Welcome to Novella channel! I'm Edmond I'm Kinson This channel is all about Making smarter decisions with your money, retirement, life in Canada
In a previous video we mentioned an analogy about retirement planning is like hiking We spend our lives saving money like hiking up a mountain Beautiful landscapes on the way up the hill But how do we descend? That is the most important thing Meaning, we've been saving for so many years The most important thing is knowing how to take the money out in an efficient way We will demonstrate using a fairly simple case scenario in today's video To explain when and how to withdraw your savings and how to use them efficiently If you haven't subscribed to our channel Please subscribe and like This really helps with the algorithm and give us a lot of support If you have any topic request Leave us a comment below Let's get started Edmond, let's dive right into the topic How many different types of retirement income sources are there in Canada? The first type is CPP Canada Pension Plan Simply put, if you have worked in Canada And made a contribution to your CPP You can withdraw it when you reach retirement standard age of 65 When you take CPP payments, it will be taxed as income for that year You can watch our last video for details on CPP We have explained it in detail The second type is OAS Old Age Security Simply put, it's government retirement pension When you are 65 years old And if you have lived in Canada for a certain number of years you will be eligible for this money The OAS payments you receive will also be taxed as income for that year The third type is RRSP and RRIF We spoke in details about these two registered accounts
in the first episode this "Let's Retire" series When you withdraw money, it will be taxed as income for that year also The fourth type is TFSA Tax-Free Saving Account For the money put in each year The capital gains will not be taxed Withdrawals are also tax-free Another type of income is the income from investments placed in non-registered accounts Examples are stock accounts and mutual fund accounts These are taxed annually for capital gains and dividends and interests earned Another type is other Pension Plan Simply put, it's a private pension Money contributed is tax deductible But the withdrawal will be taxed as income for that year The last type of retirement income source in Canada is life insurance Utilizing an insurance policy as a pension plan for yourself Because the annual increase in the value of life insurance is not taxable You can legally avoid tax when you withdraw it The 3 main factors to consider in retirement planning No. 1 is taxes By the time we retire we will still have a lot of income to pay taxes on But what's the best way to maximize the tax benefits? to receive these incomes No. 2 is the durability and duration of the different types of investments For example, if I've been making time deposits Should I continue to do this at maturity or should I take it out and use it? Or how about if there is government restriction on certain money must be withdrawn at a certain age? For example, CPP you can't defer past certain age At different stages you have to make different investment withdrawals No. 3 is the estate planning What are the ways to make sure you have enough money to spend when you are living And still leave some for your family when you pass away? Traditionally speaking When tax-deferred accounts are available Keep using your tax-deferred account Because you don't have to pay tax So it is generally recommended to withdraw from non-registered accounts first For example, use the money from your stock accounts first Then withdraw money from registered accounts so that the money inside can be tax-deferred for longer The compounded value will be much bigger Let's illustrate using a case scenario It's a scenario from a recent client case Our client Say, he is Mr. Chan He is now 60 years old He started working at the age of 20 Had worked for around 40 years He contributed to his RRSP account every year There's about half a million dollars in there He has another account which is TFSA He invested in his TFSA as well And it has about $130,000 now He also has a non-registered stock investment account There's about $30,000 in it He has lived and worked in Canada for many years So he can qualify for CPP and OAS He has no pension plans of his own He has a life insurance policy The premiums have been paid off Current cash value is about $50,000 He owns a home property which he lives in Also already paid off the mortgage And he defers the property tax each year This is one of the government benefits in B.C. He has a car but there is no car loan to pay anymore So basically, he has no debt In order to make this case scenario much simpler and easier to understand We will assume hypothetically that Mr. Chan has no spouse and no children So we don't have to think about passing down any money to the next generation Before calculating retirement income First we need to know what our monthly costs will be after retirement As we said in one of our previous videos There are 3 different levels of retirement income A comfortable retirement life will need about $4,100 per month So I discussed with Mr. Chan What are his expectations for his retirement lifestyle? After he watched our video He says he wants to have $5,000 a month to live on $5,000 a month is equal to $60,000 a year If you want $60,000 after-tax income per year That means about $75,000 in income to have $5,000 a month to live on in retirement When we do retirement planning for people The most important question is when will this be used? In short, that is, until we pass away If we base on the Canadian average life expectancy He would have a life expectancy of 82 years old So let's just assume Mr. Chan has a life expectancy of 82 years old He is now 60 years old So he will have 22 years to spend in retirement Mr. Chan likes to enjoy life early on We recommend that he starts taking CPP at age 60 The maximum CPP this year in 2022 is about $1,200 Mr. Chan used to have higher income He is also entitled to the highest CPP amount But because he starts receiving CPP at age 60 He will receive less monthly payments Say about $800 a month But he needs $5,000 a month That's about $4,200 short. Where can we get this? We recommend that he take it out of the RRSP $4,200 per month plus tax-withholding amount He currently has $500,000 in RRSP If you get $60,000 out of this account every year Assuming an annual return of 5% This $500,000 will last for 11 years You may ask: why aren't we withdrawing from his non-registered account first? Or withdraw money from his TFSA account first? Because we want to have the highest tax efficiency and tax benefits when withdrawing funds If you think about it Actually, $30,000 in his stock account is not that much Assuming a very normal 5-6% annual return The amount of gained is not significant Even if you have to pay taxes on it, it's not a lot So we don't have to consider withdrawing funds from his non-registered stock account first But why should the money be withdrawn from the RRSP first? That is because if the funds are not withdrawn from RRSP as soon as possible In the event of an unfortunate early death The $500,000 in RRSP will immediately be treated as that year's income upon death All of it is taxable income And he will have to pay half of it in taxes But how about withdrawing from TFSA? Because there's a tax benefit with TFSA There is no tax on the value gained in the account And also withdrawal amounts from TFSA will not be taxed as income either That is a very efficient tax saving tool So the longer the money stays in the TFSA, the better. Another reason is that TFSA accounts do not have expiration RRSP will have an expiration date at 71 years old By which time you need to convert to RIFF account And start withdrawing minimum payment as per the government rule So first off, retirement income will be taken from CPP 2nd source is RRSP Combined together to make $5,000 a month Many people have a misconception that they need to just spend money when they retire And not continue to save and invest We will all give Mr. Chan a suggestion Since there is no age limit for TFSA We'll ask Mr. Chan if he can put a portion of the $5,000 to invest back into his TFSA Actually, it is possible We recommend that Mr. Chan puts a portion of his monthly income into TFSA So that when he runs out of RRSP At another stage the money will be withdrawn from TFSA To achieve the best results After discussing with Mr. Chan During his 60-64yo stage and he will withdraw money in our recommended way But at age 65 there is a new plan Because by then he will be eligible for OAS Old Age Security Since he still has higher income He is not eligible for GIS Guaranteed Income Supplement So he receives OAS at age 65 That's about $600 a month CPP is still about $800 per month The government retirement benefits add up to about $1,400 So then he only needs to take out $3,600 a month after taxes from his RRSP Edmond did a previous calculation If he withdraws from RRSP like the original plan He would run out of funds in RRSP at age 71 But since there is additional government benefit amount with OAS starting at age 65 Which means he doesn't need to withdraw as much from RRSP If he only needs to take $3,600 per month from age 65 Then there will be enough money in his RRSP to last until he is 73 years old When the RRSP money runs out Mr. Chan can start withdrawing money from his TFSA when he is 73 years old By then, Mr. Chan's TFSA account will have grown to approximately $340,000
by the time he is 72-73 years old In the next 10 years Based on a 5% annual growth in returns He will earn $44,000 per year In other words Mr. Chan will have enough retirement income until he was about 82 or 83 years old We initially planned with him That he has a life expectancy of about 82 years old What if... Mr. Chan lives longer than 82 years old Then what should he do? Don't forget that Mr. Chan still has A life insurance policy with a cash value of about $50,000 We calculated that by the time he turns 82 years old The cash value of this life insurance policy will appreciate to about $120,000 He can use the money from the life insurance policy To give him monthly retirement payments Another one of his largest assets is home property He can decide how to utilize this Rent out or sell it, or even take out another mortgage on it To maintain his longer retirement life Of course, we have only discussed this based on purely mathematical approach to calculate how much money it will cost to retire But there are many things that cannot be calculated For example, if Mr. Chan really lives longer than 82 Or if Mr. Chan pass away earlier These factors cannot be predicted But think about it Does retirement mean zero income? You can still do some part-time work to pass the time in retirement Your retirement income plan will then be completely different What I'm trying to say is When should we start retirement planning? The answer is right now! Don't wait until it's too late Today we discussed a fairly simple retirement case scenario and
shared with you the tax implications on different retirement income sources What are your comments? You can tell us in the comment section below Or share how your retirement planning is going Remember to leave a comment to help our channel Also don't forget If you want personalized advice on your retirement planning Scan this QR code to book an appointment with us For a free consultation planning If you haven't subscribed yet Remember to subscribe and like our videos! We'll see you next time BYE BYE
