Chapter 14 Retirement Planning

2004 McGraw-Hill Ryerson Ltd.

Kapoor Dlabay Hughes Ahmad

Prepared by Cyndi Hornby, Fanshawe College

Chapter 14Retirement Planning

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Learning Objectives - Chapter 14

1. Recognize the importance of retirement planning.

2. Analyze your current assets and liabilities for retirement.

3. Estimate your retirement spending needs.

4. Identify your retirement housing needs.5. Determine your planned retirement

income.6. Develop a balanced budget based on

your retirement income. 14-2


Learning Objective # 1

Recognize the importance of retirement planning.

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Misconceptions About Retirement Planning

My expenses will drop when I retire.My retirement will only last 15 years.I can depend on the government and my company pension to pay for my basic living expenses.My pension amount will keep pace with inflation.My employer’s health insurance plan will cover my medical expenses.There’s plenty of time for me to start saving for retirement.Saving just a little bit won’t help. 14-4


The Importance of Starting Early

To take advantage of the time value of money.

If from age 25 to 65 you invest $300 a month (9%) at age 65 you’ll have $1.4 million in your retirement fund.Wait ten years until age 35 to start and you’ll have about $550,000.

Wait twenty years until age 45 and you’ll have only $201,000 at age 65. 14-5


Why Think AboutRetirement Planning Now?

People are spending more years (16-20) in retirement.A private pension and government benefits are most often insufficient to cover the cost of living.Inflation may diminish the purchasing power of your retirement savings.

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Analyze your current assets and liabilities for retirement.

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Conducting a Financial Analysis

Review Your AssetsHousing.

If owned, probably your biggest single asset.If large equity, reverse annuity mortgage.

Life insurance cash value can be converted into an annuity.Other investments, such as stocks and bonds.

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Estimate your retirement spending needs.

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Estimating Retirement Living Expenses

Spending patterns and where and how you live will probably change.Some expenses may go down or stop.

Work expenses - gas, lunches out.Clothing expenses - fewer and more casual.Housing expenses - house may be paid off, but taxes and insurance may go up.Federal income taxes will probably be lower. 14-10


Estimating Retirement Living Expenses

Other expenses may go up.Life and health insurance unless your employer continues to pay them.Medical expenses increase with age.Expenses for leisure activities.Gifts and contributions.

Inflation will raise the amount you need to cover your expenses over your probable 16-20 years in retirement.

(continued)

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Identify your retirement housing needs.

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Planning Your Retirement Housing

Think about where you want to live.Consider the cost of living and taxes.Type of housing as needs change.

Staying in their present home is what most people prefer.Universal design is a home built to allow for potential physical limitations.If not built using universal design, home may need to be retrofitted.Continuing care retirement community provide increasing levels of care.

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Avoid Retirement Housing Traps

If you plan to move when you retire…Write the local Chamber of commerce to learn about taxes and the economic profile.Check on provincial income and sales taxes and taxes on pension income.Subscribe to a local weekend edition paper.Estimate what your utility costs would be in the area.Rent for awhile instead of buying immediately.

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Determine your planned retirement income.

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Planning Your Retirement Income

Canada/Quebec Pension Plan (CPP/QPP)Provide disability benefits, retirement pensions and survivor benefitsContributions based on salary, Maximum per yearCan collect reduced benefits as early as 60

Old Age Security (OAS)Must be over 65 years oldResidency requirement

Public PensionsPublic Pensions

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Guaranteed Income Supplement (GIS)

Payable to low income OAS recipients over 65 years of age

Spouse’s Allowance (SPA)Benefits to widow, widowers and spouses of OAS beneficiaries who are between 60 - 65

Public PensionsPublic Pensions

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Money purchase pension plan Specifies contribution from the

employer and/or employee does not guarantee pension benefit

you will receiveVesting is employees right to at least a

portion of the benefits accrued under an employer pension plan, even if they leave employ of company before retirement.


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Employer Pension Plans - Defined ContributionEmployer Pension Plans - Defined Contribution



A plan that specifies the benefits the employee will receive at the normal retirement age Employer’s contribution not

specified Employer makes the investment

decisions for your and their contribution, but your benefit amount stays the same regardless of how the investments perform.

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Employer Pension Plans - Defined BenefitEmployer Pension Plans - Defined Benefit



Contributions from employer only Tax-deductible for company Based on company’s net income DPSP holdings taxed when you

withdraw them Contributions to DPSP are

subtracted from allowable RRSP contributions 14-20

Deferred Profit Sharing PlanDeferred Profit Sharing Plan



Property of employees Can take money out if you

need it Participation may lower

payroll tax withholdings

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Group RRSP’sGroup RRSP’s


Pension Plan Portability

Legislations enforces right to transfer pension credits from one employer to anotherThree options when changing jobs

Leave credits and receive pension on retirementTransfer to new employerTransfer benefits to locked-in RRSP

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Personal Retirement Plans

Registered Retirement Savings PlansAn RRSP is an investment vehicle that allows you to shelter your savings from income taxNot a specific investment, but a way to register a variety of investments to shelter fundsEligible investments include guaranteed funds, mutual funds, life insurance and life annuity products

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Registered Retirement Savings Plans (RRSP’s)

Types of RRSP’sRegularSelf-directed• can invest in all categories

Spousal• spouse is named as beneficiary

Contribution Limits18% of earned income to a maximum of $13,500Maximum amount to increase in years to comereduced by RPP contributionscan ‘carry forward’ unused room to later years

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Options when you deregister your RRSPfull withdrawallife annuitiesfixed-term annuitiesRegistered Retirement Income Funds (RRIF)Life Income Funds (LIF)Segregated funds

Registered Retirement Savings Plans

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Pay a fixed level of payments on a regular basis for a specified amount of time or until death of holderAdvantages

Income payments until deathLevel paymentsSimpleNo record-keepingLegitimate tax shelterNo investment limitsTax-free transfers

Annuities

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DisadvantagesLess control over investmentsLess control over income payoutNo inflation protections, unless indexedNo opportunity for growthNo tax deferralNo lump sumsNo protection for spouse, unless jointNo estate planning benefits

Annuities

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Develop a balanced budget based on your retirement income.

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Living on Your Retirement Income

Be sure you are receiving all the income you are entitled toMay need to make some changes in your spending plansTake advantage of all tax savings and benefits available to seniorsMay work part-time after retirement

be aware of how earnings affect your public pension

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Low yield safe investments must earn enough to keep up with or exceed inflation Withdraw savings with caution

need to maintain enough to continue to live comfortablymay need to leave some in an estate for your heirs

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Investing for Retirement

Chapter 14 Retirement Planning

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Transcript of Chapter 14 Retirement Planning