Life Income Funds

Question:

Is there a way to specify whether a DC pension in converted to a LRIF or LIF. It looks like it is defaulting to LIF.

Answer:

You can specify the plan type and jurisdiction on the Finances page under Locked-in Retirement Account on the 'Registered' tab.

By: RetireWare / Equisoft On 11:09 AM

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Defined Benefit Accruals

Question:

I have a defined benefit pension with a reduction of 5% between 57 and 65.

The amounts for the bridge benefit from age 57 to 65 and the lifetime pension amount should be reduced,  but they don't appear to be being reduced much at all.

Why are these amounts above the values that would be received at age 65?

Answer:

Since the user is going to retire in a few years, the program calculates future pension accruals between the calculation date and the termination date. This explains why the amount is different.

For the amounts to remain constant, enter the information under "Prior Employer Plans".

By: RetireWare / Equisoft On 11:09 AM

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Software Upgrade

RetireWare has been updated today with several new features that have been requested by users.

1. Excess funds to TFSA

In any year where there is excess income during retirement, i.e. income above the retirement income goal, the after -tax value of the excess funds are deposited in the TFSA account up to the available contribution room. Any excess then goes to the non-registered account.

Before this change, excess funds were deposited entirely in the non-registered account.

2. Showing spouse name on the "Spouse Bar"

When doing a plan combining the financial information of both spouses, a drop-down menu at the top of the page allows you to move from one spouse to the other for data entry and viewing results.

Now, the name entered on the General Information tab is showing for each spouse.

Before this change, the program used the generic identifiers "Spouse (1) " and "Spouse (2)".

3. Option to select age for RRIF and LIF accounts

On the Options page, you can select the age for starting withdrawals from the RRIF or LIF (locked-in) account.

4. Option to select amount payable from RRIF and LIF

Also on the Options page, you can select the type of payments from a RRIF (either the minimum or flat amount), or LIF (either the minimum, maximum or flat payment).

Note that with any of these options, the actual amount withdrawn in any year may be overridden by a higher payment if the selected amount falls below the minimum or more funds are required to meet the retirement income goal.

5. Option to purchase a smaller residence when disposing of principal residence

Finally, a common strategy is to downsize to a smaller residence at one point during retirement. With this new option, you can use part of the proceeds from the sale of the principal residence as a source of retirement income, and the remainder toward the purchase of a smaller residence.

By: RetireWare / Equisoft On 11:10 AM

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Plans for Both Spouses

Question:

How do I add the financial information for my spouse?

Answer:

On the Forecast page select the option to do a plan that combines the financial information of both spouses. You will then see a drop-down menu at the top of the page allowing you to enter information for the other spouse.

There is a video showing how it works:

https://www.youtube.com/c/retireware

By: RetireWare / Equisoft On 8:00 PM

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An Interview with NewRetirement

I was recently approached by the US website www.newretirement.com to answer a few questions about retirement planning and issues facing individuals nearing retirement. Here are the questions and answers.

Tell us about RetireWare … what does your software do? Who should be using it?

RetireWare is a Web-based retirement planning software that helps users understand how their assets and future income can create the lifestyle they want. I should mention that it is only for Canadians, because the software takes into account Canadian taxation and retirement savings programs. We plan to have a US version available, but only in 2016.

There are basically two versions, one for individuals who want to do their own planning and one for financial advisers. The version for individuals are usually financially literate persons who do their own investing and want to make their own decisions. They are a few years away from retirement or about to retire, and have significant assets.

Professional users get the same product, but the application has a collaborative component:  the adviser can provide an account to a client and the client can do their own planning, review or tweak what the adviser has done or vice versa. There are social media features that let users spread the good word about their adviser using email, Facebook, LinkedIn or Twitter.  This way, advisers can grow their referral networks online.

Advisers providing personalized retirement planning reports to their clients often find that there is low engagement with having a lengthy paper report. Having online access and being able to dabble is a great way to leverage technology and increase engagement. Moreover, monitoring the plan and keeping it fresh every few months really creates value for clients.

