Why is inflation a risk to my retirement income?

Statistics Canada releases inflation figures regularly to determine the health of the Canadian economy. Increasing inflation indicates that the economy’s overall prices are rising. This means there is good economic growth pushing these numbers higher. Some inflation is necessary to a vigorous economy. You do not want to over control it by raising interest rates too swiftly, yet some management of inflation helps to keep the costs of goods and services in check.

Historic inflation numbers show that Canada’s annual inflation rate is an average of 3%. Fast increases in the index percentile can spark the Bank of Canada to raise our interest rates as they began to do in 2017-2018. This was largely due to an aggressive bull market and home prices skyrocketing.

The cost of our basic retirement needs will increase.

When you go to the pumps or to the grocery store, ask yourself, “will my retirement investment portfolio create sufficient income to pay for all these rising expenses?” Only by accumulating assets in your pre-retirement years, will you be able to increase your net worth, which can lead you to financial independence.

Investing to beat Inflation is a constant battle.

The importance of the economic fact of inflation may not be obvious. “What does the fish know about the water in which it swims?” asked Albert Einstein. Over the years, inflation radically reduces our buying power. Interest rates when increasing as a policy to combat (reduce) inflation also increases our debt repayment load as a percentage of income putting a strain on our budgets. In this respect, both inflation and interest on debt are the foremost enemies of wealth creation. The following table shows just what inflation can do to your investment income when needed at retirement.

You can get ahead of inflation now by investing.

A healthy investment fund portfolio can give you a sense of financial security, earned by continued discipline and adherence to the principle of saving, which adds to our sense of personal dignity.

Saving on a month to month basis while purchasing investment fund units can help you realize your goals and objectives in life (such as acquiring a home, making major purchases, travelling, putting children through college or university, or going back to school yourself). Finally, your investments must outpace inflation—the rising cost of goods and services—the investor’s worst future enemy. Ask your financial specialist to do a complete analysis of your retirement income potential.

Does your business need an Estate Freeze?

If your business assets possess the potential for significant capital gains, and you have children who might take over the company, an estate freeze may be worthwhile considering. An estate plan can assess the fair market value of an estate and the potential tax on the capital gains that will be due.

shutterstock_69171412 MEDIUM SIZEThe company’s value can be reasonably pre-established with your input, as opposed to your executors and lawyers negotiating with Canada Revenue Agency (CRA) after your death. Ask your tax accountant how an estate freeze would affect your business and if this is the most viable option to consider when transferring or selling your business to your heirs.

Estate planning will help you determine who will be the beneficiaries of your estate, who will take over the company, or if you should sell your assets currently.

An estate freeze or a partial freeze is a way to transfer all or a portion of the new growth in the value of the company to the new owner-heirs. You exchange all or a portion of your existing equity for a class of non-growth voting preferred shares. These preferred shares allow for a fixed income in retirement and the maintenance of future control, enabling a fall-back contingency for the freezor to assume a takeover (to save the company from poor management by the new heirs or to sell the company etc.).

Due to the technical complexity of an estate freeze, and potential changes to tax legislation professionals must be consulted when considering this option.

Estate freezes coupled with the intelligent use of life insurance can help reduce the effect of a massive tax-bite on your estate. Such planning can also free up capital for retirement because life insurance can pay the tax bill versus using any money saved for retirement.

What are my Retirement Income Options?

 

Retirement Income Options are strategies that provide you with a retirement income paycheque from the funds saved during your working years.

  • Registered Retirement Income Funds The most common retirement income option is a retirement income fund (RRIF). It is like a registered retirement savings plan (RRSP) in reverse. It has the same tax-deferred growth, flexibility and choices you had in your RRSP, with the added benefit of being able to withdraw a retirement income and have the flexibility to determine the amount of income you withdraw each year (where a minimum annual amount is determined by a federal government schedule).

When you need to begin receiving income, or at the latest by December 31st of the year you turn 71, you must convert your RRSP to a RRIF. A RRIF is designed to provide you with income while keeping the assets retained in your RIFF tax-deferred.

  • What are the types of Locked-in Retirement Savings Plans (LRSPs)? Locked-in RSPs originate from Registered Pension Plans (RPPs) which are plans where funds are set aside by an employer, and/or employee, to provide a pension when the employee retires.

If you are a member of a fully vested Registered Pension Plan (RPP), once employment is terminated, the proceeds of your RPP will be considered ‘locked-in’ and must be transferred into certain ‘Locked-in Plans’ which include the following Locked-in RSPs and Locked-in Retirement Income Options:

  • LIRAs and LRSPs Locked-in Retirement Accounts (LIRAs) and Locked-in RSPs (LRSPs) are registered retirement savings plans which are established by the transfer of locked-in pension fund assets from a Registered Pension Plan (RPP) or another locked-in retirement savings or income plan (such as a LIRA, LRSP, Life Income Fund (LIF), Prescribed Retirement Income Fund (PRIF) or Locked-in Retirement Income Fund (LRIF).

