While insurance is about protecting what you have, retirement and estate planning is about protecting what you may have in the future. Insuring what you have means finding the best way to protect it. Retirement planning, on the other hand, means finding the best way to protect the life that you’d like to be living after you stop earning income from employment. Estate planning involves protecting what you have even after your death.
Both types of planning aim to address some of the following questions, even if you really can’t answer them:
- What will my life be like when I retire?
- Will I have a spouse or partner?
- Will I have dependents?
- Will I have a home?
- Will I have a mortgage?
- Will I be disabled?
- Where will I live?
- What will I do?
- What would I like to do?
Planning, especially for retirement, should start as early as possible, allowing the most time for savings to occur and accrue. Ironically, that’s when it is hardest to try to imagine answers to these questions. Understanding the practical means to planning and saving for retirement can help you get started. If your plans are flexible, they can be adapted to the unexpected as it happens, which it inevitably will.
11.1 RETIREMENT PLANNING: PROJECTING NEEDS
- Identify the factors required to estimate savings for retirement.
- Estimate retirement expenses, length of retirement, and the amount saved at retirement.
- Calculate relationships between the annual savings required and the time to retirement.
Retirement planning involves the same steps as any other personal planning: assess where you’d like to be and then determine how to get there from where you are. More formally, the first step is to define your goals, even if they are no more specific than “I want to be able to afford a nice life after I stop getting a paycheque.” But what is a “nice life,” and how will you pay for it?
It may seem impossible or futile to try to project your retirement needs so far from retirement given that there are so many uncertainties in life and retirement may be far away. But that shouldn’t keep you from saving. You can try to save as much as possible for now, with the idea that your plans will clarify as you get closer to your retirement, so whatever money you have saved will give you a head start.
Chris and Sam are young professionals in Regina, Saskatchewan. Their families live elsewhere in the province—Chris’s family lives in Prince Albert, and Sam’s family lives on a reserve forty-five minutes from Regina near Fort Qu’Appelle. Both Chris and Sam miss not having their families close by, especially now that they have young kids. Both would like to move closer to Sam’s reserve one day, but they have good jobs in Regina, so they agreed that for the time being, they would like to buy a second home near Sam’s reserve. They plan to go there a couple weekends each month and during holidays in order to spend more time with family. They have also discussed the possibility of Sam’s younger cousin, Jen, paying them a modest monthly rent to live there. This monthly rent would help them to pay for the cost of the home. Jen has agreed to stay with family when they visit during weekends and holidays. Chris and Sam are planning to use the value of their house in Regina to finance their second home. Now in their mid-thirties, Chris and Sam are planning to retire in thirty years. They hope to sell their home in Regina when they retire, for retirement income, and move to their second home.
As they plan, Chris and Sam need to project how much money they will need to have saved by the time they wish to retire. To do that, they need to project both their future capital needs (to buy their second home) and their future living expense in retirement. They also need to project how long they may live after retirement, or how many years’ worth of living expenses they will need, so that they won’t outlive their savings.
They know that they have thirty years over which to save this money. They also know, as explained in Chapter 4 “Evaluating Choices: Time, Risk, and Value,” that time affects value. Thus, Sam and Chris need to project the rate of compounding for their savings, or the rate at which time will affect the value of their money.
To estimate required savings, in other words, you need to estimate the following:
- Expenses in retirement
- The duration of retirement
- The return on savings in retirement
As difficult as these estimations seem, because it is a long time until retirement and a lot can happen in the meantime, you can start by using what you know about the present.
Estimating Annual Expenses
One approach is to assume that your current living expenses will remain about the same in the future. Given that, over the long run, inflation affects the purchasing power of your income, you factor in the effect inflation may have so that your purchasing power remains the same.
For example, say your living expenses are around $25,000 per year and you’d like to have that amount of purchasing power in retirement as well. Assuming your costs of living remain constant, if you are thirty years from retirement, how much will you be spending on living expenses then?
The overall average annual rate of inflation in Canada in 2017 was about 1.53 per cent.
So, you would have to spend $25,000 × (1 + 0.0153)30 = $39,425 per year to maintain your standard of living thirty years from now. In this case, $25,000 is the present value of your expenses, and you are looking for the future value, given that your expenses will appreciate at a rate of 1.53 per cent per year for thirty years.
As you can see, you would need a little more than two times your current spending to live the life you live now. Fortunately, your savings won’t be just “sitting there” during that time. They, too, will be compounding to keep up with your needs.
You may use your current expenses as a basis to project a more or less expensive lifestyle after retirement. You may anticipate expenses dropping with fewer household members and dependents, for example, after your children have grown. Or you may wish to spend more and live a more comfortable life, doing things you’ve always wanted to do. In any case, your current level of spending can be a starting point for your estimates.
