Maximizing your Retirement February, 14, 2014

What we’d like to cover Should I contribute to an RRSP or TFSA What rate of return should we use for our retirement savings projections? How much income can I plan to draw from my savings in retirement York University Faculty & Staff

RRSP or TFSA? RRSP Defers income receipt from high tax years to low tax years –Appropriate for high income earners who expect to have lower incomes in retirement –Replaces regular earned income in retirement TFSA Eliminates tax on future investment incomes and growth –Appropriate for both high and low income earners –Great vehicle for saving for large ticket items in retirement –Can also replace regular earned income in retirement York University Faculty & Staff

Planning with TFSAs & RRSPs Tax Deferral in Action – TFSA used as a retirement savings vehicle In this example we invest $5,000 per year for 25 years assuming a 3% yield In the RRSP example, we have reinvested the annual tax refund

Planning with TFSAs & RRSPs Tax Deferral in Action – TFSA used as a retirement savings vehicle In Year 26 begin withdrawing $10,000 annually (net of taxes) For a low income earner/pensioner (earning less than $37,000 year from all sources) both the TFSA and RRSP provide an additional 6 years of income TFSA offers specific advantages over RRSP –Not income tested –No minimum withdrawals –No negative tax impact from emergency withdrawals

Planning with TFSAs & RRSPs Tax Deferral in Action – TFSA used as a retirement savings vehicle In Year 26 begin withdrawing $10,000 annually (net of taxes) For a typical high income earner (earning more than $75,000 annually) the RRSP will offer a longer income stream and larger contribution opportunity

Advantages of a TFSA in retirement Contribution room is not age or income tested TFSA withdrawals are not included in taxable income Tax-free rollover to spouse on death

TFSA in retirement example Retiree needs to purchase a new car –$25,000 net withdrawal from RRIF would be taxed and may claw back most if not all Old Age Security –$25,000 net withdrawal from TFSA would not increase taxation or affect OAS payments –Over subsequent years, retiree can re-contribute the $31,000 York University Faculty & Staff

TFSA tax-free rollover on death Couple both have TFSAs with a balance of $35,000 each, naming the other as beneficiary Spouse dies Survivor retains $70,000 in TFSA York University Faculty & Staff

Canadian Savings Bond Interest Rates 1980's Series nameInterest paid 1980 Nov S % 1981 Nov S % 1982 Nov S % 1983 Nov S389.25% 1984 Nov S % 1985 Nov S408.50% 1986 Nov S417.75% 1987 Nov S429.00% 1988 Nov S439.50% 1989 Nov S % Average10.88% York University Faculty & Staff

Canadian Savings Bond Interest Rates 1980's2000's Series nameInterest paid2000 Nov S664.85% 1980 Nov S %2000 Nov S664.85% 1981 Nov S %2001 Nov S721.80% 1982 Nov S %2002 Nov S782.00% 1983 Nov S389.25%2003 Nov S841.75% 1984 Nov S %2004 Nov S901.50% 1985 Nov S408.50%2005 Nov S962.00% 1986 Nov S417.75%2006 Nov S % 1987 Nov S429.00%2007 Apr S % 1988 Nov S439.50%2007 Nov S % 1989 Nov S %2009 Nov S % Average10.88%Average2.37% York University Faculty & Staff

TSX Composite compound growth York University Faculty & Staff 1980’s CAGR of 8.3%

TSX Composite compound growth York University Faculty & Staff 1980’s CAGR of 8.3%2000’s CAGR of 3.8%

S&P 500 compound growth York University Faculty & Staff 1980’s CAGR of 12.7%

S&P 500 compound growth York University Faculty & Staff 1980’s CAGR of 12.7%2000’s CAGR of (1.3%)

Rate of return expectations have changed 1980s Portfolio Experience InvestmentReturnWeight Bonds10.88%50% Canadian stocks8.30%25% US stocks12.70%25% Portfolio return10.69% CPI5.89% 2000s Portfolio Experience InvestmentReturnWeight Bonds2.37%50% Canadian stocks3.80%25% US stocks-1.30%25% Portfolio return1.81% CPI2.00% York University Faculty & Staff

One approach Risk-free rate of return + Inflation + Risk premium = Return 0.50% (Risk-free rate of return) 2.00% (inflation target of BOC) 2.00% (Risk premium) 4.50% Adverse conditions test at 75% of return York University Faculty & Staff

Other approaches Using a series of historical annual returns to give a sense of volatility Monte Carlo scenarios where many possible market outcomes are calculated York University Faculty & Staff

Making adjustments along the way When you review your investment returns: –If investment returns are under expectation –Do you need to increase how much you’re saving? Do you need to consider a later retirement? –If investment returns are above expectation –Should you consider decreasing how much you’re saving? Can you consider an earlier retirement? York University Faculty & Staff

How much money can we draw in retirement? Income obligation that may last thirty years or more (Longevity Risk) Markets that will be volatile (Performance Risk) Loss of purchasing power (Inflation Risk) York University Faculty & Staff

Establishing sustainable draw down rates Interest, dividends, rents and royalties Annuity rates York University Faculty & Staff

Draw down rates in retirement Interest, dividends, rents and royalties –Can be calculated on a portfolio –Probably between 1.5% and 2.5% currently Annuity rates –65 Male with 10 year minimum guarantee – 6.7% payout –65 Female with a 10 year minimum guarantee – 6.1% payout –65 Year old couple, 10 year minimum guarantee, non-reducing joint-life annuity – 5.7% payout 3%-5% is where we currently test at –Investment allocation will depend on risk tolerance, planned draw down rate and investor’s sophistication York University Faculty & Staff

Good money habits in retirement Plan for those large infrequent purchases (replacing your car) in your retirement income plan prior to retiring Where possible, make your large discretionary draws from your retirement capital in good years. Review your drawdown rate –If it falls below your income yields, consider increasing your ‘fun money’ spending –If it falls beyond current annuity rates, consider tightening your budget York University Faculty & Staff