the structure of retirement income daryl diamond cfp clu chfc diamond retirement planning ltd....

The Structure of Retirement Income

Daryl Diamond CFP CLU CHFC

Diamond Retirement Planning Ltd.

Advanced Workshop CAIFA Vancouver

November 1, 2001

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Today’s Presentation

1. What is different from six years ago?

2. The structure of retirement income

3. Developing a process to attract clients

4. Touch on today’s investment climate

Things you can use with clients

Above all else…

to accomplish the above without putting you into a coma

Today’s Business Realities

GIC harvest is over Banks /C.U.’s have

plannersFund industry salesDifficult marketsDSC out of favorMore demanding

clients?

RetirementsTermination/severance Inheritance Life insurance proceeds

Attracting existing portfolios

Five Stages of Retirement Planning

1 Accumulation

2 Positioning

3 Income Structure

4 Disposition

5 Distribution

Three Significant Timing Points

1 Point of independence

2 Point of realization

3 Point of consolidation

The Point of Independence

That juncture where an individual’s assets and benefits can create an ongoing income stream that would allow them to discontinue employment.

It is at this point that an individual can make an election to “Trade money for time”

The Point of Realization

That juncture when an individual (couple) realizes the following;

We should get some help with this and really see how it is going to look when we retire.

We need to find someone who can pull all of this together for us.

Point of Consolidation

Where action is taken after the point of realization has been reached

Becoming “The Consolidator”

• You must be the one they trust

• Help them define what it is they want

• Be aware of the issues that are significant to and unique to this market

• Provide advice on other income sources

Becoming “The Consolidator”

• Be technically competent

• Be able to integrate all sources of income

• Illustrate and communicate your plan

• Understand that income structure is only one facet of income planning

The Planning Process

1. Gathering data

2. Establishing client objectives & priorities

3. Identification of issues and opportunities

4. Preparation of alternatives and recommendations

5. Implementation of chosen alternatives

6. Monitor and review

Initial meeting and assessment

The Four Planning Channels

1. Income Structure

2. Investment Portfolios

3. Health Risk Management

4. Wealth Transfer

StructuralPlan

InvestmentPortfolio

Health RiskManagement

Wealth Transfer

The Two Factors… From Two Perspectives

Accumulation

Retirement

Income

Risk Return

Risk Return

In the retirement market, there is an incredible opportunityin risk analysis / risk management

Managing Risk

Capital Loss

Investment Loss

Purchasing Power Loss

Health Related Loss

Tax Loss

Protecting income producing assets

Changing FactorsMale Age 65

Income FactorsYear Life Expectancy

7.5 Yrs

10 Yrs

14 Yrs

1975

1985

1965

Today

2010

17.5 Yrs

20 + Yrs

Only a few retirement years to fundCPP commences

Appreciating real estate valuesHigh nominal interest ratesExcessive taxationExcessive Government borrowing

None of the above apply in the same manner

Issues and Assets

Issue

Retirement Age

Life Expectancy

Lifestyle Expectations

Taxation

Inflation

Family Complications

Wealth Transfer

Forecast Impact

_______ _______

_______ _______

_______ _______

_______ _______

_______ _______

_______ _______

_______ _______

earlier

longer

better

greater

present

possible

important

more

more

more

more

more

more

Potential Clients

• Parents of existing clients

• Educational seminars

• Mining group accounts

• Referrals

Retirement Income Planning Defined

Creating and implementing a plan that will deliver what clients want by making the most efficient use of their assets and benefits.

Income Basics

• What are my priorities

• How much income do I want / need?

• How long will I require this?

• From where should I draw my income?

• General issues and considerations

INITIAL CONSIDERATIONS

It’s Net Income That CountsRet.

Emp. @ 65 DifferenceGross Income 4,000 2,500 1,500 (-37.5%)Deductions Combined Fed.& Prov. Taxes 962 494 CPP 110 0 E.I. 78 0 Group Benefits 72 0 Pension @ 4.5% 180 0 Parking 125 0 Group RRSP 200 0Net Income 2,273 2,006 267 (-11.7%)

1. How Do Income Needs Change?

1. You now have 100% leisure time expenses

2. Business/work expenses disappear

3. Group benefits disappear (health, dental, life insurance)

4. From payroll to ‘drawing upon assets’

5. No longer in ‘savings mode’

2. Our Retirement Expectations

1. More fulfilling

2. Longer life expectancy

3. Stay healthier longer

4. Question stability of government programs

5. View retirement as the start of a new phase v/s ‘The End’

3. General Issues

Defining “retirement”

Working after you retire

Where are you going to live?

