Hub Blogs contains fresh contributions written by Financial Independence Hub staff or contributors that have not appeared elsewhere first, or have been modified or customized for the Hub by the original blogger. In contrast, Top Blogs shows links to the best external financial blogs around the world.
Locked-in Retirement Accounts (LIRAs) differ from RRSPs in that you usually can’t “unlock” the funds in them before age 55.
I guess the annual RRSP season is just around the corner, based on some of my most recent writing assignments. Earlier in the week, for MoneySense.ca, I made the case for semi-retirees in their Sixties (like me!) for starting the process of withdrawing money from RRSPs early. Click on the headline Retirement Tax Tips. The Hub summary ran here under the headline The case for Early RRSP withdrawals.
As TriDelta Financial wealth advisor Matthew Ardrey told me for the FP article, you’re going to see a lot more about LIRAs in the coming years. Whether you’re leaving a classic Defined Benefit pension plan or a more market-tied Defined Contribution pension plan, the job market these days is in such flux that a lot of people are going to have to start learning about what happens when you leave an employer pension plan earlier than you might once have envisaged.
LIRAs will multiply as Boomers reach Findependence
It’s hard to believe, but the Financial Independence Hub (aka FindependenceHub.com) is now two years old, a veritable toddler!
We launched the evening of Nov. 3, 2014, several months after I declared my Findependence Day on May 20, 2014.
This is post number 802, which means we have more than exceeded our original goal of providing fresh content every day (Sundays excepted). While I try to write one or two blogs a week myself, this wouldn’t have been possible without the many guest contributors who have lent their time, energy and names to the project.
Thanks also to the early supporters of the Hub: you know who they are from the banner ads that provide a little operating cash and a lot of moral support.
Thanks too to the many individuals who registered on the site and subscribed to our daily news email. There is no charge for this service (that’s why we need some banners to defray costs): all that’s needed is to supply a valid email address.
Fram Oil Filters: “Pay me now or pay me later.” (YouTube.com)
My latest MoneySense Retired Money column was published earlier today: click on the headline Retirement Tax Tips for full version.
As I say at the end of the column, after decades of the RRSP contribution habit, I admit it goes against the grain to start decumulating. And even more so, it’s counterintuitive to pay taxes on investment funds before you HAVE to.
However, to paraphrase the famous Fram Oil Filters TV commercial, you can pay me now or you can pay me more later — much more later. (For the famous 1972 “Pay me now or pay me later” Fram Filter ad, click on this YouTube link.)
Since tax is one of the biggest, if not THE biggest expense in retirement, I’d rather pay a little tax now prematurely than a lot of tax later.
Live on early RRSP withdrawals and defer CPP benefits
Emeritus’s Doug Dammer
So what has this got to do with RRSPs and taxes? As the column points out in detail, citing Emeritus Retirement Solutions’ Doug Dahmer, at some point those great tax refunds from decades of RRSP contributions eventually come back to haunt you. Usually that’s when you turn 71 and are forced to start making annual, and taxable, withdrawals from Registered Retirement Income Funds or RRIFs. (you can opt instead to annuitize or to cash out and pay a ton of tax upfront).
In practice, most will choose to take RRIF withdrawals starting at the end of the year you turn 71, but if you also have a good employer pension, the usual government pensions and other income sources, there’s a good chance some of those withdrawals will be at or near the top marginal tax rate, which these days ranges from 46% to more than 50%, depending on your income and the province in which you reside. And as the MoneySense column mentions, if you’re in the OAS clawback zone, you may have to add a further 15% to the government’s haul.
But if you’re semi-retired and “basking” in a relatively low tax bracket in your Sixties, you may be able to start withdrawing RRSP funds earlier than necessary, which may make sense if it’s only being taxed at 20 or 30%. Plus, as Dahmer suggests, by living on some of this relatively low taxed early RRSP funds you can defer the receipt of Canada Pension Plan (CPP) benefits and possibly Old Age Security benefits to as late as 70.
