Vital Knowledge for Canadian Retirement Planning by Megadox

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									    THE TEN MOST COMMON
    ERRORS OF RETIREMENT
          PLANNING



   Waiting too long to start saving
                   ~
  Not having a systematic system
to save money and to keep it saved
                   ~
 Keeping too much money in GICs
and other low-interest-bearing plans
                   ~
  Not owning a sufficient amount
     of long-term life insurance
                   ~
  Not taking advantage of income
     splitting opportunities with
  appropriate spousal contributions
                   ~
Not making use of a financial advisor
    or confusing him or her with
       an investment advisor
                   ~
     Not having and maintaining
          an up-to-date Will
                   ~
   Not knowing what government
         benefits belong to you
                   ~
    Not fully understanding what
     retirement income options
             are available
                   ~
    Not planning your retirement
     activities before you retire




              1
               Copyright © 2000

               Lyalta Publishing

               All rights reserved.

               Published by Lyalta Publishing
               1403 - 2nd St. SW
               Calgary, Alberta T2R 0W7

               Telephone: (403) 233-2558
                              1-888–322-2558

               Fax:           (403) 266-7078

               E-mail: lyle@chimofinancial.com
               Web Site: www.chimofinancial.com

               ISBN 0-9699101-7-7

               Printed In Canada



        Updated December 2003


Lifestyle Management is actually what you are doing
at all stages of planning. Estate Creation, Estate
Conservation and Estate Distribution are all integral
parts of the process of retirement planning. As
advisors, we think of retirement planning in the context
of the many lifestyle decisions to be made.

This booklet is not meant to be an answer to all of
your questions. Rather it is intended to help provide
some concepts and programs that should be considered
by you and your financial advisors.

If any aspect of this booklet is not clear, or if you have
questions that are not answered adequately, our advice
is that you should consult your financial advisor for
clarification.

                                 2
             CONTENTS
Introduction ........................................        5

What is Retirement - Retirement Planning?........ 6

Four Distinct Planning Phases................                7

Vesting. .................................................   11

Old Age Security...................................          11

Indexing ...............................................     12

Claw-back provision...............................           12

Guaranteed Income Supplement. ..........                     12

Canada Pension Plan (CPP)...................                 13

What is an RRSP?.................................            14

Spousal Contributions............................            17

Employer-Sponsored Retirement Plans...                       17

What is a Pension for Life? ..................               18

What is a Fixed Period Plan? .................               18

What is a Defined-Benefit Pension?........                   19

What is a Defined-Contribution Pension?.                     20

What is a Retiring Allowance ..................              21

What is an Annuity?...............................           21

What is a RRIF? .....................................        24

What is a LIF? .......................................       25

 What is an LRIF? .................................          27

Common Financial Concerns. ................                  27

How Much Will You Need? .....................                27

Why You Need Professional Advisors .....                     32

                              3
How to Choose a Financial Advisor ........                   34

Professional Designations .....................              36

Elements of Comprehensive Planning .....                     37

Four Sources of Retirement Funds ..........                  39

How and Where Should You Buy RRSPs?...                       39

What are Mutual Funds? ........................              40

What are Segregated Funds? .................                 40

Disability Income ....................................       42

Critical Illness .........................................   42

Long-Term Care ......................................        44

What About Medicare? ...........................             45

Other Useful Products ........................... .          45

Offshore Tax Havens .............................            46

Oil Wells and Flow-through Shares ........                   47

Self-directed Trusts ...............................         48

Taxation ...............................................     49

Capital Gains......................................          51

Capital Gains Protection.........................            52

RRSP/RRIF Protection.............................            53

Revocable Living Trust ........................              54

Wealth Accumulation Trust.....................               54

Taxation of Life Insurance Death Proceeds...                 55

Eclectica ..............................................     57

Wills Planning .....................................         62

Happy Retirement .................................           63
                                          4
                 Introduction

George S. Clason expounded upon the
theme of “Pay yourself first” in 1926, in his
book The Richest Man in Babylon. Financial
institutions, especially banks, life insurance,
and trust companies, advanced these basics
of financial planning in order to promote the
importance of saving money.