You’re based out of Canada … can you tell us some of the biggest headlines or trends for retirement in Canada? What are the most important issues right now?

I would think it's similar to the US. We have similar demographics, but Canadians have a longer life expectancy, so even more money will be required to fuel our retirements!

One trend is that 40% of baby boomers do not choose their retirement date. A large segment retire sooner than they wish because of job loss or health issues. Others must defer retirement and continue working because there's not enough money to fund their retirement.

Another trend is that the middle class is quite vulnerable. High earners have investments, pensions and real estate to draw from, and low earners are covered by Canada's "safety net". But the middle class struggles to accumulate significant assets and the safety net provides them inadequate protection.  This has been caused largely by declining employment pensions, which is now down to 25% of the active working population.

What are some best practices for determining how much an individual will need to save for retirement ? What are some common factors we fail to consider when coming up with a savings goal?

You need to calculate how much you'll need. It is an iterative process. Set your retirement income goals, then determine how much lifetime income you'll receive (such as social security or employment pensions). You must then determine if the money you expect to have at retirement will be able to fund the difference.

It sounds simple enough, and there are many free online calculators, some that are quite good,  that can help in this process.

But there are a few pitfalls: you don't know how much your investments will return and how long you (and your spouse) will live. As well, you don't know how much inflation there will be in the future.

So to complement this approach, many software products include a Monte Carlo simulation. We don't know how the economy will perform in the future, but we can simulate future returns and volatility of capital markets. We can determine our odds of success after doing a large number of random simulations. This information is very helpful to decide if our retirement income goals are adequate relative to the retirement assets.

Another approach is to "stress test" the financial plan for retirement for adverse events and see if the plan can deal with the main post-retirement risks, such as longevity, investment and inflation.

To sum it up, I like a "holistic" approach: one that looks at the plan from many angles. If all signals point to success, then the plan is probably good.

Why is managing risk so important to planning retirement? What happens if you don’t do it?

Risk management provides a framework around which we can make decisions.

When assessing risk, we determine its likelihood and magnitude. Armed with this information we can decide whether we want to apply techniques to reduce, eliminate, transfer, or retain each risk.

For retirement, a sound plan must examine each of the potential risks that can occur: market, longevity, inflation, health care costs, long-term care and early death.

Failing to plan is planning to fail, to repeat an overused cliché. The idea is to avoid catastrophic outcomes by having a plan of action to deal with each risk should it occur.

We don’t know about the rest of your clients, but when we hear the words “risk management” and hear references to math, we get a bit overwhelmed … especially as it relates to that giant sum of money we’ll somehow have to save leading up to retirement. What do you tell clients who are intimidated by the subject of risk management?

Risk management has come to the forefront in the last 10 years. Corporations have to evaluate all risks and it permeates all their decisions. Investors select an asset allocation that reflects their risk tolerance. When you buy home insurance you are managing risk: you pay a (relatively) small premium to protect yourself against a large potential expense (destruction of property and civil liability).

The Society of Actuaries (the body that qualifies actuaries and conducts research) has many excellent publications on managing post-retirement risks and it's a great starting point to learn about this. One I recommend is Managing Post–Retirement Risks–A Guide to Retirement Planning.

What do you think are the biggest oversights individuals make when it comes to managing risk in their retirement planning?

I think many don't appreciate their longevity risk. While we all wish for a long life, the "risk" of living too long is running out of money, especially at a time when assisted living and long-term care can become a real possibility.

A good strategy is to try to cover essential expenses (rent, food, health care, etc.) with sources of lifetime income, such as social security and annuities. Then cover discretionary expenses (e.g. travel and lifestyle expenses) from invested assets. This approach lets you control a good share of your money and leave what is left to your heirs.

What do you think are the biggest challenges facing individuals nearing retirement today?

The biggest challenge is knowing if there is enough money to maintain our standard of living. This creates uncertainty and doubt, and the outcome is that we tend to be overly conservative with our spending. Having a reduced lifestyle is losing the opportunity of enjoying life to the fullest after a lifetime of hard work, raising a family and contributing to society.

That's why we need to put numbers behind our dreams and see the possibilities that the future holds.

