How to Retire Worry-free Diana Mau, C.A. www.dianamau.bc.ca Copy right by Diana Mau
Objectives of This Seminar Sources of retirement income or other benefits provided by governments, who will be eligible, how benefits are calculated, how benefits are penalized or enhanced, and how to maximize benefits. Some tax planning ideas for retirees. How to be really worry free !
Objectives of This Seminar - Winston Wong How to take advantage of some investment products to maximize retirement income, minimize income taxes and provide security.
Sources of Retirement Income 1. Old Age Security (OAS), Guaranteed Income Supplement (GIS) and other provincial supplements 2. Canada pension Plan (CPP) 3. Savings from Registered retirement savings Plan (RRSP), Registered pension Plan (RPP) and personal savings
Old Age Security (OAS) Federally funded from general tax revenue A social security program designed for lower & middle income Canadian residents since 1952 Nearly 1/3 of all Canadian residents rely on OAS as their source of retirement income In 2000, OAS paid over 24 billion to 3.6 million seniors; GIS provided 5 billion to 1.4 million pensioners
Old Age Security (OAS) Full pension – a Canadian citizen or resident who has lived in Canada for at least 40 full calendar years between age 18 and 64. Full pension amount (Oct 2008 to December 2008) - $516.96 per month or just over $6,000 per year.
OAS - Partial Pension Earned 1/40 of the full pension for each complete year of residence after 18 Once a partial pension is approved, the amount cannot be increased for additional years of residence in Canada Minimum of 10 years residence in Canada For non-residents, an applicant must have at least 20 years of residence in Canada after 18 If an OAS pensioner leaves Canada, the benefit continues for only the month of departure and 6 months thereafter, unless the recipient has at least 20 years residence after age 18
OAS Benefits Full OAS pension is $516.96 per month for the last quarter of 2008, or just over $6,000 per year Benefits are adjusted quarterly to reflect increase of cost of living to Consumer price Index Benefits must be applied Retroactive payments are available for up to 12 months Benefits will cease if the recipient dies or becomes a non-resident for more than 6 months unless the recipient has resided in Canada for a minimum of 20 years after age 18
OAS Clawback Since OAS is designed for low to medium income pensioners, higher income seniors with income over $64,718 in 2008 are required to pay back some The payback is 15% of the amount by which the recipient’s net income is over $64,718 in 2008 No OAS when income is over $105,266 in 2008
Guaranteed Income supplement (GIS) Purpose: GIS is an additional source of income for residents in Canada who are in receipt of OAS but who have little or no other source of income
Eligibility for GIS Be age 65 or older Be in receipt of OAS (resident of Canada for at least 10 years since age 18) Meet certain low income requirements Be a resident of Canada
More about GIS benefits Max benefit is $652.51 per month for single or $430.90 for each married/common-law couple for Oct to Dec 2008 Subject to a means test
More about GIS benefits For single individuals, the clawback is 50% of the pensioner’s base income for the preceding year (base amount = net income - OAS) In 2008, the max cutoff for single is $15,672 and couple is $37,584 GIS benefits are available equally to all recipients of OAS, regardless of how long one has been living in Canada
More about GIS benefits GIS is not impacted by OAS benefit GIS must be applied and income tax return must be filed If GIS recipient leaves Canada, GIS is payable for one month of departure and for 6 months thereafter
GIS Benefit Will Terminate If The pensioner does not file a tax return by April 30 th The pensioner’s income exceed the max cutoff The pensioner leaves Canada for more than 6 consecutive months The pensioner dies
Allowance Purpose: To provide an additional source of income to qualifying low income seniors who are 60 to 64, married to a spouse or common-law partner who is receiving both OAS and GIS, to enhance their standard of living
Allowance -Eligibility An individual aged 60 to 64 An individual’s spouse or common –law partner receives OAS and GIS The individual is a Canadian citizen or resident at the time of application The individual must have lived in Canada for a minimum of 10 years since age 18
Allowance Benefits Maximum allowance for Oct to Dec 2008 is $947.86 per month (sum of OAS & GIS, $516.96 + $430.90) Allowance is subject to a clawback. The max income cutoff for the allowance is $28,992 on the couple’s combined income At 65, the Allowance is replaced by the GIS If the Allowance recipient leaves Canada, Allowance is payable for the month of departure and for 6 months thereafter
