Chapter 17

Question 1

Who wins when Actual Inflation exceeds Expected and vise versa?

Answer 1

When Actual > Expected - Debtors gain in real terms at the expense of creditors. When Expected > Actual then creditors gain at the expense of Debtors.

Question 2

What strategy is used to provide certain real returns?

Answer 2

Indexation. Contract specifies real instead of nominal payments. Can be fully or partially indexed.

Question 3

What is the purpose of indexation? What happens with indexation?

Answer 3

Eliminate purchasing power risk. Without indexing, debt instruments are written with a floating rate. A percentage + prime.

Question 4

What are some of the issues with taxation?

Answer 4

Taxation of nominal returns is a tax on real returns that increases with inflation.
Taxes change in an unpredictable manner.
Asset can decline in real terms but investors pay capital gains tax on an inflation adjusted capital loss.

Question 5

What is the marginal tax rate used for?

Answer 5

Rate for future accumulations of wealth.

The rate should be used for determining savings.

Question 6

What tax rate should be used for consumption?

Answer 6

Average Tax Rate

Question 7

What is and isn’t taxed for retirement savings?

Answer 7

RRSP and Pension income is fully taxed.
Capital gain on the primary residence is not.
Unsheltered investments earnings are taxed.

Question 8

What should our dollar be converted into for Retirement Cash Flows?

Answer 8

Before tax, Real Dollars

Question 9

READ SLIDES 17-35-36

Answer 9

AHHHH

Question 10

What are the considerations in regards to Life expectancy?

Answer 10

Have to manage the trade off between not having enough cash and reducing your consumption. Use conditional probabilities to figure out how old you might be.

Question 11

How much do you need for retirement?

Answer 11

Analyze goals you have in your retirement.
Increases in expenses: Benefits from employers, travel, entertainment costs.
Decreases: House expenses, food, etc.

Question 12

Rule of thumb for retirement savings

Answer 12

70% of your current income. 85% for low income families, as low as 50% for high income.

Question 13

Characteristics of a pension plan:

Answer 13

A specified percentage multiplied by the number of years of service to a specified maximum.

Question 14

What is a defined contribution plan?

Answer 14

Money purchase plans

Employer and employee contribute a certain percentage of earnings.

Question 15

What is indexation?

Answer 15

Payments are increased for inflation. Desirable for employees, risky and expensive for employers.

Question 16

What is vesting and portability?

Answer 16

The employers contribution does not belong to the employee until vested.
Used to be a long period - 10-15 years. Now 1. Vested contributions are locked in until retirement.

Question 17

What are the details of CPP?

Answer 17

Maximum monthly retirement benefit at 65 is 1,013$.
Benefits are taxable and adjusted for inflation.
Can be received starting at 60 with penalty - deferred till 70 with bonus.
In 2016 penalty of .6% and bonus of .7%

Question 18

What is Old Age Security?

Answer 18

Based on length of time in Canada - 40 years starting at age 18.
Max payment of 551$/month. Taxable, indexed.
Payments are clawed back starting at 70,954$ and reaches 100% at 114,815$.

Question 19

Guaranteed income Supplement details

Answer 19

Income adjusted supplement for OAS pensioner. Changes with financial status. Not taxable, Indexed.

Question 20

What is a registered pension plan?

Answer 20

Contributions made by either or both the employer and the employees are deposited with a trustee for investment.
Tax deductible, accumulate at before tax rate.
Can be indexed/non-indexed, defined contri/benefit.

Question 21

What is an RRSP?

Answer 21

Tax deductible.
Earnings are not taxed until withdrawn.
At withdrawal all income is taxed at the rate for income regardless of how it was generated.

Question 22

What is a Deferred profit sharing plan (DPSP)?

Answer 22

Contributions are from employer only, Based on net income from agreed upon formula.
Usually used by smaller companies.

Question 23

What is involved in the termination of an RRSP?

Answer 23

An RRSP is terminated by death. A spouse can elect for a tax free roll over into his or her RRSP.
Must be terminated by December 31 of 71st year.

Question 24

What is Voluntary Liquidation?

Answer 24

Withdraw funds and pay tax immediately.2\

Purchase annuity, get taxed when payments are received.

Question 25

Hierarchy of Tax Strategies for Retirement Savings

Answer 25

Basic Principle: Use tax assistance and tax sheltering opportunities first. Use employer pension plans, then RRSPs, then family home, TFSAs, Unsheltered Investments, Rental Property.

Question 26

Tax Details: Employer Pension Plan

Answer 26

Deferred until retirement

Purchase service credits if you can.

Question 27

Tax Details: RRSPs

Answer 27

Deferred until retirement.

Can be split through spousal plan.

Question 28

Tax Details: Family Home

Answer 28

Capital gain is not taxable.
Implicit income (rent) is not taxable.
Allow income splitting from proceeds of sale.

Question 29

Tax Details: TFSAs

Answer 29

Not tax deductible.
Savings grow tax free.
Unused balance accumulates.
Withdrawals can be made with an penalties.

Question 30

Tax Details: Unsheltered Investments

Answer 30

With capital gains create deferral.

Dividend income is taxed preferentially.

Question 31

Tax Details: Rental Property

Answer 31

Capital gain is deferred until realized.

Tax Spreading benefits. CCA and Mortgage amortization.

Question 32

What are some of the Risks in retirement planning?

Answer 32

Not accumulating enough.
Losing capital suddenly in high risk investments.
Diversification: Use time to your advantage. Should be diversified across securities.