The importance of teamwork in managing affairs

Couples who both have an equal interest in managing their investments are not as common as you might think.  The best case scenario is, of course, that both are working with a financial advisor to ensure continuity and an easier transition when one spouse passes away.  But that doesn’t always happen.  Even the simplest of investment approaches can be quite overwhelming and confusing to the surviving spouse who has never manager their financial affairs.

Although the spouse who has handled the finances may feel they are taking car of their spouse, it may actually do more harm than good.  The obvious pitfalls are failure to manage risk, getting too emotionally attached, missing out on opportunities and spending a good part of their spare time in order to avoid paying an advisor commissions for trades.  They can easily miss a big picture item that can cost dearly later on.  A good financial planning tip can often cover years of fees for an advisor. Ensuring your spouse has a good adviser after you’re gone is more valuable than trying to save a few dollars today.

There are a few basic suggestions to simplify your finances and hope both you and your spouse.

■ Consolidating accounts is almost always a good move, regardless of your age.  By closing unnecessary bank and investment accounts you reduce the amount of work considerably.  You will have fewer tax slips, and have a much clearer picture of your situation.  The more financial institutions you deal with the more phone calls and paper work that will be left for your spouse and executor after you are gone.

■ Having all monthly registered pension plan payments (employer pensions, Old Age Security, and Canada Pension Plan) automatically deposited into one bank account will make it easier to budget.   This one bank account should be linked electronically to your non-registered investment account.  RRIF payments can be set up for monthly payments to be transferred from your investment account to your bank account.  Having all transactions flow in and out of one account makes it easier to track income and expenses.

■ Organizing your financial papers will be helpful for you and your spouse.   Check with your advisor and Canada Revenue Agency regarding what documents can be destroyed and shredded.  We recommend cancelling charge cards you no longer use.  If you do owe anyone money that is not registered (i.e. mortgage), we recommend you inform your spouse of these amounts.  Insurance policies that have been cancelled should be clearly labelled.  Any valid insurance policies should be organized with your spouse knowing where they are stored.

■ Old share certificate that have value should be deposited into an investment account.  Old share certificates with no value should either be shredded or clearly marked as having no value.  An advisor can search old share certificates to provide assurance whether an investment is defunct.

■ We recommend having one easy to access list of professionals you work with (banking contact, accountant, lawyer, investment advisor, insurance company), including all their contact information.  This list should provide key information, such as where your will is stored and the name of your executor.  It is quite common for couples to name their spouse as their primary executor.  Your advisor can provide a list of some of the main responsibilities of being an executor.  Obtaining an understanding of your duties should be done while you’re updating wills, power of attorney, representation agreements, and other legal documents.  Your spouse should know where your will is located and who is the executor (if your spouse is not the executor).

■ Ensure that you have the correct beneficiary designated on each registered account.  In the majority of cases it is advantageous to name your spouse.  If you are naming anyone other than your spouse then we recommend that you obtain advice to ensure it is appropriate and you understand the consequences.

■ Obtain financial and accounting advice for any non-registered investment and bank accounts that are solely in your name.   There are many benefits for opening joint with right of survivorship accounts with your spouse.  Changing ownerships on accounts should only be done after an informed discussion with your advisor.

Nearly every couple has additional steps they should follow that are unique to their individual needs.  We encourage couples to come in to investment and planning meetings together.  These meetings help your financial advisor formulate a plan that helps both of you.  The best way you can take care of your spouse is to ensure that all is in order today and that a trusted advisor will be available to help after you’re gone.

Don’t rely solely on pensions for retirement

Retirees have become reliant on their employer sponsored pension plan(s), Old Age Security (OAS), and Canada Pension Plan (CPP) for a comfortable retirement. When these pensions are threatened in any way it can have a significant impact on your retirement. These plans are changing – and not necessarily for the better.

Financial analysts have come out with reports showing how many companies in Canada have real problems with their defined benefit plans and funding benefits. With interest rates at extremely low levels, and uncertain equity markets, it has put many employers in a material pension shortfall position. To address these problems, companies are looking at how the pension is structured and making decisions that do not favour the employees. Employers are also looking to reduce benefits such as health care and dental as a way for companies to save costs.

The biggest change that a company can do with a pension is to change it from a defined benefit plan to a defined contribution plan. Below is a brief description of each type of plan:

Defined Benefit Plan

With a defined benefit plan, the employer is committed to providing a specified retirement benefit. The “benefit” is established by a formula, which normally takes into account the employee’s years of service, average salary and some percentage amount (usually between one to two per cent). The key point to take away is that the employer bears the risk of pension fund performance. Another key point is that the employee is able to calculate their benefit with more certainty than a defined contribution plan.

Defined Contribution Plan

The “contributions” made into this type of pension plan are established by a formula or contract. Many defined contribution plans require the employer and/or employee to contribute a percentage of an employee’s salary each month into the pension fund. The employer does not make a promise with respect to the amount of retirement benefits. This leaves the employee to bear the risk of pension fund performance in a defined contribution plan.

