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Nine Nuggets of Advice for Retirement-Age Clients

As your Financial Planner, I continuously read and listen to economists, portfolio managers  and analysts.  Gautam Dhingra recently wrote an article for the CFP Institute which I noticed in Advisor Analyst.  I want to share some of these tips for you, adapted for our Canadian markets.   

1.  Minimize Taxes. 

Efficient tax management is crucial.  In your Non-Registered accounts, you may want to focus on earning tax-preferred dividends and capital gains.  Since interest income is highly taxable, you may be wise to hold your GIC's or bonds in tax-sheltered accounts such as RRSP/TFSA.  Since withdrawals from an RRSP/RRIF are taxable as income, you may want to consider whether to make withdrawals before your OAS benefits begin at age 65.   Once RRSPs are converted to RRIFs, there is a minimum required withdrawal each year.  By projecting estimates of your RRSP/RRIF withdrawals, we can estimate your tax bracket through the years and look at how fast to draw down your accounts.  Because all assets remaining in an RRSP/RRIF are taxable as earnings in the year of death, some clients prefer to de-register these assets before hitting a certain age.  As Financial Planners, we would do a projection of all income streams, from an employer, from Canada Pension Plan, Old Age Security (OAS), and from private savings such as RRSP/RRIF/TFSA.

2.  Mortgage Debt

Unlike in the US, mortgages on aprincipal residence in Canada is not tax deductible, giving Canadians an incentive to pay off their personal mortgage.  However, more than half of retired Canadians today are carrying debt, a mortgage or a home equity line of credit.  Even at today's low interest rates, it makes sense to pay off one's mortgage.  Without a mortgage payment, it is much easier to live on a fixed income budget, and there is peace of mind knowing the primary home is free of debt.  Many Canadians view the sale of their residence as a way of funding rent or a retirement residence in their older years. 

3.  Withdrawal Strategy

While we would run several projections and scenarios, it is handy to know a few rules of thumb.  For example, a client can withdraw 4% of their retirement savings each year and ti is reasonable to assume their portfolio earns 4%  and they would face a very low risk of running out of capital.   For example, if you think you need $30,000 per year to supplement your public pensions in retirement, using a the Rule of 4%, you should have a minimum of $750,000 in retirement savings before you retire ($30,000 / .04 = $750,000).  In recent years, with lower inflation and lower growth, some have said this rule should be updated to 3%.   Another rule of thumb is the Rule of 25.  For example, if you needed $20,000 per year in addition to public pensions, you would need $500,000 in retirement savings ($20,000 x 25 - $500,000).  

4.  Safe and Liquid Assets

Foundational to financial planning is to have an emergency fund in place, and it is generally advisable to keep six to twelve months worth of expenses in cash-type accounts that are safe and liquid.  This is the same no matter how old you are.  In the case of RRIF accounts, where a portion of the money will be withdrawn in less than a year, you may consider having an portion of your RIF in a safe investment savings account, so that you can make your RRIF withdrawals without being affected by market movements.  It may be a good idea to have a home equity line of credit approved against your home before you retire and your income drops, so that if you need cash for an emergency, you could borrow easily.  

5.  Asset Allocation

It is key to work with an investment advisor, and to discuss your investment risk tolerance, goals and time horizon, as well as any changes in your personal or professional life that could have an impact on your portfolio.  A professional investment advsiors will discuss market volatility and work with you to achieve the least risk for a given rate of return objective.   In 2019 we havea seen an increasing frequency of volatility in the markets.  Once you have retired, it is even more important to manage downside risk, because you are less likely to be adding new money to the portfolio, and your investment time horizon is shorter.  

6,  Estate Planning

In Canada, you need a Will, a Power of Attorney for property, and  Power of Attorney for healthcare.  These documents should be reviewed every five years or when there are changes in your family.   The two power of attorney documents are essential, as we have longer life expectancies but greater incidence of illness that can mean incapacity.  The Will is your opportunity to select a guardian for dependents, and to select a Trustee to handle your affaris when you're gone.  A Will is especially important for same-sex couples, common-law situations, those with children, those with mortgages, and those in second marriages.  Without a valid Will, your estate is processed through the provincial intestacy laws, which can be costly, time-consuming, and ultimately allocate your money in ways that you did not intend.

7.  Charitable Contributions

You legacy is your children, your friends, your community involvements, and also your estate and what you financial assets you leave behind.   There are several effective ways of contributing to charities in Canada, and tax incentives to do so.  The maximum deductible charitable donation is the lesser of total donations made in the year, plus any donations made and not deducted from the previous five years, up to a maximum of 75% of net income.  In the year of death and the year prior, you can deduct up to 100% of net income.  Ecological gifts are exempt from any net income limits.  Any capital gain on the disposition of publicly-listed securities is waived if those securities are donated in-kind to a registered charity.  Your favourite charity can benfit from a bequest in your Will, setting up a Trust, purchasing a charitable gift or using your life insurance.  Speak to your advisor for further details.  

8.  Record-keeping

Canada Revenue Agency has the power to audit your records for the last seven years, and further if required to establish a cost base on property or securities.  Canada Revenue Agency now requires reporting on all property bought or sold, even if it is a principal residence.  With today's many on-line services, it is advised to have a trusted person responsible for your e-mail and on-line accounts and passwords should you pass away.  

9.  Today's Economic Climate

As mentioned earlier, 2019 saw an increase in market volatility.  While we focus on a strategic mix based on your risk tolerance and time horizon, our view is that 2020 will see continued economic growth. The October 2019 statement from the Bank of Canada projected that the Canadian economy will grow by 1.5 percent this year, 1.7 percent in 2020 and 1.8 percent in 2021.  Growth in Canada was slower in the second half of 2019, reflecting the uncertainty of trade tensions, adjustments in the energy sector, and slower business investment and exports.  Slower growth, however, does not point to a recession.  Corporate balance sheets are strong, corporate earnings are growing, and the US consumer remains strong and supports further economic growth.  We believe that as US-China trade tensions ease and Brexit is resolved, business sentiment should improve.  

The outlook for the global economy weakened over the fall and twenty different global central banks eased monetary policy in 2019,  with lower interest rates and other policies to stimulate  global growth (or to prevent deflation).  This stimulus has increased the price of stocks and real property, and caused some investors to allocate more to cash or gold.  Please see your investment advisor before taking any action, as an investment advisor who understands your situation can recommend what is most suitable for you and your situation.  

To discuss any of these ideas, phone or email our Advisor team at Manulife