Estimating Length of Retirement
How much you need to have saved to support your annual living expenses after retirement depends on how long those expenses continue or how long you’ll live after retirement. In Canada, life expectancy at age sixty-five has increased dramatically in the last century due to increased access to health care, medical advances, and healthier lives before age sixty-five.
If life expectancy continues to increase, in thirty years your life expectancy at age sixty-five could be twenty-eight to thirty years. In that case, your retirement savings will have to provide for your living expenses for as long as thirty years. Put another way, at age thirty-five you have thirty years to save enough to support you for thirty years after that.
Estimating the Amount Needed and Annual Savings for Retirement
You can use what you know about time and value (from Chapter 4) to estimate the amount you would need to have saved up by the time you retire. Your annual expenses in retirement are really a series of cash flows that will grow by the rate of inflation. At the same time, your savings will grow by your rate of return, even after you are making withdrawals to cover your expenses.
The amount you need at retirement varies with the expected rate of return on your savings. While you are retired, you will be drawing income from your savings, but your remaining savings will still be earning a return. The more return your savings can earn while you are retired, the less you have to have saved by retirement. The less return your savings can earn in retirement, the more you need to have saved before retirement.
The more your account can earn before you retire, the less you will have to contribute to it. On the other hand, the more you can contribute to it, the less it has to earn.
The time you have to save until retirement can make a big difference to the amount you must save every year. The longer the time you have to save, the less you have to save each year to reach your goal.
The longer the time you have to save, the sooner you start saving, and the less you need to save each year. Chris and Sam are already in their thirties, so they have thirty years to save for retirement. Had they started in their twenties and had forty years until retirement, they would not have to save so much each year. If they wait until they are around fifty, they will have to save a lot more each year. The more you have to save, the less disposable income you will have to spend on current living expenses, making it harder to save. Clearly, saving early and regularly is the superior strategy.
When you make these calculations, be aware that you are using estimates to determine the money you’ll need at retirement. You use the expected inflation rate, based on its historic average, to estimate annual expenses, historical statistics on life expectancy to estimate the duration of your retirement, and an estimate of future savings returns. Estimates must be adjusted because things change. As you progress toward retirement, you’ll want to re-evaluate these numbers at least annually to be sure you are still saving enough.
- To calculate required savings, you need to estimate:
• expenses in retirement, based on lifestyle and adjusted for inflation;
• the duration of retirement, based on age at retirement and longevity; and
• the return on savings in retirement.
- You must save more for retirement if:
• expenses are higher;
• duration of retirement is longer; and
• the return on savings in retirement is less.
- Your annual savings for retirement also depends on the time until retirement; the longer the time that you have to save, the less you need to save each year.
- Write in your personal finance journal your ideas and expectations for your retirement. At what age do you want to retire? How many years do you have to prepare before you reach that age? Will you want to stop working at retirement? Will you want to have a retirement business or start a new career? Where and how would you like to live? How do you think you would like to spend your time in retirement? How much have you saved toward retirement so far?
- Review the Financial Consumer Agency of Canada’s worksheet 10.6.1 Your retirement planning worksheet. What will you have saved for retirement by the time you retire? What will you need to live in retirement without income from employment? How old will you be when your retirement savings run out? Run several combinations of estimates to get an idea of how and why you should plan to save for retirement.
11.2 RETIREMENT PLANNING: WAYS TO SAVE
- Compare and contrast employer, government, and individual retirement plans.
- Explain the differences between a defined benefit pension plan and a defined contribution pension plan.
- Summarize the structure and purpose of the Canada Pension Plan.
- Identify retirement plans for the self-employed.
While knowing the numbers clarifies the picture of your needs, you must reconcile that picture with the realities that you face now. How will you be able to afford to save what you need for retirement?
There are several savings plans structured to help you save; some offer tax advantages, some don’t. But first you need to make a commitment to save.
Saving means not spending a portion of your disposable income. It means delaying gratification or putting off until tomorrow what you could have today. That is often difficult, as you have many demands on your disposable income. You must weigh the benefit of fulfilling those demands with the cost of not saving for retirement, even though benefit in the present is much easier to credit than benefit in the future. Once you resolve to save, however, employer, government, and individual retirement plans are there to help you.
Defined Benefit and Contribution Plans
Employers may sponsor pension or retirement plans for their employees as part of the employees’ total compensation. In Canada, a registered pension plan “is an arrangement by an employer or a union to provide pensions to retired employees in the form of periodic payments. The Income Tax Act provides deductions in respect of both employee and employer contributions. Contributions and investment earnings are tax-exempt until such time as benefits commence to be paid” (Government of Canada, 2016a). There are two kinds of employer-sponsored plans: defined benefit plans and defined contribution plans.
