Chapter 18

Question 1

How does Financial planning change at retirement?

Answer 1

Debt management is over
Budgeting is simpler
Risk management is less complicated
Tax issue arise in estate planning

Question 2

What is a life annuity?

Answer 2

Pays an agreed amount until death.

-Insures against outliving your money.

Question 3

What are the different types of Life Annuities?

Answer 3

Straight Life: Level payments until death, nothing left for estate.
Life with guaranteed term: If annuitant dies before end of term, beneficiary receives balance. Lower payments.
Joint life and last survivor: a second person receives payments until death of annuitant. Payments can be equal, reduced after death.

Question 4

What are other types of annuities available?

Answer 4

Term Certain: pays a level amount to a specified date.
Indexed: Increases the payment each year by an agreed value, up to 4%.
Registered: If the annuity is purchased with after tax money, only the interest is taxable.

Question 5

What are the determinants of Annuity Payments?

Answer 5

Length of time that payments are made - Mortality tables.
Initial amount contributed.
Interest rate at the time of purchase.

Question 6

What is an RRIF?

Answer 6

Mirror Image of RRSP. Income accumulates tax free.
Funds are withdrawn each year for income. Fully taxable.
No Max withdrawal, minimum starts are 4%, increases to 20% at 94.
Can be guaranteed rate or self-administered.

Question 7

What is a Lock-in Pension fund?

Answer 7

When changing employers, contributions are transferred to a locked-in RRSP or Lock-in Retirement account.

• No Cash withdrawals
• Only life annuities can be purchased.

Question 8

What is a LIF (Life Income Fund)

Answer 8

A type of RRIF for converting locked-in pensions.

Min and max payment set by province.

Question 9

An LRIF Is similar to a LIF except for

Answer 9

You can carry forward unused withdrawal entitlements.

No requirement to purchase life annuities.

Question 10

Saskatchewan repalced LIFs and LRIFs with PRIF, which are similar to RRIFs. What are the differences?

Answer 10

Creditor Proof
Protection for spousal rights
No min, no max withdrawals
Manitoba since 2005 allows a one time transfer from an LRIF/LIF to a PRIF up to 50% of the balance.

Question 11

What is a reverse mortgage?

Answer 11

Family can realize past of the equity of a fully paid residence and continue to live in it during retirement.
Types: Term or Straight reverse.
-Proceeds are lump sum
-Loan and interest must be repaid only upon the death of the homeowners or the sale of the house.

Question 12

What is a RAM?

Answer 12

Provides a life annuity to the owner
At death the lender can not recover more than the value of the house.
Mortgager has a put option to make the issuer take the lesser value of the house or the value of the mortgage.
The value of the put rises with the length of time to expiration of the option.

Question 13

Reverse Mortgage vs. Home Equity loan

Answer 13

No payments until death or sale
Lower max loan, but no income test
Higher interest rate
High admin fees

Question 14

Reverse Mortgage vs sale and rent

Answer 14

Allow retiree to live in house

Value changes of the house are partly shared with mortgager.

Question 15

Name the 7 sources of retirement income

Answer 15

GIS
OAS
CPP - Can be split with spouse for 60% survivor benefit
RPP (Employer Pension)
RRSP or LIRA - Withdraw and pay, purchase annuities, roll over in RRIF at 71
Home Equity - downsize, sell and rent, reverse mort, include fees
Other - Insurance, annuities

Question 16

What are the main goals of retirement?

Answer 16

Minimize risk out outliving money.
Maximize income available to a single survivor
Maximize the money sent to heirs

Question 17

What are the risks of retirement?

Answer 17

Insufficient income for the family
Surviving spouse won’t have enough
Payments are not secure

Question 18

How can you protect insufficient income?

Answer 18

Use indexation to protect against inflation.
Put non-pension earning in life annuities
Change maturity options.

Question 19

What are the tax effects at retirement?

Answer 19

Tax Spreading - Avoid cashing in RRSPs or RRIFs all at once.
Tax Deferral - First use up fund in which no tax is paid. Sell house is that fits plan.
Tax Splitting - Share CPP
Sell house and reinvest proceeds. High income spouse should pay living expenses.

Question 20

What are the main concerns and strategies for investing retirement funds?

Answer 20

Risk of outliving your money in low return investment. Risk of losing your money in high risk investment.

Investment in equity for retirement is usually the best.
Diversify across securities.

Question 21

Why is liquidity important during retirement and what type of investment provides the necessary level?

Answer 21

Without earning income, borrowing is hard. Need liquidity. Unsheltered investments can help meet unanticipated demands.

Question 22

What are some illiquid investments and how can they be addressed?

Answer 22

Real Estate, direct investment is small business, private securities, collections.

Can be addressed by PLC, Credit card, home equity loan, etc.

Question 23

Canada Deposit Insurance Company CDIC does what?

Answer 23

Insurances depositors from bank failure up to 100k per specified account, per institution. RRSPs also covered up to 100k, specific asset classes.

Question 24

Assuris (once CompCorp) insures the policies of life and health companies. What are the different types of coverage and amounts?

Answer 24

Health: Up to 60k per person, more than 60k, 85% coverage.

Cash: Same as above.

Accumulated Value: Full coverage up to 100k per person, per institution for each of four cat.

Death: Full coverage up to 200k, 85% if above.

Monthly Income: Up to 2k of coverage, 85% if above of monthly promised benefit.

Question 25

What are the two main goals of estate planning?

Answer 25

Assets distributed with your wishes
Asset distributed with maximum benefit to heirs.

Get money to the family members that need it most.

Question 26

Methods of Transferring property to avoid taxes

Answer 26

Gifts
LivingTrust
Non-Probatable assets
Directly through will
Indirectly through a trust created in a will.

Question 27

What are some main end of life estate planning considerations?

Answer 27

Record of affairs
Location of documents
List of advisers
Financial records
Memberships
Planned funeral arrangements
Gifts
Charitable donations
Joint Property
Life Insurance - Liquidity to pay liabilities, Provide income for family.
Letter of Wishes
Taxes - Spousal rollover of property, RRSPs, trusts, TFSAs
Incapacity - Power of Attorney, Living Wills (not legally binding)

Question 28

What is a living trust?

Answer 28

Transfers beneficial ownership to intended heir while maintaining control. 
Provide for children
Protect assets
Avoid probate
Tax Planning

Question 29

What is in a will?

Answer 29

Ensure property is distributed according to your wishes.
Implement tax saving methods
Name executor/executrix
Choose Guardian

Question 30

What is a testamentary trust?

Answer 30

Designate certain assets for specific family members

Place restrictions on the use of money

Question 31

What are the various estate costs?

Answer 31

Probate: the legal process of confirming a will. Costs .7% in MB, .5% up to 50k, then 1.5% in ON.
Executor fees - .3%-.5% of the estate value.

Question 32

What are some methods to reduce estate costs?

Answer 32

Make spouse the RRSP/RRIF, life insurance, annuity beneficiary.
Hold Joint tenants
Hold Bank accounts jointly
Living Trust use

Question 33

Choosing a will executor, person should be:

Answer 33

Trustworthy
Impartial
Willing and able to put in time
Knowledgable