“Welcome to the PlanEasy blog! We make personal finance easy.
Thanks for visiting.”
– Owen
The Biggest Risk In Retirement Is… Sequence Of Returns Risk
There are a lot of risks that we face in retirement. When you enter retirement, there are lots of changes happening all at once. Along with big personal changes, and lifestyle changes, there are also big changes happening to your finances. After you enter retirement one of the biggest financial changes you’ll face is a shift from a regular income source (eg. employment) to an income source based entirely on your own savings and pension. Making this switch can create a few risks, one of those risks is the risk of running out of money.
One of the biggest risks facing retirees is something called sequence of returns risk. When a good portion of your retirement income comes from your own savings this is the biggest risk a retiree can face. But what does “sequence of returns risk” mean exactly?
Before we talk about sequence of returns risk it’s important to understand that most retirement plans are based on an assumed (and constant) investment return each year. This investment return is usually assumed to happen in a straight line with the same percentage return each year. An assumed return of return of 5% would be 5% per year starting on the day you retire, but in reality your investment return is going to fluctuate from year to year, and this is where the risk comes from.
Over the short-term you will probably see your investment return fluctuate greatly from year to year. Instead of seeing investment returns of +5%, +5%, +5%, +5%, +5%, you might see +20%, +2%, -10%, +15%, +1%. In this case the average return is still +5%, but there were some huge swings from year to year. “Sequence of returns risk” refers to this sequence, the actual investment returns you see year after year.
The big risk for retirees happens when the sequence is negative for a few years in a row. Even if average investment returns recover over the long-term, that short period of negative returns can have a devastating effect on a retiree’s portfolio.
When To Convert RRSP To RRIF?
When to convert RRSP to RRIF? What is the right time to convert? What are the advantages of converting?
Converting an RRSP to a RRIF is mandatory by the end of the year you turn age 71. This triggers mandatory minimum withdrawals the following year and each year after that. The minimum withdrawal is based on the ending balance the previous year and the account holder’s age.
There is a common misconception that you should wait until the last possible moment to convert an RRSP to a RRIF. Maybe this is because it’s a “forced” conversion? Something that’s forced couldn’t be good right? Perhaps it’s because RRSPs grow tax free? Why not delay withdrawals as long as possible, why voluntarily make withdrawals by converting to a RRIF early?
Despite the misconceptions above, in many cases, converting an RRSP to a RRIF should be done much earlier than age 71.
There are many reasons for a retiree to convert an RRSP to a RRIF well before the mandatory age of 71. In this post we’ll highlight some of the considerations when deciding when to convert RRSP to RRIF.
Canada Child Benefit Increase! What Will Your Monthly CCB Be?
The Canada Child Benefit is one of the most generous government benefits in Canada and it just increased! Unlike many government benefits, the Canada Child Benefit is available to low, moderate, and also some high income families.
The amount you receive from the Canada Child Benefit (CCB) depends on a few factors, one is the taxable net income for the family (line 23600 on your tax return), another is the number of children in the family, and the final factor is the age of each child.
The Canada Child Benefit is an “income tested” government benefit. The higher your taxable net income is, the lower your Canada Child Benefit will be. For some high income families, at a certain level of income the Canada Child Benefit will be reduced to $0. Anyone with income above that income level will not receive any benefit. The tricky thing is that this income level is different depending on the number of children and their ages.
The Canada Child Benefit also changes every year. New benefits start in July and are based on prior years tax return (the first payment of the updated benefit is July 20th).
The Canada Child Benefit also increases with inflation. The new 2023 Canada Child Benefit has increased by 6.3% versus 2022.
So how much Canada Child Benefit can you expect in July? We’ve got a table below that shows the Canada Child Benefit based on family taxable net income (line 23600) in $10,000 increments, so you can figure out generally how much you can expect in July.
Owen Winkelmolen
Advice-only financial planner, CFP, and founder of PlanEasy.ca
“Welcome to the PlanEasy blog! We make personal finance easy.
Thanks for visiting.”
– Owen
New blog posts weekly!
