Retirement Planning

Retirement planning on a financial note refers to allocating a proportion of monthly income for retirement. It is a plan with a goal to achieve financial independence. Future is uncertain and in today’s world no one wants to be a burden on the other. When it comes to self-dependency, even parents doesn’t want to bother their children, even though it their child’s love to take care of them. Thus, it is where Retirement Planning comes in.

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Retirement Planning
Retirement Planning
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Table of Contents
Retirement Planning.............................................................................................................................2
Registered Retirement Savings Plan (RRSP)....................................................................................2
Tax-Free Savings Account (TFSA)..................................................................................................3
Locked-in Retirement Accounts (LIRAs).........................................................................................4
Provisions for holding LIRA................................................................................................................5
Retirement Income Conversion Options for LIRA...............................................................................5
Reverse Mortgages............................................................................................................................6
References...........................................................................................................................................10
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Retirement Planning
Retirement planning on a financial note refers to allocating a proportion of monthly income
for retirement. It is a plan with a goal to achieve financial independence. Future is uncertain and in
today’s world no one wants to be a burden on the other. When it comes to self-dependency, even
parents doesn’t want to bother their children, even though it their child’s love to take care of them.
Thus, it is where Retirement Planning comes in.
“Retirement Planning involves identifying proposed requirement of income at the retirement
age, assessing the current expenses and chalking out how much the money to save for the future
income identified and in what frequencies (Baldwin & Shillington, 2017).” There are also various
retirement programs some of which are briefly described as follows:-
Registered Retirement Savings Plan (RRSP)
This plan is a type of Savings Account in Canada that individuals open so that they could
hold investment and savings assets. This would result in a number of tax benefits to making
investments outside tax-preferred accounts. This plan was introduced in 1957 for promoting savings
that the staffs and self-employed individuals should receive after employment.
This savings plan has two main benefits. The contributors might deduct contributions in
opposition to their income. For instance, if the tax rate of a contributor is 40%, for every $100
invested in this plan, the individual would be able to save $40 in taxes up to the limit of
contribution. In addition, the growth of investments in RRSP is sheltered by tax. Unlike the non-
RRSP investments, returns are exempted from capital gains tax, income tax or dividend tax. This
implies that investments according to RRSPs are compounded at pre-tax rate (Beshears et al., 2015).
In effects, the contributors of RRSP delay the tax payments until the retirement period, when
the marginal tax rate would be lower compared to their working periods. The Canadian government
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has provided such tax deferral in order to boost savings for retirement, which would help the
population in concentrating less on the Canadian Pension Plan for funding retirement.
RRSP are generally of the following types, which are formed by one or two related
individuals generally spouses or individuals.
 A single RRSP is set by one individual holding accounts as well as the contributor
 Spousal RRSP offers advantages for one spouse along with tax benefit for both
spouses. A high-earner might contribute to this RRSP in the name of the spouse or
the account holder. Since there is even division of retirement income, each spouse
could seek advantage from minimized marginal tax rate.
 An employer sets the group RRSP for the staffs and the individual is financed with
deductions related to payroll like the plan of 401(k) in USA. The investment manager
administers the same and the contributors are afforded with the benefit of immediate
tax savings (Boisclair, Lusardi & Michaud, 2017).
 There has been development of pooled RRSP in 2011, which is an alternative
developed for the small business employers and staffs along with the self-employed
individuals.
Tax-Free Savings Account (TFSA)
This account is an account in Canada, which is involved in providing tax advantages in
relation to savings. Investment income takes into consideration dividends and capital gains gained in
the account, which are mainly not taxed even when withdrawn. Unlike a Registered Retirement
Savings Plan (RRSP), TFSA contributions are not eligible for deduction in relation to income tax
purposes (Cross, 2014).
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A TFSA need not be a cash savings account like its name. It might take into account other
investments that include the following:
 Mutual funds,
 Different stocks and bonds
 Guaranteed Investment Certificates (GICs) in addition to cash like RRSPs.
