The Biggest Risk In Retirement Is… Sequence Of Returns Risk

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?

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.

9 Important Considerations When Selling Your Home In Retirement

9 Important Considerations When Selling Your Home In Retirement

The largest financial transaction you will ever make is selling your home in retirement. Selling your home in retirement comes with a number of important considerations.

In this blog post we’re going to touch on 9 important things to consider when selling your home in retirement.

Selling a home in retirement can be a core part of many retirement plans. A sale usually takes one of three forms…

– Sell and rent
– Sell and downsize
– Sell when entering long-term care

Often the plan is to hold the home throughout retirement, but it can still be used as a “fall back” asset if necessary. Even if there was never a plan to sell the home, it can still be used to help fund long-term care costs in late retirement.

Each situation above has its unique circumstances but, in all cases, there is a major transaction taking place. So, before you put up the ‘for sale’ sign in retirement there are a few important considerations to highlight.

The CPP Max Will Be HUGE In The Future

The CPP Max Will Be HUGE In The Future

Did you know that the Canada Pension Plan (CPP) is getting bigger? Every year since 2019 CPP has been expanding and it will continue to expand for the next 40+ years until 2065. By the end, CPP will be HUGE!

CPP is an important retirement benefit. The old “base” CPP aimed to replace 25% of pre-retirement employment income. The new “expanded” CPP will increase this amount to 33.33% and will cover a larger amount of pre-retirement of income. The result is that CPP will be over 50% larger in the future.

If we follow the rule of thumb* that suggests that we need 70% of pre-retirement income in retirement, then for the average Canadian the new expanded CPP could provide nearly half of retirement income in the future. When combined with OAS this means that over half of retirement income could be covered by CPP and OAS combined.

And if we consider that the maximum annual CPP payment could be over $7,000 per year higher in the future (and over $14,000 per year for a couple), that could mean the average Canadian needs to save hundreds of thousands less for retirement.

In this post we’ll look at the current maximum CPP payment, the maximum CPP contribution, the current contribution rate, and how these will change in the future as CPP expands. We’ll also look at how the current “base” CPP will grow by over 50% in the future…

The NEW First Home Savings Account (FHSA) Explained

The NEW First Home Savings Account (FHSA) Explained

There is a new tax advantaged account in Canada, the First Home Savings Account! Along with the TFSA and RRSP, the new First Home Savings Account (FHSA) is another great way to reach your financial goals in a very tax efficient way. The account provides a significant advantage to those planning to purchase their first home and creates a new option for parents who are thinking about helping their children with a future home purchase.

The new First Home Savings Account (FHSA) does add a little bit of complexity to an already complex landscape of tax planning options, however like the TFSA and RRSP, if used properly it can help accelerate progress towards financial goals like purchasing a home and planning for retirement.

When saving and investing for future goals you can now choose between TFSA, RRSP, and the new FHSA, and for families with small children, there is the RESP too.

The new First Home Savings Account is very new, so in this post we’re going to explore how this account works, the eligibility criteria, the contribution and withdrawal rules, some things to possibly watch out for, and some strategic options when using it within your financial plan.

These 3 Retirement Tax Credits Equal Up To $50,000+ Per Year In Tax Free Income

These 3 Retirement Tax Credits Equal Up To $50,000+ Per Year In Tax Free Income

When we talk about retirement planning with our clients one topic that inevitably comes up is tax planning.

Income tax is often the single largest expense in retirement. Larger than travel, food, or medical expenses.

Income tax often comes up when we talk about retirement planning because many people are worried about paying too much tax in retirement and negatively impacting their retirement spending goals.

Many people do not realize that in retirement there are new tax credits that can help reduce income tax, sometimes to zero. It’s understandable that people aren’t aware of these tax credits because they’re mostly available to those over age 65, so they’re not necessarily on someone’s radar if they’re under age 65.

Paying less tax in retirement is nice, but what if you could pay NO TAX at all in retirement? With some pre-retirement planning that is easily possible.

There are three important tax credits that can help you earn over $25,000 per year as an individual, or over $50,000 per year as a couple, and pay zero tax in retirement.

In this blog post we’re going to look at three important tax credits in retirement, two of which, for most people, are only available after age 65. We’re also going to work backward to craft a retirement plan that provides $75,000 per year in spending with zero tax.

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