Termination of Allowance Benefits The couples combined base income is greater than the max income cutoff The recipient leaves Canada for more than 6 months The couple separates or ceases to live common-law The recipient spouse/partner dies, then change to Allowance for survivors Recipient dies
Table of OAS, GIS rates (Oct to Dec 2008) Avg Monthly benefitMax Monthly benefitMax base income OAS$479.07$516.9615% clawback from $64,718, no OAS if income >$105,266 GIS Single$434.40$652.52$15,672 Spouse of pensioner $356.80$430.90$37,584 Spouse of non- pensioner $414.22$652.51$37,584
Table of Allowance Rates Avg monthly benefitMax monthly benefitMax base income Allowance 60 to 64$372.35$947.86$28,992 Survivor’s$555.26$1050.68$21,120 60 to 64
Tax Treatment of OAS/GIS/allowance OAS is fully taxable GIS/ Allowance are included in income, but subject to a full deduction, making them effectively not taxable
Canada Pension Plan (CPP) Became effective Jan 1, 1966 Fully funded by employers and employees Not funded by general tax revenue Initially structured on a pay as you go basis By 1990s, demographic picture had changed Contribution rates has increased from 5.6% in 1996 to 9.9% in 2004 Employers & Employees contribute 4.95% each
CPP Payment Rates - 2008 Type Average Monthly Max Monthly CPP (age 65)$481.46$884.58 CPP (under 65)$360.70$493.28 Survivors 65 /+$313.14$530.75 Survivors <65$360.70$493.28 Combined survivors & retirement $682.84$884.58
CPP Payment Rates (Con’t) TypeAvg MonthlyMax Monthly Disability$785.77$1,077.52 Combined survivors & Disability $925.45$1,077.52 Death benefit$2,237.81$2,500.00 Children of disabled $204.68$208.77 Children of deceased $204.68$208.77
CPP Benefits Eligibility An individual has made at least one valid CPP contribution Is at least age 65 Is between 60 & 64 and has ceased employment or low earnings Ceased employment if one is not working at the end of the month prior to when CPP begins and during the month in which the CPP begins Low earnings if one earns less than the current max CPP in the month before CPP begins and the month in which CPP begins
CPP Benefits (Con’t) A person cannot be both a contributor to CPP and a recipient of CPP at the same time. Therefore, if an individual is receiving CPP, no further CPP contributions will be required CPP stops at the month of pensioner’s death. There is no guaranteed period.
Calculating CPP CPP benefit is a function of how much of the contribution and for how long of the contributory period and the age when one chooses to begin retirement benefits CPP benefits = 25% of the average of current & last 4 YMPE (yearly max pensionable earnings) x Average earnings ratio
Average Annual Earning Ratio Average of annual earning ratios Annual earning ratio is calculated as the unadjusted earnings divided by the YMPE for that year. Any time that the earnings is less than the year’s basic exemption ($3,500), the ratio is zero, any time when earnings are more than YMPE, the ratio is one
Example to Calculate Annual Earnings Ratio & Average Earnings Ratio Year20082007200620052004 Earnings 45,00042,00038,00036,0003,000 YMPE44,90043,70042,10041,10040,500 Annual earning ratio 10.96110.90260.87590 Average earning ratio 0.74792
Example of Calculating Monthly CPP Benefit Yearly CPP benefit = 25% x average of current & last 4 YMPE x average earnings ratio = 25% x $42,460 x 0.74792 = $7,939 Monthly CPP benefit = 1/12 of $7,939 or $661.60 Note: there are only 5 years earnings for demonstration purposes. In real life, all contributory years less drop-out periods should be included in the calculation
Relief for Average Earnings Ratio CPP acknowledges interruptions & low income periods by allowing some contributory period to be dropped out of the benefit calculation The drop-out calculation includes: Low earnings while raising children <7 Months when the contributor was eligible to receive CPP disability pension 15% of the contributor’s lowest earnings
How to Get Max CPP Benefits To be eligible for max CPP benefits,an individual would require solid employment record throughout the contributory period (from age 18) even allowing for the 15% dropout periods
Normal, Early & Late Retirement Normal retirement for CPP – Age 65 Early retirement – from age 60, CPP payment reduction of 0.5% per month or 6% per year, to a max reduction of 30% for 5 years Late retirement – after age 65, payment enhanced by 0.5% per month or 6% per year, to a max increase of 30%
Assignment of CPP Pension sharing between spouses & common-law partners to achieve income splitting Both spouses/partners must assign their CPP Both must be at least age 60, and both must be receiving CPP
Other Governmental Programs for Seniors Low-Income Grant Supplement Program- for age 65 or older or receiving disability allowance and whose home is assessed above $1,050,000 Low income family of net income less than $28,000 will be eligible for max supplement of $845, between $28,000 to $30,000, eligible for 50%. Call 1-888-355-2700