A defined benefit plan is a retirement plan funded by the employer, who promises the employee a specific benefit upon retirement. The employer can be a corporation, labour union, government, or other organization that establishes a retirement plan for its employees. In addition to (or instead of) a defined benefit plan, an employer may also offer a profit-sharing plan, a stock bonus plan, an employee stock ownership plan, or other plan. Each type of plan has advantages and disadvantages for employers and employees, but all are designed to give employees a way to save for the future and employers a way to attract and keep employees.
The payout for a defined benefit plan is usually an annual or monthly payment for the remainder of the employee’s life. In some defined benefit plans, there is also a spousal or survivor’s benefit. The amount of the benefit is determined by your wages and length of service with the company.
With a defined benefit plan your income in retirement is constant or “fixed,” and it is the employer’s responsibility to fund your retirement. This is both an advantage and a disadvantage for the employee. Having your employer fund the plan is an advantage, but having a fixed income in retirement is a drawback during periods of inflation when the purchasing power of each dollar declines. In some plans, that drawback is offset by automatic cost of living increases.
To avoid the responsibility for defined benefit plans, more and more employers are moving toward defined contribution retirement plans.
Under defined contribution plans, each employee has a retirement account, and both the employee and the employer may contribute to the account. The employer may contribute up to a percentage limit or offer to match the employee’s contributions, up to a limit. With a matching contribution, if employees choose not to contribute, they lose the opportunity of having the employer’s contribution as well as their own. The employee makes untaxed contributions to the account as a payroll deduction, up to a maximum limit specified by the tax code. The employer’s contributions are a tax-deductible expense and are not a taxable benefit to the plan member. After a certain period of time, the employee obtains the right to the employer’s contribution. Employers can allow employees to make the investment decisions for the employer contributions, or the decision may be left to the employer. Employees usually make the investment decisions for their own contributions.
Private pension plans (including pooled registered pension plans) provided to employees whose employment falls under federal jurisdiction or for pension plans established in the Yukon, the Northwest Territories, and Nunavut, are regulated and supervised by the Office of the Superintendent of Financial Institutions. Every province, except Prince Edward Island, “has its own laws and regulations that govern pension plans in industries that are not under federal jurisdiction” (Government of Canada, 2016a). Regulations pertain to withdrawals both in retirement and in special situations.
The employer offers a selection of investments, but the employee chooses how the funds in his or her account are diversified and invested. Thus, the employee assumes the responsibility—and risk—for investment returns. The employer’s contributions are a benefit to the employee. There is a considerable choice of investment options. These typically include:
- Guaranteed investment funds
- Canadian bond funds
- Canadian balanced funds
- Canadian equity funds
- International and/or global equity funds
Many defined benefit and contribution plans are structured with a vesting option that limits your claim on the retirement fund until you have been with the company for a certain length of time. For example, Paul’s employer has a defined benefit plan that provides for Paul to be 50 per cent vested after five years and fully vested after seven years. If Paul were to leave the company before he had worked there for five years, none of his retirement fund would be in his account. If he left after six years, half his fund would be kept for him; after ten years, all of it would be.
Employers can also make a contribution with company stock, which can create an undiversified account. A portfolio consisting only of your company’s stock exposes you to market risk should the company not do well, in which case, you may find yourself losing both your job and your retirement account’s value.
Employers are increasingly moving towards defined contribution plans versus defined benefit plans because they are concerned about investment risk as well as liquidity within the plan to pay active retirees versus contributing employees.
Canadian Government: Public Pensions
The Canadian government has three different retirement income systems. The first is Old Age Security (OAS), which provides a modest monthly pension starting at the age of sixty-five. The second system is the Canada Pension Plan (CPP), a retirement plan for all citizens offered by the federal government, except those living in Quebec who must contribute to the Quebec Pension Plan (QPP). The third level of the retirement income system is composed of private pensions and savings.
Canada Pension Plan and Quebec Pension Plan
The CPP and QPP is not an automatic benefit, but an entitlement. To qualify for benefits, you must work and contribute. The CPP and the QPP are closely coordinated so that your pension is protected no matter where you live in Canada. If you have contributed to both the CPP and the QPP, the amount you receive will take into consideration all contributions made to both plans. However, if you live in Quebec, you must apply for the QPP, and if you live elsewhere in Canada, you must apply for the CPP. Your benefit will be paid depending on your place of residence (Government of Canada, 2016a). Every person over the age of eighteen (with some exceptions) who works in Canada and earns more than the minimum amount per year (it is frozen at $3,500) must contribute pensionable earnings to either the CPP or QPP. It is important to note that employers and First Nations workers on-reserve are not required to pay into the Canada Pension Plan. However, if a First Nation employer chooses to participate in the CPP, all employees must contribute to the CPP through payroll deductions. If people are self-employed or their First Nation employer decides not to participate in the CPP, they can still contribute by paying both the employee and the employer’s portions of the CPP contributions. Those who are employed off-reserve or are receiving taxable employment income must contribute to the CPP (Government of Canada, 2016b).