The cash in a TFSA account will accrue interest, which is evident in case of normal savings
account; however, there would be no tax on interest.
Locked-in Retirement Accounts (LIRAs)
This is mainly an investment account in Canada, which is formulated so that it could hold
pension funds that are locked-in for different individuals. These individuals mainly constitute of
previous plan members, previous partners or spouses or living partners or spouses (Inderst & Della
Croce, 2014). The funds that are held under LIRA would be provided to the subsequent holders after
their retirement.
• This is a pension plan designed privately at the time an individual transfers his employed
amount from a pension plan sponsored by the employers
• LIRA’s main purpose is to provide an opportunity to the employees who prefer to take the
value of their pension plan assets with them over the company’s pension plan
• Can be established as an individual LIRA or self-directed LIRA, similar to RRSPs
• Qualified investments are similar to RRSPs and TFSAs
• In case of RRSPs and TFSAs where it is possible to make regular contributions, LIRAs do not
provide an opportunity to make further contributions. Once a fund is transferred, it is locked.
No more additions are possible.
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• In addition LIRAs are subject to the rules governing pension plans and hence cannot be cashed
at any time unlike RRSPs.
• The money in a LIRA Account must be used after retirement to provide for a retirement
income.
Provisions for holding LIRA
LIRAs are designed for gathering money, which has originated from a pension plan. This is
because both the provincial and federal governments do not provide permission to convert pension
into cash. The individuals leaving their employers with either defined contribution plans or defined
benefit plans could shift their pension funds to LIRA, in which they could manage their assets on
their own by seeking or not seeking the assistance of a financial advisor.
The staffs falling within Registered Pension Plans (RPPs) and staying with their company
until their retirement age will receive lifetime income at retirement. However, at the time of
termination of membership in a pre-retirement corporate pension plan, death before retirement
(where funds become property of the surviving spouse or partner) or breakdown of marriage or
common-law relationship holders must transfer and hold their funds in a LIRA until retirement
(Madura & Gill, 2015).
Retirement Income Conversion Options for LIRA
 The retirement income conversion option for a LIRA are more limited than those for an RRSP
since a LIRA is required to provide an income for life
 As a result, the two main conversion options for a LIRA are:
 Life Income Fund (LIF)
 These are tax-deferred plans that pay out LIRA over a number of years.
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 It is a form of Registered Retirement Income Fund (RRIF) but a restricted one.
 Unlike an RRIF, the annual withdrawal from an LIF is subject to a maximum amount,
which means that the investments in an LIF cannot be withdrawn in lump sums or
cannot be all cashed in.
 In addition, in the year that the owner of the LIF account reaches age 80, any
remaining assets in a LIF must be used to purchase a registered life annuity
 In some provinces, the assets from a LIRA or Locked-in RRSP may be transferred to a
Locked-in Retirement Income Fund (LRIF)
 In general, a LIF and an LRIF are identical retirement income options. However, there
are two main differences between them:
 The formula used to calculate the maximum withdrawal from an LRIF is
different.
 LRIF does NOT have to be converted to a life annuity at age 80.
Reverse Mortgages
 According to Statistics Canada, more than 70% of Canadians age 65 or older owned a
home in 2011
 In fact, a significant proportion of a senior's net worth is home equity
 As such, for many elderly Canadian, the most important source of retirement income will
be the equity they have in their homes
 Is a secured loan that allows older Canadians to generate income using the equity in their
homes without having to sell this asset
 Eligibility
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 You must be 60 years of age or older
 You can borrow up to 40% of the value of the house or $500,000
 The largest provider of reverse mortgages in Canada is the Canadian Home Income Plan
(CHIP)
 Even though it is a loan, reverse mortgage does not have to be repaid immediately
 Instead, a reverse mortgage provider, such as CHIP, allows the interest to accumulate
during the period of the loan
 In many cases, a reverse mortgage does not have to be paid back until the death of the
borrower
 The proceeds from a reverse mortgage may be paid in a single lump sum, set up as a line
of credit, or used to purchase an annuity for the borrower
 Drawbacks
1. The setup costs, which include appraisal, legal, and closing costs, may be as high
as $2,000 - $2,500.
