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Maximizing your Retirement

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  1. Maximizing your Retirement February 14, 2013

  2. 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

  3. RRSP or TFSA? RRSP 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 • 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 York University Faculty & Staff

  4. Planning with TFSAs & RRSPsTax 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

  5. Planning with TFSAs & RRSPsTax 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

  6. Planning with TFSAs & RRSPsTax 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

  7. 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

  8. 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 increase taxation or OAS payments • Over subsequent years, retiree can re-contribute the $25,000 York University Faculty & Staff

  9. TFSA tax-free rollover on death • Couple both have TFSAs with a balance of $30,000 each, naming the other as beneficiary • Spouse dies • Survivor retains $60,000 in TFSA York University Faculty & Staff

  10. Canadian Savings Bond Interest Rates York University Faculty & Staff

  11. Canadian Savings Bond Interest Rates York University Faculty & Staff

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

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

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

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

  16. Rate of return expectations have changed York University Faculty & Staff

  17. 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

  18. 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

  19. 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

  20. 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

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

  22. 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 – 6.4% payout • 65 Female with a 10 year minimum guarantee - 5.9% payout • 65 Year old couple, 10 year minimum guarantee, non-reducing joint-life annuity – 5.4% 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

  23. 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