Between the two types above, the defined benefit plan is normally viewed as the better type of plan for employees. As noted above the employer bears the risk with defined benefit plans. Employees have more certainty with a defined benefit plan. Unfortunately, most companies are choosing the defined contribution plan to avoid having unfunded liabilities and shortfalls as a result of low interest rates and market conditions. With the defined contribution plan, employees are generally given a choice amongst different types of investments (i.e. conservative, balanced, and aggressive). It is up to the employee to select their own investments (from the group plan offering), even if they have no knowledge in this area.

In planning for the most likely outcome it appears that pension plans will offer less for retirees in the future. As pensions deteriorate it is even more important to look at other ways to supplement your income at retirement.

Registered Retirement Savings Plans

(RRSPs) should be used by all individuals without an employer sponsored pension plan. Even if you are a member of a pension plan, an RRSP may be an effective way to build additional savings and gain investment knowledge. With defined contribution plans, many employees are required to transfer the funds to a locked-in RRSP upon retirement. If you have both a defined contribution pension plan and an RRSP, we recommend that you periodically look at these accounts on a combined basis to review your total asset mix (the percentage in Cash, Fixed Income, and Equities). This is a wise exercise because it helps in the investment selection for both the pension plan and your RRSP. As an example, you may choose to have the defined benefit pension plan invested 100 per cent in fixed income, and rely on your other accounts to provide the emergency cash reserve and equity exposure.

Tax Free Savings Accounts

(TFSA) are a great type of account to build savings on a tax free basis. How you invest within the TFSA is really dependent on your goal. It is important to note that the funds in your TFSA do not have to stay in a bank account as the name somewhat suggests. What is your current goal for the TFSA account? How does it fit into your overall retirement plan? Is the purpose of this account to act as an emergency cash reserve currently? At some point, these accounts are going to be significantly larger, exceeding most recommended emergency cash amounts. The investment approach in this account should be consistent with your objectives and risk tolerance. If the funds are not required immediately then we encourage clients to have a combination of growth and income. Purchasing a blue chip equity with a good dividend (four per cent or higher) can provide both growth and income over time. If income is not needed today then it can be reinvested until you need it at retirement.

Non-Registered Accounts

are as important as RRSP accounts at retirement. When we talk about non-registered accounts, we are referring to both investment and bank accounts. Both hold after tax dollars that can be accessed with no tax consequence. When I prepare a financial/retirement plan, one of the important areas I look at is the ratio of non-registered to registered funds. Having funds in a non-registered account at retirement does provide more flexibility. If all funds are within an RRSP or RRIF, it becomes more challenging to come up with funds for emergencies (i.e. medical, new roof, etc.)

Retirees that have built up savings within RRSPs, TFSAs, and non-registered accounts will be better prepared to deal with further changes to pensions. Regular contributions and savings into these three types of accounts over time will put more certainty on being prepared for retirement. Relying solely on your pensions and the government for a comfortable retirement could set you up for disappointment.

Comfortable retirement? It’s time to sell your house

Many Canadians entering retirement find themselves with a significant portion of their net worth tied into their principal residence.  Home ownership in many ways is the national symbol of success.  Most people clearly remember the first home that they purchased.  Of course, how could one forget the years of forced savings to pay down the mortgage.  You probably also remember the day you paid off the mortgage.

So it might seem a bit ridiculous now that the house is fully paid off, and you finally have time to enjoy it, for someone to suggest that you sell it.  But for some, this is the only way they can ensure a comfortable retirement.  In first getting to know our clients we ask for a net worth statement that lists all assets and liabilities.  The challenge we are seeing is that the principle residence in many cases represents 50 to 80 per cent or more of their net worth.

When preparing a financial plan for clients with more than fifty per cent of equity in illiquid assets we feel that mapping out three scenarios helps illustrate options.

  • Scenario 1: Sell the house early in Retirement.  With this option the house is sold early in retirement to provide for additional capital to fund all retirement years.  This may be the best scenario if you’re among the many house-rich and cash-poor retirees.
  • Scenario 2 – Sell the house part-way through Retirement.  This scenario is what typically unfolds for most people. The house may be sold later in retirement as a way to fund an assisted living arrangement.
  • Scenario 3 – Do not sell the house.  There is definitely a cost to continuing to own your home throughout your retirement.  If you have sufficient other liquid assets then this scenario can certainly work.

We have listed the five most common obstacles we encounter when Scenario 1 or 2 is the solution to a comfortable retirement.

1) Psychological Component – It has been engrained in us that being a home owner is a symbol of success.  Renting has a stigma that is associated with the lack of success.

2) Emotional Component – Selling the home in which you and your family were raised can be a tough emotional decision for many.

3) Needing Space – Many people who have enjoyed having space to garden, etc. may shutter at the idea of living in a condo or townhouse.  This obstacle is relatively easy to overcome as people have the option to rent a place with characteristics similar to what they previously owned.

