Tim Cestnick, Globe & Mail, Aug. 5, 2022
I’ve got some good friends who are insurance advisers. If there’s one thing they have in common, it’s that they’re persistent. Maybe you’ve heard the story about the executive who met with an insurance adviser. “You ought to feel privileged that I’ve agreed to meet you today,” the executive said. “So far today, I’ve had my assistant turn away eight insurance salespeople,” he continued. “Yes, I know,” the adviser replied, “I’m all of them.”
Insurance advisers often get a bad rap because they tend to be so persistent. But I’ve always believed that insurance can be an effective tool – so be kind to your insurance adviser. Today, I want to share an idea involving insurance that can provide a tax-free source of cash flow in retirement.
Many people are lamenting the performance of their investment portfolios this year. The concept I’m going to share can provide cash flow in retirement without subjecting your retirement savings to the volatility of the markets. I’m not suggesting that traditional investments should be abandoned, but you might want to supplement your current retirement savings with this insurance-based strategy.
Let me share an example that comes courtesy of Nigel Kettle at Farber Wealth Management in Toronto. Consider Warren and Wendy. This couple, both 50 and with children, have purchased a whole life insurance policy on a joint, last-to-die basis. This means that the insurance won’t pay out until the second of them dies, which is a cheaper way to buy insurance than on either of their lives alone. A policy like this not only pays out on the death of the insured, but part of the premiums go into a growing pool of investments.
Now, this couple is investing $100,000 annually in the strategy, for 10 years. That’s the amount of their insurance premiums. While that’s a pretty big figure for most, we’ll use it for the sake of simplicity – you can adjust for your own situation. (If you can afford to invest $10,000 a year, for example, then take the figures in this example and divide them all by 10.)
Back to Warren and Wendy. After paying $100,000 premiums for 10 years, when they reach 60 they will have paid a total of $1-million. At age 65, they’ll use the cash value that has accumulated inside the policy to provide income in retirement. But they won’t do this by withdrawing the funds from the policy – which they could do (this would be taxable). Rather, they’ll visit their bank and borrow funds each month to provide the cash they’ll need in retirement. The insurance policy will be pledged as collateral for the loan. The couple will capitalize their loan interest, which means they don’t actually make interest payments during their lifetimes. The interest will be added to the total amount of the loan each year.
In this example, it’s expected that Warren and Wendy will be able to borrow $100,000 annually (about $8,300 a month) for a total of 30 years (if they live to the age of 95) based on the cash value in the policy at age 65. The policy can allow for this amount of loan because of the growth of the cash value, not only over the first 10 years while deposits are made in the policy, but over the entire life of the policy. And since loan proceeds aren’t taxable, this retirement cash flow will be tax-free.
Now, $8,300 after taxes each month is equivalent to $12,770 before taxes at a 35-per-cent marginal tax rate (the average marginal tax rate in Canada for someone earning $100,000 annually). That is, the insurance strategy will provide the same cash flow after taxes as an interest-bearing portfolio generating $12,770 monthly, or $153,240 annually.
How much would you need in an interest-bearing portfolio to produce this much income annually? Well, at a 4.5-per-cent annual yield (the current average rate on a five-year GIC), you’d need $3,405,300 ($3,405,300 at 4.5 per cent a year is $153,240). With the insurance strategy, Warren and Wendy have only invested $1-million of total capital over 10 years, which makes the insurance strategy more efficient than generating income from a traditional portfolio.
The story isn’t over yet. Warren and Wendy are accumulating debt during their lifetimes as they borrow each month to meet their cash needs. How will that debt be paid off? When the second of them dies, the insurance proceeds to be paid out tax-free will amount to approximately $5.5-million. Most of that – a total of $4-million – will be used to pay off the accumulated debt. This will leave about $1.5-million for their kids.
In the case of Warren and Wendy, an interest-bearing portfolio would leave their kids with $3,405,300 of capital upon the second of Warren and Wendy to die, but the insurance idea, leaving the kids with about $1.5-million, is nothing to sneeze at.
It may also be possible to make the interest cost on the debt tax-deductible by drawing down on non-registered investments in retirement, then using the funds borrowed under the insurance strategy to replace those portfolio investments.
Speak to your insurance adviser to have the numbers crunched in your specific situation.
This Globe and Mail article was legally licensed by AdvisorStream.
