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How to Retire Worry-free

How to Retire Worry-free. Diana Mau, C.A. www.dianamau.bc.ca Copy right by Diana Mau. Objectives of This Seminar.

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How to Retire Worry-free

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  1. How to Retire Worry-free • Diana Mau, C.A. • www.dianamau.bc.ca • Copy right by Diana Mau

  2. 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 !

  3. Objectives of This Seminar- Winston Wong • How to take advantage of some investment products to maximize retirement income, minimize income taxes and provide security.

  4. Sources of Retirement Income • Old Age Security (OAS), Guaranteed Income Supplement (GIS) and other provincial supplements • Canada pension Plan (CPP) • Savings from Registered retirement savings Plan (RRSP), Registered pension Plan (RPP) and personal savings

  5. 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

  6. 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.

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. GIS Benefit Will Terminate If • The pensioner does not file a tax return by April 30th • The pensioner’s income exceed the max cutoff • The pensioner leaves Canada for more than 6 consecutive months • The pensioner dies

  16. 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

  17. 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

  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

  19. 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

  20. Table of OAS, GIS rates (Oct to Dec 2008)

  21. Table of Allowance Rates

  22. 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

  23. 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

  24. CPP Payment Rates - 2008

  25. CPP Payment Rates (Con’t)

  26. 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

  27. 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.

  28. 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

  29. Yearly Max Pensionable Earnings (YMPE) calculation

  30. 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

  31. Example to Calculate Annual Earnings Ratio & Average Earnings Ratio

  32. 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

  33. 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

  34. 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

  35. 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%

  36. 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

  37. OAS / CPP Website • www.hrsdc.gc.ca • Tel: 1-800-277-9914

  38. 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

  39. 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

  40. 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

  41. 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

  42. 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

  43. 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

  44. Health Services • MSP • Can apply for premium assistance • Pharmacare • Home & Community Care and many others

  45. 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

  46. How to Minimize Income & Not Cash Flow • Bury money under your mattress? • Give away your money ? • Tax free savings account ? • RESP for grandchildren ?

  47. 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 ?

  48. Registered Pension Plans (RPP) • Defined Benefit Plan • Defined Contribution Plan

  49. 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%

  50. 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

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