4) Loss of Control – When renting there is the potential that the landlord sells your home or puts restraints on you as far as modifications to the home.  Spending the time to find the right place, and to negotiate a long term lease, should reduce this risk.

5) Lack of Knowledge to Invest Proceeds – In some cases the first time people have invested serious amounts of capital is after they have sold their home during retirement.  This can be a daunting feeling to self manage the proceeds from a house sell.  Seeking professional help at this stage is important to ensure the proceeds are set up in a way to both protect your capital and generate the cash flow you require.

For those considering Scenario 1 or 2 we have listed ten benefits to selling your home that are briefly touched on below.

1. Relocating to Cheaper Area – Many of our clients have sold homes in higher cost communities and have chosen to move to lower cost areas within Canada.  This also includes clients of ours who have retired to less expensive countries outside of Canada.

2. Timing of Selling Home – The best part of selling your home in Scenario 1 and 2 is that you can control the timing of when the house is sold.  If you treat your house also as an investment then you will be able to maximize the value.   There is a distinct difference between wanting to sell at the right time and having to sell as part of an estate.

3. Access to Non-Registered Funds – Gains from selling your home are tax free and the proceeds can be used to open up a non-registered investment account.  These funds can then be accessed with no tax consequence.  This is distinctly different from RRSP and RRIF funds that are fully taxable if pulled out. When you have investment funds in both registered and non-registered accounts you are able to smooth out your income during retirement and still meet your cash flow needs.

4. Having Funds When You Need It –Early on in retirement is when you would typically require the most capital to fund your cash flows.  The early retirement years is the period that I define as the time “when you want to do things” and “while you can do things.”   Later in retirement you may have a medical condition that prevents you from doing the things you want to do.  Some people simply lose interest as they age.  It is important to have enough cash while you can do things and also while you want to do things.

5. Budgeting is More Certain – Knowing what your monthly rent is provides peace of mind from a budgeting standpoint.  With home ownership you have to plan for potential replacement of appliances, new roof, and other repairs and maintenance.  These are in addition to annual required large payments such as property taxes.

6. Matching Lifestyle – As you enter retirement you may not have the desire to deal with such a large home or yard.  The next phase of your life may involve less maintenance and flexibility (i.e. ability to lock the door and travel for a month).

7. Increased Flexibility – When significant assets are sold during retirement you have more control over your net worth.  You can choose to gift assets early to family members.  I’ve seen situations where my clients want to help children buy a home, pay down a mortgage, setting up a TFSA for yourself and each adult child, setting up an RESP for each grandchild, etc..

8. Downsizing – Some people may also look at the option of selling their large prime real estate property and purchasing a smaller home.  With real estate fees, legal costs, and property purchase tax this may not net out as much as some people first believe.  Stepping back to see why you are downsizing is the key.  The purpose of downsizing may be to have access to your net worth and to have a lower maintenance home.

9. Charitable Giving – Planned giving prior to death has many benefits.  Donations provided during your lifetime often have a far greater tax benefit then a large lump sum amount provided for in your estate.  In addition to tax benefits, you have the ability to better control the donation while you are alive.

10. Estate Planning is Easier – We have clients who have more than one child and would also like to leave the family home to the children.  The practicality of this is normally not realistic.  In the majority of cases I have seen the house put up for sale and the proceeds divided amongst the beneficiaries.  The executor has the duty to secure the home and deal with the property.  The house is subject to probate fees, and is exposed to a forced sale at potentially the wrong time in the real estate market cycle.

Designing a portfolio to create retirement income

An important component of retiring comfortably is having a plan. We recommend that those people who require income from their investments devise a plan sooner rather than later. It is vital that this plan ensures that income is transferred from their investment account to their banking account.

Although investment firms still issue manual cheques, the number of transactions executed electronically is rising rapidly as investors are becoming more comfortable trusting the electronic transfer of funds from one account to another.  With electronic transfers, there is no risk of mail being lost and transactions are done in a timely manner.  A systematic withdrawal plan – often referred to as a SWIP – allows funds to be transferred on a scheduled basis as requested by the investor.

Void Cheque

In order to set up an electronic transfer between financial institutions, a financial institution may request a void cheque from the investor’s banking account to obtain the institution, transit, and account numbers.  Although the numbers themselves may be provided without a void cheque, we encourage the use of a void cheque to ensure the banking information is correctly obtained.


SWIPs are set up to electronically transfer a predetermined amount from an investment account to a banking account.  Understanding the income currently being generated from the investments, maturity dates, and liquidity of the portfolio are key components to look at when setting up an appropriate SWIP. Often the dollar amount of a SWIP ties in to a cash flow budget.

SWIP Examples

Investors have flexibility with respect to the amount of income they would like to receive and when they would like to receive it.  The following illustrations provide an overview of how SWIPs are often used.

Example 1

Mr. Adams requires a high level of income from his portfolio. He has requested that we send him all of the income from his investment account on the first of every month.  Mr. Adams has $400,000 invested generating approximately $24,000 per year in income.  We provided Mr. Adams with an expected income report and noted that his monthly income ranges from $1,200 to $4,000; however, his average income is approximately $1,000 a month.  For the month of September he earned $1480 investment income.  This amount will automatically be transferred to his investment account on the first of October.

