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Inflation continues to be a main concern to many Canadians. Here are some strategies advisors can use to protect their Clients' retirement savings
Inflation continues to be a main concern to many Canadians as it affects the cost of groceries, housing, travel and pretty much everything. The more prices rise – the less one can spend because his purchasing power is decreasing. Retirees and people nearing retirement are particularly sensitive to inflation as their income may not keep up with rising prices. Here are some strategies advisors can use to protect their Clients' retirement savings.
That’s the foundation. Without a plan, it’s much harder to cope with inflation. The first step is to understand what a Client's retirement will look like. You need to identify their income needs, but also their sources of income. Will money come from government benefits? A defined benefit plan? You should also look at the Client’s assets and consider any health concerns.
Another source of worry is debt. And, how well a retiree with debt can handle interest rate hikes. Ideally, debt should be fully paid off before retiring.
Also, to ensure that the retiree is meeting their basic livings needs, purchasing an annuity can be a good choice. It can provide a reliable source of cash flow, while reducing the need to access money from investments when they are down. The income generated by an annuity can provide Clients with some peace of mind, knowing their basic living expenses can be met.
Need help with explaining an annuity and its features? Share this article with Clients.
Inflation or not, this is an important decision. Clients can choose to receive their Quebec Pension Plan (QPP) or Canada Pension Plan (CPP) benefits as early as age 60. However, delaying benefits is often the best choice, no matter how you run the numbers.1 Of course, you need to assess each Client’s specific situation. It may be inappropriate to annuitize if the client has a shortened life expectancy.
For individuals who take CPP/QPP before age 65, the amount that they otherwise would have been entitled to at age 65 is reduced by 0.6% for each month that it is taken early, so at age 60 it is reduced by 36%.
For individuals who decide to delay CPP/QPP after age 65, the amount that they otherwise would have been entitled to at age 65 rises by 0.7% for each month that it is deferred, so at age 70 it is increased by 42%.
But this doesn’t tell the whole story. CPP/QPP benefits are adjusted annually for inflation, so it does provide some level of inflation protection for Clients. And for those who delay receiving their CPP/QPP benefits, their entitlement will also be adjusted by the CPI growth. It affects the CPP/QPP benefit calculation in a way that often increases the delay incentive and also heightens the penalty for taking benefits early’.1
Only 1% of people wait until age 70 to receive their CPP/QPP pension benefits. The Canadian Institute of Actuaries estimates that 25% of Canadians are financially healthy enough to wait until age 70 before they start to collect their pension. But 95% of Canadians start to collect benefits before age 65 or at age 65.
Deciding whether to collect CPP/QPP benefits early or at age 65, or to defer to a later age, is a choice that needs serious consideration. To facilitate the deferral decision, one interesting option is to purchase a term certain annuity to bridge a Client’s cashflow needs until they start to receive the CPP/QPP benefits at a later date. The annuity will produce a steady and reliable source of income for the retiree.
One of the most important factors affecting any decision is whether the Client’s retirement plan can withstand the ups and downs of inflation, and when it can’t. It’s worth considering the use of solutions, like a term certain annuity, that can provide the Client with a guaranteed income source, customized to adjust annually for inflation, similar to that of CPP/QPP.
Does a Client wonder if they should start to collect their QPP/CPP benefits? Here’s a resource to help them make an informed decision.
Often overlooked, the tax-free savings account has many advantages for retirees. This applies especially to Clients who have higher cash flow needs or income in retirement. It’s more cost-effective for them to withdraw money from their TFSA. These withdrawals are not taxed. So, they will not affect income tested benefits, such as Old Age Security received. Clients can even replenish their TFSA the year following their withdrawal and use those savings as needed later on.
Does a Client want to know more about TFSAs? Send them this article.
A variety of investment products and strategies can generate income in a tax-efficient way. Guaranteed Investment Funds (GIFs), commonly referred to as segregated fund contracts, may be suitable for some Clients. A Client has a number of funds from which they can choose to invest in, thereby allowing them to choose funds that allocate tax-efficient income, such as eligible Canadian dividends and capital gains (losses) in non-registered plans.
Some segregated funds offer guaranteed lifetime income. To learn more about it, read this article.
For tax purposes, it may be possible to transfer some income to a spouse. This is the case for QPP/CPP income, where up to 50% of each spouse’s benefit can be shared with the other spouse. Another easy to implement solution involves a RRIF. With a RRIF, the younger spouse’s age can be used to minimize the withdrawal amount that is required in the year.
1Get the Most from the Canada & Quebec Pension Plans by Delaying Benefits, Bonnie Jeanne MacDonald, PhD, FCIA, FSA, National Institute on Ageing, Toronto Metropolitan University, December 2020
This article contains information in summary form for your convenience, published SLGI Asset Management Inc. Although this article has been prepared from sources believed to be reliable, SLGI Asset Management Inc. cannot guarantee its accuracy or completeness and is intended to provide you with general information and should not be construed as providing specific individual financial, investment, tax, or legal advice.
Information and opinions contained in this article are intended for investors as general information and has been compiled from sources believed to be reliable but no representation or warranty, express or implied, is made with respect to their timeliness, accuracy or completeness or accuracy and SLGI Asset Management Inc. disclaims any responsibility for any loss that may arise as a result of the use of the strategies discussed. Views contained in the article expressed by SLGI Asset Management Inc. are subject to change without notice and are provided in good faith without legal responsibility. The article is not intended to provide specific financial, tax, insurance, investment, legal or accounting advice and should not be relied upon in that regard and does not constitute a specific offer to buy and/or sell securities. This article is not a substitute for professional advice or services. The case study presented is hypothetical in nature and is provided for illustrative purposes only. Case studies include certain material factors or apply certain assumptions to draw conclusions believed to be appropriate in the circumstances, but are not intended to represent an investor(s) personal scenario. Prior to making any decisions or taking any action, investor(s) should conduct a thorough examination of their circumstances with their advisor(s) prior to implementing any of the strategies discussed herein. Each investor(s) will have individual personal income or tax situations that may have additional complexities outside the scope of materials discussed in this article.
Sun Life Assurance Company of Canada is the issuer of accumulation annuities (insurance GICs), payout annuities and individual variable annuity contracts (segregated fund contracts). Any amount that is allocated to a segregated fund is invested at the risk of the contract owner and may increase or decrease in value. Sun Life Financial Trust Inc. is the issuer of guaranteed investment certificates. Sun Life Financial Trust Inc. is the issuer of guaranteed investment certificates.
SLGI Asset Management Inc. is the investment manager of the Sun Life family of mutual funds. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the fund’s prospectus. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
Sun Life Assurance Company of Canada is the issuer of accumulation annuities (insurance GICs), payout annuities and individual variable annuity contracts (segregated fund contracts). Any amount that is allocated to a segregated fund is invested at the risk of the contract owner and may increase or decrease in value. Sun Life Financial Trust Inc. is the issuer of guaranteed investment certificates.
Sun Life Global Investments is a trade name of SLGI Asset Management Inc., Sun Life Assurance Company of Canada and Sun Life Financial Trust Inc. all of which are members of the Sun Life group of companies.
