Transcript Designing Retirement Your Way

Retire “retirement”
87% of Canadians said the word retirement does
not mean today what it meant years ago.
What should we call it?
• Next stage of my life
• Rest of/second half of my life
• Time to pursue my dreams
• My years
Today’s Retirement
The Changing Retirement picture:
• Semi-retirement
– To be mentally active
– To keep in touch with people and
– To earn money
• Sandwich generation
• Life expectancy
– living longer (middle age is 54)
Result: 65 is an arbitrary age – retirement is no longer a
“point in time”
“Risky” Business
Longevity Risk
Contingency Risk
Income Risk
Longevity Risk (2)
- Extending Planning Horizons
86
91
96
Contingency Risk
Eldercare
–
By 2010, 60% of Baby Boomers (age 50+) will have surviving Senior parents or grandparents
some of whom will require specialized care and support (Source: Canadian Academy of Seniors Advisors,
Inc. c. 2003-05)
•
Personal Health Issues
Healthy Life
Expectancy
Canada (2002)*
Current
Age
Years
Remaining
Ave. Life
Expectancy **
Potential
Care
Period
Male
60
16.1
21
4.9
Female
60
19.3
24
4.7
* Source: World Health Organization
** Source: Manulife (Canada)
Definition: Healthy Life Expectancy (HALE) is based on life expectancy, but includes an adjustment
for time spent in poor health. This indicator measures the equivalent number of years in full health that a
person at age 60 years can expect to live based on the current mortality rates and prevalence
distribution of health states in the population.
Income Risk
Withdraw Rate
Estimated Portfolio Lifespan by Percentage of Assets Withdrawn
Annually
10%
11
13
8%
15
18
6%
21
27
4%
33
0
5
10
15
20
25
30
35
Years
Source: Fidelity Investments
Retirement Your Way
How will you spend the rest of your life?
Regeneration
Re-designing the next phase
If you were to imagine your life in retirement,
what would it be like?
What does the word “retirement” mean to you?
How will you spend your time?
Where will you live?
What interesting things do you want to do?
Regeneration
Re-designing the next phase
• Will you continue to work and transition into
full time retirement?
• What will you miss most about work and how
will you replace it?
• Have you considered your partner’s plans/goals?
• Does longevity run in your family?
• How do you want to be remembered?
Why is Financial
Planning Important?
Where will you be at 65?
Take 100 40-year-olds today. Where will
they be at 65?
Wealthy
Financially Secure
Must continue to work
No longer alive
Require financial assistance
Where do you want to be?
Men
1
Women
1
8
2
14
24
53
11
4
82
What is Financial Planning?
1. Know where you are now – the starting
point of any financial plan
Your Net Worth
+ $ Assets
Your Cash Flow
• Income
• Expenditures
• Savings
Activity
$ Liabilities
$ Net Worth
What is Financial Planning?
2. Know where you want to go
•
If you don’t know where you’re going
you’ll never get there
What is Financial Planning?
Develop and implement the plan



This is where you may need
assistance
The plan should help you to
achieve your financial goals
It should be realistic based on
your current financial position
The 6 Steps of Financial Planning

Clarify your current position

Identify financial and personal goals

Identify financial problems

Find solutions

Implement the strategy

Ongoing reviews
The Changing Retirement Picture
Active retirement
– To be mentally active
– To keep in touch with people and
– To earn money
• Sandwich generation
The Changing Retirement Picture
Life expectancy
• Living longer (middle age is 54)
Result: 65 is an arbitrary age – retirement is
no longer a “point in time”
Traditional Retirement Plan
Total
Retirement
Savings
Capital Draw-Down
Capital Accumulation
Working Career
Age
Fully Retired
65
Key Concerns:
Key Concerns:
• Am I saving enough?
• How much income will I have?
• Am I investing wisely?
• Where will it come from?
•Will I outlive my savings?
Today’s Retirement Plan
Capital Draw-Down
Capital Accumulation
Fully Retired
Working Career
Transition
55
65
Active
70
75
Dependent
85
Key Concerns:
Key Concerns:
Key Concerns:
• Am I saving enough?
• Have I accumulated
enough to do what I
want to do?
• Will I have to change my lifestyle?
• Am I investing wisely?
• Will I need to continue
working?
• How can I afford to
help my parents and/or
other family members?
• Will I outlive my savings?
• How can I create more income based on
my total net worth?
• What happens if I or my spouse need
specialized care support and/or nursing
home care?
Three Tiered System
Government
$
Employment
Related
Personal
Savings
Government Benefits
Old Age Security