Example 2

Mrs. Douglas has several investments that generate income.  She has a mixture of common shares, preferred shares, convertible debentures, and bonds.  Mrs. Douglas would like to see her portfolio grow a little further before she begins pulling out all of the income generated.  She has decided to set up a SWIP that automatically transfers the investment income from the income funds to her bank account on the first of every month.  The income from the preferred shares and the bonds will stay in the investment account.  At some point in the future she may increase the SWIP to include all income.

Example 3

Mrs. James has a cash flow need of approximately $4,000 per month.  Her sources of income are from CPP, OAS, and a small pension, all of which add up to approximately $2,400 per month.  How is Mrs. James going to fund the monthly shortfall of $1,600?  The most obvious place to look is her investments which are currently generating approximately $800 per month, short of the $1,600 she requires monthly expenses.  We explained to Mrs. James how a SWIP can be set up to transfer a flat dollar amount, such as $1,600, even if this amount exceeds the monthly income generated in the account.  We established a plan that allowed for certain investments to be partially or fully liquidated over time to ensure the monthly payments could be sustained during her lifetime.  This included factoring in projected income amounts and maturity dates of her investments.  With this type of SWIP more planning is required.

Pension plans: Know your options

Most employees who are members of a pension plan have to make some decision when their job ends.   The process is easier once you understand the options and resources available.

The following summarizes the two main types of pension plans:

Defined Contribution Plan: The contributions into this type of pension plan are established by formula or contract.  Many defined contribution plans require the employer and/or employee to contribute a percentage of an employee’s salary each month into the pension fund.  The employer does not make a promise with respect to the amount of retirement benefits.  The employees bear the risk of pension fund performance, so we encourage individuals to take advantage of any pension matching the one your employer may offer.

Defined Benefit Plan: With a defined benefit plan, the employer is committed to providing a specified retirement benefit.  The “benefit” is established by a formula, which normally takes into account the employee’s years of service, average salary and some percentage amount (usually between one to two per cent). The employer bears the risk of pension fund performance.  The employee is able to calculate their benefit with more certainty then a defined contribution plan.

Those with a defined benefit plan know their monthly payment amount, which provides some benefits for financial planning.  The end benefit is less known for people with defined contribution plans.

A key question to ask yourself: “Is the pension your primary asset or main source to fund retirement?”

If the answer is yes, then we would encourage most people to take the monthly pension.  If your pension is not your primarily asset or you have multiple sources of income then leaving the fund and receiving a lump-sum may make sense.

For defined benefit plans, the intent of the lump sum is to give the employee what is known as present value (or commuted value) of the monthly pension amounts that would otherwise be received.

The calculation, which is usually made by an actuary, makes assumptions about life expectancy and inflation and uses a discount factor to determine what the lump sum equivalent should be.

The lump sum amount is meant to represent the effect of receiving a lifetime worth of pension payments (from retirement to death) all at once.  It is important to note that individuals that leave the pension, and receive a lump sum, may purchase an annuity with some or all of these funds.

The following are some factors to consider when deciding whether to stay with the pension, purchase an annuity or take the lump sum.

Retirement Planning

Determining what you would like from your retirement may assist you in making the decision.

  • Is the pension your primary asset?
  • Would you lose sleep worrying about managing a lump sum?
  • Will the fixed monthly amount cover your monthly cash flow needs?
  • Are you concerned about outliving your savings?
  • Do you like the idea of managing your finances at retirement?
  • What other sources of income do you have to fund your retirement?


Some people may want the freedom to choose their own investments while others may choose the hands off approach.

  • How are the funds currently being managed?
  • If you chose the lump sum would you manage the funds yourself or obtain assistance from a financial advisor?
  • How much risk are you willing to take with your investments?

Pension Benefits

Many employers provide individuals that choose to stay with the pension a few other benefits that should be factored in.

  • Do you have a defined benefit plan or a defined contribution plan?
  • How long have you been a member of the pension plan and how is the pension formula calculated?
  • Is the monthly pension indexed?
  • Does the monthly pension option provide medical, dental or life insurance coverage?

Tax Consequences

Major decision relating to your pension should be discussed with your accountant.

  • Are their any immediate tax consequences?
  • Are any retiring allowances transferable to your RPP or RRSP?
  • How will the choice of options affect future income taxes?
  • Is it possible to split any income?

Estate Planning

Those interested in leaving an estate may feel the lump sum offers more advantages.

  • Are you single, married or living common-law?
  • Does your pension provide a benefit to your surviving spouse (if applicable)?
  • Is leaving an estate important to you?

Life Expectancy

This is perhaps the most important component to the decision making process.  Most people normally begin the decision process by doing a few calculations.  With every calculation people would have to make assumptions with respect to life expectancy.  If you were to live to an old age, significant value may be obtained by leaving your funds in a defined benefit plan or by purchasing an annuity with lump sum proceeds.

