A GIS case study Adeline’s dilemma

July 29, 2012 James Daw

Adeline, age 66 Income $20,000 GIS $2,927 GIS stopped mid-year

Assets RRSP $30,000 $120,500 from home sale TFSA $12,086 (Tax-Free Savings Account) car $16,000

Bank’s RRSP advice “ …given my modest income, I could withdraw $2,000 per year without losing ANYTHING from my GIS.”

FALSE

Service Canada’s advice “I lose 50 cents from every dollar I withdraw.”

FALSE

Adeline’s actual loss $1,000 of GIS + $308 of taxes 65.4 % of $2,000

Adeline’s reaction “ I don’t feel I can afford to lose anything. This RRSP was to be my security blanket.”

Tina’s advice Developed educational tools for National Initiative for the Car of the Elderly (NICE)

Step 1 Convert RRSP to RRIF (Registered Retirement Income Fund) $2,000 pension tax credit REASON

Step 2 Withdraw entire RRIF in $15,000 installments Lose GIS once Only pay tax Only 20% held for tax REASONS

Step 3 Move $5,000 per year to Tax-Free Savings Account No tax on interest No GIS lost on TFSA withdrawals REASONS

Adeline’s $120,500 House? Not enough, even in Barrie Property tax, maintenance Rental income to help with mortgage would cut into GIS Shared ownership would not cut into GIS Annuity? Prescribed annuity pays capital + interest Capital doesn’t cut into GIS $4,911 capital, $1,123 interest Interest not enough to be taxed, but cuts GIS by $561.50

Other income potential $3,500 from part-time work does not affect GIS income

GIS strategies are controversial

Reasons to save Age 67 for OAS/GIS by 2029 Options before long-term care Major purchases Legal, other professional fees Final expenses

Age 67 OAS/GIS Average CPP benefit is $6,349 Someone age 50, with no other savings, might have to save$32,657* by 2027 to replace OAS/GIS from age 65 to 67 *Amount in 2027 dollars if inflation averages 2%

Closing OAS/GIS gap Birth month A person born in February 1962 would have biggest challenge to save $32,657 by age 65 in February 2027 * Assumes interest rate in tax-free savings account equals inflation rate. Start saving monthly in January, 2013

Long-term care Apply to Community Care Access Centre (CCAC) Waiting lists can be three years long You are considered “safe” in hospital, but at risk of losing capacity for independent living High risk of infection Private alternatives can cost $40,000/year Few can afford without selling a home

Final expenses Toronto’s Employment and Social Services department will help cover funeral costs Not just for those receiving Ontario Works or Ontario Disability Support Program (ODSP) One must apply for the support The city may recover costs from all sources available to the deceased person

Guaranteed life insurance Policies sold on TV are not the cheapest You may pay for two years to qualify (if you die first, premiums may be refunded) Insurance is cheaper than saving -- if your life is short Costs could grow beyond the death benefit

Guaranteed life insurance Funeral cost Benefit Total premium Male 41 $30/month

Final expenses: ‘Preneed’ Insurance Pay premiums for 1, 3, 5, 10, 15 or 20 years Funeral home guarantees policy will pay for funeral of your choice if you have a funeral contract If unhealthy can pay one to five years to qualify Savings annuity, trust accounts Contributions refundable Once funded, keeps up with cost of funeral if you have a funeral contract Up to $15,000 tax-free for funeral, $20,000 for cemetery

‘Preneed’ insurers Guaranteed Funeral Deposits of Canada Fraternal (Owned by funeral directors) Foresters (Also a fraternal) Contact funeral home first to arrange service!