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Tag: Ask a Retirement Expert

  • Why a reverse mortgage should be a last resort for Canadian retirees – MoneySense

    Why a reverse mortgage should be a last resort for Canadian retirees – MoneySense

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    “This leaves a total outstanding now of $204,939, with the interest owing being 25% of the balance owing after only five years,” says Ardrey. “As time goes on, this can overtake the entire value of the home. Thankfully, they do note that there is no negative equity, but there is not much left at the end of the day for the home owner or their heirs.” 

    Heath points to the fact that reverse mortgage rates tend to be much higher than traditional sources. “A borrower can expect to pay at least a couple percentage points more than mortgages and lines of credit. But if you read the fine print in your home equity line of credit agreement, the lender typically reserves the right to decrease your limit or even call the outstanding balance.”

    So, homeowners should not count on their HELOC being available when they need it.

    Right now, reverse mortgage variable rates are in the 9.5% range, while 5-year variable mortgage rates are about 6% and 5-year fixed mortgage rates are about 5%. HELOC rates are generally 1% above prime, so they’re currently around 7.95%. “There is definitely a premium paid to take advantage of reverse mortgages,” says Heath.  

    Ardrey raises another concern: how retirement living care can be paid for. “Often a home can be sold when a senior moves into retirement living, allowing them to pay for this care. In this example, the ability to use the home for this purpose would be significantly impaired.”

    He suggests that instead of using a reverse mortgage that could cripple the financial future, retirees need to look honestly at their situation and the lifestyle they can afford. “Though it may not be preferable to sell their home and live somewhere else, it may also be their financial reality. This speaks to the value of planning ahead to avoid being house-rich and cash-poor.”

    What are the alternatives to a reverse mortgage for Canadian retirees?

    Allan Small, senior investment advisor with IA Private Wealth Inc., says reverse mortgages “have not played a part in any of the retirement plans and retirement planning that I have done so far in my career. I think the reverse mortgage idea or concept, for whatever reason, has not caught on.” Also, “those individual investors I see usually have money to invest, or they have already invested. Most downsize their residence and take the equity out that way versus pulling money out of the property while still living in it.” 

    Finance professor and author Moshe Milevsky told me in an email, that when it comes to reverse mortgages—or any other financial strategy or product in the realm of decumulation—“I always ask this question before giving an opinion: Compared to what?” He worries about the associated interest-rate risk, which is “difficult to control, manage or even comprehend at advanced ages with cognitive decline.”  

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    Jonathan Chevreau

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  • Annuity vs. GIC: What makes sense for retiring? – MoneySense

    Annuity vs. GIC: What makes sense for retiring? – MoneySense

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    As you know, of course, annuities and GICs are not the same thing. An annuity provides a guaranteed income for life, or a set time period, and it can be purchased from insurance companies, agents and brokers. And a GIC is primarily a savings vehicle, which can be bought from banks, trust companies, credit unions and investment firms.

    In most cases, purchasing an annuity means exchanging your capital—a lump sum of money—for a lifetime payment that is similar to a pension. It’s a fixed, guaranteed income for life, with no more worries about interest rates, stock market crashes, running out of money, etc.

    On the other hand, purchasing an annuity means making a long-term commitment to an unknown future. And you will no longer have access to your original capital.

    Consider this example: If you want to buy a new car, you can’t go to the insurance company and ask for a little extra money. It’s not your money anymore.

    I’m guessing you’re thinking about GICs as an alternative because you’re aware of the longer-term risks associated with an annuity, and you may want to maintain control and flexibility over your money.

    A GIC can give you a guaranteed income over the length of the term and control of your capital; however, there is no guarantee on future interest rates or a lifetime income. You may also find it difficult to draw a monthly income from a GIC portfolio. This will prompt you to create a GIC ladder with different maturity dates so there is cash available when needed. The laddered approach may have an overall return that is less than the five-year return you are using to compare to an annuity.