  • How close are you to retirement?
  • Are you in good or poor health?
  • Are you likely to get full value from a monthly pension?

Spending the time to think about the above issues will allow you to have a more productive discussion with your professional advisor prior to making any decisions.  The choice people make with respect to their pension is one of the many important financial decisions in the transition to retirement.



Will your retirement funds be enough?

Many Canadian investors worry about outliving their retirement savings.  Planning for retirement can be very intimidating, but with the right advice, the process can be less overwhelming.

There are key areas to consider

Changing investment objectives from growth to income

When working there is usually no requirement to withdraw funds from your investment accounts.  These are considered the growth years when the focus should be on building up your net worth.  In the early years, paying down debt on a mortgage may be a priority.  In the middle income years the focus may be on paying for educational expenses for children and building up investment savings as employment income increases. Contributions into an RRSP during the higher income earning years will result in a greater deferral of income into retirement.  People should focus on growth related investments in their earlier years and shift to more conservative income generating positions as they approach retirement.  This should result in less volatility in the later years and will increase the available cash flow.

Medical advancements mean people are living longer

It is very realistic for some people to be in retirement for as long, or longer, than they have worked.  This is becoming a challenge for some defined benefit pension plans – and one reason they are slowly disappearing.  Retirement plans should factor in your family health history, lifestyle, and retirement date. Actuarial studies have proven that the earlier you may retire, the longer your life expectancy.  Your advisor can calculate the required savings given a life expectancy date, along with other assumptions like inflation and rates of returns.   The required savings numbers are considerably different when looking at different life expectancies.   A useful first step is to run the numbers at five year increments, such as age 80, 85, 90, 95, and 100.

Not factoring in inflation

Canadian inflation numbers this past month surprised to the upside at an annualized increase of 3.3 per cent.  We feel that changes in inflation rates should be monitored. It is important when factoring the future cost of living into retirement planning as this will impact cash flow requirements.  Below we have inserted a table illustrating the impact of inflation purchasing power.

Annual Inflation Rate Value Today Today $ Value in

5 Yrs

Today $ Value in

10 Yrs

Today $ Value in

15 Yrs

Today $ Value in

20 Yrs

1% $1,000 $951 $905 $861 $821
2% $1,000 $906 $820 $743 $673
3% $1,000 $863 $744 $642 $554
4% $1,000 $822 $676 $555 $308
5% $1,000 $784 $614 $481 $377

More people retiring without a company pension

Even those people who have a company pension are finding their pension reliability may be suspect.  The issue of underfunded pension liabilities has been a greater concern in the past decade as those companies under financial stress may not be able to meet their obligations to retirees.  The onus has shifted more to the individual to ensure that they are a member of a sustainable plan. People are often faced with several career changes over their working life which may result in additional decision requirements regarding various severance options.

Working part-time during retirement

Many people may find sudden retirement a challenge both psychologically and from a cash flow perspective.  Continuing to work part time may be a more suitable transition for some.  People may decide to do something unrelated to previous experience as a welcomed change.  Your retirement plan should factor in whether you “want to work” or whether you “have to work”.  It is easy to illustrate how pulling large lump sums out early in retirement materially stresses long term planning.  Working part-time can keep the mind active, is social for many people, and can cover immediate expenses allowing your investment savings to compound for a longer period.

Communication with parents is often ignored in retirement plans

As you’re approaching retirement, your parents are likely beginning to require more help in their latter years.  This may be in the form of time or financial assistance.  In other cases, parents are financially well off and your retirement plan may factor in the possibility of an inheritance.  In some situations we encourage parents to gift assets to children early. This may lower their taxable income and help out the younger generation.

Families are more distant

We are getting more inquiries about people who say they have no children or that their children live in another part of the country or outside the country.  They are concerned about their long-term care should they become incapacitated or require assistance as they age. People should consider the potential cash requirements if there is this eventual need.  Downsizing personal residences is also a factor as their house becomes a significant component of net worth.

Insurance policies are often not understood

Not all insurance policies are equal and many people will focus on the lowest premium when first taking out a policy.  There are many things to look out for, including whether or not the policy has a level cost of insurance.  The policies that do not have a level cost often become a thorn in the side for many people at retirement.  Prior to purchasing an insurance policy, we recommend that you read the fine print and determine if premiums could change, even in your retirement.  The inflation table up above can also be used to illustrate the future real value (in today’s dollars) of a $200,000 life insurance policy.  If in 20 years the policy is paid out (assuming 3 per cent inflation), the equivalent amount in today’s dollars is $110,800.

Seeking advice early

For many people it makes sense to start working on a retirement plan in advance.  One of the most important things to consider is what your lifestyle will look like in retirement and the necessary cash flow requirements to make it happen.

Determining your savings factor

Financial success often revolves around savings.   This week, we will look at the savings factor four different ways:

Saving Versus Returns

Initial growth for investment accounts comes mostly from savings, not returns.  To illustrate, we will use two investors, Sarah and John.  We will assume both have market returns of five per cent.