Every year you can defer taking CPP by living instead on early RRSP withdrawals, the CPP benefit will be 8.4% higher. Dahmer poses the rhetorical question whether your RRSP can generate an annual return of 8.4%. These days you certainly can’t generate that return with fixed-income and after all, we’re talking about people who by now should have a good percentage (perhaps 50%) in fixed-income. You may or may not get 8.4% from stocks but if you do, you’re also subjecting your portfolio to possible capital losses.
For many Canadians, shopping is a national pastime. Some of our favourite activities include planning a vacation and picking up new furniture – unfortunately, shopping for a mortgage and auto insurance doesn’t seem to be one of them, finds a recent Ipsos survey commissioned by LowestRates.ca.
For most of us, buying a home is the single biggest financial decision of our lifetime. It shouldn’t come as a surprise then that 67% of Canadian mortgage holders consider taking a mortgage a “very important” financial decision. Yet, what comes as a shocker is how little time we’re spending shopping for mortgages. We’re spending an average of 7.75 hours planning a $2,000 vacation, yet we’re only spending 5.75 hours (2 hours less) finding a $300,000 to $500,000 mortgage. I discuss these surprising findings and more in my upcoming book, Burn Your Mortgage.
The survey findings aren’t any different for auto insurance. While 52% of us believe auto insurance is a “very important” financial decision, we’re spending more time picking furniture and choosing a paint colour than auto insurance. Based on these findings, it would seem many of us don’t have our financial priorities straight.
Take the time to shop for Mortgage and Auto Insurance
If you have young children or grandchildren, you know what’s really important. Yes, it’s Halloween time again, which means you’ll see plenty of witches and vampires scurrying around. You’ll no doubt find these characters more amusing than frightening, but you don’t have to look far to find things that are a bit more alarming — such as these scary investment moves:
Paying too much attention to the headlines
Some headlines may seem unnerving, but don’t abandon your investment strategy just because the news of the day appears grim.
Chasing “hot” investments
You can get “hot” investment tips from the talking heads on television, your next-door neighbour or just about anybody. But even if the tip was accurate at one point, by the time you get to a “hot” investment, it may already be cooling down. And, even more importantly, it simply may not be appropriate for your individual risk tolerance and goals.
Ignoring different types of investment risk
Most investors are aware of the risk of losing principal when investing in stocks. But if you shun stocks totally in favour of perceived “risk-free” investments, you’d be making a mistake because all investments carry some type of risk. For example, with fixed-income investments, including GICs and bonds, one risk you may encounter is inflation risk — the risk that your investment will provide you with returns that won’t even keep up with inflation and will, therefore, result in a loss of purchasing power over time.
Another risk you can incur is interest-rate risk — the risk that new bonds will be issued at higher rates, driving down the price of your bonds. Bonds also carry the risk of default, though you can reduce this risk by sticking with bonds that receive the highest ratings from independent rating agencies.
Failing to diversify
If you only own one type of investment, and a market downturn affects that particular asset class, your portfolio could take a big hit. But by spreading your dollars among an array of vehicles, such as stocks, bonds and government securities, you can reduce the effects of volatility on your holdings. (Keep in mind, though, that diversification cannot guarantee profits or protect against loss.)
Focusing on the short term
If you concentrate too much on short-term results, you may react to a piece of bad news, or to a period of extreme price volatility, by making investment moves that are counterproductive to your goals. Furthermore, if you’re constantly seeking to instantaneously turn around losses, you’ll likely rack up fees, commissions and possibly taxes. Avoid all these hassles by keeping your eyes on the future and sticking to a long-term, personalized strategy.
You can’t always make the perfect investment choices. But by steering clear of the “scary” moves described above, you can work toward your long-term goals and hopefully avoid some of the more fearsome results.
Fraser Willson is a financial advisor and insurance agent for Edward Jones Investments. He works closely with families and businesses, helping them achieve their investment objectives in an organized and disciplined manner.
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