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We can estimate retirement income in stages: 1) the period from Wayne’s age 62 in retirement to his age 65 with Lilly still working, 2) when Wayne is 65 and drawing CPP and OAS and Lilly is still working, and 3) when both are retired and both drawing CPP, OAS and company pensions.

Retirement income

In stage 1, income will be Wayne’s $40,164 annual pension plus a $8,244 bridge to 65 and Lilly’s $43,903 salary, and $4,767 RRSP income total $97,078. In stage 2, they will have Wayne’s $40,164 pension without bridge, Lily’s $13,788 pension, her $1,716 bridge to 65, his CPP of $13,077, his OAS of $7,384 and RRSP income of $4,767 for total income of $80,896. That would last until stage 3 when their income would be Wayne’s $40,164 pension plus Lily’s $13,788 pension, plus CPP benefits of $13,077 for Wayne and $8,858 for Lilly, two $7,384 OAS benefits and $4,767 RRSP payouts for total income of $95,422.

Assuming they split eligible income, apply eligible pension income and age credits and pay 14 per cent average tax in each stage, they would have monthly after-tax income of $6,960 in stage 1, $5,800 in stage 2 and $6,840 in stage 3. That would easily cover their anticipated spending. An accumulating surplus could pay for the boat or RV or some part could go to a TFSA for a permanent emergency reserve.

Wayne and Lilly can buy the boat or the RV, travel, donate to good causes, or increase financial security by investing their surplus in TFSAs. They have left planning their future to others, but they would do well to take charge of their plans to make the most of their secure and ample resources.

e-mail andrew.allentuck@gmail.com for a free Family Finance analysis

3 Retirement Stars *** out of 5

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This simple example may, at first glance, seem counter-intuitive. After all, with the RRSP Shira is paying tax on the dividend income at her full, ordinary Alberta tax rate of 30 per cent and if she went the non-registered route, her dividend income is only taxed at a 10 per cent marginal rate on eligible dividends. But, of course, her “net” investment in a non-registered investment is lower, and thus her dividend income is lower, because she had to pay 30 per cent tax on her employment income before she could invest.

Another way to look at is that by contributing to an RRSP, you are effectively getting a 100 per cent tax-free rate of return on your net after-tax RRSP contribution. In this case, Shira’s net (after-tax) RRSP contribution was $2,100 (i.e. $3,000 X (1 – .30)), which at a five per cent return, yields $105 of effectively tax-free dividends.

Finally, I would argue that even if your tax rate is higher in the year of withdrawal (or ultimately, in the year of death) than it was in the year of contribution, you could still be better off with an RRSP than non-registered investments because the benefits of effectively tax-free compounding might actually outweigh the additional tax cost of a higher withdrawal tax rate. This, of course, will depend on your expected rate of return, the number of years of compounding available, as well as the types of investment income you might otherwise earn by saving an equivalent amount in a non-registered account.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

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Some provinces have high probate fees payable on death to validate the will of the deceased before distribution. These fees can be avoided by naming beneficiaries, holding assets jointly with right of survivorship, using insurance products, or by establishing joint partner or alter ego trusts. Some provinces charge flat fees for probate, while others charge a percentage. A small percentage of a large estate can still be significant. Despite the cost of probate, the time and effort required may be reasons to try to avoid probate as well.

The risk of living too long is an important possibility to plan for and a risk to mitigate when planning retirement. Family history may contribute to life expectancy, but someone can live to a ripe old age even if their parents did not. There is a 50 per cent probability of a 65-year-old man living to age 89, and for a woman, two years longer, to age 91.

Deferring the start of a CPP or OAS pension to as late as age 70 is a good way to plan for a long life expectancy. A pensioner who lives well into their 80s may be better off in the long run, despite a delay to their pension in the short run. It may mean they need to draw down on their investments earlier in retirement while they hold off on government pensions, but this can be a beneficial strategy for someone who does not have a DB pension plan from their working years. CPP and OAS are increased for every year they are deferred, up until age 70, and are also indexed annually to inflation.

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Olivia’s total invested financial assets, $492,000, put her in a position to hire an investment manager for fees well below the 2.6 per cent average charged by mutual funds. She could have the liquidity she needs, tax planning for when she is 71 and has to convert her RRSP to a Registered Retirement Income Fund and perhaps even better returns along the way. Those fee savings could go straight into her TFSA.

A custom portfolio would be structured and traded for her needs rather than the needs of others. As well, a restructuring of her investments and her tax rate, which will rise when she starts taking Canada Pension Plan and Old Age Security benefits, would be valuable.