Maximum pensionable earnings are adjusted every January according to the increases in average wage. In 2018, the maximum amount was $55,900. Employers pay half the required contributions and the employee pays the other half. If you are self-employed, you make the whole contribution, to a maximum contribution of $5,187.60 as of 2018. Your contributions are based on your net business income after expenses (Government of Canada, 2018).
You can apply to begin collecting a monthly retirement pension from the federal government at the age of sixty if you have paid into the CPP. However, the earlier you begin collecting your pension before the age of sixty-five, the less you will receive on a monthly basis. If you begin collecting at age sixty, your pension payments could be reduced by as much as 36 per cent. If you collect after seventy, it could be as much as 42 per cent greater (Government of Canada, 2016c). The CPP has three different types of benefits: disability benefits (for disabled contributors and their children), a retirement pension, and survivor benefits (which include the death benefit, the surviving spouse’s pension, and the children’s benefit).
“CPP was designed to replace only 25 per cent of the salary from which you made your CPP contributions” (Kapoor et al., 2015, p. 421). Given this information, it is critical that you understand that CPP and other public pensions cannot meet all of your financial needs in retirement. You must combine private savings with public pensions in order to be prepared for retirement. A statement of your CPP contribution is available through the Service Canada website; this statement must be used as a personal finance tool in order to properly plan for retirement and set realistic goals (Kapoor et al., 2015).
The following recent changes to CPP will be implemented over the course of a number of years:
- The annual payout target will increase from about 25 per cent of pre-retirement earnings to 33 per cent.
- The maximum amount of income covered by the CPP will increase from $54,900 to about $82,700 when the program is fully phased in by 2025. Those who earn a higher income will be eligible to earn CPP benefits on a larger portion of their income (McFarland and McGugan, 2017).
- Canadians who take time out of the workforce to raise children or due to disability will not see a decline in their retirement benefits. A drop-in provision has been introduced by the federal government that allows for a drop-in amount based on an average of previous years’ earnings. The formula assigns income to those during years without work because they have chosen to raise a child or because of disability (Canadian Press, 2017; Press, 2017).
- Survivor benefits will be paid out to everyone, regardless of age, dependent children, or disability, beginning in 2019.
- The death benefit, a one-time payment to, or on behalf of, the estate of a deceased CPP contributor, will be set for everyone at $2,500, instead of being calculated based on a deceased’s earnings (Canadian Press, 2017).
Old Age Security, Guaranteed Income Supplement,and Spouse’s Allowance
According to the Government of Canada, the Old Age Security program is its largest pension program and is funded out of its general revenues; Canadians do not pay directly into it. OAS is available to seniors aged sixty-five and older who meet the Canadian legal status and residence requirements and the amount one receives is determined by how long one has lived in Canada after the age of eighteen.
OAS benefits are adjusted quarterly (in January, April, July, and October) if there are increases in the cost of living as measured by the Consumer Price Index. Seniors who have low income may be eligible to also receive the Guaranteed Income Supplement (GIS) and Spouse’s Allowance (SPA). The GIS is a monthly, non-taxable benefit for Old Age Security pension recipients who have a low income and are living in Canada. The SPA is also a benefit available to low-income individuals aged sixty to sixty-four who are the spouses or common-law partners of GIS recipients (Government of Canada, 2016d).
Seniors who have high income must pay back all or a portion of their OAS (line 113 of the tax return) as well as any net federal supplements (line 146) if their annual income exceeds a certain amount (TurboTax Canada, 2017).
Traditionally, many plans for public employees have been defined benefit plans providing annuities upon retirement.
Personal Retirement Plans
Registered Retirement Savings Plan
Any individual can save for retirement without a special “account,” but since the government would like to encourage retirement savings, it has created tax-advantaged accounts to help you do so. Because these accounts provide tax benefits as well as some convenience, it is best to use them first in planning for retirement, although their use may be limited.
A registered retirement savings plan (RRSP) is a personal investment vehicle that allows you to shelter your savings from income taxes. RRSPs allow you to shelter your money in a wide range of financial products: stocks, Canada Savings Bonds (CSBs) and treasury bills (T-Bills), corporate bonds, term deposits, guaranteed investment certificates (GICs), mutual funds, savings accounts, real estate, and so on. In the 2017 federal budget, the Government of Canada announced its decision to end the sale of CSBs as of November 1, 2017. Savings accounts, term deposits, and GICs are examples of guaranteed funds because you are ensured the return of your principal plus a guaranteed rate of return, and they are offered by most financial institutions. Mutual funds do not guarantee a rate of return or the return of your principal and are available through most financial institutions including investment dealers and life insurance companies. Life insurance and life annuity products, which are sold through life insurance companies, may also qualify as RRSP investments, but they might not be the best financial plan due to various restrictions on these types of investments (Kapoor et al., 2015).
An RRSP allows you to realize immediate tax benefits at a time when your income is generally highest. Your annual contribution can be deducted from your gross income at tax time, reducing the amount you pay in income tax that year. The income earned in your RRSP is not taxed until you begin to withdraw funds at retirement and will likely be taxed at a lower rate given that most people will be earning a reduced income compared to when they worked full-time. However, one will certainly be receiving taxable income and not everyone will be in a lower tax bracket upon retirement. Your RRSP investments can grow and are tax-sheltered until retirement. If one is paying little to no income tax, likely an RRSP is not needed. As mentioned above, an RRSP is best utilized when your income is generally highest. An additional advantage of the RRSP is that principal appreciation (interest, dividend income, or capital gain) is not taxed until the funds are withdrawn.
Types of RRSPs
The most common type of RRSP held by Canadians is a “regular” RRSP due to the fact that fees are minimal and it requires minimal management. However, because of the type of low-risk and low-return investments available within the regular RRSP, there is a limited return on investment. “Self-directed” RRSPs allow for greater scope of categories, such as cash, T-Bills, bonds (including CSBs), mortgages, mutual funds, and stocks (Kapoor et al., 2015). The fees are higher and require more management, but the return on investment is often higher. Spousal RRSPs are available to common-law couples and same-sex couples, and they allow one to contribute to an RRSP and name one’s spouse/partner as the beneficiary. This can be a useful type of RRSP when one spouse/partner does not participate in the labour market. However, this type of contribution will reduce one’s allowable contribution to his or her own plan.
As mentioned in Chapter 9 “Buying a Home,” you can use RRSP funds for a down payment on your first home under the Home Buyer’s Plan. Up to $25,000 can be withdrawn as a loan from your RRSP; no interest is required on the loan and it must be paid back within fifteen years. A certain payment must be paid every year; if it is not, that amount due will be included in your income for that year.
RRSP funds, up to a maximum of $20,000, can also be used for full-time training or educational purposes for you or your common-law partner or spouse under the Life-Long Learning Plan, up to $10,000 per year. Withdrawals have to be paid within ten years. As with funds used for a down payment on a house, if a payment that is due is not made, it will be included in your income for the year it was due (Kapoor et al., 2015).
If you are already contributing to a registered pension plan, the CRA will calculate, along with the help of your employer, the allowable contribution using a pension adjustment. If you do not have an RPP, then you can contribute up to 18 per cent of your earned income or the stated maximum (Kapoor et al., 2015). You can exceed your contribution limit by $2,000 without penalty, but anything beyond this amount will incur a 1 per cent fine. If you do not contribute the maximum contribution in a given year, you can carry forward your contribution shortfall and invest more in a year when you are able to.
Deregistering an RRSP
Cashing in or “deregistering” your RRSP must take place before the end of the calendar year of your seventy-first birthday. Upon deregistering an RRSP, you have a number of options:
- Withdraw the funds and pay the income tax. If a lump-sum payment is withdrawn, it is likely a high marginal tax rate will apply. The tax consequences of doing this could be quite expensive.
- Purchase a single-payment life annuity from an insurance company. This life annuity will allow you to receive a fixed level of payment on a regular basis for the rest of one’s lifetime and you only pay taxes on your annual income.
- Purchase a fixed-term annuity from an insurance company that pays you an income for a fixed-term. Unlike life annuities, life expectancy or the pooling of funds with others is not taken into account.
- Set-up a registered retirement income fund (RRIF) that allows you to withdraw a minimum amount from the RRSP and invest that money. That minimum amount increases over time. The amount and frequency of payments to your RRIF can be adjusted. Earnings in a RRIF are tax-free and amounts paid out of a RRIF are taxable upon receipt (Kapoor et al., 2015, pp. 440–442).
- One could also choose a combination of the options mentioned above, such as withdrawing funds, buying an annuity, and putting the rest in a RRIF.
For more information regarding your options when deregistering an RRSP, see Options for your own RRSPs on the Government of Canada website.
Fixed-Term and Life Annuities
Fixed-term and life annuities can be purchased with a lump sum from any Canadian life insurance company; the lump sum can be from either registered or non-registered sources. Examples of registered funds used to purchase both fixed-term and life annuities are: individual RRSPs, locked-in RRSPs, RRIFs, pension plans, or deferred profit sharing plans. Fixed-term annuities specify to the insurance company how long the purchaser wishes this type of annuity to pay them. The insurance company is obligated to pay out all capital used to pay for this annuity. All income payments cease and the annuity contract ends once the payment period has ended. Fixed-term annuities are purchased when a guaranteed income is needed for a specific time period. Any guaranteed payments that have not been paid due to the death of the annuitant will be paid to a named beneficiary or his or her estate (Canadian Annuity Rates, 2018).
Life annuities can be purchased as either single life or joint life. “Single Life annuities pay a periodic income as long as the sole annuitant is alive. Joint Life annuities continue to pay as long as one of the two joint annuitants is alive” (Canadian Annuity Rates, 2018).
As mentioned in Chapter 6 “Taxes and Tax Planning,” a tax-free savings account (TFSA) is a flexible investment account where one’s investment income—interest, dividends, or capital gains—is not taxed, even when withdrawn. TFSAs are an increasingly popular investment strategy because your money grows more quickly inside a TFSA than in a taxable account due to tax-free compound growth. Through a TFSA, one can invest in various vehicles, such as GICs, bonds, mutual funds, stocks, and exchange-traded funds. Furthermore, eligibility for federal income-tested benefits (e.g., OAS), or credits (non-refundable tax credit for taxpayers sixty-five years and older) are not affected by investment gains within the TFSA or by withdrawals (Kapoor et al., 2015). The following are important facts about contributions to your TFSA:
- The current contribution limit is $5,500 per year; contributions to your RRSP/RPP do not limit your TFSA contribution.
- Any unused room can be carried forward.
- You can contribute up to your TFSA contribution limit. A tax applies to all contributions exceeding your TFSA contribution limit.
- Withdrawals will be added to your TFSA contribution room at the beginning of the following year.
- You can replace the amount of the withdrawal in the same year only if you have available TFSA contribution room.
- Direct transfers must be completed by your financial institution (Government of Canada, 2016e; Government of Canada, 2016f).
The federal government introduced TFSAs in 2009. One can go back and contribute for every year since 2009 for a total of $57,500 (2009–2012: $5,000 per year; 2013–2014: $5,500 per year; 2015: $10,000; 2016–2018: $5,500). Many different groups can benefit from TFSAs, and they should be considered as a viable retirement savings strategy for young and old as well as low- to high-income Canadians (Government of Canada, 2016e).
- Retirement plans may be sponsored by employers, government, or individuals.
- Defined benefit plans differ from defined contribution plans in that the benefit is a specified amount for which the employer is liable. In a defined contribution plan, the benefit is not specified, and the employee is responsible for the accumulation in the plan.
- CPP is an entitlement financed by payroll taxes and designed to supplement employer retirement plans or individual retirement plans.
- Examples of personal retirement plans are registered retirement savings plans and tax-free savings accounts.
- Do you participate in an employer-sponsored retirement savings plan? If so, what kind of plan is it, and what do you see as the benefits and drawbacks of participating? If you contribute to your plan, how did you decide how much to contribute? Could you contribute more? In searching for your next good job, what kind of retirement plan would you prefer to find in the new employer’s benefit package, and why?
- As part of your planning, how can you estimate what you will need for your retirement income? Find this answer by going to the Canadian Retirement Income Calculator on the Government of Canada’s website.
Canadian Annuity Rates. (2018). “Types of Canadian Annuities.” Retrieved from:.
Canadian Press. (2017). “The Canada Pension Plan is getting more changes: Here are five things you need to know.” Financial Post, 2017. Retrieved from:.
Government of Canada. (2016a). “About Registered Pension Plans (RPPs).” Retrieved from:.
Government of Canada. (2016b). “First Nations workers and the Canadian Pension Plan.” Retrieved from: https://www.canada.ca/en/employment-social-development/services/pension/reports/aboriginal.html.
Government of Canada. (2016c). “Canada Pension Plan—How much could you receive. Retrieved from:.
Government of Canada. (2016d). “Old Age Security.” Retrieved from:.
Government of Canada. (2016e). “Contributions, withdrawals, and transfers.” Retrieved from:.
Government of Canada. (2016f). “Contributions.” Retrieved from:.
Government of Canada. (2018). “CPP contribution rates, maximums and exemptions.” Retrieved from: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/payroll-deductions-contributions/canada-pension-plan-cpp/cpp-contribution-rates-maximums-exemptions.html
Kapoor, J., L. Dlabay, R. Hughes, and F. Ahmad. (2015). Personal Finance. Toronto: McGraw-Hill Ryerson.
McFarland, J. and I. McGugan. (2017). “A new premium on retirement.” Globe and Mail, Nov. 12. Retrieved from:.