How will retirement for Baby Boomers and after look different from those of our parents and grandparents? 

Baby Boomers have a much longer life expectancy than the previous generations, in part due to lifestyle changes and advances in medicine. Life expectancy has increased more than 6 years since 1980.

Longer life coupled with a longer healthy lifespan also means that expenses during retirement will be significant for many, with travel, vacations, sports and hobbies.

Another difference is that defined benefit pensions have all but disappear other than for civil servants. This means that they have to invest their funds and decide how to use these funds for retirement income.

The good news is that technology and the Internet facilitates the dissemination of information on investing and retirement planning, including many excellent software products in Canada and the US.

By: RetireWare / Equisoft On 9:30 AM

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Avoiding Retirement Setbacks

Ignorance or bad luck?

There are many things that can derail retirement dreams.

We all make mistakes when it comes to investing, but with retirement all our chips are on the table. There are no more chances to recover what we lost. Whether caused by bad luck or bad skills, we need to be aware of what can go wrong when we plan for retirement.

Retiring early

According to statistics, about 40% of workers retire earlier than anticipated. About half apply for the Canada Pension Plan before age 65, the age where the pension is not reduced for early retirement. Postponing retirement is a great way to get "actuarially" increased pension benefits (available for the CPP or any defined benefit pension sometimes offered by employers), and the later we retire, the more money we can spend each year from our nest egg.

Underestimating longevity

Our retirements will be much longer than our parents. We are healthier, more active and medical advances will keep us alive for as long time.

At age 65, a male has a 50% chance of living to age 85. A female has a 62% chance. So retirement is going to last 20 to 30 years, longer if you retire earlier. It is necessary to pace our spending in order to go the distance with the funds that we have.

Debt

Retiring with large debts, such as a home mortgage makes it very hard to accumulate wealth when a part of our savings have to pay off debt. Being debt-free is an essential ingredient of a worry-free retirement.

Medical expenses

Unforeseen medical expenses is a bit of an oxymoron. They are not unforeseen because they will happen at one point during retirement and there's unfortunately no way around this. You should explore ways to cover these costs, preferably via medical expenses insurance, otherwise by having funds set aside to cover the cost. Part of this should include funds or insurance to cover long-term care needs.

Excessive withdrawals

Withdrawing too much each year is a prescription for disaster. Either have a detailed and financial plan for retirement where you can assess your odds of success, or abide by the "4% rule", a popular guideline stating that you should withdraw only about 4% of your retirement savings annually. The "4% rule" is not a rule, but many studies concluded it is a "safe" withdrawal rate (read this blog post about the 4% rule).

So try not to overspend and live it up too much, be reasonable and curb your appetite for costly undertakings such as travel, toys or adventures.

Out of the market

The return on guaranteed investment certificates and savings account are pitiful. Investing in a diversified portfolio that includes equities has higher risk, but historically has earned way more despite the added volatility. Remember that retirement is a "long" game, and that a few disappointing years are rewarded many times over by much higher overall returns.

Education first?

If money is not sufficient for retirement, it cannot be diverted to your children's education costs. Putting education costs before retirement costs can put you in a dire situation. Your children have their whole financial lives ahead of them. Try to refrain from depleting your retirement assets or your home equity to pay for your children's education.

Impact of tax and fees

Knowing that your retirement can last very long, it makes sense to take advantage of tax efficiencies that can be achieved by investing equity-type assets in a non-registered account and less tax-efficient investments in a tax-sheltered plan such as a RRSP or RRIF. This is because capital gains and dividends have a preferential tax treatment, while interest income (e.g. interest income on guaranteed investment certificates) is taxed the same as income or withdrawals from registered funds.

Account fees also have a large impact. For example, an RRSP with a 1.5% annual account fee would leave you with 28% less money than a plan with a 0.5% annual fee.

My plan is no plan

One last retirement mistake is retiring with no plan or investment strategy. Many of us do this. Lack of planning can bring unpleasant financial surprises because we don't know how much we can spend and where the money will be coming from.