Q: I’m diligently preparing for my retirement and doing some extensive financial planning. I’m only 57 years-old and I’m in fabulous health, but my parents both retired in their mid-60s and then died in their mid-70s. They were also in good health, then life threw them both a curve ball. On the other hand, my four grandparents all lived into their 80s and 90s, so I guess you never know what can happen. I figure I’ve got another 25 years ahead of me and want to save and plan accordingly. Am I on the right track for a successful retirement?
A: Comprehensive wealth planning incorporates two life expectancy risks: dying too soon and leaving a dependent spouse and/or young children; or living too long and not having saved enough to financially sustain yourself throughout retirement. The latter situation may apply to your generation and the ones that follow.
Your parents weren’t far off in average lifespans for their generation. In their lifetime, work was more physically demanding, medical technology was less advanced, tobacco use more prevalent and seatbelts were optional. As might be expected, these factors took a toll on life expectancy.
Back then, retirement planning was pretty simple: stockpile a few years’ worth of savings in a cookie jar and live off that for the few years that you had left. You’d soon be dearly departed and your savings would hopefully not be depleted before that time.
But there’s a bigger problem brewing for your generation and those that follow. Canadians are living longer and this demographic transformation will have tremendous financial implications in their retirement planning. Today, average life expectancy is 80-plus years of age, and this number continues to increase, thanks to enhanced health care, cleaner air and water, better disease prevention and healthier food choices.
The future will look very different because we will live longer, more productive and healthier lives. As a result, the cookie-jar method of retirement planning will no longer do the trick.
You still have quite a few years to go before you even get to today’s life expectancy. And by the time you do, it will have extended again. Under current projections, when you get to age 80-plus, the average life expectancy will be approaching 90 years of age. This trend means that you could spend 20, 30 or maybe even 40 years in retirement. That’s a long time to plan for, and a long time to finance with the money you are saving today. You could potentially spend more years in retirement than in your working career.
The English writer Charles Dickens summed it up perfectly nearly 175 years ago and the fiscal lesson still applies today. In his 1849 novel, “David Copperfield,” he wrote: “Annual income 20 pounds, annual expenditure 19 [pounds], 19 [shillings] and six [pence], result happiness. Annual income 20 pounds, annual expenditure 20 pounds ought and six, result misery.”
To paraphrase Dickens, if you plan for longevity and die with money in your metaphorical pocket, you will have attained financial success. Whereas, if you have not saved enough for a long life but happen to live one, you will experience financial challenges or even hardship in your later years.
It’s much better to err by assuming you will live a longer than anticipated life expectancy, having saved a bit too much and dying with excess cash, than needing money down the road and not having set aside enough initially. So, don’t shortchange yourself in your retirement planning and funding.
I encourage you to intentionally design your retirement with longevity in mind. Of course, live as though today is your last day, but also create and implement a retirement savings plan that will financially sustain you for the rest of your — potentially very long — life.
By Thie Convery Contributing Columnist - Feb. 16, 2022 - The Toronto Star
A succession plan will help assure business continuity.
If you’ve built a successful business, you know that having a plan is critical to making it work. By the same token, readying your business for your retirement, or to enable it to carry on if anything happens to you, is an important piece of the puzzle.
While there are no set rules about what to address in a succession plan, you may want to include such details as:
Protecting your most valuable asset: You
Your exit strategy not only recognizes when you are planning to retire from the business, but it can also address any potential surprises that may impact your ability to remain in charge.
You may develop a major illness or injury that takes you away from day-to-day operations. Having insurance in place can ensure your company will continue to function in your absence, while also protecting your own earnings and family, particularly if you’re not able to return:
If you plan to retire, you need a plan
If it’s time for you to hand over the reins, your succession plan should address the time horizon for your transition and how much involvement you will maintain. You may want to execute a buy-sell agreement with partners or co-owners. It outlines the circumstances of your leaving, as well as the price that will be paid for your share of the business. Insurance can be used to help minimize the tax impact of a small business sale as well as financing retirement income.
There are many tax-efficient ways to protect your business and help you transition to your retirement.
Contact us if you’d like to learn more about these business-owner strategies.
This article was prepared by AdvisorStream for Al Mcdonald and is legally licensed for use by AdvisorStream.
