The Structure of Retirement
Income
Advanced Workshop
CAIFA Vancouver
November 1, 2001
Daryl Diamond CFP CLU CHFC
Diamond Retirement Planning Ltd.
www.personalfinanceseries.com
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Today’s Presentation
1.
2.
3.
4.
What is different from six years ago?
The structure of retirement income
Developing a process to attract clients
Touch on today’s investment climate
Things you can use with clients
Above all else…
to accomplish the above without putting
you into a coma
Today’s Business Realities
GIC harvest is over
Banks /C.U.’s have
planners
Fund industry sales
Difficult markets
DSC out of favor
More demanding
clients?
Retirements
Termination/severance
Inheritance
Life insurance proceeds
Attracting existing
portfolios
Five Stages of Retirement Planning
1
2
3
4
5
Accumulation
Positioning
Income Structure
Disposition
Distribution
Three Significant Timing Points
1 Point of independence
2 Point of realization
3 Point of consolidation
The Point of Independence
That juncture where an individual’s assets
and benefits can create an ongoing income
stream that would allow them to discontinue
employment.
It is at this point that an individual can make
an election to “Trade money for time”
The Point of Realization
That juncture when an individual (couple)
realizes the following;
We should get some help with this and really
see how it is going to look when we retire.
We need to find someone who can pull all of
this together for us.
Point of Consolidation
Where action is taken after the point
of realization has been reached
Becoming “The Consolidator”
• You must be the one they trust
• Help them define what it is they want
• Be aware of the issues that are significant
to and unique to this market
• Provide advice on other income sources
Becoming “The Consolidator”
•
•
•
•
Be technically competent
Be able to integrate all sources of income
Illustrate and communicate your plan
Understand that income structure is only
one facet of income planning
The Planning Process
Initial meeting and assessment
1.
2.
3.
4.
5.
6.
Gathering data
Establishing client objectives & priorities
Identification of issues and opportunities
Preparation of alternatives and recommendations
Implementation of chosen alternatives
Monitor and review
The Four Planning Channels
1.
2.
3.
4.
Income Structure
Investment Portfolios
Health Risk Management
Wealth Transfer
Structural
Plan
Investment
Portfolio
Health Risk
Management
Wealth
Transfer
The Two Factors
… From Two Perspectives
Accumulation
Risk
Return
Retirement
Income
Risk
Return
In the retirement market, there is an incredible opportunity
in risk analysis / risk management
Managing Risk
Protecting income producing assets
Capital Loss
Investment Loss
Purchasing Power Loss
Health Related Loss
Tax Loss
Changing Factors
Male Age 65
Year
Life Expectancy Income Factors
1965
7.5 Yrs
1975
10 Yrs
1985
14 Yrs
Today
17.5 Yrs
2010
20 + Yrs
Only a few retirement years to fund
CPP commences
Appreciating real estate values
High nominal interest rates
Excessive taxation
Excessive Government borrowing
None of the above apply in the
same manner
Issues and Assets
Issue
Retirement Age
Life Expectancy
Lifestyle Expectations
Taxation
Inflation
Family Complications
Wealth Transfer
Forecast
earlier
_______
longer
_______
better
_______
greater
_______
present
_______
possible
_______
important
_______
Impact
more
_______
more
_______
_______
more
more
_______
more
_______
_______
_______
more
Potential Clients
•
•
•
•
Parents of existing clients
Educational seminars
Mining group accounts
Referrals
Retirement Income Planning
Defined
Creating and implementing a plan that will
deliver what clients want by making the
most efficient use of their assets and
benefits.
Retirement Income Planning
Defined
Creating and implementing a plan that will
deliver what clients want by making the
most efficient use of their assets and
benefits.
Income Basics
•
•
•
•
•
What are my priorities
How much income do I want / need?
How long will I require this?
From where should I draw my income?
General issues and considerations
INITIAL CONSIDERATIONS
It’s Net Income That Counts
Emp.
4,000
Gross Income
Deductions
Combined Fed.&
Prov. Taxes
962
CPP
110
E.I.
78
Group Benefits
72
Pension @ 4.5%
180
Parking
125
Group RRSP
200
Net Income
2,273
Ret.
@ 65
2,500
494
0
0
0
0
0
0
2,006
Difference
1,500 (-37.5%)
267 (-11.7%)
1. How Do Income Needs Change?
1. You now have 100% leisure time expenses
2. Business/work expenses disappear
3. Group benefits disappear (health, dental, life insurance)
4. From payroll to ‘drawing upon assets’
5. No longer in ‘savings mode’
2. Our Retirement Expectations
1. More fulfilling
2. Longer life expectancy
3. Stay healthier longer
4. Question stability of government programs
5. View retirement as the start of a new phase v/s ‘The
End’
3. General Issues
 Defining “retirement”
 Working after you retire
 Where are you going to live?
 What is the state of health?
4. Determining Your Income
Level
• Percentage of pre-retirement income
• Budget approach
– After-tax
– Household
• Reduction at some point
• Survivor income needs
Additional Considerations
• Will there be any debt / mortgage to service
at the time of retirement?