    Think about the different ways you—and the world for that matter—may change in the next 25 years. Look at interest rates, inflation, your lifestyle and spending habits, and so on. Inflation is likely the biggest risk you’ll face when purchasing a life annuity.

    If you purchase a $100,000 annuity, what other financial resources do you now have? What will be coming to you in the future? What can you use to deal with any changes in your life? It’s important for you to know the answers to these questions.

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    Allan Norman, MSc, CFP, CIM

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  • How to qualify for EI benefits in retirement – MoneySense

    How to qualify for EI benefits in retirement – MoneySense

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    What are EI benefits? What are special benefits?

    Regular benefits are paid to eligible employees who lose their job through no fault of their own, JM. Typically, this would include those who are terminated because of a restructuring or those who work in seasonal industries.

    Special benefits include parental benefits (maternity and parental leave), sickness benefits (for those who cannot work due to injury or illness), compassionate care benefits (for those caring for a seriously ill family member needing end-of-life care) or parents of critically ill children benefits (regardless of their age).

    An optional retirement is not a qualifying reason for EI benefits, JM, because it does not fall into the special benefits categories and regular benefits are not meant to pay out to people who choose to stop working.

    Can you get EI if you quit your job in Canada?

    If your retirement, JM, is not your choice, you may qualify for regular benefits. Of note is that there are several reasons when quitting a job is considered “just cause,” but you must be able to substantiate to Service Canada that quitting was the only reasonable option.

    These reasons may include:

    • sexual or other harassment
    • needing to move with a spouse or dependent child to another place of residence
    • discrimination
    • working conditions that endanger your health or safety
    • having to provide care for a child or another member of your immediate family
    • reasonable assurance of another job in the immediate future
    • major changes in the terms and conditions of your job affecting wages or salary
    • excessive overtime or an employer’s refusal to pay for overtime work
    • major changes in work duties
    • difficult relations with a supervisor, for which you are not primarily responsible
    • your employer is doing things which break the law
    • discrimination because of membership in an association, organization or union of workers
    • pressure from your employer or fellow workers to quit your job

    Can you receive EI and OAS and CPP?

    If you do qualify for EI benefits, JM, your Old Age Security (OAS) pension won’t impact your eligibility for EI benefits, since it is an age-based pension that does not have to do with work or earnings. However, Canada Pension Plan (CPP) or Québec Pension Plan (QPP) benefits will, as they are pensions that are related to work and earnings. Likewise, with employer pension plans and even foreign pensions that arose from employment in another country.

    CPP, QPP and employer pensions generally constitute “earnings” that reduce your entitlement to EI benefits and must be reported to Service Canada. These types of earnings are deducted from your EI benefits.

    There is an impact on your EI if you have earnings while receiving it, whether from employment, self-employment, or CPP/OAS/workplace pension income. You lose $0.50 of your EI for every $1 you earn up to 90% of your previous weekly earnings. For earnings in excess, EI benefits get reduced dollar-for-dollar.

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    Jason Heath, CFP

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  • How to model retirement income in Canada – MoneySense

    How to model retirement income in Canada – MoneySense

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    Mike, you are at risk of leaving too much money after you die, and it may not be until you reach age 70, 75 or 80 when you realize it. You could think, “I have all this money, and only so much time and energy left. If I had known, I would have done more.” 

    Lucky for you Mike, you are already thinking about it. Now, it is time for you to engage in some serious play and run some “what ifs” with the projection model you created. Experiment by finding the maximum you can spend each year until your deaths, and then do the same thing again but to the end of your expected health span, when you are too old to enjoy yourself.

    When the money runs out in the model you created, find out the value of your house and farm. Would you sell these to support your retired lifestyle? How much money, if any, do you want to leave your beneficiaries? Play with a few different combinations to see what spending patterns are possible.

    Don’t worry about how you will draw any funds, taxes or other planning strategies. Just get a good sense of what is possible for you.

    Then you will know how much you can spend each year. It’s up to you to decide how you are going to spend or gift your money, which is easier said than done.