What is the state of health?

4. Determining Your Income Level

• Percentage of pre-retirement income

• Budget approach– After-tax– Household

• Reduction at some point

• Survivor income needs

Additional Considerations

• Will there be any debt / mortgage to service at the time of retirement?

• Is there a desire / need for additional income in the early years?

• Are there any major purchases to be made at the time of retirement?

• Do we need cash flow for risk management premiums?

Varying Income Needs

Different objectives Do more things earlier Don’t need same income all the way through Difference between life expectancy and years

of good health

The Prime Approach ToYour Retirement Years

That period of time between

when you commence “retirement”

and

the moment that one of you needs care or passes away

Information Gathering

Formal “Data Gathering” process Investor profile Details of investments, RRSP’s pensions,

Government Benefits Most recent income tax return Revenue Canada Notice Of Assessment Life, disability, C.I. or health plan contracts Copy of will, POA, trust agreements etc. Advisor’s checklist

Establishing Your Priorities

• Income security

Rank the following in terms of their importance to you

The Older You Become, The Longer You Will Live

Current Average Life Expectancy

Age Men Women

55 81 86

60 82 87

65 83 88

70 84 88

75 86 89


• Income security

• Highest possible income today

• Coping with inflation

• Estate transfer

• Using capital assets


Asset UsageA) No IncomeGrow assets instead

B) Some IncomeKeep asset values constant

C) Max IncomeDeplete assets

Age Life expectancy

Income producing assets


• Income security



• Estate transfer



• Health risk management

Years Of Good Health At Age 65

Life Good

Expectancy Health

Male 15 8

Female 19 9


• Income security



• Estate transfer


• Health risk management


• Tax Reduction

Taxation Of Income

Taxable Income

$0 - $30,754

$30,755 - $61,509

$61,510 -$100,000

$100,000 and over

Federal Tax

0 + 16%

$ 4,920 + 22%

$11,685 + 26%

$21,692 + 29 %

Combined Marginal*

25.7%

36.8%

42.5%

* Average provincial rate

46.8%

Taxable Income <$30,755 >$30,754

Interest $743 $632

Dividends $846 $707

Capital Gains $871 $816

What You Keep On Your InvestmentsFor each $1,000 taxable

Marginal rates using average provincial rate

The “Age Credit”

• To qualify you must be age 65 or over by the end of the calendar year

• Serves as a credit against Federal tax

• In 2000, net income greater than $26,284 reduces credit by 15% and is eliminated by net income of $49,284

• Is transferable

The Pension Income Credit• $160 Federal credit applies to the first $1,000 of

eligible periodic income– Pension income at any age or after age 65

• LIF / LRIF payments

• RRIF or registered annuity payments

• Taxable portion of a non-registered annuity including deferred annuities

or where you are the surviving spouse of someone who was claiming the credit

• Is transferable

A Tax Checklist

• Withholding tax amounts

• Form of investment income

• Making use of lower tax brackets

• Splitting income where possible

Incomefrom other

investments

RRSP Income(RRIF’s, Annuities

Employer pension

Canada Pension Plan (CPP)

Old Age Security (OAS)

