 2004 McGraw-Hill Ryerson Ltd. Kapoor Dlabay Hughes Ahmad Prepared by Cyndi Hornby, Fanshawe College Chapter 14 Retirement Planning 14-1

 2004 McGraw-Hill Ryerson Ltd. Learning Objectives - Chapter 14 1.Recognize the importance of retirement planning. 2.Analyze your current assets and liabilities for retirement. 3.Estimate your retirement spending needs. 4.Identify your retirement housing needs. 5.Determine your planned retirement income. 6.Develop a balanced budget based on your retirement income. 14-2

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 1 Recognize the importance of retirement planning. 14-3

 2004 McGraw-Hill Ryerson Ltd. Misconceptions About Retirement Planning My expenses will drop when I retire. My retirement will only last 15 years. I can depend on the government and my company pension to pay for my basic living expenses. My pension amount will keep pace with inflation. My employer’s health insurance plan will cover my medical expenses. There’s plenty of time for me to start saving for retirement. Saving just a little bit won’t help. 14-4

 2004 McGraw-Hill Ryerson Ltd. The Importance of Starting Early To take advantage of the time value of money. If from age 25 to 65 you invest $300 a month (9%) at age 65 you’ll have $1.4 million in your retirement fund. Wait ten years until age 35 to start and you’ll have about $550,000. Wait twenty years until age 45 and you’ll have only $201,000 at age

 2004 McGraw-Hill Ryerson Ltd. Why Think About Retirement Planning Now? People are spending more years (16-20) in retirement. A private pension and government benefits are most often insufficient to cover the cost of living. Inflation may diminish the purchasing power of your retirement savings. 14-6

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 2 Analyze your current assets and liabilities for retirement. 14-7

 2004 McGraw-Hill Ryerson Ltd. Conducting a Financial Analysis Review Your Assets Housing. If owned, probably your biggest single asset. If large equity, reverse annuity mortgage. Life insurance cash value can be converted into an annuity. Other investments, such as stocks and bonds. 14-8

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 3 Estimate your retirement spending needs. 14-9

 2004 McGraw-Hill Ryerson Ltd. Estimating Retirement Living Expenses Spending patterns and where and how you live will probably change. Some expenses may go down or stop. Work expenses - gas, lunches out. Clothing expenses - fewer and more casual. Housing expenses - house may be paid off, but taxes and insurance may go up. Federal income taxes will probably be lower

 2004 McGraw-Hill Ryerson Ltd. Estimating Retirement Living Expenses Other expenses may go up. Life and health insurance unless your employer continues to pay them. Medical expenses increase with age. Expenses for leisure activities. Gifts and contributions. Inflation will raise the amount you need to cover your expenses over your probable years in retirement. (continued) 14-11

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 4 Identify your retirement housing needs

 2004 McGraw-Hill Ryerson Ltd. Planning Your Retirement Housing Think about where you want to live. Consider the cost of living and taxes. Type of housing as needs change. Staying in their present home is what most people prefer. Universal design is a home built to allow for potential physical limitations. If not built using universal design, home may need to be retrofitted. Continuing care retirement community provide increasing levels of care

 2004 McGraw-Hill Ryerson Ltd. Avoid Retirement Housing Traps If you plan to move when you retire… Write the local Chamber of commerce to learn about taxes and the economic profile. Check on provincial income and sales taxes and taxes on pension income. Subscribe to a local weekend edition paper. Estimate what your utility costs would be in the area. Rent for awhile instead of buying immediately

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 5 Determine your planned retirement income

 2004 McGraw-Hill Ryerson Ltd. Planning Your Retirement Income Canada/Quebec Pension Plan (CPP/QPP) Provide disability benefits, retirement pensions and survivor benefits Contributions based on salary, Maximum per year Can collect reduced benefits as early as 60 Old Age Security (OAS) Must be over 65 years old Residency requirement Public Pensions 14-16