• Is there a desire / need for additional
income in the early years?
• Are there any major purchases to be made
at the time of retirement?
• Do we need cash flow for risk management
premiums?
Varying Income Needs
Different
objectives
Do more things earlier
Don’t need same income all the way through
Difference between life expectancy and years
of good health
The Prime Approach To
Your Retirement Years
That period of time between
when you commence “retirement”
and
the moment that one of you
needs care or passes away
Information Gathering
 Formal “Data Gathering” process
 Investor profile
 Details of investments, RRSP’s pensions,
Government Benefits
 Most recent income tax return
 Revenue Canada Notice Of Assessment
 Life, disability, C.I. or health plan contracts
 Copy of will, POA, trust agreements etc.
 Advisor’s checklist
Establishing Your Priorities
Rank the following in terms of their importance to you
• Income security
The Older You Become,
The Longer You Will Live
Current
Age
55
60
65
70
75
Average Life Expectancy
Men
Women
81
86
82
87
83
88
84
88
86
89
Establishing Your Priorities
Rank the following in terms of their importance to you
•
•
•
•
•
Income security
Highest possible income today
Coping with inflation
Estate transfer
Using capital assets
Asset Usage
A) No Income
Grow assets instead
Income
producing
assets
B) Some Income
Keep asset values
constant
C) Max Income
Age
Life
expectancy
Deplete assets
Establishing Your Priorities
Rank the following in terms of their importance to you
•
•
•
•
•
Income security
Highest possible income today
Coping with inflation
Estate transfer
Using capital assets
• Health risk management
Years Of Good Health At Age 65
Life
Expectancy
Good
Health
Male
15
8
Female
19
9
Establishing Your Priorities
Rank the following in terms of their importance to you
•
•
•
•
•
•
•
Income security
Highest possible income today
Coping with inflation
Estate transfer
Using capital assets
Health risk management
Tax Reduction
Taxation Of Income
Taxable Income
Federal Tax
Combined
Marginal*
$0 - $30,754
0 + 16%
25.7%
$30,755 - $61,509
$ 4,920 + 22%
36.8%
$61,510 -$100,000
$11,685 + 26%
42.5%
$100,000 and over
$21,692 + 29 %
46.8%
* Average provincial rate
What You Keep On Your Investments
For each $1,000 taxable
Taxable Income
<$30,755
>$30,754
Interest
$743
$632
Dividends
$846
$707
Capital Gains
$871
$816
Marginal rates using average provincial rate
The “Age Credit”
• To qualify you must be age 65 or over by
the end of the calendar year
• Serves as a credit against Federal tax
• In 2000, net income greater than $26,284
reduces credit by 15% and is eliminated by
net income of $49,284
• Is transferable
The Pension Income Credit
• $160 Federal credit applies to the first $1,000 of
eligible periodic income
– Pension income at any age or after age 65
• LIF / LRIF payments
• RRIF or registered annuity payments
• Taxable portion of a non-registered annuity including
deferred annuities
or where you are the surviving spouse of someone who was
claiming the credit
• Is transferable
A Tax Checklist
•
•
•
•
Withholding tax amounts
Form of investment income
Making use of lower tax brackets
Splitting income where possible
Income
{
Personal
savings
Sources
Income
from other
investments
RRSP Income
(RRIF’s, Annuities
{
Employer pension
{
Canada Pension Plan (CPP)
Employee
benefits
Government
benefits
Old Age Security (OAS)
Early Receipt of CPP
Age
60
61
62
63
64
Months
Early
60 mos
48 mos
36 mos
24 mos
12 mos
Present
decrease
@ 1/2% per
month
70%
76%
82%
88%
94%
Monthly
payments
$70.00
$76.00
$82.00
$88.00
$94.00
Monthly
decrease
$30.00
$24.00
$18.00
$12.00
$6.00
Payments
prior to 65
$4,200
$3,648
$2,952
$2,112
Make up
time in
months
140
152
164
176
188
Make up
time in
years
11.66
12.67
13.67
14.67
15.67
79
80
81
Breakeven
point at
age
77
78
$1,128
Income
{
Personal
savings
Sources
Income
from other
investments
RRSP Income
(RRIF’s, Annuities
{
Employer pension
{
Canada Pension Plan (CPP)
Employee
benefits
Government
benefits
Old Age Security (OAS)
Reading Your Pension Statement
• Shows amount of monthly income earned to
date of statement …
• Payable at age 65 - NRD
• Normal form of income - single life guar 5
• Expect a basic reduction of 10% - 15%
• D.B. restrictions at age 55
Shopping For Your Annuity
Male 65 Female 62 Joint G15, $100,000
1.
2.
3.
5.
10.
15.