Property Tax Deferment To defer property for home owners over age 55, surviving spouse or disabled Have to pay back deferred taxes + interest at prime rate + administrative fee before home transferred to a new owner or upon home owner’s death Tel: 250-387-0555
Shelter for Elderly Renters Rental subsidy for seniors 60 or over and pay rent of more than 30% of income and who do not receive provincial income assistance Tel: 604-433-2218
Home Adaptations for Seniors To help homeowners and landlords pay for minor home adaptations such as handrails, lever handles on doors, bathtub grab bars etc. Max assistance is $3,500 To qualify, senior household income below $32,500 Tel: 604-731-5733
Residential Rehabilitation Assistance Program To provide low-income homeowners with fully forgivable loans in 5 years for the repair of lower value homes. Household income below $32,500 in Vancouver Tel: 604-731-5733
Senior’s Supplement Provided by Province of B.C. to low- income seniors whose income falls below the level guaranteed by the province Max monthly supplement of $49.50 for single seniors and $120.50 for senior couples Tel: 250-387-3743 or 1-866-387-3743
Health Services MSP Can apply for premium assistance Pharmacare Home & Community Care and many others
Other Provincial Programs Transit seniors’ fare discount Bus pass for low-income seniors– yearly pass for $45, eligible for those receiving GIS / Allowance Ferry fares
How to Minimize Income & Not Cash Flow Bury money under your mattress? Give away your money ? Tax free savings account ? RESP for grandchildren ?
How to Minimize Income & Not Cash Flow Collapse your RRSP before retirement ? Invest in your home & get a reverse mortgage ? Buy a whole life or universal life insurance ? Prepaid funeral expenses, medical/critical insurance ?
Registered Pension Plans (RPP) Defined Benefit Plan Defined Contribution Plan
Defined Benefit Plan Provides pension benefits based on a defined formula where the benefit is known in advance of retirement Benefit is expressed as a % of yearly earnings multiplied by the number of years of participation For example, benefit equals 2% of average of final three years service x # of years service Public service employees get 2% per year, up to a max of 35 years, or 70%
Performance of a Defined Benefit Plan Plan sponsor / employer /union is responsible or the solvency of the plan and the investment risk Plan member is guaranteed a defined benefit regardless of the performance of the plan Generally is no risk, but nothing is certain
Defined Contribution Pension Plan Contributions into the plan are based on a specific formula, a known quantity. For example, employer and employee each contribute 8% of employee’s salary. The max total contributions by employer and employee that can be contributed to a defined contribution plan in 2008 is the lesser of 18% earnings and $20,000, same as RRSP. The retirement income is based on the sum of accumulated contributions and the plan earnings. Hence retirement income is unknown The plan member retains the investment risk
RRSP Contributions to the RRSP are tax deductible, income earned inside rhe RRSP are also tax free, withdrawals from RRSP are taxable, except the Home Buyers’ Plan or the Lifelong learning Plan Contributions to RRSP are limited to the contribution room
RRSP on Retirement At age 71, one must convert RRSP into retirement income by the end of the year, otherwise the full market value of the RRSP would be included as income for that year
Conversion of RRSP to Retirement Income 1. Registered Retirement Income Fund (RRIF). RRIF is similar to RRSP, except one may not make any new tax- deductible contributions and one must receive a specified minimum amount every year 2. Annuity
Annuity Option Buying an annuity means leaving money in the hands of the annuity issuer, usually an insurance company Annuity may be for your life, life of your spouse or with a guaranteed payment in the event of premature death You give up control of your money
Splitting Pension Income Beginning in 2007, individuals who receive pension income that qualifies for the $2,000 pension income amount may transfer up to one- half of this income to a spouse / common-law partner Pension income does not include OAS, CPP, death benefits, retiring allowance, RRSP withdrawals Joint election Form T1032 must be attached to the tax return of each spouse Income taxes deducted must be split in the same proportion
Use of Your Home to Fund Retirement Consider renting out part of your home Selling or downsizing your home Reverse mortgage – for seniors over age 62 borrowing using the home as a collateral. Interest & principal deferred until the property is sold
Other Financial Resources Personal assets such as cash, marketable securities, rental properties Business - proprietorship or corporation, to sell or to continue. $750,000 capital gain exemption on sale of small business corporation
