“Welcome to the PlanEasy blog! We make personal finance easy.

Thanks for visiting.”

– Owen

The Psychological Risk Of Taking A Commuted Value

The Psychological Risk Of Taking A Commuted Value

When leaving an employer, or when transitioning into retirement, those with a defined benefit pension will have a difficult decision to make… take a lifetime pension? Or take a commuted value?

A commuted value is essentially the current value of those lifetime pension payments in one large lump sum. The commuted value is an amount that is determined to be equal to the lifetime of payments that a pension would provide. It’s calculated by the pension actuaries and can easily be several $100,000 or even $1,000,000+

With interest rates at historical lows, the commuted value of a pension can easily be $1,000,000+ for those at retirement age. Low interest rates will push up the size of a commuted value, which is partially driven by an assumed rate of return, and right now interest rates are at historical lows.

This creates a very large psychological problem; how do you invest all that cash?

In particular, when do you invest it? Do you invest it all at once as a large lump sum? Or do you invest it in smaller increments over a period of time?

If invested all at once, that commuted value could drop dramatically if markets experience a correction in the near future.

If invested later, that commuted value could miss out on a large increase in value during a period of growth.

The indecision around how to invest a large amount of cash can cost tens of thousands of missed investment gains, or it can cost hours of lost sleep and feelings of stress. It’s not something to be taken lightly.

Investing a large lump sum is a daunting experience even for the most seasoned investor.

read more
Tax Deferral Is Not Necessarily An Advantage

Tax Deferral Is Not Necessarily An Advantage

At this time of year, the interest in deferring tax is high. It’s easy to see the appeal of deferring tax, but is all tax deferral an advantage? Does paying tax now or paying tax later really matter? As we’ll see below, no, in some cases tax deferral is not an advantage.

Tax deferral can seem like a large advantage. If you can avoid paying $10,000 in tax today, and defer that tax to later, sometimes 10, 20, 30+ years later, then that money can continue to grow and earn income. This would seem like a large advantage would it?

For the average Canadian there are two main ways to defer tax…

1. Use an RRSP

2. Earn capital gains

In this blog post we’ll explore the first type of tax deferral, using an RRSP, and we’ll see that the tax deferral itself doesn’t necessarily provide an advantage.

read more
How RRSP Contributions Affect Your Government Benefits

How RRSP Contributions Affect Your Government Benefits

RRSP contributions can be a great tool to help manage your income taxes before and after retirement. They can also be a great tool to help manage your government benefits in a similar way. RRSP contributions affect government benefits like the Canada Child Benefit (CCB), Ontario Child Benefit (OCB), Guaranteed Income Supplement (GIS), GST/HST Credit, Ontario Sales Tax Credit etc etc.

What many people may not realize is that most government benefits have a “claw back” rate that acts like a tax rate. If you earn more income the “clawback” rate will reduce your government benefits. But the opposite also happens, if you make an RRSP contribution and your income goes down, then this “clawback” rate will work in reverse and it will increase your government benefits!

There are a couple situations where RRSP contributions can have a BIG effect on government benefits. Let’s take a look at two real life examples.

One example is a senior who is receiving GIS benefits. We’re going to plan some strategic RRSP contributions to help them maximize their GIS benefits. This is counter-intuitive, we’re always told that TFSAs are best for low-income individuals, but in this case we can use RRSP contributions strategically to maximize GIS.

The second example is a young family with three children. They’re receiving the Canada Child Benefit and the Ontario Child Benefit and we’re going to plan some strategic RRSP contributions to help them maximize their family benefits.

read more

Owen Winkelmolen

Fee-for-service financial planner 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 Psychological Risk Of Taking A Commuted Value

The Psychological Risk Of Taking A Commuted Value

When leaving an employer, or when transitioning into retirement, those with a defined benefit pension will have a difficult decision to make… take a lifetime pension? Or take a commuted value?

A commuted value is essentially the current value of those lifetime pension payments in one large lump sum. The commuted value is an amount that is determined to be equal to the lifetime of payments that a pension would provide. It’s calculated by the pension actuaries and can easily be several $100,000 or even $1,000,000+

With interest rates at historical lows, the commuted value of a pension can easily be $1,000,000+ for those at retirement age. Low interest rates will push up the size of a commuted value, which is partially driven by an assumed rate of return, and right now interest rates are at historical lows.

This creates a very large psychological problem; how do you invest all that cash?

In particular, when do you invest it? Do you invest it all at once as a large lump sum? Or do you invest it in smaller increments over a period of time?

If invested all at once, that commuted value could drop dramatically if markets experience a correction in the near future.

If invested later, that commuted value could miss out on a large increase in value during a period of growth.

The indecision around how to invest a large amount of cash can cost tens of thousands of missed investment gains, or it can cost hours of lost sleep and feelings of stress. It’s not something to be taken lightly.

Investing a large lump sum is a daunting experience even for the most seasoned investor.

read more
Tax Deferral Is Not Necessarily An Advantage

Tax Deferral Is Not Necessarily An Advantage

At this time of year, the interest in deferring tax is high. It’s easy to see the appeal of deferring tax, but is all tax deferral an advantage? Does paying tax now or paying tax later really matter? As we’ll see below, no, in some cases tax deferral is not an advantage.

Tax deferral can seem like a large advantage. If you can avoid paying $10,000 in tax today, and defer that tax to later, sometimes 10, 20, 30+ years later, then that money can continue to grow and earn income. This would seem like a large advantage would it?

For the average Canadian there are two main ways to defer tax…

1. Use an RRSP

2. Earn capital gains

In this blog post we’ll explore the first type of tax deferral, using an RRSP, and we’ll see that the tax deferral itself doesn’t necessarily provide an advantage.

read more
How RRSP Contributions Affect Your Government Benefits

How RRSP Contributions Affect Your Government Benefits

RRSP contributions can be a great tool to help manage your income taxes before and after retirement. They can also be a great tool to help manage your government benefits in a similar way. RRSP contributions affect government benefits like the Canada Child Benefit (CCB), Ontario Child Benefit (OCB), Guaranteed Income Supplement (GIS), GST/HST Credit, Ontario Sales Tax Credit etc etc.

What many people may not realize is that most government benefits have a “claw back” rate that acts like a tax rate. If you earn more income the “clawback” rate will reduce your government benefits. But the opposite also happens, if you make an RRSP contribution and your income goes down, then this “clawback” rate will work in reverse and it will increase your government benefits!

There are a couple situations where RRSP contributions can have a BIG effect on government benefits. Let’s take a look at two real life examples.

One example is a senior who is receiving GIS benefits. We’re going to plan some strategic RRSP contributions to help them maximize their GIS benefits. This is counter-intuitive, we’re always told that TFSAs are best for low-income individuals, but in this case we can use RRSP contributions strategically to maximize GIS.

The second example is a young family with three children. They’re receiving the Canada Child Benefit and the Ontario Child Benefit and we’re going to plan some strategic RRSP contributions to help them maximize their family benefits.

read more

New blog posts weekly!

Tax planning, benefit optimization, budgeting, family planning, retirement planning and more...

New blog posts weekly!

Tax planning, benefit optimization, budgeting, family planning, retirement planning and more...

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