Sun Life
Equitable Life
Empire Life
Royal & Sun Alliance
Imperial Life
Great West Life
678.15
677.96
677.95
674.35
666.28
607.14
Source: Cannex Financial Exchange Limited
Pension / LIF
Income
$100,000 Male Age 65 - Female Age 62
Age
S G15
JL
65
765
678
615
70
765
678
653
75
765
678
696
79
765
678
734
G15
LIF*
* assumes 7% return
Pension / LIF
Estate Value
$100,000 Male Age 65 - Female Age 62
Age
S G15
JL
G15
LIF*
65
89,283
80,267
100,000
70
67,566
59,882
93,909
75
38,869
34,272
83,345
79
0
0
69,641
* assumes 7% return
Converting Locked-In Money
• Convert LIRA to LIF or LRIF
• Commence income on minimum w/d basis
• Difference between min & max can be
transferred to RRSP (CCRA T2030)
• Deduction offsets receipt (except for min)
• Direct transfer under 60 (I) (v) does not
affect RRSP contribution room
Income
{
Personal
savings
Sources
Income
from other
investments
RRSP Income
(RRIF’s, Annuities
{
Employer pension
{
Canada Pension Plan (CPP)
Employee
benefits
Government
benefits
Old Age Security (OAS)
RRSP / RRIF Income
•
•
•
•
•
•
Defer or commence
Taxation and control
RRIF or RRSP lump sums
Spousal RRSP considerations
Use of spouse’s age for min w/d
Stopping income streams
Capital Encroachment
Male 65 $100,000 5%
Interest only withdrawal
Age
65
72
75
80
85
90
Income
$5,000
$7,348
$7,075
$6,645
$6,219
$5,791
Balance
$100,000
$ 97,003
$ 89,085
$ 74,972
$ 59,380
$ 41,899
Income
{
Personal
savings
Sources
Income
from other
investments
RRSP Income
(RRIF’s, Annuities
{
Employer pension
{
Canada Pension Plan (CPP)
Employee
benefits
Government
benefits
Old Age Security (OAS)
Non-Registered Assets
•
•
•
•
GIC’s
Distributions from investment funds
Use of capital
Deferring taxation
Why SWP’s Work
C.I. Global
Year End Unit Price
1989
1990
1991
1992
1993
1994
1995
5.70
5.01
6.47
7.16
9.48
8.69
9.04
1996
1997
1998
1999
2000
YTD
9.38
10.38
12.02
16.48
15.84
10.78
LIF Investment Fund Selection
THE MONEY WEDGE
Fund A
Fund B
$40,159
$40,000
Fund G
$40,000
Money Market
$18,000
Fund C
Fund F
$30,000
Initial Value $228,159
$15,000
Fund E
$30,000
Fund D
$15,000
History Lesson
Don’t Miss The Recovery
Market
Top
Bear
Duration
May 46
Aug 56
Dec 61
Feb 66
Nov 68
Jan 73
Nov 80
Oct 87
Jul 90
Mar 00
38
14
6
8
18
21
21
4
3
Sep 21
Bear
Decline
30%
22%
28%
22%
36%
48%
28%
35%
20%
36%
Bull
Increase
267%
86%
80%
48%
73%
226%
233%
67%
427%
??
Non-registered capital
$3,000
per
month
RRIF
$1,800
$1,260
Non-registered
distrib. $200
Non-registered
distrib. $200
Non-registered
distrib. $200
OAS $515
CPP $540
Pension
$1,000
Age
58
Age
60
Age
65
$645
Order Of Income Structure
1 Government Benefits
2 Pension / Locked-In Assets
3 Taxable Non-RRSP Distributions
4 RRSP / RRIF Income
5 Non - Registered Capital
Income Allocation
Non-Reg
15%
Pension
45%
RRIF
20%
CPP / OAS
20%
The Investment Decision Process
Written financial plan
Objectives, risk
tolerance of investors
Risk/return characteristics
of asset classes
Long term
asset mix
Selection of Funds
Bonds/GICs/Annuities
Investment Policy Statement
Monitoring / Rebalance
Take profits
Steps In The Process
•
•
•
•
•
•
Determine priorities
Establish net income objective
Address survivor issues
Create fully taxable income as base
Use tax-efficient income at higher levels
Use least flexible assets first
Remember the “Golden Rule”
The person who advises on
“The Gold” ...
also advises on the insurance
needs
and solutions
Why We Are Worth 1% / Year
•
•
•
•
•
Increase investment returns by 1%
Save people 1% from mistakes
Save them time, stress, worry
Save them $_______ / yr in income taxes
Preserve 10’s - 100’s of thousands of $ in
estate value through conservation
• Provide continuity to spouse / heirs
Opportunity Knocks
 Demonstrate your value as an advisor
 People DO want to hear from you
 Pick up existing accounts by having
a process
 A great time to ask for referrals
 Get more money into the market
 While everyone else is hiding, get going
Positioning For The Future
•
•
•
•
Take on the role of a consultant
Have a written process for your clients
Use comprehensive planning
Become adept at Risk Analysis and
Management
• Specialize and develop strategic alliances
• Evolve your money practice in the direction
of asset-based compensation
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