Combined Income Tax Rates 08 Income rangeTax rates $0 - $34,00020.35% $34,000 - $37,00023.15% $37,000 - $68,00030.15% $68,000 - $74,00033.10% $74,000 - $79,00037.10% $79,000 - $96,00039.00% $96,000 - $121,00040.70% Over $121,00043.7% Combined Income Tax Rates
2008 Personal Amounts Personal exemption$9,600 Spousal/common law exemption, reduced by partner’s income $9,600 Age exemption (65 & over)- reduced by 15% of NI >$30,936 $5,177 Disability amount*$6,890 Caregiver amount*$4,019 Pension income *$2,000 Amounts transferred from spouse/common law partner*
Disability Amount - $6,890 A non-refundable tax credit used to reduce income tax payable May be used for yourself, or transferred to your spouse /common-law partner, or another supporting person Has to be certified by a qualified practitioner on Form T2201 and be validated by Canada Revenue Agency
Claiming Disability Your eligibility is easier than you may think Your physical or mental impairment has lasted or expected to last for a continuous period of at least 12 months and you are markedly restricted in any one of the basic activities – speaking, feeding, hearing, dressing, walking, mental functions, bowel or bladder elimination Markedly restricted means all or substantially all the time, you are unable to perform one or more of the basic activities even with the use of therapy, devices or medication
Claiming Disability (Con’t) Your physical or mental impairment has lasted or expected to last for a continuous period of at least 12 months and you are significantly restricted in two or more of the basic activities – speaking, feeding, hearing, dressing, walking, mental functions, bowel or bladder elimination Significantly restricted means you are not quite markedly restricted, but you ability to perform a basic activity is still substantially restricted
Medical Expenses In addition to disability amount, medical expenses of up to $10,000 Disability and medical expenses can be claimed by yourself If your income is too low to utilize, then disability & medical expenses can be transferred to your supporting relatives, usually your children
Caregiver Amount - $4,019 For those who provide care to relatives who live with you & dependent on you Parents & grandparents age 65 or over Children or grandchildren & other relatives who are 18 or over and physically or mentally infirm
Pension Income Amount - $2,000 Individuals 65 or over can claim lesser of $2,000 or pension income from RRSP, RRIF, life annuity from qualified pension income Individuals under 65, life annuity out of pension plan, or annuity arising from all other pension income by virtue of the death of spouse/common-law partner OAS, GIS, CPP etc. are not qualified pension income
Use pension splitting to maximize the $2,000 pension income credit Commencing 2007, individuals who receive pension income that qualifies for the $2,000 pension income amount any transfer up to 50% of this income to a spouse or common-law partner Each can claim $2,000
Amounts transferred from spouse If one spouse /common-law partner has no income tax payable and has not fully utilized a certain portion of non-refundable credits, e.g. the age amount, pension amount, disability amount, the unclaimed balance of these amounts can be transferred to the other spouse/partner.
Tax Free Savings Account TFSA TFSA is a registered account that allows taxpayers to earn investment income tax- free inside the account. Contributions are not tax deductible and withdrawals of contributions and earnings are not taxable Commencing Jan 1, 2009, any individual who is a resident of Canada and age 18 or older would be eligible to open an TFSA
TFSA Contribution Amount $5,000 per year Any withdrawals made in previous year would be added to the contribution room Any unused contribution from a previous year would be added to the contribution room for the year Example: In 2009,contribute $2,000, in 2010, withdraw $1,000. What is the contribution room in 2011?
TFSA no impact on income-tested benefits & credits Income earned & withdrawals are not be taken as income, hence would not reduce benefits based on income level, such as OAS, GIS, Allowance, GST, age credit etc. Seniors should contribute to a TFSA
Budget Your After Tax Retirement Income & Expenses Estimate your after tax retirement income Estimate your expenses in retirement. Do you over estimate your expenses? Keep your life simple Income > expenses ?
How to Retire Worry Free More important than finance is physical & mental health Physical Health – diet and exercise Mental Health – if you’re worried thinking you don’t have enough, then no matter how much wealth you have, you never have enough. You will always be worried.
You’ll Be Truly Worried Free If you can let go, let your greed goes Can you really change your mental thoughts? You come with nothing, you go with nothing