Canadian Retirement Planning Mistakes

CANADIAN RETIREMENT PLANNING MISTAKES KEY STRATEGIES ON HOW TO TAKE ACTION TO AVOID THEM This book covers strategies in four areas for financial security in retirement: Simplify–Simplify your finances. Manage–Build a retirement income plan and an investment strategy. Reduce–Minimize and defer taxes. Protect–Protect your assets. This book is written for retirees who want to learn more, to think differently, and to enhance their retirement lifestyles. I have one goal in mind–to educate retirees about what I have learned and experienced over the years. A number of common mistakes and problems appeared over and over. Mistakes costly in money, time, and energy. Mistakes that can be avoided by making some simple financial adjustments. You see, I have not retired, far from it; but in doing the job of dealing with retirement day in and day out, I have learned. With so many Canadians planning to retire or already retired, it might seem easier to plan for retirement in the traditional way; but as time goes on, one might realize there are different ways to think about retirement. Albert Einstein once said, “The significant problems we face cannot be solved by the same level of thinking that created them.” So how do we change our level of thinking? We need a paradigm shift, or a different way of looking at retirement. Not until we start to think outside the box can we discover what the other options are. The human mind is like a parachute–it only works when it is open. So open the book and open your mind to thinking about possibilities and what else you can you do to enhance your lifestyle during retirement. I want to dispel some new ideas and strategies and give you tried-and-true concepts, proven over time. Most retirees are after four things. First and foremost, they want to achieve and maintain financial security. Second, they want to simplify their finances and get rid of “ hassle assets” such as real estate or holding companies. Third, they have the time to pay attention to taxes and want to minimize their tax bite each year in retirement. Finally, they want to protect their assets. Explore the ideas in this book. Learn from an advisor who has helped hundreds of retirees since 1989. Then take those ideas and your thoughts to your accountant, lawyer, financial professional, and team of professional advisors to get the advice you deserve. Start today by making a to-do list. Speak to your financial professionals before proceeding on any idea. Only then will you start to enjoy your fruits of your success. Mistake #21 Just buying a mutual fund when you can go corporate class If you are investing your hard-earned after-tax money in a mutual fund, I have one question for you. Is the mutual fund or segregated fund taxable on an annual basis; and if so, do you know how much tax you might pay this year on it? Until recently, mutual fund investors did not have a choice, they had to pay the tax. However, some investment companies now separate mutual fund investors as taxable and tax-class. Mutual fund companies know investors have different investment needs and therefore have created two types, one called “mutual fund trusts” and the second called “ corporate-class” or “tax-class” investments. The corporate-class investors have the luxury of deferring taxes until they sell the fund or portfolio or start to take out income. They also have a huge advantage in that they can switch to another mutual fund in the same class without triggering any tax. For example, if I switch from US Equity Class fund to Canadian Dividend Class fund, there is no tax. I am not stuck on switching my investments and diversifying because of tax. Investors in regular mutual funds are always concerned about their after-tax annual returns, since some or all of the income generated may be taxable in the year received. Even worse, some investors purchase a mutual fund in November and receive taxable distributions from the fund in December as if they held it for a full year, potentially adding a lot of tax, yikes! The other problem that can arise is if the fund manager has to decide on keeping or selling a security that has a large capital gain or one that has no capital gain. That is the same for the investor as the switching problem. If you go from an equity fund to a money market fund there may be a taxable capital gain; but if you go from equity- to short-term class, there is no tax. This investment structure offers investors more flexibility for their non-registered money. The next time you talk to your advisor, ask whether your non-registered investment can be separated between mutual funds and tax-class funds. Mistake #40 Not understanding the GMWB Strategy in retirement In the next few years, every Canadian investor will know this acronym. If you are retiring soon or are already retired, you should know that GMWB stands for guaranteed minimum withdrawal benefit. This will be the largest change in retirement planning I have seen in twenty years. We know that a GIC can add safety and security in retirement; however, rates change. GMWB plans can offer a predictable income guaranteed not to decrease for life. GMWB plans are offered by Canadian life insurance companies and, as the name suggests, offer guaranteed minimum withdrawal benefits, usually at 5% to 6% (depending on your age at the time) for the rest of 114 Canadian Retirement Planning Mistakes your life. The plan gives you sustainable, guaranteed income that is designed to resemble a pension plan. The income has the potential to increase to keep pace with inflation and, unlike pension plans, investors have access to their savings at any time. (However, this can change the guarantees.) The investor can have the potential of market gains and yet has the guaranteed cash flow no matter what the market losses are. GMWB plans address two unique retirement risks. First, if you are retired and worried about outliving your savings, a properly set up GMWB can guarantee your income for life. Second, you run the risk of depleting your savings or capital due to bad investments, poor investment decisions, or taking on too much risk. A GMWB plan tackles these risks in ways that traditional investments fail–to guarantee investors their future. The GMWB carries a minimal cost compared to risking a lot of money. The additional benefits of GMWB plans are that they can be set up in non-registered investment accounts and the income is tax efficient and guaranteed for life. GMWB plans are only offered through life insurance companies, which means you must name a beneficiary; this means it will bypass probate fees and ensure an easy transition to your estate. Currently there are six Canadian insurance companies offering GMWB plans–all with guarantees for your retirement. Ask your financial advisor today whether GMWB guaranteed plans fi t into your retirement. Fore more info go to www.ghicks.com