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Chapter 14 Retirement Planning

Chapter 14 Retirement Planning. 14-1. Learning Objectives - Chapter 14. Recognize the importance of retirement planning. Analyze your current assets and liabilities for retirement. Estimate your retirement spending needs. Identify your retirement housing needs.

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Chapter 14 Retirement Planning

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  1. Chapter 14Retirement Planning 14-1

  2. Learning Objectives - Chapter 14 • Recognize the importance of retirement planning. • Analyze your current assets and liabilities for retirement. • Estimate your retirement spending needs. • Identify your retirement housing needs. • Determine your planned retirement income. • Develop a balanced budget based on your retirement income. 14-2

  3. Learning Objective # 1Recognize the importance of retirement planning. 14-3

  4. 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

  5. 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 65. 14-5

  6. Why Think AboutRetirement 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

  7. Learning Objective # 2Analyze your current assets and liabilities for retirement. 14-7

  8. 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

  9. Learning Objective # 3Estimate your retirement spending needs. 14-9

  10. 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. 14-10

  11. Estimating Retirement Living Expenses (continued) • 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 16-20 years in retirement. 14-11

  12. Learning Objective # 4Identify your retirement housing needs. 14-12

  13. 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. 14-13

  14. 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. 14-14

  15. Learning Objective # 5Determine your planned retirement income. 14-15

  16. 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

  17. 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 60 - 65 Public Pensions 14-17

  18. Planning Your Retirement Income • 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. Employer Pension Plans - Defined Contribution 14-18

  19. 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 14-19

  20. 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 14-20

  21. Planning Your Retirement Income • Property of employees • Can take money out if you need it • Participation may lower payroll tax withholdings Group RRSP’s 14-21

  22. 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

  23. 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

  24. 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

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

  26. Annuities • 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 14-26

  27. Annuities • 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 14-27

  28. Learning Objective # 6Develop a balanced budget based on your retirement income. 14-28

  29. 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

  30. Investing for Retirement • 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 14-30

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