Delaying Canada and Quebec Pension Plan Benefits Can be the Most Cost- Effective Approach to Securing Retirement Income for Life
Many Canadians are giving up substantial lifetime pension income by claiming pension benefits before age 65
TORONTO – The National Institute on Ageing (NIA) and the FP Canada Research FoundationTM released Get the Most from the Canada & Quebec Pension Plans by Delaying Benefits, a research paper authored by Dr. Bonnie-Jeanne MacDonald, outlining the significant benefits of delaying pension benefits up to age 70.
“Delaying Canada and Quebec Pension Plans (CPP/QPP) benefits for as long as possible is the safest and most inexpensive approach to get more secure, worry-free pension income that lasts for life and keeps up with inflation,” said Dr. MacDonald, director of financial security research at the NIA. “But less than one per cent of Canadians choose to delay benefits to age 70, with most taking their benefits as soon as they are eligible at age 60.”
The average Canadian receiving median CPP/QPP income can expect to lose over
$100,000 of secure lifetime income, in today's dollars, over the course of their
retirement by choosing to take benefits at age 60 rather than 70 – just from the age-
Even delaying benefits by a single year from age 60 to 61, can make a significant difference in retirement. A $1,000 monthly benefit at age 60 increases to $1,112.50 if the individual waits until age 61, and goes up to $2,218.75 at age 70 - for life and with inflation protection.
The research indicates that more than half of Canadians could have delayed taking their benefits by at least a year, and over a quarter could have delayed for more than 10 years by using only their RRSP/RRIF savings to bridge the income gap. However, current practices, often anchored in outdated assumptions about retirement, encourage Canadians to take their benefits early.
“Retiring with dignity means having peace of mind knowing you have a reliable income as you age,” says Tina Tehranchian, Senior Wealth Advisor with Assante Capital Management Ltd. “Putting a financial plan in place will help create a roadmap to manage money earned and invested so that when it’s time to retire, there’s a steady income stream. As a result, people are more financially independent and can delay collecting government sponsored pension plans.”
Retirement has changed, and industry practices should adapt to the current environment – one in which Canadians are facing longer periods of time in retirement, scarcer sources of secure pension income, low interest rates, and fewer adult children available to provide care to ageing parents as their health declines.
The goal of this research paper, funded by the FP Canada Research Foundation, is to help retiring Canadians make more informed decisions about when to start their CPP/QPP benefits. Full findings of this paper are available at: https://bit.ly/3a3hszx. The National Institute on Ageing is a Ryerson University think tank focused on the realities of Canada’s ageing population. The Foundation is committed to technical research that examines and challenges current practices in financial planning, behavioural research that examines the impact of human behaviour on effective financial planning and societal research that examines the benefits of financial planning on society as a whole.
To get the most out of your RRSP, it’s important to understand how it works. An RRSP on its own doesn’t constitute a retirement plan. Think of an RRSP as a special type of savings account that offers tax advantages to help you save for retirement.
Any money you put into an RRSP reduces your taxable income for that year. This is why many Canadians who contribute to their RRSP look forward to receiving a tax refund in the spring. The tax you would have paid on that income gets deferred until you retire. RRSPs are particularly useful when you’re in your peak earning years and anticipate being in a higher tax bracket today than when you’re retired and no longer working.
While you may see the immediate refund on your tax bill, that’s not the only tax benefit an RRSP offers. Your RRSP also provides a tax-free way to grow your savings until you need to withdraw the money and convert it to a Registered Retirement Income Fund (RRIF) by age 71. As mentioned earlier, your RRSP is simply an account; it’s how you decide to invest within that account that matters. RRSPs can hold a variety of investment vehicles, including stocks, bonds, mutual funds, exchange-traded funds and GICs. How you invest will depend on your goals and risk tolerance. Any investments you hold in your RRSP can grow and take advantage of the potential for tax-free compounding.
Maintaining a well-diversified portfolio can help you mitigate risk and volatility, and ultimately help you achieve your retirement goals. The mix of investments that make the most sense for you will depend on a variety of factors, such as your ability to save, your risk tolerance and your goals. Depending on those factors, two people of similar ages and incomes could have very different portfolios. An Investment Advisor can help you decide on the right asset mix and develop strategies to help you save for retirement and your other goals.
Key features of RRSPs
This article was prepared by AdvisorStream for Al Mcdonald and is legally licensed for use by AdvisorStream. This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances.