Such sacrifices will not be for everyone. But if you grow your nest egg large enough relative to needs, you may be able to live off the dividends and interest, or a modest systematic withdrawal plan. This scenario could appeal to people who have qualms about some retirement products. For example, they may not like certain aspects of annuities such as: counterparty risk (default by the insurance company), complexity (especially for variable annuities), high fees, irreversibility, inability to bequeath the capital, and erosion of real value through inflation.
7. Should I take CPP early?
Perhaps one of the more frequent questions asked by people approaching retirement is: Should I start taking CPP payments early? The answer once was that, in many cases, it did make sense to start early. But government proposals to amend the CPP are changing the landscape.
Under current rules, which remain in effect until 2011, starting CPP at the earliest age of 60 entails a 30-per-cent reduction in monthly payments but "you would have to live well past 75 in order to receive more from the plan than by waiting until the normal retirement age of 65," writes tax and estate lawyer Christine Van Cauwenberghe in her book, Wealth Planning Strategies for Canadians 2010 . "Also, once you begin receiving payments, you will no longer need to make contributions to the plan even if you decide to go back to work - which would save you approximately $2,000 on an annual basis and double that if you are self-employed."
After 2011, according to Department of Finance proposals, (www.fin.gc.ca/n08/data/09-051_1-eng.asp) the penalty for starting CPP early will rise from 0.5-per-cent to 0.6-per-cent per month over a five-year period so that by the end of the phase-in, taking CPP at 60 will entail a 42-per-cent reduction in monthly payments. Moreover, if you return to work, you will have to continue making contributions to the CPP (although the amount of your CPP benefit will be increased by the contributions).
8. Pension or cash?
Many retirees face the choice of taking monthly payments from their employer's pension plan or transferring the commuted value into an investment account. The latter option may make sense for someone who wants to leave behind a bigger estate.
Otherwise, it is usually better to opt for the pension income. For one thing, it pays out until the retiree's death, which insures against longevity risk. It also avoids the stress of making withdrawals from a retirement fund during a bad run in the stock market. And many pensions have a cost-of-living adjustment.
When stock markets are in a bull run earning 12 per cent or more a year, it's easier for financial advisers to convince clients to cash out their pension plans. But the fact remains that the effective 7- to 10-per-cent payoff from pensions are certain and stable. On a risk-adjusted basis, they usually can't be beat. "In most cases, I advise choosing the pension over the commuted value as long as the plan appears to be solvent," observes Mr. Pape on his website.
9. Time to get philanthropic
If you are heading into an affluent retirement, it's time to think about giving away some of the wealth you'll likely never consume. For example, "grandchildren may come along, so perhaps you should fund a registered retirement savings plan for them," says Adrian Mastracci of KCM Wealth Management Inc. (www.kcmwealth.com).
Your own children may appreciate a helping hand, like a contribution towards a downpayment on a house. But remember, nearly half of marriages end up in divorce and half of your gift could end up in the hands of your child's ex-spouse. If you don't want that to happen, there are steps you can take, as outlined in the article, Marriage and Personal Finances (www.canadianbusiness.com/columnists/larry_macdonald/article.jsp?content=20091203_151647_5464)
10. Low-income retirees
Low-income persons who contribute too much to a registered retirement savings plan may reduce their entitlement to government old-age benefits. If their retirement income ends up too high, the Guaranteed Income Supplement could be lost, as well as Old Age Security payments in part or whole. Other benefits may be affected, such as subsidized housing and nursing care. The good news is that the tax-free savings account (TFSA) allows low-income people to save for retirement without having to worry about clawbacks.
If you are heading into a rather impoverished retirement, don't be proud. Seek help from your children if they are well off and relations are good. If they are well off but won't have much to do with you, consider filing for financial support. "In most jurisdictions in Canada, adult children are legally liable … to pay parental support if their parent supported them financially when they were minor," notes Ms. Van Cauwenberghe.
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