The Insured Annuity Strategy

Perhaps the biggest retirement question we face is, “Will I have enough?” Most of us want to know that we’ll have a steady base level of retirement income that won’t run out too soon. Traditional investment vehicles such as bonds, T-bills, and term deposits are often popular choices to achieve the retirement goals of income generation, safety and preservation of capital. However, the after-tax rate of return of these options may not be enough income to meet your needs.

There is an alternative strategy that provides income that is guaranteed for life and upon death, pays your originally invested capital to your beneficiaries directly, without the usual estate-related hassles and costs. The Insured Annuity strategy can preserve the value of your estate, minimize income taxes and most importantly, guarantee an income stream for the rest of your life.

Enhance Your Retirement Income

The Insured Annuity strategy involves the purchase of two contracts: a permanent life insurance policy and a prescribed Life Annuity. You designate a portion of your non-registered capital to be used to generate a guaranteed income with which you purchase a Life annuity. This usually produces a higher income than typical fixed income investments and ensures a guaranteed income that you and/or your spouse cannot outlive. With a Life Annuity, each payment is actually a blend of interest and your original
capital, where only the interest portion is taxable. As a result, there is no residual value for your estate when you die.

Leave a Legacy

To solve this, part of the annuity payment is used to pay the life insurance premium. At death, the annuity income ceases and the life insurance death benefit is paid to your beneficiaries to replace the capital originally invested in the annuity. Because of the special tax treatment afforded by the annuity and the life insurance policy, the after-tax return on the Insured Annuity concept may be significantly greater than can be found on conventional interest-bearing investments.

An Example

The following example shows how a 60-year-old couple can benefit the Insured Annuity strategy compared to a GIC. They are generous grandparents of three who are looking to maximize their income now that they are retired. They also wish to fund their grandchildren’s education. The Insured Annuity strategy allows the couple to increase their monthly cash flow and still maintain the size of their estate.

As illustrated, the couple would apply for $500,000 of Term-to-100 insurance and once the insurance is in place, they would buy a $500,000 life annuity to generate income. They would then receive the difference between the monthly cash flow from the annuity and the monthly premiums being withdrawn for the insurance, while still maintaining the full value of their estate. Upon the death of the last surviving spouse, the annuity income ceases and the life insurance proceeds are paid out to the couple’s beneficiaries without passing through probate.

Things to Consider

This strategy is suitable for those who are between the ages of 60 and 85, risk-adverse, dissatisfied with currently low interest rates, and in good health (to qualify for life insurance). Once the annuity is purchased you cannot cancel the contract – it is locked in for life. This may represent a significant commitment, depending on your age. It also means that you should not consider moving all of your investment assets into the annuity just in case something unexpected should occur that requires some of your investment capital. As well, annuity income is fixed so although interest rate levels may go up, the annuity income remains the same. However, the accumulated cash flow over the lifetime of the Life Annuity may be more than that of a GIC, even with increasing interest rates.

Summary

The Insured Annuity strategy can generate a guaranteed, lifetime net income that is typically much higher than what you can achieve with other fixed income vehicles. As well, by directing the capital to named beneficiaries, you can avoid unnecessary estate costs and delays.

Contact us at (604) 535-4749, or use our contact page.

How Much Money Do You Really Need For Retirement?

You May Not Like the Answer

The title of this article seems to be the most sought after answer for people who are either saving for their retirement or are actually in their retirement. Obviously, it is a very important question-you spend a lot of years working and saving to hopefully achieve your retirement dreams.

Getting to the answer to the question is not as easy or straightforward as you might think. This means that constant planning and review is necessary to make sure you have done the best job possible to answer that question for yourself.

The short answer to the question is, (and you are not going to like to hear this), but, it depends!!! If you have had anyone that claims that there is a definite answer to this question, be highly suspect of the advice that you have received.

There are a number of factors that will affect how much money you need for retirement:]

When do you want to retire? Obviously, the earlier you want to retire, the more money you will need. If you want to retire at age 60 and we assume you started working at age 20 and that you will live until age 90, it means that you have 40 years of working to save enough money to provide you with income for 30 years of retirement-no small feat to accomplish!!

What do you want your lifestyle to be? Just as important as the length of time you will be in retirement is what do you want your lifestyle to be-what will your expenses be? Be careful not to underestimate them!!

Don’t forget about the effects of investment returns, taxes and inflation. These two variables will have a big effect on how much money you need to save. The higher your investment returns, the less money you need to save. However, for most people, when you get to retirement, you become more conservative in your investment decisions because you are reliant on your investment returns to generate income. This usually means that returns are lower than they may have been previously, which over the long term means you need more money. Everyone is familiar with inflation and the effect that increasing prices will have on their lifestyle-if you don’t take this into account, you may come up short achieving your lifestyle objectives. And obviously taxes will greatly affect where you ultimately end up.

What is your marital status? A single person that makes $50,000 per year will end up with less money after tax than a married couple who each make $25,000 per year. Granted, you may argue that a married couple will have more expenses because there are two people versus one, but your marital status can affect other sources of income due to such issues as OAS clawback.

To illustrate the effect that these variables can have on the answer to the question of How Much Money do You Need?, consider the following:

If an individual has a $500,000 portfolio and a $500,000 RSP. Inflation is 3%. Their average tax rate is
35%. The two variables we will change will be their expenses and their investment return. The chart below shows the number of years that their money will last using these assumptions.

What this means is that if you retired at age 55, your money would last anywhere from age 76 to 92, depending upon the variables noted above.

Alternatively, if you retired at age 60, your money would last anywhere from age 81 to 97.

After having changed only a couple of assumptions, you can see the dramatic effect on the length of time the money will last-obviously the amount of money you need is dependent on a number of factors.