The idea of tithing is very old—perhaps
ancient. It’s natural, then, to expand the
concept to pay yourself a tithe of 10% through
a program of saving. Even if that was the
total amount of your savings, you would have
saved a tidy sum prior to retirement.

Most people have found it easy to save
money for the future; it’s just difficult to keep
it saved. Planning for retirement before you
have started to live is not the most exciting
topic for most people before the age of forty.
This booklet does not fully address the subject
for younger people. Nevertheless, there may
be some valuable information for all ages,
contained within these pages.

Specifically, this booklet is directed towards
three main age groups:

•     Accumulation Phase - ages 40 to 60

•     Retirement Phase - ages 60 to 70

 •    Post-Retirement Phase

Keeping it saved is easier said than done.

                   5
For many people, retirement is a major event,
but not much time is invested in preparing for
it. Today, more than ever, most people need
assistance in developing and implementing
realistic retirement goals.

How many people really think about and plan
for a retirement life-style? How many plan for
the adjustments that come with the event of
retirement? Where will you live? Who are your
retirement friends? How will you spend your
time as a retiree? There are lots of decisions
to be made. The first step is to recognize what
retirement decisions need to be made.


            What is Retirement

“Retirement” is defined as the act of going
away, retreating or withdrawing to a private
sheltered or secluded place. In modern
usage, it refers to a withdrawal from one’s
work, business, career or vocation. It implies
a definite change in life-style.

Some people retire from something rather
than to something. People who have been
active, planning strategies and making
decisions, may find idleness in retirement
somewhat boring.


           Retirement Planning

We cannot speak glibly of retirement planning
as one all-inclusive concept. It means
different things to different people, and it
varies considerably from one stage of life to
another.

                          6
Retirement planning is much more than
saving money for future delivery. Decisions
you make today about the future will affect
how you live today. Actions you take today
will determine how you will live tomorrow.

Your efforts creating your estate, preserving
it and planning the distribution of your assets
requires life-style decisions.

If you plan well for the future, whether you
live, die, become disabled or otherwise retire,
the remainder of your earnings can be used
for better living today.

This is the process of life-style management.


      Four Distinct Planning Phases

   • Your early working years

   • Your peak earning years

   • Your final approach to retirement

   • Your actual retirement years


            When You are Young

If you are twenty-one to twenty-five years old,
identifying your retirement goals is not
necessarily a priority issue. Forty to forty-five
years from now seems to be a very long way
off. However, looking back on forty years, it
seems amazingly short.

            It was only yesterday.

                   7
It is easy to demonstrate the advantages and
benefits of starting your savings program
early. Common sense suggests that the
earlier you begin, the better the results will
be. Nevertheless, an illustration prepared by
your financial advisor will demonstrate this
benefit dramatically.

        Your Highest Earning Years

These are the years when most people realize
the importance of accumulating long-term
assets for those still faraway retirement years.

There are only two sources of income—
people at work (earning income) or dollars at
work (investment income).

Accumulation of wealth is a study on its own,
but it is important for each individual family to
comprehend the value of doing what is right
for its members.

For some people, a company pension plan
is the cornerstone of, or the foundation for, a
secure retirement program. Augmenting the
company pension plan with RRSPs or some
other form of tax-sheltered program is usually
advisable.

Some entrepreneurs look to their business
ventures to accumulate the necessary wealth.
The focus is in developing or building a
business, which can be sold profitably.

In some cases, your business may continue
to provide an income even after retirement.
With many entrepreneurs that is a goal for
which they plan and work.

                            8
Some entrepreneurs actually never do retire,
but rather, they continue in some capacity,
perhaps advisory to the new management—
sometimes family members. Retiring from
something they really enjoy doing may not
be their most wonderful dream. It may entail
giving up a lot of valuable friendships and
cherished habits.