Shopping for custom management would be worthwhile, Einarson says.

There are two final matters Olivia should consider.

First is the problem of care, should she need it. At her age, long-term-care insurance policies are costly and constrained in terms of their payouts. She could discuss arrangements for care and how it will be financed with her family as a form of pre-testamentary transfer of wealth, Einarson suggests.

Finally, Olivia also needs to consider what will happen when she passes away, for she has no spouse to whom she could transfer assets. Her capital is substantial and death will be a costly event if her registered investments still contain significant taxable sums.

Those scenarios should be years away. Olivia is healthy and employed, and her income before tax, $90,000 per year, gives her many investment and lifestyle choices. She is headed to a solid retirement.

Retirement stars: Three *** out of five

Email andrew.allentuck@gmail.com for a free Family Finance analysis.

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What is still unclear from this research, however, is whether by excluding capital gains from income, we are excluding individuals whose primary source of income annually is significant capital gains, who arguably are the so-called “rich,” as opposed to the small business owner (or real estate owner) who sold their business (property) and reported a one-time, significant capital gain that moved them into a higher tax bracket for that single year alone.

Canada vs. the world

The Fraser Institute report also compared Canada’s capital gains tax rate to that of other countries and found that Canada’s top capital gains tax rate (27 per cent) is currently above the average for countries in the Organization of Economic Co-operation and Development (OECD), and substantially above the rate in Britain (20 per cent) and the United States (20 per cent).

That being said, with the inauguration of U.S. President Joe Biden this week, and Democratic control of both the House and Senate now established, it’s quite possible that Biden’s pre-election platform to effectively increase the tax on capital gains by treating them as ordinary income for taxpayers earning more than US$1 million could actually be passed. Combined with his plan to raise the top rate on ordinary income back up to 39.6 per cent (from 37 per cent), it would nearly double the current long-term capital gains tax rate.

As for Canada, “raising the capital gains tax rate would weaken Canada’s ability to attract investment and adversely affect our economic recovery,” concluded Clemens. “Canadians across the income spectrum — and the economy as a whole — would benefit from a lower, not higher, capital gains tax rate.”

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

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In Ontario, a couple we’ll call Hank, 55, and Judy, 56, have built their lives with a lot of assets — and a lot of debt. They take home $11,463 per month from their jobs, his with a transportation company, hers with a petrochemical firm. They’ve lived in Canada for 20 years, raised two children to their mid-20s. Now they want to plot their retirement in 10 years.

Their problem is the debt. They must slash it if they want afford to move to someplace warm year-round for their retirement.

They have loans of $789,200 including a home mortgage of $452,000, a mortgage on a rental unit for $225,000, $12,000 for RRSP loans, an unsecured $35,000 line of credit, and $48,200 for car loans. Their $1,955,000 of assets less $789,200 liabilities leaves them with net worth of $1,165,800.

E-mail andrew.allentuck@gmail.com for a free Family Finance analysis.

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Hank and Judy. His plan — make their portfolio more tax efficient, cut risk and redirect savings to get to a goal of $80,000 in after-tax retirement income (or between $100,000 and $110,000 before taxes).

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Victoria, for her part, makes her qualifications clear. “In terms of my credentials, I’m a financial coach, not a financial advisor. So my goal is to help you find the resources around topics, but I do not provide individual investment advice.”

Victoria later said her social media manager took down the video about how to invest $1,000 because it could potentially be misconstrued as giving advice.

“It (was) a fine line between showing people what is available and what I personally like versus what people could take as advice,” she wrote in a follow-up message.

Fulmore said she is currently working towards getting certified as a financial planner.

Heath, for one, takes no issue with the lack of credentials.

“Just because somebody is older or even holds a certain regulated financial title, it doesn’t mean their advice is necessarily good or is necessarily better,” he said. “There are plenty of baby boomer financial planners, with plenty of experience, who give bad advice.”

As well, he was impressed by Victoria’s video on how to invest $1,000.

There are plenty of baby boomer financial planners, with plenty of experience, who give bad advice

Jason Heath

“A lot of people in the financial industry do a poor job of communicating complex topics to consumers and that creates a void that these TikTokers are filling,” he said.

Relying on generic advice when personal finance is supposed to be, well, personal is a drawback, but not one unique to TikTok.

“Nobody should be getting all their financial advice from any one source,” Heath said.

Oriana Gomez, a 23-year-old barista at an upscale Italian cafe in Toronto, heeds that message. TikTok, for her, became one of the many tools in her arsenal she uses to achieve financial security.

