by Thomas Johnson
A 2018 CTV News poll found that more than 50% of Canadians do not have a will. That means there is a 1-in-2 chance that if you’re reading this, you do not have the most important cornerstone of your estate plan in place. If you do have a will, well done! You’re off to a great start already, but you’re likely not finished. Here are some spot checks you can do to solidify your final wishes:
1. Do a beneficiary review. Any account, insurance policy or asset where you have designated a beneficiary will
likely fall outside the purview of your will. If you haven’t checked out who gets the life insurance proceeds from your company benefit plan or dug into the beneficiary designations on your TFSAs and RRSPs, you may find some surprises.
2. Update your will. If it’s been a few years since you last looked through your will, it may be time for an update. The addition (or loss) of family members, assets, liabilities and goals may have your old will completely outdated. Be sure to work with an experienced lawyer to evaluate the changes needed to reflect your situation today.
3. Own a power of attorney and living will too. Most lawyers will recommend completing these documents in addition to your will when you have it done. These documents work in tandem to outline who is responsible and how much control they will have in the event you are medically unable to look after your own affairs. They will provide guardrails around your own medical care as well as your financial management.
4. Estimate the taxes. While Canada does not have a specific estate tax like our neighbours to the south, our tax code does apply some specific rules relating to your final tax return. Any assets that fail to qualify for a tax-free, spousal rollover will be treated as though they are sold on the day you die. This can give rise to a hefty tax bill after registered assets and capital gains are accounted for. You may find that without changes, the CRA will be taking a bigger slice of the pie than you anticipated. By taking action now, you can save your heirs a fortune!
If you’ve been procrastinating on your estate plans, don’t worry. You still have time to make things right and get your affairs in order! Your loved ones will thank you as you save them time, stress and money during difficult days.
by Thomas Johnson
When it comes to preparing for retirement, I often advise clients to get some practice in. When you’ve worked consistently for 30 or 40 years, it’s often hard to truly let go of that career mindset and find new purpose in life. By taking the time to practice retirement now, while you still have a few years left to make changes, you’ll gain a great deal of perspective on how you want your golden years to look. I’ve found this kind of exercise helps motivate some clients to accelerate their retirement
plans. For others, they’ve re-examined their priorities with far more clarity. That’s why it’s critical to your long-term retirement
success to have a trial run (or two) before you finally pull the pin. What should a practice retirement look like then?
• Commit as much time as you can. If you’re used to taking a week of holidays here and there, then just one week of practice retirement won’t cut it. If your employment situation allows, try and maximize a significant block of time to live out sample retirement days. You need to feel truly separate and apart from your workplace; something that will take more than a
few days away.
• Avoid work distractions. Many of us have instant access to our offices through phone, email and text. That can be a pro for productivity but a con for self-care. Set your out-of-office reminders and voicemails to direct elsewhere and disconnect as best you can. In retirement, you won’t be answering these calls so practice retirement should be no different!
• Tell someone what you’re doing. You’re far more likely to achieve a goal when you tell someone about it out loud. When preparing for retirement, tell your friends and family what you’re about to do. Let them keep you accountable to testing the waters of post-career life. You’ll feel better about the process and might find some shared support among those around you!
• Truly live it. If you think retirement is golfing 18 holes, seven days a week, then do it. If you think retirement is going to be spending days with grandkids, do it. If you think retirement is going to be about hobbies, volunteering, or lunch with friends, do it. You may have fantasized about your retirement days for years, but until you actually live those dreams out, you’ll never
know how much you’ll truly enjoy them. You may find fishing gets tedious by day five or that gardening doesn’t fill your days like you hoped it would.
A good practice retirement may help pave the way for the real thing. It’s the kind of revealing process that I hope every person can go through, though not all employment circumstances afford it. My biggest takeaway is simply this: you should go into retirement with purpose and 100% confidence that you are going to love how you live your life!
by Thomas Johnson
If you’re in the final weeks or months of your working career before retirement, you’ve likely begun to pore over your pension options from your employer. This is often a confusing and daunting task given the plethora of choices available! “Joint, 2/3 to Survivor with a 10 Year Guarantee” versus a “Single Life with no Guarantee” requires a financial planning background just to decipher, let alone decide. Today I hope to demystify the basics of pension plan options to make reading them a little easier to understand and enable a more informed decision.
“Single Life” vs “Joint”: This is the most basic starting point in understanding how a pension payment is structured and likely the most important! A Single Life pension means the pension payment will be made for the duration of your life and, when you die, the payments will stop. Whether you’re retired for one month or 40 years, the payment will last as long as you do. A Joint payment on the other hand means the pension provider is on the hook to make payments until both you and your spouse have passed away. Given the potential for a shorter payout duration on a Single individual, these payments are typically higher than Joint plans.
“Percentage to Survivor”: This is only applicable to Joint payment options and dictates “how much” the pension provider will pay after the first death. This can be constructed a number of different ways, from a reduction only when the pension member passes away to a reduction when either the member or spouse passes away. It can be 100% to the survivor, 2/3, 60%, 50% or just about any other split. As an example, assume a Joint, 60% to Survivor on Member’s Death payout that starts at $3,000/month. When the plan member passes away, his or her spouse will continue to receive $1,800/month (60% of $3,000) for the remainder of their lifetime. As a rule of thumb, the higher the percentage paid out to a survivor, the lower the pension payment will be.