For some people, accumulating wealth the
“old-fashioned” way is a very important
consideration. What’s the old-fashion way?
Inheritance. For those who will inherit a
sizeable estate, retirement planning is a
different matter.

During these precious high-earning years,
investing well may be a most significant
exercise. Your financial advisor can be very
helpful in showing you how to keep what you
have saved. Ask him or her how to do it.

            The Final Approach

Don’t you just love it when the pilot comes on
the intercom and says, “We are now on our
final approach.” Why doesn’t he say, “We are
on our destination approach”?

Nevertheless, when you hear this, you are
thinking about the things you must do when
the plane arrives at the terminal. You collect
your belongings. You must get your baggage
and proceed to customs or to meet friends
and family or take a shuttle bus or a taxi or
whatever. Usually you are very clear about
the procedure as well as where you are going
and why. You knew most of this before you
arrived at your destination.

                  9
However, as you approach your retirement
destination, there may be many decisions that
you must make.

 •    How should you take your pension
      funds?

 •    How does any decision affect your
      spouse if you die first?

At this stage, you need to sort through your
retirement alternatives and develop a plan to
best accomplish your objectives. Your
financial advisor can demonstrate a variety
of options for you. Studying the various
approaches may be very beneficial to a
smooth landing.

            Your Retirement Years
For some people, retirement means an
extended vacation. You may plan to travel
more, golf more or return to school, or you
may take up a new vocation. Whatever your
situation in retirement, a periodic review with
your financial advisor is valuable.

Financial planning begins with the first
decision you make and continues throughout
your lifetime. In some ways, your decisions
may survive beyond your lifetime.

In the early years, your planning involved
wealth accumulation. In the middle years and
in retirement, it includes estate conservation.
In your later years, you may face many
decisions about estate distribution. Your need
is to make the best use of your financial
resources to provide and support a
sustainable level of income.

                          10
Financial planning is a work in progress. It
doesn’t finish on the day you announce your
retirement. In the larger picture, you are
managing your life-style.

                   Vesting

When does your company plan vest in you?
“Vesting” is the industry jargon for when you
acquire the right to pension benefits paid into
your plan by your employer.

Once vested, these benefits belong to you
even after you leave your employer. The
vesting rules may vary from province to
province. Your financial advisor can tell you
what they are for your province.

Even though the assets belong to you, you
may not be able to take them prior to a specific
age, depending on the contract.

 However, you can roll them over to a locked-
in RRSP. By doing so, you may obtain a higher
rate of return, and considerably more flexible
and manageable investment options.


          Old Age Security (OAS)

Old age security is a universal benefit
available to you at age 65 providing you meet
Canadian residency requirements. You must
have lived in Canada for at least ten years to
receive any payment. Since 1977 , it has been
necessary to live in Canada for forty years
after age eighteen to qualify for the maximum.
Currently the maximum benefit is $461.55.
This is an indexed benefit.

                  11
                   Indexing

Indexing means that for any increase in the
consumer price index there will be a
corresponding increase in the old age security
payments. A reciprocal social security
agreement between Canada and another
country, (e.g. the United States), may allow
you to add in your period of residency in the
other country to determine your OAS
entitlement.
.
            Claw-back Provision

Depending on your tax bracket, you may not
be able to keep all of your OAS since this
benefit is taxable. Higher income results in a
higher income tax. Since 1989, a special tax
has been applied to effectively reduce your
benefit. Any earnings in excess of $57,879
will cause some of your OAS benefit will be
“clawed back.” At $94,530 of taxable income,
you would lose the entire benefit. This may
be a reason for considering income splitting
between you and your spouse.

      Guaranteed Income Supplement

Low income earners receiving the old age
security benefit may also qualify for the
guaranteed income supplement.

If an individual has no income, he or she may
qualify for up to $548.53 per month tax-free.
Couples, who are pensioners, with a
combined income of up to $24,576 may qualify
for a total of $818.85. These calculations are
on a sliding rate scale which makes it difficult
to maintain up to date figures.

                          12
This is also an indexed benefit and thus the
amounts are subject to change. In addition
to this, some provinces provide a low-income
supplement. You can check current figures
on the internet.

        Canada Pension Plan (CPP)

The Canada Pension Plan and the Quebec
Pension Plan are both mandatory contributory
programs. If you are employed by a company,
your company pays 50% of the premium. Your
contribution is made through payroll
deductions.

If you are self-employed, you must pay the
full amount. It is a percentage of your income.
When the program was first introduced,
contributions were set at 1.8 % of pensionable
earnings.

That amount has increased until in 1998 it
became 5.85 percent. It will increase to 9.9 %
by 2003. It is supposed to remain at 9.9 percent
thereafter. The maximum pensionable
earnings, for 2003, are $39,900. CPP sends
out a Statement of Contribution periodically
so you can monitor your progress.The
maximum combined contribution is $3603.60

To check on current changes to these fiqures,
periodically, you can call 1-800 277-9914.

As you get closer to retirement, you may
want to find out what your expected ben-
efits will be. You can start payments any
time after age 60 up to age 70, once you
have retired. For every year prior to age 65,
there is a reduction in the amount you
receive.
                  13
Correspondingly, for every year you delay
payments up to age 70 , there is an increase
in the amount payable. The current maximum
at age 65 is $801.25

This benefit is payable to you for life, and it is
indexed for inflation.

There are some advantages to starting
payments early. First of all, you receive
payments for a longer time. It will take until
nearly age 78 to catch up if you wait until age
70, even at the increased amount.

Furthermore, if you do not need to use this
additional money, you can invest it at a higher
rate of interest—perhaps even in an RRSP.

Remember, these benefits are not automatic;
you must apply for them.

              What is an RRSP?

Considering all the advertising and hype
surrounding RRSPs each year, it is not
surprising that most people have some
knowledge of what they are and of how they
can be used.

“RRSP” is an acronym for registered
retirement savings plan.

An RRSP is one of the few remaining tax
shelters available to Canadians. There are
two significant benefits. First, the amount you
contribute (up to the prescribed maximum),
has an immediate tax benefit. The amount
contributed is deducted from taxable income.
It may, also, put you in a lower tax bracket.

                            14
The second benefit is that interest, dividends,
and capital gains are allowed to accumulate
tax-free with the RRSP until you withdraw the
funds—presumably at retirement.

Most people can expect a lower tax bracket
at retirement, but that is not always the case.
Some people are too successful, resulting in
a continuing high tax bracket.

However, you can continue contributions or
allow the plan to accumulate until the end of
the calendar year in which you turn age 69.

When your plan matures, you have several
options:

1) You can cash it out.

Doing so would result in the full amount being
included as income in that year. This is not a
viable alternative for most people.

2) You can purchase an annuity.

3) You can purchase a RRIF.

4) You can purchase both an annuity and
    a RRIF. (See page 23)

Current RRSP rules state that you must wind
up your RRSP by the end of December in the
year you turn age 69.

“Winding up” means that you must convert
your RRSP to one of the other options, i.e.,
cash, RRIF, or annuity. However, you may still
contribute to an RRSP for the next year or
two.

                  15
You can make future contributions. First of
all you are allowed to over-contribute up to
$2000 without penalty. However, you may also
contribute additional amounts for future use.
Of course, you must make these contributions
by December 31 of the year you reach age
69.

These over-contributions would attract a
penalty of 1% per month. However, if you
convert this overpayment early in January of
the following year, your penalty is for only one
month.

The amount you can use is determined by
the amount of eligible income you actually
have in the following year. On any additional
amount that you have over-contributed for
use in the second year, you would pay the
penalty of 1% for 12 months.

This may be a small sacrifice considering the
tax saving.

There are many other strategies that can be
used with your RRSP. For example, you can
contribute to your younger spouse until he or
she reaches age 69—providing your spouse’s
plan has room to allow it.

           Spousal Contributions

If your spouse is in a lower income tax
bracket, or will be in retirement, an effective
strategy is to contribute to a spousal plan.
You can contribute all or a portion of your
current RRSP limit. This is an effective form
of income splitting.


                          16
 Employer-Sponsored Retirement Plans

There are a number of plans available, that
qualify as pension plans:


     • Defined-benefit

     • Defined-contribution

     • Deferred profit sharing

     • Individual pension plan

     • Group RRSP s

There are benefits and drawbacks to each of
these plans. Depending on which plan you
have, there can be significant differences in
the amount of benefit you will receive.

Understanding your plan is fundamental to
retirement planning. This understanding
would be useful, also, if you are considering
a career or company change. If you know how
much your plan will pay at retirement, you can
determine how much additional income will
be required, if any, to maintain your life-style
and meet your retirement objectives. Also,
you should understand the options in your
pension plan, so you can determine how best
to receive your benefits.

There are usually three basic options:
 • a pension for life

 •      a guaranteed minimum fixed period

 •      a joint and survivor benefit

                    17
        What is a Pension for Life?

A pension for life will pay you a maximum
amount until your death. This plan pays the
most, but if the annuitant dies too soon, there
is no refund for your estate or your family.

 Ask your advisor how life insurance can be
useful in this situation.


       What is a Fixed Period Plan?

A fixed period plan will pay a specified amount
for life, but, if you die, it is also guaranteed to
pay to your spouse or estate until the end of
the period chosen. This option will provide
somewhat less than a pension for life, but it
is guaranteed for a specified number of years
or to a specified age.

A joint and survivor plan pays a specified
amount as long as you or your spouse
survives. This option may provide less income
than some other options, but it may suit some
situations better.

There are variations that can be helpful, such
as having the payment amount reduced to
75% of the total, after the death of one of the
partners in a joint and survivor annuity.
Compare this strategy to the payout from a
term certain to age 90.

   What is a Defined-Benefit Pension?

A defined-benefit pension is a registered plan
that guarantees that you will receive a specific

                            18
amount at retirement. Your employer makes
contributions to the plan sufficient to
guarantee the benefit, which is determined
by a formula. Usually a factor of 1.5 to 2 times
your years of service, times earnings, is used
to determine the amount of pension.

There are some further refinements that may
be applied. Some plans use a flat amount
times the number of years. In this case, the
amount or level of your earnings is not a
factor—just the years of service.

Some plans may use averages in determining
the earnings factor:

  • Career average. Your earnings are
totalled and divided by the number of years
of service. The result is then multiplied by the
formula.

  • Final average. This is usually the
average of the last three years or the last five
years multiplied by the formula.

Other pension plan refinements include
inflation indexing, capping the maximum
number of years of service and integration
with the Canada Pension Plan.

All of these refinements can have a significant
effect on the amount of pension payout.

An understanding of the formula to be used
and how the calculations are made will allow
you to determine how much you will receive.
This information is vital in case there is a
shortfall in your planned program.


                  19
Knowing this early enough will give you time
to take strategic action.

 What is Defined-Contribution Pension?

A defined-contribution pension is sometimes
called a money purchase plan. You make
contributions to this plan and your employer
matches your deposits up to a specified
maximum. Revenue Canada has an upper
limit on the amount that can be contributed,
based on the RRSP guidelines.

In many ways, this plan functions like an
RRSP. The employee chooses the investment
option(s) and he or she assumes the
responsibility of managing it.

While there is more flexibility, there is also
less certainty as to the amount available for
retirement. This amount will be determined
by the contributions made to your plan each
year and the return on your investments.

From an employer’s viewpoint, there are
some advantages. Administration is less. The
investment decisions are shifted to the
employee and the employer does not provide
any guarantees.


      What Is A Retiring Allowance?

Retiring allowances include severance or
termination pay and court settlements for
wrongful dismissal. Perhaps the more
common source of a retirement allowance is
a payment to an employee for long service.


                         20
A retiring allowance is treated as income in
the year in which you receive it. You may have
a re-calculation made treating the proceeds
as though a portion was received and became
taxable in the year in which the right to receive
it arose. You may be able to save taxes on
this basis rather than paying taxes on the
entire amount as actually received.

There is a better way! In most situations you
can roll the fund into an RRSP and defer
taxes until the funds are withdrawn.

            What is an Annuity?

When your pension plan matures and the
payout begins, your pension money is usually
invested in some type of an annuity. There
seems to be some confusion about what an
annuity is and what it does.

To simplify the concept, it is best to think of it
as follows: The purchase of an annuity is
actually loaning your money to an institution.
The institution contracts to repay your
principal with interest in specified installments
over a certain period of time.

 •    It may be “life” only.

 •    It may be for life with a guaranteed
      minimum of 5 or 10 or 20 years, or to
      age 90 .

The amount of your investment, the number
of payments to you, the prevailing interest and
the life expectancy factor determine the
amount of each installment.


                   21
The purchase of an annuity eliminates all
control of your money and the need to
manage it.

You and your chosen institution are committed
by contract to the agreed upon terms. There
is no flexibility. For some people, this is a
drawback.

You should consider the following:

You cannot vary the amount of            your
installment payments.

You cannot withdraw a lump sum for special
use such as travel or a major purchase.

You cannot take advantage of increasing
interest rates nor stock market booms, nor
any other investment opportunities.

On the flip side, however, your installments
do not decrease when interest rates fall and
you cannot lose your principal in a stock
market crash or through an investment
opportunity that turns sour.

With an annuity, you are relieved of all
management responsibilities. One of the
arguments often used against an annuity is
that there is no return of principal if you die
after the guarantee period.

For example, with a life and ten-year certain
annuity, you are guaranteed 120 payments
minimum. The total of these payments may
only equal the amount paid in plus a small
amount of interest.


                          22
This argument usually overlooks the life
thereafter provision. In other words, you
should remember that it is 120 payments plus
life thereafter.

If you live for 20 years, that’s 240 payments—
guaranteed.

Some people like to use annuities to provide
the foundation for a sound retirement
program. With the remainder of the available
funds or proceeds from an RRSP, they may
purchase a RRIF —a registered retirement
income fund.

If your funds are all in your registered pension
plan, you may purchase a life income fund
(LIF).

Using a combination of an annuity and a RRIF
can provide the best of all situations. You can
have both a dependable basic income from
your annuity and a flexible source of income
from a more aggressively invested RRIF.

A variation on this theme is to purchase a
RRIF, a LIF or an LRIF contract, which contains
an option to convert some or all of your funds
to an annuity.

This approach would permit you to retain
control of the investment and to maintain
flexibility during the early years of retirement.

As you grow older, or if you reach a stage of
emotional and physical health where you no
longer want to manage your fund, you simply
convert to an annuity.


                   23
Another benefit of this approach is that it
permits you to select an annuity when interest
rates are higher.

There comes a point in life when the
guarantee of an adequate income is more
important than the responsibility of squeezing
out the maximum return while risking your
principal.

               What is a RRIF?
A RRIF is a registered retirement income fund.
It is used as an alternative to buying an
annuity with your RRSP funds. In fact, it may
be likened to a continuation to an RRSP ,
except that now you withdraw money from it
instead of paying into it.

All of the investment options that were
available to you in your RRSP are still
available in your RRIF . Thus you maintain
control of, and responsibility for, your
investments.

RRIFs are especially popular when interest
rates are low. Unlike an annuity with its fixed
amount pay out, your RRIF permits total
flexibility of withdrawals.

A RRIF allows you to withdraw an extra
amount if money is needed for an emergency
or for a special holiday. Of course, it would
also allow you to exhaust your fund
prematurely.

There is no maximum amount that can be
withdrawn. There is a minimum that you can
withdraw based on your age. This minimum
increases yearly as you get older.