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The stats released also show a breakdown of TFSA holders by income level, with 52 per cent of TFSA holders reporting a total income of under $50,000 on their 2018 return. The average TFSA balance at Dec. 31, 2018 of $20,300 was pretty consistent across all income brackets from $20,000 up to $90,000. For those with total income above $90,000 and up to $250,000, the average balance was slightly larger at about $27,000. For the highest income-earners, or those Canadians with an income of over $250,000, the average TFSA balance was just shy of $43,000.

Of course, with all this talk of TFSAs, let’s not forget that we are in the middle of RRSP season, as you only have until March 1, 2021 to contribute to your RRSP to be entitled to claim a deduction on your 2020 return. For 2021, the new RRSP dollar limit is $27,830 or 18 per cent of your 2020 earned income, whichever is lower, less any pension adjustment from your employer. (You have until March 1, 2022 to make this year’s contribution.)

When asked whether someone should contribute to an RRSP or TFSA, my standard reply is: “Both!” But for most people, that’s simply not an option due to a lack of funds, so it’s important to point out a few critical differences between the two savings plans.

First, with a TFSA, there’s no maximum age limit to contribute, unlike an RRSP, to which you can only contribute up to, and including, the year in which you turn 71 (unless you have a younger spouse or partner). This makes the TFSA an ideal vehicle for seniors over the age of 71 to continue to shelter their investment income or even to contribute the after-tax value of their mandatory annual RRIF withdrawals. The newly-released stats show that nearly 19 per cent of all TFSA account holders in 2018 were age 70 or older.

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“A potential explanation for this phenomenon is that consumers with mortgages in areas with high house price growth have been shielded from insolvency over the past few years by the growing value of their home (e.g. the ability to extract home equity to consolidate their debts or sell their home to pay their debts),” it states. “Conversely, non-mortgage holders in hotter housing markets have missed out on the benefits of house price appreciation, while still bearing the costs associated with living in affordability-challenged areas (e.g. higher rents).”

In line with this possible explanation, the memo says, is that in British Columbia and Ontario, home to the pricey real estate markets of Vancouver and Toronto, the share of insolvencies filed by mortgage-bearing consumers had fallen sharply. Meanwhile, in the rest of Canada, those insolvencies had remained steady.

Recent public-opinion surveys have suggested that consumers have not forgotten about the risks posed by rising rates either.

A Royal Bank of Canada “Home Buying Sentiment Poll” found 45 per cent of those polled were concerned about interest rates in the coming year. And a recent poll conducted by the Credit Counselling Society, a non-profit that aims to help consumers manage their finances better, found that 31 per cent of Canadians it surveyed were having trouble paying down their debt, even with interest rates so low.

“If consumers don’t make a concerted effort to reduce their … non-mortgage debt over the next two to four years, and then rates start to go up — that could have a material impact on mortgage rates, which could have an impact on rental rates — then consumers will put themselves in difficulty,” said Scott Hannah, chief executive of the CCS, in an interview. “So that’s the challenge that we throw out there for consumers is, if you don’t get your financial house in order over the next three to five years, pay off your consumer debt, set aside three to six months’ worth of living expenses for emergencies, you’re going to be susceptible to the next thing, whatever that is.”

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Nevertheless, the husband persevered. A little more than two months later, he brought yet another application seeking severance and also asked the court to dismiss the outstanding claim by his wife for spousal support for delay, since she had not proceeded with her claim.

On the husband’s fourth attempt, he told a new judge that he actually did not need to comply with many of the disclosure requests, and, to the extent he would comply, as his wife’s lawyer’s refusal to meet with him in person to review the documents, he had been unable to do so.

After hearing arguments from the wife’s counsel, the judge ascertained that much relevant disclosure remained outstanding.

The judge agreed that if severance was granted and a divorce followed, the husband was unlikely to deal with spousal support and the remaining property claims. Not surprisingly, the judge also determined that the wife could not proceed with her spousal support claim because the husband had not provided disclosure.

The judge dismissed the motion for severance as well as the husband’s request to have the wife’s spousal support claim dismissed for delay.

The court also ordered the husband to pay costs of more than $6,700 within two weeks and refrain from making personal attacks and derogatory statements when communicating with the wife’s lawyer. Finally, the husband was not allowed to bring a further severance application without first obtaining leave of the court.

It seems obvious if the husband had put as much effort into fulfilling his disclosure obligations as he did in trying to divorce his first wife, he would long ago have been married to his new love.

Laurie H. Pawlitza is a senior partner in the family law group at Torkin Manes LLP in Toronto.

lpawlitza@torkinmanes.com

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