The Butler / Laing Group can help you determine how much money you need to save to reach your retirement goals and objectives. Make sure you talk to us!  Contact us at (604) 535-4749, or use our contact page.

Is Canada Ready to Retire?

Between 1947 and the mid-1960’s, Canadians produced roughly 400,000 babies each year, peaking at 500,000 in 1960. This baby-boomer generation represents a disproportionate chunk of the population, and has been the leading force behind social, cultural and economic changes in Canada during the last four decades.
This generation will begin to enter retirement in the year 2010. In fact, statistics indicate that by 2011, one in five people will be over 65 years of age as compared to one in ten in the early 1990s. While Canada currently has one of the youngest populations in the Western World, by 2030 we will have one of the oldest.

The age of self-reliance

Canada’s aging population will place a huge strain on the Canada Pension Plan/Quebec Pension Plan. And, with fewer people in the workforce, the Canadian tax base will be smaller, further stretching pension programs – not to mention the health care system.

With less money to go around, it has never been more important for Canadians to save and invest wisely. Baby-boomers must take charge of their futures, or they could pay the consequences later in life.

Canada Revenue Agency (CRA) has provided Canadians with an excellent incentive for retirement saving through its Registered Retirement Savings Plan (RRSP) program. This program is clearly telling us something – get ready for a self-reliant retirement, or else.

Will you be ready?

Unfortunately, most people don’t begin planning for retirement until just before they are ready to retire. As a result, statistics show that over 60% of Canadians will retire on CPP and Old Age Security alone. It’s frightening to imagine the number of impoverished seniors who will be relying on dwindling social assistance programs for support in the 21st century.

In addition, baby-boomers who are counting on home equity to cushion their retirement may be in for a surprise. While a home may be the most important investment in a lifetime, it is not the solution to financial security at retirement.

Research shows that home prices will appreciate only modestly over the next few decades. The booming real estate markets – fueled by baby-boomer purchases – are likely a thing of the past.

Time to plan

The only way to be ready for retirement is to follow a disciplined approach to retirement planning. This involves estimating the cost of the lifestyle you want to lead upon retirement. It also means assessing your future income needs, your current assets, and the time remaining until you retire.

Inflation is also a key planning factor, as it can erode half your spending power in a 15-year period unless you have a plan to counter it. Ideally, you should sit down with a professional who can guide you through the planning process and design a comprehensive retirement strategy.

The Butler / Laing Group has the knowledge, resources, and team of experts to develop and implement a retirement strategy that is tailored to your personal goals and circumstances.  Contact us at (604) 535-4749, or use our contact page.

RRSP

Your RRSP Contribution Limit
Your RRSP contribution room is based on your prior year’s earned income. It is the lesser of 18% of the earned income or the maximum dollar limitation. See Table below. After 2011, the limit increases will be tied to the growth in average wages.

If you contribute to a registered pension plan at your place of employment, your contribution room will be reduced by a pension adjustment amount. Your employer calculates this figure on your behalf and is reported on your T4 slip.
In addition, any unused contribution room from prior years (starting in 1991) will increase your current room.

Investing Regularly-Monthly vs. Annually

Contributing your RRSP contributions regularly throughout the year can have a significant impact on the value of your RRSP. For example if you contribute $1,000 monthly to your RRSP, after 10 years at 8% growth the RRSP will be worth $181,195. If instead you contribute the $12,000 as a lump sum at the end of the year, after 10 years your RRSP is worth $173,839. Your RRSP that was funded monthly is worth $7,356.

A Pre-Authorized Contribution Plan (PAC) allows you to automatically make regular investments from your bank account directly into your RRSP. This will allow you to take advantage of investing regularly
and ensures that your money goes to work for you right away.

Self Directed RRSPs
There are basically three types of RRSPs:

• Plans that are limited to cash and guaranteed investment certificates (GICs)
• Plans that invest in mutual funds
• Self-directed plans. The self directed RRSP offers you the maximum investment flexibility.

Self-directed RRSPs offer investors the ability to choose their own preferred mix of products –whether stocks, bonds, mutual funds, guaranteed investment certificates or treasury bills. They also offer
convenience – all investments are shown on a single statement from a single source.
Contribute Securities to your RRSP
Your RRSP contribution does not have to be made in cash. A contribution in kind gives you the benefit of the immediate tax deduction while at the same time keeping the security. You must, however declare any capital gains accrued on the investment at the time of the transfer. If the investment is in a capital loss position, you are not permitted to claim that loss unless you sell the security first and then make the contribution as cash.

Spousal RRSPs
One of the few income splitting opportunities is a spousal RRSP. A spousal RRSP is an account in which you make contributions however, your spouse is the annuitant or the owner of the account. This means that your spouse has control over the account in terms of investment decisions and when payments are received from the account.

The primary reason for establishing a spousal RRSP is to allow for income splitting at some time in the future, usually retirement. Because the assets are considered the property of your spouse, when the funds are withdrawn from the plan, they are taxed at the spouse’s marginal tax rate. The opportunity to income split arises when the spouse would have little other retirement income while the contributing spouse would be at a high marginal tax bracket.

For example, if you will be paying tax at the top marginal tax rate of 46% (Ontario), a $5,000 payment from your RRSP would result in $2,300 of income tax. If your spouse has little retirement income, a
$5,000 payment from a spousal RRSP might be received tax free. This would result in tax savings of $2,700 each year.

Conclusion
Contributing to an RRSP is one of the soundest ways to turn your retirement goal into a reality. The earlier you begin contributing to your RRSP, the larger your retirement nest egg will grow to.  Contact us at (604) 535-4749, or use our contact page.