                          24
 One strategy is to use a younger spouse’s
age for determination of the minimum
requirement. This approach allows you to
defer income tax for as long as possible.

The advantages of a RRIF are:
 • investment control

  •   flexibility of withdrawals

  •   a possibility of higher return

The disadvantages are:

  •   the responsibility of managing
      your investments

  •   the danger of withdrawing too
      muchtoo soon

  •   the potential of a lower return

  •   the shrinkage of principal in a
      market recession.

               What is a LIF?

Many people have funds in a locked-in RRSP
or a locked-in retirement account (LIRA). This
happens when an employee leaves a
company with vested benefits in their pension
benefit. Usually these employees have the
option of leaving their funds in the former
employer’s fund or moving it to a locked-in
plan. Today there is very little difference
between a locked-in RRSP and a LIRA. The
provinces using the term locked-in RRSP used
to have certain requirements that required the
purchase of an annuity.


                  25
A LIF (life income fund) now may be used, to
purchase an income plan similar to a RRIF,
with funds from either locked-in RRSPs or
locked-in LIRA s.

The major difference is that a LIF must be
converted to an annuity by age 80.

You are further required to begin taking an
income from a LIF within one year of the date
of starting the plan.

Before age 80, you can use a LIF much like a
RRIF. It has similar flexibility and minimum
withdrawal requirements.

Unlike a RRIF, there are maximum withdrawal
limits on a LIF. This maximum is determined
by calculating the amount received if the
funds had purchased an annuity to age 90.
The maximums may change each year.

There are some restrictions and limitations
that apply to a LIF. Firstly, you cannot use a
younger spouse’s age to determine the
withdrawal schedule.

Secondly, you cannot open a LIF until you
are within 10 years of your normal retirement
date as stipulated in your pension plan
contract.

For most plans, this would mean age 55.

The latest you can start the plan is December
31 in the year you turn age 69 . A LIF can be
used in most provinces, except that in Alberta,
Saskatchewan, and Manitoba, where an LRIF
supersedes a LIF.

                          26
              What is an LRIF?

An LRIF is a life retirement income fund. The
major difference is that an LRIF does not have
to be converted to an annuity. Also, the annual
maximum is calculated differently.

      Common Financial Concerns

When planning for retirement income, many
people share certain doubts such as; Will I
outlive my assets? Will my income keep pace
with inflation? Will I have enough retirement
income? Will I have enough for my spouse if
I die first?

      How Much Will You Need?

The answer to that question depends on
many factors, all depending on your decisions
about various life-style questions;
• When do you want to retire?
• Where do you want to live?
• How do you plan to use your leisure time?
• What is your life expectancy?
• How old are your parents or grandparents?
• How will inflation affect your income?
• What is the source of your income?

For many people the answer to some of these
questions depends on how much they can
accumulate during their working years.

Retiring early, say at age 55 , may be too
expensive unless you start to save early and
accumulate your wealth carefully.

Today people are living longer and they are
enjoying good health much longer.
                  27
An active retirement style may require
considerably more income.

It is easy to put off preparing a good
retirement strategy when you are young,
because it’s difficult to determine the answers
to some questions at an early age.

In the earlier years, most people have many
expenses such as raising and educating a
family, paying the mortgage and so on.

In later years, there can be unforeseen
medical expenses or costs of caring for other
family members.

An effective planning strategy would be to
start early and to save some money
systematically in an RRSP.

As your income level increases, you could
increase the percentage until you have
reached the maximum— 18% of your last
year’s earnings up to the limit set by the
government.

Compound interest is magic with an early
start.

There are many examples of the benefits of
starting young.


For example, one study illustrates that saving
$1,000 each year from age 25 until age 35 will
result in a higher accumulation than waiting
until age 35 and investing $1,000 a year until
age 65. What this study really demonstrates
well is the effect of compound interest.

                          28
Saving enough money is not the end of your
decision making. Where and how you invest
your savings is also a crucial matter. Simply
holding money in a GIC is not wise if the
inflation rate is nearly equal to or greater than
the rate of return.

Most financial institutions provide some sort
of asset allocation guideline. Certainly some
diversification is desirable rather than keeping
everything in a single investment.

These guidelines usually take into account
such things as your age, your income level
and your risk tolerance. During peak earning
years, a wealth-building program may include
a larger percentage in equities.

Some companies classify their programs as
wealth building, moderate growth program,
aggressive portfolio (for younger people) and
a pre-retirement program (for people within
the last 10 years of their working life).

Generalizations are not too helpful since an
investment strategy is very subjective. This
topic is something that should be considered
carefully by you and your financial advisor.

It is wise to know your level of risk tolerance.

It is important to review, revise and update
your program periodically. Your financial
advisor can be very helpful with projections.
Also, your advisor can look at your objectives
and your program with a degree of detached
understanding. You may have become
somewhat complacent and satisfied with
results to see potential difficulties.

                   29
Your valid concern about the sufficiency of
your retirement income for both yourself and
your spouse can be aided by running various
what if scenarios.

For example: You can calculate your probable
income for (a) a couple, and (b) a single
survivor. You can test certain variables by
inserting different assumptions for inflation,
income taxes and interest rate earnings.

What if inflation is somewhat higher and your
assumed interest earned is considerably
lower? You can also look at the effect of
retiring earlier, with fewer years to accumulate
your funds and having a longer payout period
in your retirement years.

This will help determine if you can afford to
retire younger. Another important matter for
you and your advisor to consider is the most
effective way of taking your income after
retirement.

You should determine the amount of taxable
income expected from all sources, such as
registered retirement plans, nonregistered
funds and government and employer pension
plans.

Employer and government pension plans
leave very little room for minimization of taxes.
Thus, it may be important to arrange your
income from RRIFs and non-registered funds
to provide a greater level of tax efficiency.

To make these decisions, you will need to
determine the amount of after-tax income
required in your retirement years.

                           30
Knowing where the money will come from is
important. For example, if you have a cottage
or second residence, that you plan to liquidate
or an inheritance, you need to factor in this
information.

You can assess your probable tax bracket
based on your expected fixed income from
pensions and RRSPs.

Planning asset allocation for tax efficient
growth and income can make a significant
difference.

What about estate planning goals?

Most people want to maximize after-tax
income while minimizing the risk of outliving
income. Many, however, want to leave an
estate after death.

The sign on the back of some campers, “We
are spending our kids inheritance” is meant
to be humorous. In practice, most people
make serious plans to provide an inheritance
for the “kids.”

It is wise to do your retirement planning first
and your estate planning afterwards.

  Why You Need Professional Advisors

There is much more to managing money and
creating wealth with a secure retirement than
merely trading individual securities.

A financial advisor offers:
 • knowledge gained from study and
     experience

                  31
  •   emotional detachment to help you
      avoid knee jerk reactions
  •   perspective to provide a vision of the
      overall process
  •   time to prepare a comprehensive
      analysis

Advisors provide a financial planning
approach. They have the ability to construct
a well developed plan within the context of
your needs and objectives.

Factors to be considered are your:

  •   financial goals
  •   retirement objectives
  •   risk tolerances
  •   life-style ambitions
  •   family education needs
  •   savings capabilities

Advisors provide regular reviews and
revisions.

Advisors offer perspective.A client’s emotions
can be tempered with an advisor’s sober
second thoughts. By approaching the
situation with a degree of objectivity a new
and more appropriate solution may become
obvious.

Advisors offer a multitude of products, an
assessment of new opportunities and their
applicability to each client. Advisors offer
professional expertise and professional
designations. It would seem prudent in a
marketplace full of professional designations,
that you should be guided by a professional.


                         32
Advisors save clients time by:
 • doing research
 • assessing suitability of products
 • monitoring economic and market
     changes

Advisors have many resources:
 • from networking with other advisors
 • from the companies
 • from professional associations
 • from colleagues
 • from personal r
								
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