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.

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.

Retirement Calculator Assumptions: The Good, The Bad, And The Ugly

Retirement Calculator Assumptions: The Good, The Bad, And The Ugly

Retirement calculators are everywhere. Nearly every financial institution has some form of retirement calculator. They all work very similarly, they require a few inputs perhaps age, income, spending etc. and then they provide some analysis/recommendation about retirement, how much to save, how much to spend etc.

But how accurate are these retirement calculators? What assumptions are they making when doing a retirement projection? Are they even worth the effort?

In this post we’re looking at some of the good, the bad, and the ugly parts of retirement calculators.

In general, retirement calculators make some very broad assumptions to create a very simple retirement projection very quickly. There is nothing simple about retirement, so creating a projection with only a few inputs in only a few seconds is already somewhat suspect, but as we’ll see below, the possible issues go way beyond that.

These are just some of the issues to watch out for when using a retirement calculator.

Three Ways To Transfer Retirement Risk To Someone Else

Three Ways To Transfer Retirement Risk To Someone Else

Retirement is full of risk. There is longevity risk, spending risk, health risk etc. But two of the largest risks in retirement are investment risk and inflation rate risk.

What if you could transfer some (or all) of that risk to someone else? That would make retirement that much more enjoyable, less to worry about and less to stress over. There would be more time to enjoy retirement itself rather than worry about retirement finances.

The problem with risk is that it’s hard to understand and hard to quantify. We’re pretty bad at assessing risk and probability. We might look back at the accumulation phase and think that we can manage the emotional impact of investment risk and inflation risk. After all, we’ve been managing those risks for 30-40+ years before retirement, why would that change in retirement?

The difference during the decumulation phase is that those risks are exacerbated by annual investment withdrawals. In retirement, these withdrawals, necessary to support retirement spending, multiply the effect of fluctuations in investment returns and inflation rates.

During the accumulation phase, investment contributions help reduce the impact of fluctuations (dollar cost averaging is a big benefit during accumulation). During the decumulation phase however, investment withdrawals multiply the impact of fluctuations.

As you’ll see below. The based on historical standards, the variation during the accumulation phase is nothing compared with the variation that’s possible during the decumulation phase.

So, transferring retirement risk to someone can become quite appealing when transitioning into retirement. It can help reduce that variation. Transferring even a small amount of retirement risk to someone can significantly improve peace of mind. Plus, it can help create a “floor” of retirement income that is virtually guaranteed.

Aiming For FIRE? Beware The Boring Middle

Aiming For FIRE? Beware The Boring Middle

Financial Independence Retire Early (aka FIRE) is one of those big personal finance goals that has gotten a lot of attention recently. The idea of being financially independent, choosing when and if to work, is attractive for many people, especially when there is so much uncertainty in the world.

To be financially independent means that your investments (whether that be stocks, bonds, GICs, real estate etc) can provide enough income to cover annual expenses indefinitely. FIRE enthusiasts typically use the 4% rule as a guideline for how much income they can generate from their portfolio each year. The idea being that a person can draw 4% of their initial portfolio balance, adjusted for inflation each year, and have reasonably high chance of not running out of money after 30-years.

By using the 4% rule we can generate a rough target for FIRE. The basic idea is that you can take your annual expenses and multiply by 25 and that is your “FIRE number“. This is the amount needed in investments to safely retire early (although with low interest rates and low bond returns at the moment this rule is often thought to be too risky).

But despite it being a simple concept, reaching FIRE is a difficult task. It requires a high savings rate, low expenses, and lots of time.

FIRE is made easier with an above average income, which allows for a higher savings rate, but it is still a difficult task. Reaching FIRE means living well below your means for an extended period of time.

This combination of low spending, high savings, and a long time frame can lead to what’s known as “the boring middle”.

In this post we’ll briefly explain what FIRE is, why it’s so easy in the beginning, and why “the boring middle” could be a sign that there is an imbalance in the plan, one where the means may not justify the end.

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