future benefits. Instead, DC retirement income depends on accumulated contributions and the investment returns earned by these contributions. With a DC plan, your contributions are combined with your employer's contributions, plus the investment earnings on these contributions, to purchase a life annuity contract that pays you retirement income.
Certain smaller businesses have employee Group Registered Retirement Savings Plans (Group RRSPs), regular contributions are deducted from your employment income. It's important to remember that the total contributions into your Group RRSP, plus other personal RRSPs, cannot exceed your personal annual maximum contribution limit.
Deferred Profit Sharing Plans, are funded solely by your employer and do not have the same rules as registered pension plans. With a DPSP, the size of your retirement benefit depends on how well the investment performs over time.
An important thing to note is that all these plans counts towards your RRSP contribution room.
The sources of income on this slide should be viewed as supplemental rather than a primary source of funding.
According to a survey conducted by Investors Group approximately 30% of Canadians think they will not have enough money to pay their basic retirement living expenses, meaning they may have to return to the workforce post-retirement. This additional income, even if a small amount, can go a long way to pushing back your full dependence on your retirement savings. However, it can also have an adverse effect on other income tested benefits. We’ll touch on this in a few slides.
Although both single and married individuals may move many times during adulthood, relocating in later life often involves “downsizing” to a smaller home. Older adults are frequently interested in having less space and fewer home maintenance responsibilities. For some, selling the family home can be the result of a disability, an illness, or the death of a loved one. For others, this transition is based on a desire to be near family or to experience a new retirement lifestyle in a different area of the country. Whatever your reason for downsizing, it can come with two main financial benefits: (1) you generally reduce your utility bills, home insurance and property taxes, and (2) the proceeds from the capital gains due to appreciation are tax-free, assuming the house was your primary residence.
It’s important to remember that selling a house does not always generate the level of retirement income that one would think. Remember that if you plan on staying in the same area, you will be buying back into the same market that made your house appreciate in value.
And finally you can also borrow money from the bank using your home equity as collateral. Many retirees do this to help pay for renovations, new cars or vacations. This can be very helpful, especially because you can often get loans at favorable interest rates, due to the backing of your equity.
If you were a stay-at-home parent for a period of time, be sure to mention this when you are applying for Canada Pension Plan benefits.
The amount of the benefit you or your survivor receives is based on how long and how much you have contributed to the Plan and, in some cases, the beneficiary's age.
The CPP takes into consideration that caring for young children can mean leaving the work force or working fewer hours. If your earnings either stopped or were lower because you were raising your children under the age of seven, you can ask the CPP to exclude that period of time from the calculation of your benefit.
To make sure that these periods of low earnings do not reduce your pension later, the CPP can apply the Child Rearing Provision. This means that the CPP does not count the years when you were raising your children under the age of seven when calculating the amount of your benefit. By doing this, you get the highest possible payment.
Here’s an example of how this works:
Julie was employed outside the home until her daughter, Elizabeth, was born in 1983. Julie stayed at home with Elizabeth until she started school in 1989. When Julie applied for her pension some years later, the CPP excluded the period from the month following Elizabeth's birth to 1989 when calculating the retirement pension amount Julie should receive. When her pension application was approved, Julie discovered that her monthly payment would be $735 per month. Without the benefit of the Child Rearing Provision, her retirement pension would have been $650 per month.
Of course, this is something we will advise you on and help you take into account as you approach retirement.
Our approach to creating your Retirement Paycheque looks at every income source you will have in retirement and provides you with a consolidated picture of where you’re at. We’ll look at the tax implications of the money you’re receiving and if possible, suggest alternatives again designed to help your money last longer.
We can even help you consolidate all of your sources of income into a single bank account that generates one, single monthly paycheque that’s as tax efficient as we can provide. It can be just like when you used to get bi-weekly paycheques from your job – regular and dependable.
The beauty of this process is that it’s a hands-off, no hassle approach to simplifying your retirement.
So is this were it all ends? Certainly not!