The Structure of Retirement Income Daryl Diamond CFP CLU CHFC Diamond Retirement Planning Ltd. Advanced Workshop CAIFA Vancouver November 1, 2001

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Today’s Presentation 1. What is different from six years ago? 2. The structure of retirement income 3. Developing a process to attract clients 4. 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 èGIC harvest is over èBanks /C.U.’s have planners èFund industry sales èDifficult markets èDSC out of favor èMore demanding clients? èRetirements èTermination/severance èInheritance èLife insurance proceeds èAttracting existing portfolios

Five Stages of Retirement Planning 1 Accumulation 2 Positioning 3 Income Structure 4 Disposition 5 Distribution

Three Significant Timing Points 1Point of independence 2Point of realization 3Point 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 1. Gathering data 2. Establishing client objectives & priorities 3. Identification of issues and opportunities 4. Preparation of alternatives and recommendations 5. Implementation of chosen alternatives 6. Monitor and review Initial meeting and assessment

The Four Planning Channels 1. Income Structure 2. Investment Portfolios 3. Health Risk Management 4. Wealth Transfer

Structural Plan Investment Portfolio Health Risk Management Wealth Transfer

The Two Factors … From Two Perspectives Accumulation Retirement Income Risk Return Risk Return In the retirement market, there is an incredible opportunity in risk analysis / risk management

Managing Risk Capital Loss Investment Loss Purchasing Power Loss Health Related Loss Tax Loss Protecting income producing assets

Changing Factors Male Age 65 Income FactorsYearLife Expectancy 7.5 Yrs 10 Yrs 14 Yrs Today Yrs 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 Impact _______ earlier longer better greater present possible important 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 Ret. 65 Difference Gross Income4,0002,500 1,500 (-37.5%) Deductions Combined Fed.& Prov. Taxes CPP110 0 E.I Group Benefits %180 0 Parking125 0 Group RRSP200 0 Net Income 2,273 2, (-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? ¹ 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 è Different objectives è Do more things earlier è Don’t need same income all the way through è 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 4 Formal “Data Gathering” process 4 Investor profile 4 Details of investments, RRSP’s pensions, Government Benefits 4 Most recent income tax return 4 Revenue Canada Notice Of Assessment 4 Life, disability, C.I. or health plan contracts 4 Copy of will, POA, trust agreements etc. 4 Advisor’s checklist

Establishing Your Priorities Income security Rank the following in terms of their importance to you

The Older You Become, The Longer You Will Live Current Average Life Expectancy AgeMenWomen

Establishing Your Priorities Income security Highest possible income today Coping with inflation Estate transfer Using capital assets Rank the following in terms of their importance to you

Asset Usage A) No Income Grow assets instead B) Some Income Keep asset values constant C) Max Income Deplete assets Age Life expectancy Income producing assets

Establishing Your Priorities Income security Highest possible income today Coping with inflation Estate transfer Using capital assets Rank the following in terms of their importance to you Health risk management

Years Of Good Health At Age 65 Life Good ExpectancyHealth Male 15 8 Female 19 9

Establishing Your Priorities Income security Highest possible income today Coping with inflation Estate transfer Using capital assets Health risk management Rank the following in terms of their importance to you Tax Reduction

Taxation Of Income Taxable Income $0 - $30,754 $30,755 - $61,509 $61,510 -$100,000 $100,000 and over Federal Tax % $ 4, % $11, % $21, % Combined Marginal* 25.7% 36.8% 42.5% * Average provincial rate 46.8%

Taxable Income $30,754 Interest $743 $632 Dividends $846 $707 Capital Gains $871 $816 What You Keep On Your Investments For each $1,000 taxable 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 from other investments RRSP Income (RRIF’s, Annuities Employer pension Canada Pension Plan (CPP) Old Age Security (OAS) { { Government benefits { Employee benefits Personal savings IncomeSources

Payments $4,200 $3,648 $2,952 $2,112 $1,128 prior to 65 Make up time in months Make up time in years Breakeven point at age Early Receipt of CPP

Income from other investments RRSP Income (RRIF’s, Annuities Employer pension Canada Pension Plan (CPP) Old Age Security (OAS) { { Government benefits { Employee benefits Personal savings IncomeSources

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, Sun Life Equitable Life Empire Life Royal & Sun Alliance Imperial Life Great West Life Source: Cannex Financial Exchange Limited

Pension / LIF Income $100,000 Male Age 65 - Female Age 62 Age S G15 JL 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, , ,566 59,882 93, ,869 34,272 83, ,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 from other investments RRSP Income (RRIF’s, Annuities Employer pension Canada Pension Plan (CPP) Old Age Security (OAS) { { Government benefits { Employee benefits Personal savings IncomeSources

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 AgeIncomeBalance 65$5,000$100,000 72$7,348$ 97,003 75$7,075$ 89,085 80$6,645$ 74,972 85$6,219$ 59,380 90$5,791$ 41,899

Income from other investments RRSP Income (RRIF’s, Annuities Employer pension Canada Pension Plan (CPP) Old Age Security (OAS) { { Government benefits { Employee benefits Personal savings IncomeSources

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 YTD

LIF Investment Fund Selection THE MONEY WEDGE Initial Value $228,159 $40,159 $40,000 $18,000 $40,000 $30,000 $15,000 Fund G Fund F Fund E Fund D Fund C Money Market Fund B Fund A

History Lesson Don’t Miss The Recovery Market Bear Bear Bull Top Duration Decline Increase May % 267% Aug % 86% Dec % 80% Feb % 48% Nov % 73% Jan % 226% Nov % 233% Oct % 67% Jul % 427% Mar 00 Sep 21 36% ??

Age 58 Pension $1,000 Age 60 Age 65 CPP $540 OAS $515 Non-registered distrib. $200 Non-registered capital $3,000 per month $1,800$1,260$645RRIF

Order Of Income Structure 1Government Benefits 2Pension / Locked-In Assets 3Taxable Non-RRSP Distributions 4RRSP / RRIF Income 5Non - Registered Capital

Income Allocation

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 sDemonstrate your value as an advisor sPeople DO want to hear from you sPick up existing accounts by having a process sA great time to ask for referrals sGet more money into the market sWhile 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