Click here to read article published by Toronto Star on April 22, 2015.
We’re getting older, we’re living longer and we have to take better care of ourselves and our financial needs.
Those were some of the messages hidden in the details of Tuesday’s federal budget, a document that rained down benefits on older Canadians. It is a sign that changing demographics and a world of low interest rates and lower investment returns mean the task of remaining financially fit in old age will get tougher. We’ll be living as long in retirement as our working careers lasted and so we need more resources.
The Ontario Retirement Pension Plan (ORPP), which will roll out in 2017, and future changes to the Canada Pension Plan (CPP) — should finance ministers ever agree — will help younger workers. Those already retired need other avenues.
Not a senior yet? Don’t worry. Sooner or later, you will be.
The budget offered two good energizers for this group: relaxed rules for registered retirement income funds (RRIFs) and an expanded limit on tax-free savings accounts (TSFAs). Together they’re a powerful combination.
RRIFs are what happen to your RRSP in the year you turn 71. Ottawa wants all those tax deductions back, so it forces you to collapse your RRSP into a RRIF and start withdrawing the money and begin paying the tax. The minimum withdrawals each year are fixed by the Canada Revenue Agency and rise gradually.
Two important things have changed since the rules were created in the early 1990s. At the time, investments like guaranteed investment certificates (GICs) were paying between 6 per cent and 8 per cent. The life expectancy from birth was in the mid-70s for men and 80 for women.
A woman who is 60 this year can now expect to live on average to 89, says the Canadian Institute of Actuaries, the group who sets the benchmark for pension calculations says. A man who is 60 can expect to live on average to 87.
At the same time, a five-year Government of Canada bond yields 1.5 per cent, which means the money is losing value after inflation.
The relaxed minimum RRIF withdrawal rates mean the money can stay inside longer and have a chance to grow. The new rules set a 5.28 per cent withdrawal in the first year, 30 per cent less than the prebudget amount. If your RRIF was worth $100,000, as an example, the new rules mean withdrawing at least $5,280 in the first year, versus $7,380 under the old ones.
Clay Gillespie a Vancouver financial planner and member of the Conference for Advanced Life Underwriting (CALU), a national organization of financial advisers, said the changes are welcome. They offer flexibility in the face of new and complex retirement realities. CALU made a prebudget pitch to have the rules changed.
“Budget day was good one for me,” Gillespie said in an interview.
Susan Eng, a vice-president with the Canadian Association of Retired Persons (CARP), says the RRIF changes acknowledge our increasing longevity and mean “you’re letting people use their money when they need it. At 71, when you’re relatively healthy you may not need it as much as a decade or two later when medical needs may increase.”
CARP says the need for this flexibility is growing. There are 265,000 Canadians who are 90 or more and the numbers are growing. The probability a woman will reach 90 has doubled for women and tripled for men in the last two decades.
The budget’s worst kept secret, an increase in the TFSA limit, didn’t unfold quite as expected. The limit increases to $10,000 this year (not doubled to $11,000) and is no longer indexed with inflation.
Even so, it is more good news for everyone and for older Canadians in particular, who are looking for ways to shelter money coming out of a RRIF. Those over 75 and between 55 and 59 are the biggest users of TFSAs. Here the combination of lower withdrawals from RRIFs, which mean less taxable income and more income from TFSAs, which is not taxed, means less clawback of such things as Old Age Security.
“The TFSA-RRIF combination becomes very powerful,” Gillespie says.
The budget measures put a new twist on retirement planning, says Karen Tarbox, a senior consultant in Toronto with HR consultant Towers Watson. As defined benefit pension plans disappear and more people are left with defined contribution plans, it means a self-help world.
“The more opportunities there are for savings the better,” she said. “These changes are immediate and help people manage their retirement now.”
I couldn’t agree more.