“Guarantee Period”: Another estate planning piece, the guarantee period is a minimum number of years the pension will pay out regardless of death date(s) of the pensioner(s). If you elect a 10 year guarantee and pass away in year six, there will be four more years worth of payments made to your beneficiary. If you elect a 10 year guarantee and pass away in year 11, no more payments will be made as you’ve outlived the guarantee. These guarantees are typically offered in five year increments and eligible on Single Life or Joint payment options.The shorter the guarantee period, the higher the initial
pension payment will be.
“Commute The Lump Sum”: rather than choose a pre-planned pension option, most pensions allow members to convert their income stream to a lump sum (called the “commuted value”) and self-manage their funds. This likely results in a combination of locked-in registered, un-locked registered, and some non-registered money being created. The plan member can then design an income stream, subject to jurisdictional regulations, with the funds available. This is a complex decision that should not be made lightly, with many pros and cons.
There you have it – those components dictate how your pension will be paid to you, your spouse and potentially your heirs. Deciding how you want your pension to be paid for the rest of your years (and beyond) is a tough one. With a little guidance and plenty of thought, you can make the right decision for your family!
by Thomas Johnson
The idea of insuring a pension seems a little counter-intuitive. Why and how would a person “insure” a source of income in retirement? It may surprise you to know that all pensions are inherently insured and setting your coverage up the right way could pay off BIG time in retirement.
The concept of an insured pension is pretty straightforward: “while I’m alive, I get a consistent income in retirement from a large asset I built while working. When I pass away, I want the remainder of that asset to go to loved ones.”
Where it gets complicated is with the plethora of options that come with pensions. In a Single-Life pension, with no guarantees, the pensioner will receive the largest possible monthly payout (let’s use $5,000/month as our example). When the pensioner dies, the payments stop and the pension provider keeps any unspent proceeds. It doesn’t matter if the pension was paid for one month or 40 years, there’s nothing left over to be bequeathed. This is a “self-insured” route where all risk of mortality is born by surviving family members, who receive nothing after the pensioner is gone.
Pension companies (and provincial legislators) recognize that pensions are a family asset and therefore mandate insured options be available, to continue providing income for loved ones beyond the pensioner’s lifetime. Most commonly, the pension may be in a form that provides 2/3 of the previous benefit to a surviving spouse. There is a cost to doing this option compared to a Single-Life variant. Our example may see the pension drop to $4,800/month for having this estate benefit; however, it comes with the knowledge that a surviving spouse receives $3,200/ month (66.67% of the initial amount) for their lifetime.
Another common option is a 100% survivor benefit where the payments are the same for both the pensioner and their surviving spouse. Given this is a higher estate benefit than the 2/3 option, we can expect a further reduced pension amount. For our example, perhaps $4,600/month for the lives of both spouses compared to $5,000/month on a Single-Life. As you can see, it can cost hundreds or even thousands of dollars a year in lost retirement income for these insurance options.
Additional options may include a 5 year, 10 year, or even longer guarantee window that the pension will be paid to a non-spouse beneficiary, commonly your children. In cases where the pensioner passes away very early on in retirement, a minimum number of pension payments will continue on to the beneficiary based on the guarantee window chosen. The longer the window, the higher the estate benefit, the lower your monthly pension will be.
Alternatively, Canadians with pensions can be proactive in insuring their assets while still in their working years. If you have a spouse, children, or both and want to leave them the largest amount of your pension possible, consider buying a permanent life insurance policy while you’re young. The premiums can be quite affordable, you can design the policy to no longer require payment by the time you retire, and having a large, tax-free estate benefit can empower you to select fewer expensive guarantees at retirement. It’s a win-win scenario wherein you can elect larger pension payments without the downside risk of leaving your family empty-handed.
by Thomas Johnson
Maybe you’ve looked at an investment statement and never noticed it before. Or maybe your former employer has sent you a letter with it. That strange little acronym that was never talked about at school. Never on display at the bank. “LIRA”. What is it and what does it mean?
A LIRA, short form for “Locked-In Retirement Account”, is simply a unique account type for housing pension funds that aren’t ready to be spent yet. Just like an RRSP or TFSA, a LIRA has unique rules about how it must be operated and how it must be taxed.
LIRAs are formed when an employee leaves a firm with a qualifying pension. Pensions, depending on province of legislation, have rules about how much can be paid out and when money can be paid out. In order to maintain that legislative integrity, but also allow employees to take their money with them, the LIRA was born.
You cannot deposit personal funds into a LIRA. You can only add money by rolling in more pension funds with the same provincial legislation. You cannot withdraw from a LIRA. It must be converted into a Life Income Fund (LIF), annuity or Prescribed RRIF in order to access funds. Often LIRAs cannot be converted before the age of 55 and must be converted by December 31st of the year of the owner turns 71.
There are no capital gains, interest or dividends to report for income tax if your LIRA grows. Any withdrawals after the LIRA has been converted will be taxed in the hands of the owner as normal income.
LIRAs can hold a wide variety of investments. Mutual funds, segregated funds, GICs, cash and more. You can run your LIRA as a self-directed account or hire someone to manage it for you.
If you’re young with a longer time horizon for retirement, consider being aggressive with your investment selections within your LIRA. The tax advantaged growth and restricted income options make it the perfect vehicle for higher risk, higher returning investments. If you’re closer to retirement age, you’ll likely want a more moderate level of risk with your investments inside a LIRA as the income years are just around the corner.
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