Press, J. (2017). “New CPP changes give survivors full benefits immediately.” Toronto Star, Dec. 13. Retrieved from:.
TurboTax Canada. (2017). “Old Age Security (OAS) Clawback and Strategies to Help Reduce It.” Retrieved from:.
11.3 ESTATE PLANNING
- Identify the purposes, types, and components of a will.
- Describe the roles and types of trusts and gifts.
- Analyze the role of the estate tax in estate planning.
Your estate includes everything you own. Other aspects of financial planning involve creating and managing your assets while you are alive. Estate planning is a way to manage your assets after your death. Age is not really a factor, because death can occur at any time, at any age, by any cause. Arranging for the disposition of your estate is not a morbid concern, but a kindness to those you leave behind. Death is a legal and financial event as well as an emotional one. Your loved ones will have to deal with the emotional aftermath of your loss and will appreciate your care in planning for the legal and financial outcomes of your death.
Provincial family law varies from province to province when it comes to the distribution of one’s estate. For example, British Columbia and Ontario consider common-law or same-sex unions when determining when one has matrimonial rights; this is particularly important for the purposes of distributing an estate without a will. While these provincial laws differ, the motive behind provincial laws is to fairly distribute your estate to those who are financially dependent on you at the time of your death. It is important that you make known your desires regarding the distribution of your estate so that it is not left up to the legal system to make sensitive decisions.
Elder Norma Jean Byrd emphasizes the importance of a will in order to plan for the future of loved ones (Video 4).
Since you won’t be here, you will need to leave a written document outlining your instructions regarding your estate. That is your will, your legal request for the distribution of your estate—that is, assets that remain after your debts have been satisfied. If you die intestate, or without a will, the laws of your province or territory of legal residence will dictate the distribution of your estate.
You can write your own will so long as you are a legal adult and mentally competent. The document has to be witnessed by two or three people who are not inheriting anything under the terms of the will, and it must be dated and signed and, in some provinces, notarized. A holographic will is handwritten, and as such, it may be more difficult to validate. A formal will is usually prepared on a typed or pre-printed form with the assistance of an attorney. A statutory will is a pre-printed form that you can buy from a store or in a software package. Online will-writing services, such as Canadian Legal Wills (legalwill.ca) or MakeYourWill.com (canada.makeyourwill.com), provide easy, affordable access to statutory wills. Consider, however, that a will is a legal document. Having yours drawn up by a lawyer may better insure its completeness and validity in court. A notarial will is only available in Quebec and must be signed in the presence of a notary, who keeps the original copy to share with heirs, and at least one witness (Kapoor et al., 2015).
Probate is the legal process of validating a will and administering the payment of debts and the distribution of assets by a probate court. The probate court process legally confirms the authority of the executor of an estate by granting the executor letters probate (or in Ontario, a certificate of estate trustee with a will). In Quebec, probates are not common because notarial wills do not require probate (Financial Post, 2013). Probate courts also distribute property in the absence of a will. However, probate is not required if the deceased:
- owned assets of little value, allowing for transfer without court supervision;
- owned assets jointly with or “payable on death” to another person;
- owned assets naming another person as beneficiary; or
- held all assets in a living trust (a legal entity for managing assets on behalf of beneficiaries).
Besides the details of “who gets what,” a will should name an executor, the person or persons who will administer the payment of your debts and the distribution of your remaining assets according to your wishes as expressed in your will. If you have legal dependents, you should name a guardian for them who will assume responsibility for providing for your children and managing the estate for them. A great deal of thought and consideration should be put into the selection of a guardian for your children to ensure you are choosing someone who has a similar parenting philosophy and who would be willing to accept responsibility for your children. You may also include a “letter of last instruction” stating the location of important documents, safe deposit keys, and bank accounts, and specifying your funeral arrangements.
You may change or rewrite your will at any time, but you should definitely do so as your life circumstances change, especially with events such as marriage or divorce, the birth of a child, and the acquisition of significant assets, such as a house. If the changes in your circumstances are substantial, you should create a new will.
There are several types of wills. A simple will leaves everything to a spouse.
It is possible that you will become mentally or physically disabled before you die and unable to direct management of your assets. To prepare for this possibility, you may create a living will with instructions for your care in that event. You may appoint someone, usually a spouse, child, or sibling, who would have power of attorney—that is, the right to act on your behalf, especially regarding financial and legal decisions. That power may be limited or unlimited (such as a “durable power of attorney”) and is restricted to certain acts or dependent on certain circumstances. The two major types of powers of attorney are ordinary and enduring. An ordinary power of attorney is no longer valid if the donor becomes mentally incompetent while an enduring power of attorney remains valid regardless (LawDepot, 2018).