Tax planning, benefit optimization, budgeting, family planning, retirement planning and more...
The Biggest Risk In Retirement Is… Sequence Of Returns Risk
There are a lot of risks that we face in retirement. When you enter retirement, there are lots of changes happening all at once. Along with big personal changes, and lifestyle changes, there are also big changes happening to your finances. After you enter retirement one of the biggest financial changes you’ll face is a shift from a regular income source (eg. employment) to an income source based entirely on your own savings and pension. Making this switch can create a few risks, one of those risks is the risk of running out of money.
One of the biggest risks facing retirees is something called sequence of returns risk. When a good portion of your retirement income comes from your own savings this is the biggest risk a retiree can face. But what does “sequence of returns risk” mean exactly?
Before we talk about sequence of returns risk it’s important to understand that most retirement plans are based on an assumed (and constant) investment return each year. This investment return is usually assumed to happen in a straight line with the same percentage return each year. An assumed return of return of 5% would be 5% per year starting on the day you retire, but in reality your investment return is going to fluctuate from year to year, and this is where the risk comes from.
Over the short-term you will probably see your investment return fluctuate greatly from year to year. Instead of seeing investment returns of +5%, +5%, +5%, +5%, +5%, you might see +20%, +2%, -10%, +15%, +1%. In this case the average return is still +5%, but there were some huge swings from year to year. “Sequence of returns risk” refers to this sequence, the actual investment returns you see year after year.
The big risk for retirees happens when the sequence is negative for a few years in a row. Even if average investment returns recover over the long-term, that short period of negative returns can have a devastating effect on a retiree’s portfolio.
When To Convert RRSP To RRIF?
When to convert RRSP to RRIF? What is the right time to convert? What are the advantages of converting?
Converting an RRSP to a RRIF is mandatory by the end of the year you turn age 71. This triggers mandatory minimum withdrawals the following year and each year after that. The minimum withdrawal is based on the ending balance the previous year and the account holder’s age.
There is a common misconception that you should wait until the last possible moment to convert an RRSP to a RRIF. Maybe this is because it’s a “forced” conversion? Something that’s forced couldn’t be good right? Perhaps it’s because RRSPs grow tax free? Why not delay withdrawals as long as possible, why voluntarily make withdrawals by converting to a RRIF early?
Despite the misconceptions above, in many cases, converting an RRSP to a RRIF should be done much earlier than age 71.
There are many reasons for a retiree to convert an RRSP to a RRIF well before the mandatory age of 71. In this post we’ll highlight some of the considerations when deciding when to convert RRSP to RRIF.
Canada Child Benefit Increase! What Will Your Monthly CCB Be?
The Canada Child Benefit is one of the most generous government benefits in Canada and it just increased! Unlike many government benefits, the Canada Child Benefit is available to low, moderate, and also some high income families.
The amount you receive from the Canada Child Benefit (CCB) depends on a few factors, one is the taxable net income for the family (line 23600 on your tax return), another is the number of children in the family, and the final factor is the age of each child.
The Canada Child Benefit is an “income tested” government benefit. The higher your taxable net income is, the lower your Canada Child Benefit will be. For some high income families, at a certain level of income the Canada Child Benefit will be reduced to $0. Anyone with income above that income level will not receive any benefit. The tricky thing is that this income level is different depending on the number of children and their ages.
The Canada Child Benefit also changes every year. New benefits start in July and are based on prior years tax return (the first payment of the updated benefit is July 20th).
The Canada Child Benefit also increases with inflation. The new 2023 Canada Child Benefit has increased by 6.3% versus 2022.
So how much Canada Child Benefit can you expect in July? We’ve got a table below that shows the Canada Child Benefit based on family taxable net income (line 23600) in $10,000 increments, so you can figure out generally how much you can expect in July.
Join over 250,000 people reading PlanEasy.ca each year. New blog posts weekly!
Tax planning, benefit optimization, budgeting, family planning, retirement planning and more...
Join over 250,000 people reading PlanEasy.ca each year. New blog posts weekly!
Tax planning, benefit optimization, budgeting, family planning, retirement planning and more...