 2004 McGraw-Hill Ryerson Ltd. Planning Your Retirement Income Guaranteed Income Supplement (GIS) Payable to low income OAS recipients over 65 years of age Spouse’s Allowance (SPA) Benefits to widow, widowers and spouses of OAS beneficiaries who are between Public Pensions 14-17

 2004 McGraw-Hill Ryerson Ltd. Money purchase pension plan Specifies contribution from the employer and/or employee does not guarantee pension benefit you will receive Vesting is employees right to at least a portion of the benefits accrued under an employer pension plan, even if they leave employ of company before retirement. Planning Your Retirement Income Employer Pension Plans - Defined Contribution

 2004 McGraw-Hill Ryerson Ltd. Planning Your Retirement Income A plan that specifies the benefits the employee will receive at the normal retirement age Employer’s contribution not specified Employer makes the investment decisions for your and their contribution, but your benefit amount stays the same regardless of how the investments perform Employer Pension Plans - Defined Benefit

 2004 McGraw-Hill Ryerson Ltd. Planning Your Retirement Income Contributions from employer only Tax-deductible for company Based on company’s net income DPSP holdings taxed when you withdraw them Contributions to DPSP are subtracted from allowable RRSP contributions Deferred Profit Sharing Plan

 2004 McGraw-Hill Ryerson Ltd. Planning Your Retirement Income Property of employees Can take money out if you need it Participation may lower payroll tax withholdings Group RRSP’s

 2004 McGraw-Hill Ryerson Ltd. Pension Plan Portability Legislations enforces right to transfer pension credits from one employer to another Three options when changing jobs Leave credits and receive pension on retirement Transfer to new employer Transfer benefits to locked-in RRSP 14-22

 2004 McGraw-Hill Ryerson Ltd. Personal Retirement Plans Registered Retirement Savings Plans An RRSP is an investment vehicle that allows you to shelter your savings from income tax Not a specific investment, but a way to register a variety of investments to shelter funds Eligible investments include guaranteed funds, mutual funds, life insurance and life annuity products 14-23

 2004 McGraw-Hill Ryerson Ltd. Registered Retirement Savings Plans (RRSP’s) Types of RRSP’s Regular Self-directed can invest in all categories Spousal spouse is named as beneficiary Contribution Limits 18% of earned income to a maximum of $13,500 Maximum amount to increase in years to come reduced by RPP contributions can ‘carry forward’ unused room to later years 14-24

 2004 McGraw-Hill Ryerson Ltd. Options when you deregister your RRSP full withdrawal life annuities fixed-term annuities Registered Retirement Income Funds (RRIF) Life Income Funds (LIF) Segregated funds Registered Retirement Savings Plans 14-25

 2004 McGraw-Hill Ryerson Ltd. Pay a fixed level of payments on a regular basis for a specified amount of time or until death of holder Advantages Income payments until death Level payments Simple No record-keeping Legitimate tax shelter No investment limits Tax-free transfers Annuities 14-26

 2004 McGraw-Hill Ryerson Ltd. Disadvantages Less control over investments Less control over income payout No inflation protections, unless indexed No opportunity for growth No tax deferral No lump sums No protection for spouse, unless joint No estate planning benefits Annuities 14-27

 2004 McGraw-Hill Ryerson Ltd. Learning Objective # 6 Develop a balanced budget based on your retirement income

 2004 McGraw-Hill Ryerson Ltd. Living on Your Retirement Income Be sure you are receiving all the income you are entitled to May need to make some changes in your spending plans Take advantage of all tax savings and benefits available to seniors May work part-time after retirement be aware of how earnings affect your public pension 14-29

 2004 McGraw-Hill Ryerson Ltd. Low yield safe investments must earn enough to keep up with or exceed inflation Withdraw savings with caution need to maintain enough to continue to live comfortably may need to leave some in an estate for your heirs Investing for Retirement