Tax on the interest you earn in these plans is deferred until you withdraw the funds, and are only accessible prior to retirement age under certain conditions. Upon reaching retirement age (most are at 55), you can transfer the plan to one or more eligible Retirement Income Options available for a regular RSP.

LIRAs and LRSPs must be converted to a Retirement Income Option such as an Life Income Fund (LIF), Locked-in Retirement Income Fund (LRIF), or a Prescribed Retirement Income Fund (PRIF) before December 31st of the year you turn 71.

  • Life Income Funds (LIFs) Life income funds are purchased with a Locked-in RRSP (LRSP). You are required to roll over your LRSP assets into an annuity (Life Annuity in some provinces) or a Life Income Fund (LIF) by the end of the year you turn 71. You will have the ability to withdraw an income and you maintain the flexibility and choices you need within prescribed limits similar to a registered retirement income fund (RRIF). However, the minimum and maximum withdrawal schedule for a LIF is calculated differently and changes each year.
  •  Locked-in Retirement Income Funds (LRIFs) Locked-in Retirement Income Funds are purchased with a Registered Pension Plan (RPP) or a Locked-in Retirement Account (LIRA).

A LRIF is different from a Life Income Fund (LIF). The maximum payments are based on the investment returns, not your age or current interest rates. And there is no requirement to purchase an annuity at age 80. LRIFs are only available in certain provinces.

How can I avoid Financial Internet Scams?

Online Identity theft is any kind of Internet fraud that results in the acquisition of your personal data, such as personal Logins and Passwords, user names, banking information, or credit card numbers. Moreover it is theft of your financial identity!

  • How to avoid donation scams Be on guard if you receive an unsolicited email message from a charitable organization asking for money in relation to a news event such as a natural disaster, a national election, or a significant change in the world financial system. Don’t open any attachments or click any links. Manually type the charity’s web address into your browser’s address bar and make sure the request is legitimate before you donate.
  • Phony links in email If you see a link in a suspicious email message, don’t click on it. These links might also lead you to .exe files, known to spread malicious software on your computer.
  • Fake Alerts and Threats Some thieves use threats that your Hotmail, Google, Facebook or bank account will be closed if you don’t respond to an email message? Internet criminals often use threats that your security has been compromised.
  • Spoofing popular websites or companies Scam artists use graphics in email that appear to be connected to legitimate websites like Facebook, or your bank by using their logos in fake requests for your Login and Password, but actually take you to phony scam sites or legitimate-looking pop-up windows to ask for your financial information.
  • Fake web addresses Internet criminals also use fake web addresses that resemble the names of well-known companies but are slightly altered.
  • Lies about your computer software Internet criminals might call you on the phone and offer to help solve your unknown computer problems warning of viruses or speed-slow downs. They might try to sell you a software license or an agreement to periodically assist you. In most cases neither Microsoft nor Apple make unsolicited phone calls to charge you for computer security or software fixes.

Source: Microsoft

Designating your charitable contributions

A charitable contribution is a gift, and, like any gift, is an irrevocable transfer of a donor’s entire interest in the donated cash or property. Hence the donor’s entire interest in the donated property is transferred, and it is for the most part (except for “designated” uses) impossible for the donor to recover the donated property.

Undesignated contributions Most charitable contributions are undesignated, meaning that the donor does not specify how the contribution is to be spent. An example would be a church member’s weekly contributions to a church’s general fund or a contribution to the United Way or World Vision. Undesignated contributions are unconditional gifts and there is absolutely no legal obligation to return undesignated contributions to a donor under any circumstances.

Designated contributions A donor can make a “designated” contribution to a charity, where the donor designates how the contribution is to be spent. Where such contributions are held in trust for a specific purpose, and insofar as the charity honors the designation, or plans to do so in the foreseeable future, it has no legal obligation to return a donor’s designated contribution.

Where designated contributions will not be used for the specified project, and donors can be identified, they should be asked if they want their contributions returned or retained by the charity and used for some other purpose. Ideally, donors should communicate their decision in writing to avoid any misunderstandings. Charities must provide donors with this option in order to avoid violating their legal duty to use “trust funds” only for the purposes specified.

A charity should send a letter to donors who request a refund of a prior designated contribution informing them that (1) there may be tax consequences, (2) they may want to consider filing an amended tax return to remove any claimed deduction, and (3) they should discuss the options with their tax advisor. Charities should consult with an tax attorney when deciding how to dispose of designated funds if the specified purpose has been abandoned or is no longer feasible.