Payments start at 65
Pension based on years of
Canadian residence
Maximum benefit for 2007
is approximately $6,027
Additional payments made
to those with low income
1. Government Benefits
Canada/Quebec Pension Plan


Benefits normally start at 65
They can be requested at 60 or deferred
until 70

Pension is based on contributions

Maximum pension for 2007 is $10,365
1. Government Benefits
OAS and C/QPP total about $16,392 per year
Is this going to be enough to
fund your retirement?
Guaranteed Income Supplement
2. Employment Pensions
Two main types:
Defined Contribution Plans



Similar to an RRSP
Pension is based on contributions and
investment performance
All of the investment risk rests with the
employee
2. Employment Pensions
Defined Benefit Plans





Pension is based on a
formula
Looks at earnings and
service
Investment yield doesn’t
affect payments
May be integrated with
government plans
May have indexing feature
3. Personal Savings
Non-registered savings
RRSP/RRIF
Locked-in plans
Other options
3. Personal Savings
Non Registered Savings
Bank accounts
Brokerage accounts
No restrictions on contributions and withdrawals
Income is taxed when earned
3. Personal Savings
RRSPs/RRIFs

Tax deduction for contributions

Unused contributions may be carried forward


Contributions may be restricted due to
participation in a pension plan
Tax deferral on growth
RRSP versus Non-RRSP
Savings
$1,000,000
Sara - Non-RRSP - $244,974 $789,544
RRSP
$800,000
Bob - RRSP - $789,544
$600,000
$400,000
$200,000
$0
1
3
5
7
9
11
13
15 17
19 21
23
25
RRSP versus Non-RRSP Savings
Sara
Bob
Amount Invested
Annually
$5,400 after tax
$10,000
Rate of return
4.32% after tax
8%
Plan balance at age 65
$244,976
$789,544
Annual after-tax
withdrawals from age 65
to 90
$16,216
$49,555
RRSP/RRIF
Income splitting possibility with spouse
Cash withdrawals can be made at any time
RRSP matures at age 71

RRIF

Annuity

Lump sum cash withdrawal
RRSP Withdrawals
Home Buyers’ Plan
Lifelong Learning Plan
3. Personal Savings
Locked-In Plans
Can only be funded when assets are
transferred from a pension plan
Restrictions on timing and amount of withdrawals
Otherwise similar to “regular” RRSPs
3. Personal Savings
Other Options
Saving more
Taking less
Earning more
Waiting
Lottery Winnings
Downsize House
Future Challenges
Inflation
Rate of return
Tax rates
Questions?
ESTATE PLANNING
Fundamentals
Will
Exercise your right to choose who gets what and when.
Power of Attorney
Appoint someone you trust to handle things in your
absence, and make personal decisions if you are unable.
Estate Costs/Fees/Taxes
Probate
Income tax
Executor/Trustee fees
Legal costs
Probate
What is it?
The formal confirmation by a Court that the Will is the
last Will of the deceased and gives the executors named
in the Will the authority to act.
Fees/Costs vary by province
In Ontario - $250 on the first $50,000 of an estate and 1
½% on value above $50,000
Reduce Probate Fees – Property
passing outside Estate
•Joint with right of survivorship
•Beneficiary Designations
• RRSP, RRIF and Insurance
•Alter Ego or Joint Partner Trusts
42
Joint Accounts with person other than spouse:
Problems
•Deemed sale and Tax on creation to
contributor
•Tax on income to all joint owners
•If not intended to be effective till death
• All have access
• Claims of 3rd parties
• Will your intentions be carried out?
Non Tax Uses of Testamentary
Trusts
•Spendthrift trusts
•Disabled beneficiary
•To protect capital for others
• If spouse remarries
• For children of 1st marriage
• For grandchildren
Tax Uses of Testamentary Trusts
•To get spousal rollover but preserve capital
for another
•To income split with a beneficiary
•To sprinkle income to low tax rate family
members
Income Taxes
Deemed disposition of all assets at their fair
market value plus a de-registration of all
RRSP/RRIF accounts
Tax deferral available if assets are inherited by
spouse
Special tax deferral for RRSP/RRIF assets
inherited by a minor child or dependent disabled
child

Common Solution To Estate
Taxes & Fees
Joint last life insurance contract
•Funds the tax & fees at half the cost
•Provides liquidity in the estate
•Peace of mind that it’s done
Just another way to ensure the family gets the full
value of the RRSP accounts, the cottage or business.
Gifting public company shares
...
Backgrounder
• Gift of public securities to public charity
– May 2, 2006 federal budget
– Reduced capital gains inclusion rate to nil
– Includes stocks, bonds, mutual funds, seg funds
– Includes stock options
– Significant tax incentive for funding major gifts
Disclaimers
•All insurance products are offered through BMO Nesbitt Burns
Financial Services Inc. by licensed life insurance agents, and, in
Quebec, by financial security advisors.
•This presentation has been prepared with the understanding that
BMO Nesbitt Burns Financial Services Inc. is not engaged in
providing legal or accounting services.
Stocks, Bonds or Cash?
Stocks, Bonds or Cash?
Stocks have provided the best returns
(Pre-Tax Total Returns)
Cdn. Stocks Bonds T-Bills
$877,396 $358,196 $181,444
January 1, 1961 = $10,000
3,000,000
1,000,000
300,000
100,000
30,000
10,000
3,000
1960
1965
1970
1975
1980
1985
1990
January 1961 - December 2005
1995
2000
2005
Stocks, Bonds or Cash?
Asset returns after taxes
Cdn. Stocks Bonds T-Bills
$154,466 $35,455 $33,797
January 1, 1961 = $10,000
200,000
100,000
50,000
20,000
10,000
5,000
1960
1965
1970
1975
1980
1985
1990
January 1961 - December 2005
1995
2000
2005
Stocks, Bonds or Cash?
Keeping pace with Inflation
(After-Tax Total Returns)
Cdn. Stocks Bonds T-Bills Inflation
$154,466 $35,455 $33,797 $68,748
January 1, 1961 = $10,000
200,000
100,000
50,000
20,000
10,000
5,000
1960
1965
1970
1975
1980
1985
1990
January 1961 - December 2005
1995
2000
2005
Stocks, Bonds or Cash?
Treasury bills provide steady returns...
Annual Total Returns (%)
30
20
10
0
-10
-20
1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005
(1961 - 2005)
Stocks, Bonds or Cash?
Bonds provide superior returns …
Annual Total Returns (%)
40
30
20
10
0
-10
-20
1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005
(1961 - 2005)
Stocks, Bonds or Cash?
While stocks are more volatile
Annual Total Returns (%)
60
40
20
0
-20
-40
1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005
(1961 - 2005)
Stocks, Bonds or Cash?
Two types of risks
Best
Average
Worst
Pre-Tax C$ Annual Total Return (%) (1961-2005)
80
67.8
60
40
20
44.8
40.7
13.7
35.4
12.3
19.1
11.6
8.5
6.8
0
-20
-40
-4.3
-23.1
Int'l Stocks
-26.9
U.S. Stocks
-25.9
Cdn. Stocks
Pre-Tax Returns
Bonds
T-Bills
2.2
Income Portfolio
T-Bills Int'l Stocks
Cdn. Stocks U.S. Stocks Income Portfolio Bonds
$372,738 $188,991 $1,991,055
$554,165
$1,028,834 $1,265,853
December 31, 1960 = $10,000 based on total returns
3,000,000
1,000,000
300,000
100,000
30,000
10,000
3,000
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
January 1961 - December 2006
Income Portfolio
Annual Total Returns (%)
40
30
20
10
0
-10
-20
1961
1966
1971
1976
1981 1986
1961-2006
1991
1996
2001
2006
Balanced Portfolio
Cdn. Stocks U.S. Stocks Balanced Portfolio Bonds
T-Bills Int'l Stocks
$1,028,834 $1,265,853
$802,050
$372,738 $188,991 $1,991,055
December 31, 1960 = $10,000 based on total returns
3,000,000
1,000,000
300,000
100,000
30,000
10,000
3,000
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
January 1961 - December 2006
Balanced Portfolio
Annual Total Returns (%)
40
30
20
10
0
-10
-20
1961
1966
1971
1976
1981 1986
1961-2006
1991
1996
2001
2006
Growth Portfolio
Cdn. Stocks U.S. Stocks Growth Portfolio Bonds
T-Bills Int'l Stocks
$1,028,834 $1,265,853