Sarah has $50,000 on January 1.  Sarah has committed to contributing $500 a month in savings through a pre-authorized contribution (commonly referred to as a PAC).  At the end of the year she has $58,650.  The $8,650 increase is broken up between $6,000 in her own contributions and $2,650 in investment returns.  Of the increase in the value of her account, 69 per cent was the result of savings.  As the investment account grows, the percentage declines.  If Sarah had $120,000 on January 1, and contributed $500 per month, then her investment returns (assuming 5 per cent) would be approximately equal to her savings.  If the market value of Sarah’s investment account exceeds $120,000 then at that point she would expect that the annual investment returns would begin exceeding her monthly savings given a five per cent rate of return.

John has $50,000 on January 1 but does not contribute to his account.  By the end of the year, John has $52,500.  Even if we assume that John invests the account with higher risk investments, he will not achieve the same outcome as Sarah.  Let’s say John earns ten per cent on his investments for the year.  At the end of the year he has $55,000 and has taken considerably more risk than Sarah. The main reason John has less than Sarah is that he has not focused on saving.

Saving Early Versus Late

Living all for today may come with some sacrifices down the road.  Saving too much today may also come with some immediate sacrifices of not enjoying life to the fullest.  The challenge that everyone has is to balance current life style with future needs.

Our role as financial advisors is to assess individual incomes and map out a reasonable savings factor.  We find that some people save too much, and others save very little given the income they have earned.

It is easy to illustrate the concept of compound growth – income on income.  The earlier you save the more time the income has the ability to grow, especially if it is tax deferred within a registered account.  If most of your savings are done in the final years before retirement then you will not have as much of a benefit of compound growth.

By savings we are not saying that part of your pay cheque has to go into the bank or an investment account.  Paying down debt is savings.  If you are doing extra mortgage payments, or applying lump sums then you are essentially saving.  If you are doing neither, then you’re not saving.  Whether you pay your mortgage off earlier, or begin investing, there are some distinct advantages.

Saving Versus Spending

It is not how much money you make, but rather how much you spend.  This is easily illustrated when you hear about celebrities filing for bankruptcy.  Spending is a huge component to financial success.  We would expect that as incomes increase, people would buy nicer cars or homes.  This is different than living beyond your means.  One of the benefits of a financial plan is that it allows you to map out how much you should be saving to reach your retirement goals.  Savings are a key component to being able to retire comfortably.  Savings may also help you weather any difficult economic periods.

Savings Based On Income

The more we make, the more we spend.   If your income is low then your primary needs are food, shelter, clothing and transportation.  If you have a family then savings become even more difficult with a low income.

As your income rises, so does your ability to consider savings.  You could say that until your income exceeds a certain dollar threshold that your savings factor is zero.  If you exceed certain dollar thresholds then your savings factor should increase.  This savings factor really fluctuates based on where you live, whether you have a family, and what your primary needs are.  If your income does not exceed the cost of your primary needs then you have no savings decision to make.  As your income rises above the cost of your primary needs you have to make a choice between savings or buying the things you want.

Differentiating between the things you need versus the things you want helps in determining your planned savings.

Just how liquid are your assets?

Liquidity is a term associated with the ease in which your assets may be converted into cash.  High interest savings accounts and money market investments are extremely liquid and can be sold and converted to cash within a day.  Holding a portion of your assets in cash is important for ongoing cash flow purposes and emergency reserves.

Fixed income investments, such as guaranteed investment certificates, are typically purchased for a period of time, but may be sold in a pinch with cash raised usually within three days.  Bonds can also be sold through a financial firm’s fixed income-trading desk.

Convertible debentures, also known as convertible bonds, are fixed income investments that trade on a stock exchange and have a three-day settlement timeline.

Equities that trade on a recognized stock exchange are typically classified as fairly liquid.  Cash can generally be raised within three days after the investment is sold.  Typically one could look at the number of shares trading each day to determine the volume.

We caution any investor buying too large of a position in a company, especially a small company with low trading volumes.  It may be easy to purchase the shares but selling is often a bigger challenge.

Equities that do not trade on a recognized exchange may or may not be liquid.  Most mutual funds is whether you purchased these on a deferred sales charge basis.  If a fee or penalty exists for selling an investment, then we would classify this as “liquid for a cost.”  Structured products such as principal protected notes, hedge funds, venture capital investments, may have restrictions with respect to liquidity.  If liquidity exists then you should understand the associated costs to sell the investment.

Non-registered investment accounts should be considered more liquid than RRSP investment accounts.  Withdrawals from an RRSP account are considered taxable.  We prefer planned RRSP withdrawals rather then required withdrawals due to emergency cash requirements.  Some registered investment accounts are considered “locked-in” and have restrictions with respect to withdrawals.

There are several categories of illiquid assets, which cannot be converted into cash quickly.  In most cases, it is a result of not having a market in which it regularly trades.  An asset is usually illiquid when the valuation is uncertain.   Two common types of illiquid assets are shares of a private company and real estate.