{

{Government

benefits {Employeebenefits

Personalsavings

Income Sources

Age 60 61 62 63 64

MonthsEarly

60 mos 48 mos 36 mos 24 mos 12 mos

Presentdecrease@ 1/2% permonth

70% 76% 82% 88% 94%

Monthlypayments

$70.00 $76.00 $82.00 $88.00 $94.00

Monthlydecrease

$30.00 $24.00 $18.00 $12.00 $6.00

Payments $4,200 $3,648 $2,952 $2,112 $1,128prior to 65

Make up 140 152 164 176 188time inmonths

Make up 11.66 12.67 13.67 14.67 15.67time inyears

Breakevenpoint atage 77 78 79 80 81

Early Receipt of CPP

Incomefrom other

investments


Employer pension



{

{Government


Personalsavings

Income Sources

Reading Your Pension Statement

• Shows amount of monthly income earned to date of statement …

• Payable at age 65 - NRD

• Normal form of income - single life guar 5

• Expect a basic reduction of 10% - 15%

• D.B. restrictions at age 55

Shopping For Your AnnuityMale 65 Female 62 Joint G15, $100,000

1. Sun Life 678.15

2. Equitable Life 677.96

3. Empire Life 677.95

5. Royal & Sun Alliance 674.35

10. Imperial Life 666.28

15. Great West Life 607.14

Source: Cannex Financial Exchange Limited

Pension / LIF Income $100,000 Male Age 65 - Female Age 62

Age S G15 JL G15 LIF*

65 765 678 615

70 765 678 653

75 765 678 696

79 765 678 734

* assumes 7% return

Pension / LIF Estate Value $100,000 Male Age 65 - Female Age 62

Age S G15 JL G15 LIF*

65 89,283 80,267 100,000

70 67,566 59,882 93,909

75 38,869 34,272 83,345

79 0 0 69,641

* assumes 7% return

Converting Locked-In Money

• Convert LIRA to LIF or LRIF

• Commence income on minimum w/d basis

• Difference between min & max can be transferred to RRSP (CCRA T2030)

• Deduction offsets receipt (except for min)

• Direct transfer under 60 (I) (v) does not affect RRSP contribution room

Incomefrom other

investments


Employer pension



{

{Government


Personalsavings

Income Sources

RRSP / RRIF Income

• Defer or commence

• Taxation and control

• RRIF or RRSP lump sums

• Spousal RRSP considerations

• Use of spouse’s age for min w/d

• Stopping income streams

Capital EncroachmentMale 65 $100,000 5% Interest only withdrawal

Age Income Balance

65 $5,000 $100,000

72 $7,348 $ 97,003

75 $7,075 $ 89,085

80 $6,645 $ 74,972

85 $6,219 $ 59,380

90 $5,791 $ 41,899

Incomefrom other

investments


Employer pension



{

{Government


Personalsavings

Income Sources

Non-Registered Assets

• GIC’s

• Distributions from investment funds

• Use of capital

• Deferring taxation

Why SWP’s Work

C.I. GlobalYear End Unit Price

1989 5.70 1996 9.38

1990 5.01 1997 10.38

1991 6.47 1998 12.02

1992 7.16 1999 16.48

1993 9.48 2000 15.84

1994 8.69 YTD 10.78

1995 9.04

LIF Investment Fund SelectionTHE MONEY WEDGE

Initial Value $228,159

$40,159

$40,000

$18,000

$40,000

$30,000

$30,000 $15,000

$15,000

Fund G

Fund F

Fund EFund D

Fund C

Money Market

Fund BFund A

History LessonDon’t Miss The Recovery

Market Bear Bear Bull Top Duration Decline Increase

May 46 38 30% 267%Aug 56 14 22% 86%Dec 61 6 28% 80%Feb 66 8 22% 48%Nov 68 18 36% 73%Jan 73 21 48% 226%Nov 80 21 28% 233% Oct 87 4 35% 67%Jul 90 3 20% 427%Mar 00 Sep 21 36% ??

Age 58

Pension $1,000

Age 60

Age 65

CPP $540

OAS $515

Non-registered distrib. $200



Non-registered capital

$3,000permonth $1,800 $1,260 $645RRIF

Order Of Income Structure

1 Government Benefits

2 Pension / Locked-In Assets

3 Taxable Non-RRSP Distributions

4 RRSP / RRIF Income

5 Non - Registered Capital

Income Allocation

Pension45%

CPP / OAS20%

RRIF20%

Non-Reg15%

The Investment Decision Process

Written financial plan

Objectives, risk tolerance of investors

Risk/return characteristics of asset classes

Long term asset mix

Selection of Funds Bonds/GICs/Annuities

Investment Policy Statement

Monitoring / RebalanceTake profits

Steps In The Process

• Determine priorities

• Establish net income objective

• Address survivor issues

• Create fully taxable income as base

• Use tax-efficient income at higher levels

• Use least flexible assets first

Remember the “Golden Rule”

The person who advises on

“The Gold” ...

also advises on the insurance needs

and solutions

Why We Are Worth 1% / Year

• Increase investment returns by 1%

• Save people 1% from mistakes

• Save them time, stress, worry

• Save them $_______ / yr in income taxes

• Preserve 10’s - 100’s of thousands of $ in estate value through conservation

• Provide continuity to spouse / heirs

Opportunity Knocks

Demonstrate your value as an advisorPeople DO want to hear from youPick up existing accounts by having

a processA great time to ask for referralsGet more money into the marketWhile everyone else is hiding, get going

Positioning For The Future

• Take on the role of a consultant

• Have a written process for your clients

• Use comprehensive planning

• Become adept at Risk Analysis and Management

• Specialize and develop strategic alliances

• Evolve your money practice in the direction of asset-based compensation

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the structure of retirement income daryl diamond cfp clu chfc diamond retirement planning ltd....

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