    Don’t worry if you can’t identify future plans. Instead, make this year a good one, and do the same next year. If you string together a good year after another and after another, and so on, over your lifetime, you will have lived a full and rich life, with no regrets. Once you have a good sense of how you want to live in your retirement, that’s when you can apply tax and planning strategies. 

    How to model out retirement income

    Mike for some people, the risk of dying with too much money is all-too real. For all the emphasis Canadians place on investments and on tax and planning strategies, there’s very little on the important thing: maximizing life satisfaction.

    Using the model as I have described will give you a glimpse into your future, so you can make confident spending decisions today. Updating the model annually will keep your assumptions honest, keep you on track and allow you to enjoy yourself without feeling guilty spending your money.

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    Allan Norman, MSc, CFP, CIM

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  • Are GICs worth it for Canadian retirees? – MoneySense

    Are GICs worth it for Canadian retirees? – MoneySense

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    In other words, during the near-zero interest rates that prevailed until recently, investors wanting real inflation-adjusted returns had almost no choice but to embrace stocks. (Read more about TINA and other investing acronyms).  

    GICs have a place in locking in some real-returns, especially if inflation tracks down further. But Raina says investing in bonds offer opportunities to lock in healthy coupon returns, with the prospect of higher capital appreciation opportunities if interest rates fall further, since bonds currently trade at a discount. The risk is the unknown: when interest rates will start falling. Based on what the Bank of Canada (BoC) announced in the fall, Raina feels that could be some time in 2024. (On Dec. 6, the BoC announced it was holding its target for the overnight rate at 5%, with the bank rate at 5.25% and deposit rate at 5%.)

    CFA Anita Bruinsma, of Clarity Personal Finance, is more enthusiastic about GICs for retirees in Canada. “I love GICs right now,” she says. “It’s a great time to use GICs.” For clients who need a portion of their money within the next three years, she says, “GICs are the best place for that money as long as they know they won’t need the money before maturity.”

    Other advisors may argue bond funds could have good returns in the coming years, if rates decline. However, “I would never make a bet either way,” Bruinsma says, “I think retirees looking for a balanced portfolio should still use bond ETFs and not entirely replace the bond component with GICs. However, I do think that allocating a portion of the bond slice to GICs would be a good idea, especially for more nervous/conservative people.” For Bruinsma’s clients with a medium-term time horizon, she recommends laddering GICs so they can be reinvested every year at whatever rates then prevail. 

    GICs vs HISAs

    An alternative is the HISA ETFs. (HISA is the high-interest savings accounts Small referred to above). HISA ETFs are paying a slightly lower yield than GICs and also do not guarantee the yield. “I also like this product but GICs win for the ability to lock in the rate,” says Bruinsma.

    When investing in a GIC may not make sense

    Another consideration is that GICs are relatively illiquid if you lock in your money for three, four or five years or any other term. “If you are uncertain if you will need those funds in the near future, you can look at a high interest savings account ETF like Horizon’s CASH,” says Matthew Ardrey, wealth advisor with Toronto-based TriDelta Financial. “This ETF is currently yielding 5.40% gross—less a 0.11% MER.”

    Apart from inflation, taxation is another reason for not being too overweight in GICs, especially in taxable portfolios. Even though GIC yields are now roughly similar to “bond-equivalent” dividend stocks (typically found in Canadian bank stocks, utilities and telcos), the latter are taxed less than interest income in non-registered accounts because of the dividend tax credit. In Ontario, dividend income is taxed at 39.34% versus 53.53% for interest income at the top rate in Ontario, according to Ardrey. This is why, personally, I still prefer locating GICs in TFSAs and registered retirement plans (RRSPs). 

    When GICs are right for retirees

    Ardrey says GICs can be a valuable diversifier when it’s difficult to find strong returns in both the stock and bond markets. “This is especially true for income investors who would often have more of a focus on dividend stocks.” Using iShares ETFs as market proxies, Ardrey cites the return of XDV as -0.54% YTD and XBB is 1.52% year to date (YTD). “Beside those numbers a 5%-plus return looks very attractive.”

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    Jonathan Chevreau

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