Retirement plans are more complicated when illiquid assets are meant to fund retirement cash flows.  In some cases, these assets generate net cash flow, such as rental income.

But what happens if a roof needs to be replaced, or you have tenant vacancies?  If the real estate is financed, how will a rise in interest rates impact you?

If the majority of assets are considered illiquid, this will cause cash flow pressures at retirement.  Planning should look at the different options, including selling assets.  By planning in advance, you should be able to factor in the most tax efficient option.  It may take longer to sell an illiquid asset.  We recommend that our clients plan ahead to ensure they do not find themselves stuck, having to sell an asset at the wrong time.

To illustrate our point we will use Norman and Pauline Baker.  Norman is 66 years old and Pauline is 70.  The Bakers have a personal residence valued at $750,000 and an 18 acre parcel of land valued at over $1 million.  They have registered investments valued at $250,000.  Annually they have been living off of CPP, OAS and small registered account withdrawals.

Pauline would like to sell the 18 acre parcel of land and enjoy retirement while they can.  She knows that if they sold the property that they would never have cash flow problems again.  Norman is a retired realtor, and feels that they should hold onto the land for a couple more years so that they will get a greater value. 

The above situation highlights that the Bakers failed to factor in liquidity as part of their retirement plan.  Waiting too long to sell an illiquid asset could result in unfavourable timing, such as a depressed real estate market.  Although the Bakers have a good net worth, this has not translated to cash flow at retirement for them. 

In order for the Bakers to begin enjoying their net worth to the fullest extent they will need to sell their 18 acre parcel of land.  With the proceeds we will assist them in developing a liquid portfolio that generates the cash flow they require.

Mapping out your investment income

Throughout your working days the focus is savings and growth.  At retirement, objectives change and you begin looking at capital preservation and income needs.

These changes in investment objectives are best outlined in a four-part plan.  The first part of the plan is to prepare a financial plan or budget estimating how much income you require from your investments.

The second part of the plan is to determine how much your current investments are generating in income.  We recommend breaking this income analysis down by account type (i.e. non-registered, RRSP, TFSA).

The third part of the plan is to determine the hierarchy of which accounts to pull the income and capital, from first.

The last part of the plan is to ensure that income is transferred from the investment account to the bank account at the right time, like the end of every month.

Step 1:  Whether you prepare a budget or have a detailed financial plan prepared, you will have a better understanding of your cash in-flows and out-flows.  In some cases, pensions and other income sources are enough to fund retirement cash flow.  Others rely primarily on the cash flow generated from their investments.  Your financial advisor should be able to assist you in reviewing this information and mapping out an appropriate income stream given your situation.

Step 2:  Investment advisors are able to generate reports beyond the monthly statements mailed to your home.  One statement we provide to our clients is called an expected income report.  This report lists every single investment that pays income and provides the frequency, dates and amount of each payment.  This is a useful report to assist people with cash flow and budgeting for the upcoming year.  Note that investors who only invest in mutual funds may not be able to generate this type of report.  An expected income report can be generated when you own individual holdings, such as preferred shares, common shares, bonds, debentures and GICs.

Step 3:  If you have multiple types of investment accounts you should determine which account you pull your income (and capital) from first.  As an example, we will use Mr. and Mrs. Thomson who have a non-registered investment account, RRSPs, and TFSAs.  Based on their tax situation we recommended they first deplete the non-registered account (over the next six years), then the TFSA, and then the registered accounts.  Every financial situation is unique.  Factors we look at are whether or not someone is married, pension splitting options, marginal tax brackets, percentages of registered versus non-registered, life expectancy (genetics/lifestyle), and cash flow needs.

Step 4:  The third component of the income plan outlines how your investments are converted to cash and then transferred to your bank account.   Although manual cheques are still issued and mailed, most transactions are now being executed electronically.  Investors are more comfortable trusting the electronic transfer of funds from one account to another.  With electronic transfers there is no risk of mail being lost and transactions are done in a timely manner.

When an investment account is first opened we request a void cheque from our clients’ bank account to obtain the institution information, including transit and account numbers.  This information is required to set up electronic transfers between their investment account and the bank they deal with.

When transfers from an investment account to a bank account are done on a scheduled basis they are referred to as a systematic withdrawal plan – often referred to as a SWIP.  SWIPs are set up to electronically transfer a predetermined amount from an investment account to a bank account.  Understanding the income currently being generated from the investments, maturity dates, and liquidity of the portfolio are key components to look at when setting up an appropriate SWIP.

Investors have flexibility with respect to the amount of income they would like to receive and when they would like to receive it.  The following illustrations provide an overview of how SWIPs are often used.