2. The interest that accumulates on the reverse mortgage loan will reduce the value
of your estate over time.
In the case of Mr. John Monestime, we find that he has a fixed income and a list of
expenditures and future financial obligations. It apparently seems that he is going through a highly
constrained budget. As a parent, he has a responsibility of providing his children a better education
on one side and the other side he wishes to have his own house which after his death will act as a
security for his daughters thus securing their future.
Again an individual has some desires of his own over and above his/her obligations and
necessities, and Mr. Monestime is not an exception. He also desires to travel at the cost of $3,000
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per annum. Going through the above scenario let us see how we balance his income and
expenditures and also provide for all his requirements and desires in a justified way.
As per what he earns and the expenses that he incurs in a month, he is left out with
$1,212.12 as his monthly savings which in a year accumulates to $14,545.44. Now keeping this
amount in mind, he will be able to fund Natasha’s Master’s degree along with Anastasia’s university
education. Since he wishes to generate an income of $60,000 a year after retiring at the age of 65, he
also has a Registered Retirement Savings Plan (RRSP) where he can contribute on a recurring basis
so that after 20 years when he reaches 65, he is able to withdraw his desired annual income
(MacDonald & Osberg, 2014).
He also anticipates that he could afford a house of about $500,000 and wishes to leave this
estate to his two daughters upon death. In view of this situation, it is better for him to use his LIRA
amount for reverse mortgage and buy a home for himself as he cannot use this amount up till the
lock-in period. Further saving an amount from his monthly salary for house purchase will hamper
his present expense which needs to be immediately addressed. An immediate or near requirement of
money addressed after the requirement is over does not serve the purpose and hence in this case
purchase of house becomes a secondary priority as compared to daily expenses and children’s
education. Thus, the better way to fulfill the wish of a house purchase is to use the LIRA for a
reverse mortgage and get an owned home (Schuetze, 2015).
Thereafter, there is also no requirement for the payment of loan until the death of the
borrower as prescribed which makes the borrower or the legal heir to make arrangements of the
borrowed amount in proposed frequencies so as to repay them at the time of the death of the
borrower or at a later date when the principal amount along with the interest fully accumulates.
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Therefore, it will be a wisest option to go for as it does not create any hindrance for Mr. John
Monestime to meets his daily obligations as well as his near future expenses. As a father he will be
able to fulfill his duties providing better education and daily maintenance for their daughters as well
as a home for their secured future.
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References
Baldwin, B., & Shillington, R. (2017). Unfinished Business: Pension Reform in Canada. IRPP
Study, (64).
Beshears, J., Choi, J. J., Hurwitz, J., Laibson, D., & Madrian, B. C. (2015). Liquidity in retirement
savings systems: an international comparison. American Economic Review, 105(5), 420-25.
Boisclair, D., Lusardi, A., & Michaud, P. C. (2017). Financial literacy and retirement planning in
Canada. Journal of Pension Economics & Finance, 16(3), 277-296.
Cross, P. (2014). The Reality of Retirement Income in Canada. Fraser Institute.
Inderst, G., & Della Croce, R. (2014). Pension fund investment in infrastructure: A comparison
between Australia and Canada. OECD.
MacDonald, B. J., & Osberg, L. (2014). Canadian retirement incomes: How much do financial
market returns matter?. Canadian Public Policy, 40(4), 315-338.
Madura, J., & Gill, H. S. (2015). Personal finance. Pearson Canada.
Schuetze, H. J. (2015). Self-employment and retirement in Canada: The labour force dynamics of
older workers. Canadian Public Policy, 41(1), 65-85.
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