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.

When To Convert RRSP To RRIF?

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.

How Big Is Your TFSA? How Would That Compare To Past Historical Periods?

How Big Is Your TFSA? How Would That Compare To Past Historical Periods?

As of January 1st, everyone in Canada over the age of 18 has the chance to add another $6,000 to their TFSA. If you were 18 or older in 2009 your total original contribution room would be $75,500.

But that’s just contribution room, what about investment growth?

With investment growth where would a TFSA be? How much would it be worth? And how would that compare to other historical periods?

Let me preface this post by saying I don’t like to compare personal finances. Everyone’s path is different and it’s impossible to compare apples to apples. Even in the same financial situation everyone values money differently and therefore two people with the exact same income, assets, debts etc will have very different financial plans, part of the reason why financial planning is so important, and also so interesting.

That being said, in this post we’re going to compare hypothetical TFSA balances of today with those of the past. We’ve had a great “bull run” over the last 10+ years but what would it look like if we had different set of returns? What if we looked at the best periods and the worst periods in recent history to compare how the last 10+ years stacked up?

The TFSA has been around since 2009. Each year, once you reach age 18, you accumulate TFSA contribution room. In 2021, someone who was 18 or older in 2009 would have $75,500 in original contribution room. But with investment growth where would the actual balance be?

What do you think the top 5 and bottom 5 historical periods would be? And how do you think they’d compare with the last 10+ years?

Understanding TFSAs: The 8 Benefits (And 3 Drawbacks) of TFSAs

Understanding TFSAs: The 8 Benefits (And 3 Drawbacks) of TFSAs

Tax-Free Savings Accounts (TFSAs) are relatively new. They were introduced just over 10 years ago in 2009. Even though they’ve only been around for a relatively short time they’re already the most used out of the major tax-sheltered accounts. There are over 5.5 million households in Canada that have an active TFSA account.

(Authors Note: I love it when people use their tax-sheltered accounts. Good tax planning is a key component of any financial plan and can add $100,000’s to your net worth)

The average usage rate for the TFSA is pretty impressive at 40.4%. This is relatively consistent across both age and income. The highest usage rate is in Ontario where over 45% of the households are using a TFSA. The median contribution to a TFSA in 2016 was $5,765.

All-in-all these are impressive numbers for a relatively new tax-sheltered account.

Given the high usage rate the TFSA must be pretty great, right?!?!

In this post we’ll cover exactly how a TFSAs works, the benefits of a TFSA, as well as some of the drawbacks of a TFSA.

Understanding RRSPs: The 6 Benefits (And 7 Drawbacks) of RRSPs

Understanding RRSPs: The 6 Benefits (And 7 Drawbacks) of RRSPs

RRSPs are one of the three major tax shelters available to Canadians. They were created in 1957 and since then RRSPs have been a key way to delay and avoid taxes. There are many benefits to an RRSP but also a few drawbacks.

In general Canadians aren’t taking full advantage of this tax shelter. As of 2015 there was over $1 trillion of unused contribution room. That’s an average of $41,560 per tax payer!

Each year the unused contribution room continues to grow. Over the last 5 years unused contribution room has grown by $1,900 per person per year.

This begs the question….

Why aren’t we using the RRSP to its full advantage?

Out of all tax payers only 1 in 4 used an RRSP last year. While this might seem low it’s important to note that RRSPs aren’t for everyone. There are drawbacks to using an RRSP and it’s because of these drawbacks that some people choose a different tax shelter instead, like a TFSA.

Still, there is a huge potential for tax savings out there. Even at the lowest federal tax rate the potential tax rebate is about $150 million or roughly $6,000 per person. Who wouldn’t like to get a $6,000 tax refund?!?

In this post we’ll cover how RRSPs work. We’ll also cover both the benefits and drawbacks of an RRSP.

The New TFSA Contribution Limit! How Big Could Your TFSA Get If You Contribute The Max Each Year?

The New TFSA Contribution Limit! How Big Could Your TFSA Get If You Contribute The Max Each Year?

The TFSA is an amazing account and it just got a little bit better. The contribution limit for 2021 is an additional $6,000. This means that as of January 1st 2021, anyone over the age of 18 in 2009 will have $75,500 of TFSA contribution room if they’ve never contributed before!

What makes the TFSA so amazing is the tax free compounding and when this compounding starts to take hold the results are incredible (just take a look at some of the projections below).

It’s reasonable to expect that many of us with TFSAs will see them reach $1,000,000+ at some point in the future. It’s just a matter of time. We’ll share some projections below but its pretty reasonable to expect that TFSAs could reach $5M, $7M or even $10M+ (in future dollars).

In fact, having TFSAs that reach $1,000,000+ is pretty common in many retirement projections that we do at PlanEasy.

Often, from an income tax and estate planning perspective, we want to draw down TFSAs last in retirement (or sometimes they’re also draw down strategically to avoid higher marginal tax brackets). We’re also strategically shifting assets from RRSPs/RRIFs into TFSAs over time. This leads to some very large TFSA balances and very little tax on the estate (depending on future investment returns of course).

Pin It on Pinterest