Illustration 1

Mr. Williams requires a high level of income from his portfolio.   He has requested that we send him all of the income from his non-registered investment account on the first of every month.   Mr. Williams has $250,000 invested generating approximately $12,000 per year in income (interest and dividends).  We provided Mr. Williams with an expected income report and noted that his monthly income ranges from $600 to $2,000.  However, his average income is approximately $1,000 a month.  For the current month he earned $740 in dividend and interest income.  This total amount will automatically be transferred to his bank account on the first day of the next month.

Illustration 2

Mrs. Walker has a cash flow need of approximately $4,000 per month.  Her sources of income are from CPP, OAS and a small pension, all of which add up to approximately $2,400 per month.  How is Mrs. Walker going to fund the monthly shortfall of $1,600?  The most obvious place to look is her investments, currently generating approximately $800 per month (short of the $1,600 she requires for monthly expenses).

We explained to Mrs. Walker how a SWIP can be set up to transfer a flat dollar amount, such as $1,600, even if this amount exceeds the monthly income generated in the account.  We established a plan that allowed for certain investments to be partially or fully liquidated over time to ensure the monthly payments could be sustained during her lifetime.  This included factoring in projected income amounts and maturity dates of her investments.  With this type of SWIP additional planning is required.

Check out the various options for your retirement allowance

The terms retirement allowance and severance pay are essentially the same thing.  Whether you are retiring or losing your job you may be offered some additional related amounts on top of your final employment income.

This additional pay is often confusing for people, especially if they are given options for how the amount is to be paid.   Most people are not familiar with the terms or the outcomes of different choices.  A time frame is often noted on the forms making the choice even more stressful during an emotional time.

One of the first items we review is the tax consequence of the different payments.  Don’t leave this to the last minute.  Spend the time to map out a tax smart plan with your accountant and financial advisor.  As your income may be about to change, a little planning can easily reduce the amount of tax you pay.

Income Tax Act

People who have worked for a company for a long period of time may be eligible to roll a portion of their retirement allowance into their RRSP without using your RRSP deduction limit.  The amount that may be eligible to transfer into your RRSP is outlined in the Income Tax Act and is limited to $2,000 for each year or part of a year before 1996.  For those employed prior to 1989 the limit is increased by $1,500 unless the employer vested the contributions to a company pension plan.  Simply put, if you began working for a company before 1996 you may have an eligible portion.  If you began working after 1995 then you will not have an eligible portion.

Taking advantage of contributing the eligible portion of a retirement allowance to an RRSP generally makes sense, especially if your income will be lower in future years.   Your employer should be able to tell you how much is eligible, in any.


If you began working after 1995 for your current company then you will not have an eligible portion.  You may still contribute the non-eligible portion to your RRSP, or to a spousal RRSP, up to your available RRSP deduction limit.   The company paying you the retirement allowance is required to withhold income tax unless you instruct them of your deduction limit and the portion you would like to contribute to your RRSP.

If you provide these instructions to your employer then they do not have to deduct income tax on the amount of the retiring allowance that you transfer to your RRSP.  Using your RRSP deduction limit at retirement is often prudent, especially if you do not have plans for further employment.

Lump sum payments made directly to you are subject to withholding tax.  If the amount is below $5,000 then 10 per cent withholding tax is applied.  If the amount is $5,000 to $15,000 then the rate is 20 per cent.  Amounts over $15,000 are subject to a withholding tax rate of 30 per cent.  The actual amount of tax will be calculated when you file your annual income tax return.


If you have received a retirement allowance during the year you should ensure you receive a T4A prior to filing your annual tax return.  The T4A will have the income amounts as well as the income tax deducted at source.  The non-eligible portion of a retirement allowance is fully taxable in the year the amount is received.   Both the eligible and non-eligible amounts are reported on a T4A.  The amount of retiring allowance paid in the year should be reported in either Box 26 (eligible amounts) or Box 27 (non-eligible amounts).  It is possible to have amounts in both boxes for the same year.


Some employers may provide the option for you to receive a retiring allowance as a lump sum payment or to be paid out over two or more years.  If you retire in January then the lump sum payment may be the best choice, as your employment income will be minimal.  Chances are you will have some RRSP deduction limit as well that may be used.

If you retire later in the year then you may be in a situation of high employment income plus a retirement allowance on top of this.  Deferring a portion of a retirement allowance may assist both you and the company.  The company benefits in that they do not have to come up with a lump sum immediately.

Deferring a portion of the retirement allowance may also make sense if you are moving the taxable income from a high marginal tax bracket (if taken immediately) to a lower marginal tax bracket if deferred one or more years.  Your retirement date, current income, future income, and specific details of these payments need to be reviewed.

If you are planning to look for work immediately you should ask how finding new employment might impact the retirement allowance if a deferral option is selected.  In some packages we have reviewed, the deferred retirement allowance is lost if you begin working again.

Retirement Package

Retirement packages should always be reviewed with your accountant and financial advisor.  In some situations, we recommend meeting with your lawyer to determine if the package being presented is fair given your situation.  Retirement packages typically have other important components, such as your pension plan, that also needs to be reviewed.  Planning retirement, or a sudden loss of a job, are two very important “life events” that should always involve your financial advisor.