An ethical will is a way for one to pass along values and beliefs as well as emotional and spiritual wishes (Kapoor et al., 2015).
Along with granting power of attorney, your living will may include a health-care proxy, requesting that medical personnel follow the instructions of a designated family member who expresses your wishes concerning your end-of-life treatment. Many people request, for example, that they not be revived or sustained if they cannot experience some quality of life. But be sure to update your living will, as over time your views may change and medical and technological advances may change our notions of what constitutes “quality of life.”
Trusts and Gifts
A trust is a legal entity created by a trustor, or grantor, who owns assets managed by a trustee or trustees for the benefit of a beneficiary or beneficiaries. A trust is often preferred to probating a will, which can be a costly and lengthy process that could make the contents of the probate a matter of public record. A testamentary trust may be established by a will so that beneficiaries who are unable to manage assets (minor children or disabled dependents) can benefit from the assets but have them managed for them. This type of trust becomes effective upon one’s death. A living trust is established while the grantor is alive. Unlike a will, it does not become a matter of public record upon your death. A spousal trust is a trust created for one’s spouse and “requires that 1) all income of the trust is paid to the spouse during the spouse’s lifetime, and 2) that none of the capital can be distributed to anyone else during your spouse’s lifetime” (Kapoor et al., 2015, p. 464).
Most trusts, whether testamentary or living, are created to avoid either the probate process or to avoid wills from becoming a public record. The probate process can be long and costly and therefore a burden for your executor, your beneficiaries (who may have to wait for their distributions), and your estate. Living trusts are also easier to change than the contents of a will.
An estate includes everything you own, such as property, life insurance, annuities, employee benefits, etc. Unlike the United States, Canada no longer has any form of estate or inheritance tax. However, there are three potential taxes that may be incurred at death:
- Income tax due to deemed disposition (Income Tax Act)
- Provincial probate taxes
- US estate tax (on your US assets)
Your primary objective is to see that your dependents are provided for by the distribution of your assets and that your assets are distributed as you would wish them to be were you still there to distribute them yourself.
Estate Services for First Nations Peoples
In Canada, under the Indian Act, the Department of Indigenous Services Canada (DISC) is required to manage the estates of First Nations people who lived on reserve upon their time of death as well as the estates of dependent adults or a minor. DISC will get involved in managing an estate if no one is identified in the will or if no other eligible person is willing and able to. If First Nations individuals live off-reserve upon their time of death, the province or territory where an individual lives will be responsible and provincial/territorial laws will apply. DISC will also assist First Nations people to administer the estates themselves (INAC, 2017).
DISC provides the following services as part of its Deceased Estates Service:
- appoints estate administrators or executors,
- approves wills so they can take effect,
- transfers reserve lands from the estate to the heirs or beneficiaries,
- if someone dies without a will, DISC will determine the heirs,
- if the family does not or cannot settle the estate, DISC will serve as administrator,
- if DISC is the administrator, it will distribute estate assets according to the will or the intestacy provisions of the Indian Act (INAC, 2017).
- A will describes your wishes for the distribution of your assets (the estate) after your death.
- Probate courts distribute assets in the absence of a will and administer wills in estates with assets valued above a certain (variable) dollar amount.
- There are many kinds of wills, including:
• the holographic will
• the formal will
• the statutory will
• the notarial will
• the simple will
• the living will
• the ethical will
- Living wills, with power of attorney and health-care proxy, provide medical directives, empower someone to manage your estate while you are still alive, and authorize someone to make decisions about your end-of-life care.
- Trusts are used to provide the benefits of assets for beneficiaries without them assuming responsibility for asset management.
- There are testamentary, living trusts, and spousal trusts. Setting up and administering trusts involves some considerable expense.
- Draft a holographic will or use a form for a statutory will. Start by reviewing your balance sheet, showing your assets, liabilities, net worth, and inventory of personal and household property. Think about how you would want your estate to be distributed upon your death. Identify an executor. For more information on writing a will, read the Canadian Living article “What you need to know about writing a will,” and visit formalwill.ca for free forms and advice.
- Find out what kind of document your province or territory requires for a “last will and testament.” Also, consider drafting a living will. What should be in a living will?
Financial Post. (2013). “To probate or not to probate.” Financial Post, Feb. 22. Retrieved from:.
Indigenous and Northern Affairs Canada. (2017). Estate services for First Nations people. Retrieved from: https://www.aadnc-aandc.gc.ca/eng/1100100032357/1100100032361
Kapoor, J., L. Dlabay, R. Hughes, and F. Ahmad. (2015). Personal Finance. Toronto: McGraw-Hill Ryerson.
LawDepot. (2018). “Power of Attorney—FAQ.” Retrieved from: .