Maximizing your Retirement February, 14, 2014. What we’d like to cover Should I contribute to an RRSP or TFSA What rate of return should we use for our

Maximizing your Retirement

February, 14, 2014

What we’d like to cover

• Should I contribute to an RRSP or TFSA• What rate of return should we use for our

retirement savings projections?• How much income can I plan to draw from my

savings in retirement

York University Faculty & Staff

RRSP or TFSA?

RRSP

• Defers income receipt from high tax years to low tax years– Appropriate for high

income earners who expect to have lower incomes in retirement

– Replaces regular earned income in retirement

TFSA

• Eliminates tax on future investment incomes and growth– Appropriate for both high

and low income earners– Great vehicle for saving for

large ticket items in retirement

– Can also replace regular earned income in retirement


Planning with TFSAs & RRSPsTax Deferral in Action – TFSA used as a retirement savings vehicle

$100,000

$120,000

$140,000

$160,000

$180,000

$200,000

$220,000

$240,000

$260,000

Account Values

RRSP TFSA Savings

• In this example we invest $5,000 per year for 25 years assuming a 3% yield

• In the RRSP example, we have reinvested the annual tax refund

Planning with TFSAs & RRSPs Tax Deferral in Action – TFSA used as a retirement savings vehicle

RRSP, 26

TFSA, 26

Savings, 20

0 10 20 30

Years ofIncome

RRSP TFSA Savings

• In Year 26 begin withdrawing $10,000 annually (net of taxes)

• For a low income earner/pensioner (earning less than $37,000 year from all sources) both the TFSA and RRSP provide an additional 6 years of income

• TFSA offers specific advantages over RRSP

– Not income tested– No minimum withdrawals– No negative tax impact from

emergency withdrawals

Planning with TFSAs & RRSPs Tax Deferral in Action – TFSA used as a retirement savings vehicle

RRSP, 31

TFSA, 26

Savings, 20

0 20 40

Years ofIncome

RRSP TFSA Savings

• In Year 26 begin withdrawing $10,000 annually (net of taxes)

• For a typical high income earner (earning more than $75,000 annually) the RRSP will offer a longer income stream and larger contribution opportunity

Advantages of a TFSA in retirement

• Contribution room is not age or income tested• TFSA withdrawals are not included in taxable

income• Tax-free rollover to spouse on death

TFSA in retirement example

• Retiree needs to purchase a new car– $25,000 net withdrawal from RRIF would be taxed and may claw

back most if not all Old Age Security– $25,000 net withdrawal from TFSA would not increase taxation

or affect OAS payments– Over subsequent years, retiree can re-contribute the $31,000


TFSA tax-free rollover on death

• Couple both have TFSAs with a balance of $35,000 each, naming the other as beneficiary

• Spouse dies• Survivor retains $70,000 in TFSA


Canadian Savings Bond Interest Rates

1980's

Series name Interest paid

1980 Nov S35 11.50%

1981 Nov S36 19.50%

1982 Nov S37 12.00%

1983 Nov S38 9.25%

1984 Nov S39 11.25%

1985 Nov S40 8.50%

1986 Nov S41 7.75%

1987 Nov S42 9.00%

1988 Nov S43 9.50%

1989 Nov S44 10.50%

Average 10.88%


Canadian Savings Bond Interest Rates

1980's 2000's

Series name Interest paid 2000 Nov S66 4.85%

1980 Nov S35 11.50% 2000 Nov S66 4.85%

1981 Nov S36 19.50% 2001 Nov S72 1.80%

1982 Nov S37 12.00% 2002 Nov S78 2.00%

1983 Nov S38 9.25% 2003 Nov S84 1.75%

1984 Nov S39 11.25% 2004 Nov S90 1.50%

1985 Nov S40 8.50% 2005 Nov S96 2.00%

1986 Nov S41 7.75% 2006 Nov S102 3.00%

1987 Nov S42 9.00% 2007 Apr S107 3.10%

1988 Nov S43 9.50% 2007 Nov S108 3.25%

1989 Nov S44 10.50% 2009 Nov S120 0.40%

Average 10.88% Average 2.37%


TSX Composite compound growth


1980’s CAGR of 8.3%

TSX Composite compound growth


1980’s CAGR of 8.3% 2000’s CAGR of 3.8%

S&P 500 compound growth


1980’s CAGR of 12.7%

S&P 500 compound growth


1980’s CAGR of 12.7% 2000’s CAGR of (1.3%)

Rate of return expectations have changed

1980s Portfolio Experience

Investment Return Weight

Bonds 10.88% 50%

Canadian stocks 8.30% 25%

US stocks 12.70% 25%

Portfolio return 10.69%

CPI 5.89%

2000s Portfolio Experience

Investment Return Weight

Bonds 2.37% 50%

Canadian stocks 3.80% 25%

US stocks -1.30% 25%

Portfolio return 1.81%

CPI 2.00%


One approach

Risk-free rate of return + Inflation + Risk premium = Return

0.50% (Risk-free rate of return)

2.00% (inflation target of BOC)

2.00% (Risk premium)

4.50%

Adverse conditions test at 75% of return


Other approaches

• Using a series of historical annual returns to give a sense of volatility

• Monte Carlo scenarios where many possible market outcomes are calculated


Making adjustments along the way

• When you review your investment returns:– If investment returns are under expectation– Do you need to increase how much you’re saving? Do you need

to consider a later retirement?

– If investment returns are above expectation– Should you consider decreasing how much you’re saving? Can

you consider an earlier retirement?


How much money can we draw in retirement?

• Income obligation that may last thirty years or more (Longevity Risk)

• Markets that will be volatile (Performance Risk)• Loss of purchasing power (Inflation Risk)


Establishing sustainable draw down rates

• Interest, dividends, rents and royalties• Annuity rates


Draw down rates in retirement

• Interest, dividends, rents and royalties– Can be calculated on a portfolio– Probably between 1.5% and 2.5% currently

• Annuity rates– 65 Male with 10 year minimum guarantee – 6.7% payout– 65 Female with a 10 year minimum guarantee – 6.1% payout– 65 Year old couple, 10 year minimum guarantee, non-reducing

joint-life annuity – 5.7% payout

• 3%-5% is where we currently test at– Investment allocation will depend on risk tolerance, planned

draw down rate and investor’s sophistication


Good money habits in retirement

• Plan for those large infrequent purchases (replacing your car) in your retirement income plan prior to retiring

• Where possible, make your large discretionary draws from your retirement capital in good years.

• Review your drawdown rate– If it falls below your income yields, consider increasing your ‘fun

money’ spending– If it falls beyond current annuity rates, consider tightening your

budget


Documents

Maximizing your Retirement February, 14, 2014. What we’d like to cover Should I contribute to an RRSP or TFSA What rate of return should we use for our