The flip side is being overly conservative and not living life to the level that our funds can support. So our retirement becomes a lost opportunity to do all the things we wanted to do during our lives.

A plan will make you spend just the right amount, while having the peace of mind of knowing you can maintain your standard of living to an advanced age.

Plan plan plan

These are a few of the retirement planning mistakes that are so easy to make. We should do our best to avoid them.

Take some time to review and formulate a retirement strategy. It will set the course for a carefree retirement where you can enjoy life to the fullest.

By: RetireWare / Equisoft On 3:54 PM

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Retirement Savings Marathon

The magic bullet

We try to learn about investing and become better at it, but too many of us cannot overcome being financially challenged, or more precisely being comfortable making investing decisions. To boot many have no time or interest in the topic.

To alleviate this state of affairs, the Canadian Government established a federal Task Force on Financial Literacy. The task force made several recommendations for improving financial knowledge and these will take time to be adopted by the public.

What should we do to improve our odds of success?

Our biases

Behavioural science tries to understand social, cognitive and emotional biases that affect and influence economic decision-making. When it comes to money decisions, we don't act in a rational way.

There are several factors that play against us:

• Overemphasizing immediate rewards at the expense of long-term needs,
• Procrastination and inertia: delaying decision and a difficulty to change course,
• Preferring the status quo to making active decisions,
• Complexity of making retirement planning decisions far into the future, and 
• Choice overload: the sheer volume of choice causes "paralysis analysis".

Meeting the challenge

Maybe we can learn from how employers and stakeholders worldwide have met the challenge of encouraging pension plan members to save for their retirement. I am referring here to capital accumulation plans such as defined contribution pension plans or group RRSPs. One big problem has been the large number of employees lacking any interest in their pension plan and more generally the task of saving for retirement.

This negatively impacts the level of contributions and investment returns and is disastrous to retirement income adequacy. Too many employees  commonly continue to contribute at the rate they first chose when they joined the plan and remain invested in the portfolio they were defaulted into initially.

So the industry addressed this apathy by adding automatic features to savings plans: enrollment, escalation and investing.

With "auto-enrollment", employees don't decide whether or not to enroll in a plan, they are automatically enrolled but have the right to opt out. This address the concern of employees never joining a plan and not bothering to save at all.

"Auto-escalation" adds automatic increases to the contributions rate over time. An employee who joins the plan starts contributing at a low rate, and as time goes on, the contribution rate slowly rises over time until it reaches a level that improves the chances of providing a reasonable retirement income. This concept helps employees "ease in" to the plan in a financially manageable way, while maximizing contributions as retirement becomes closer.

The other popular feature is to "auto-invest" the contributions. Instead of defaulting to money market funds, which cannot provide the investment returns required to accumulate an adequate retirement nest egg, the default fund where contributions are invested is a "target date" fund appropriate to the plan member's investment horizon. For example, these funds invest younger employees in higher-risk portfolios that automatically glide toward a more conservative profile over time.

These features are beneficial in many ways. First, it gets employees to develop solid savings and wealth accumulation habits. Second, it reduces the likelihood of getting extremely low investment returns and making them disengaged with the daunting task of saving for retirement. Third, experiencing volatility in the early years - when assets are low - teaches the discipline of "staying the course" and riding fluctuations with a low impact on the long-term outcome.

Being young

Younger savers have very different priorities, and saving for retirement isn't at the top of their list. Retirement is a lifetime away, and getting started in the housing market, paying off debt, travel, sports, hobbies and having a safety net for emergencies leaves little room for the retirement planning savings marathon.

But living in the present, where spending trumps saving, does have very real implications on the ability to retire with adequate income. Building savings to provide retirement income for 30 or more years requires patience and discipline, and it starts with regular ongoing monthly contributions that increase over time and are invested in a portfolio appropriate for the investor's risk tolerance and investment horizon.

These auto-features are designed to address the shortcomings identified in behavioural science and steer investors in a direction that serves their long-term interests.

We can all learn from this by adopting these strategies and forcing ourselves to act rationally with our economic decisions.

By: RetireWare / Equisoft On 11:40 PM

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