$1,031,393
$372,738 $188,991 $1,991,055
December 31, 1960 = $10,000 based on total returns
3,000,000
1,000,000
300,000
100,000
30,000
10,000
3,000
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
January 1961 - December 2006
Growth Portfolio
Annual Total Returns (%)
40
30
20
10
0
-10
-20
-30
1961
1966
1971
1976
1981 1986
1961-2006
1991
1996
2001
2006
Stocks, Bonds or Cash?
Recommended Asset Mixes
CASH
BONDS
STOCKS
Cdn. Foreign
Income
As of September 2007
10%
55%
15%
20%
Stocks, Bonds or Cash?
Recommended Asset Mixes
CASH
BONDS
STOCKS
Cdn. Foreign
Income
10%
55%
15%
20%
Balanced
5%
30%
25%
40%
As of September 2007
Stocks, Bonds or Cash?
Recommended Asset Mixes
CASH
BONDS
STOCKS
Cdn. Foreign
Income
10%
55%
20%
15%
Balanced
5%
30%
25%
40%
Growth
5%
10%
35%
50%
As of September 2007
Stocks, Bonds or Cash?
Benefit of International Diversification for Canadian Investors
(Using the MSCI World & S&P/TSX Composite Indices in C$)
Average annual total return (%) 1980-2005
13.4
World
13.2
13.0
80% World/20% Canada
12.8
12.6
12.4
12.2
12.0
11.8
14.2
TSX
14.5
14.7
15.0
15.2
15.5
15.7
15.9
Standard Deviation of Returns (Risk) (%)
16.2
16.4
16.7
Stocks, Bonds or Cash?
Security specific risk (above market risk)
for Canadian equities
Risk (variance of returns) above market in (%)
100
80
60
40
20
0
0
10
20
30
40
Number of randomly selected securities
50
Stocks, Bonds or Cash?
Volatility decreases with time
Standard Deviation of Returns in %
18
16
14
12
10
8
6
4
2
1
3
5
Holding Period for S&P/TSX Composite in years
10
S&P/TSX Sector Weights
Telecommunication
Utilities
Services
1.5%
5.6%
Information
Technology
3.4%
Energy
27.9%
Financials
31.1%
Health Care
0.7%
Consumer Staples
2.5%
As of May 31, 2007
Materials
16.5%
Consumer
Discretionary
5.2%
Industrials
5.6%
S&P 500 Sector Weights
Telecommunication
Services
3.8%
Utilities
3.6%
Information
Technology
15.2%
Materials
3.1%
Industrials
11.2%
Consumer
Discretionary
10.2%
Financials
21.3%
Health Care
11.9%
As of May 31, 2007
Energy
10.4%
Consumer Staples
9.3%
MSCI World Index Sector
Weights
Telecommunication
Services
4.6%
Utilities
4.5%
Materials
6.3%
Information
Technology
10.1%
Industrials
10.9%
Consumer
Discretionary
11.4%
Financials
25.9%
Health Care
8.9%
As of March 30, 2007
Energy
9.0%
Consumer Staples
8.3%
MSCI World Index Regional
Weights
Canada
3.5%
United Kingdom
11.3%
EMU
16.7%
U.S.A.
47.8%
As of March 30, 2007
Other Europe
5.4%
Japan
10.9%
Pacific ex. Japan
4.3%
Stocks, Bonds or Cash?
General Disclosure
The information and opinions in this report were prepared by BMO Nesbitt Burns Inc., and BMO Nesbitt Burns Ltee/Ltd’s Investment Strategy Group
(“BMO Nesbitt Burns”). Harris Nesbitt Corp. (“HNC”) is an affiliate of BMO Nesbitt Burns. BMO Nesbitt Burns and HNC are subsidiaries of Bank of
Montreal.
The opinions, estimates and projections contained in this report are those of BMO Nesbitt Burns as of the date of this report and are subject to change
without notice. BMO Nesbitt Burns endeavours to ensure that the contents have been compiled or derived from sources that we believe are reliable
and contain information and opinions that are accurate and complete. However, BMO Nesbitt Burns makes no representation or warranty, express or
implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising
from any use of, or reliance on, this report or its contents. Information may be available to BMO Nesbitt Burns or its affiliates that is not reflected in this
report. This report is not to be construed as an offer to sell or solicitation of an offer to buy or sell any security.
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