Do you ever get tired of people asking you what you are going to be doing when you retire? Most people about to retire will respond with a vague desire to travel or fix up the basement, but in my experience, most about-to-retire types have little to offer beyond that. While it is important how you will spend your spare time following retirement, there are other strategic considerations that you have to look after as part of your retirement plan. Many people who retire in their 50s will be retired for longer than they were actually employed, and the problems they may face in retirement will require as much attention (or more) than those of the former workplace. Our society is now faced with a rambunctious, noisy, demanding about-to-retire baby boomer generation and the following explores how the government has made legislative changes to answer its needs in retirement.
The issue of a mandatory retirement age has plagued the courts because of the advent of the Charter and the desire of some seniors to continue working past the normal retirement age of 65. The truth be told, there is no longer any normal retirement age and some professions require retirement at an even earlier age for completely different reasons. An example of this would be firefighters, thanks to the physical demands of their occupation. On the other end of the spectrum, the mandatory retirement age for judges is fixed by statute at 75 years, probably because of the absence of heavy lifting on the job.
In actual fact, a very small percentage of seniors choose to work beyond the age of 65 and so the problem has not yet become a significant one to resolve. In actual fact, most retirements are driven by the provisions of a pension plan because many persons are able to maximize their pension benefits as early as 60 years of age or younger. Most human resource departments can provide advice on the most advantageous departure date opportunities. Unhappily, there are pension plans that are so poorly funded that they may force an employee to stay in the workplace longer than they had wished for purely economic reasons.
Canada Pension Plan
The government has for many years had a provision in the Canada Pension Plan (CPP) for a person who is 60 years of age and no longer working to apply for an early Canada Pension Plan benefit. If application is made for the Canada Pension before age 65, it is reduced by one-half of one per cent for each month before the age of 65 that the pensioner receives a pension cheque. In some instances, it is very prudent for a prospective retiree to claim the Canada Pension at age 60. For instance, the Public Service Superannuation Act integrates and reduces the Superannuation benefit by the amount of the Canada Pension received by the member at age 65, so it makes real sense for a public servant who has retired
to apply for Canada Pension Plan benefits at age 60. In this way, the five years of CPP benefits will be received before the benefit of the CPP pension is integrated out of existence with the Superannuation benefit.
Ultimately, a retiree is entitled to the CPP benefit at age 65 without regard to whether or not the retiree is working and, interestingly, the receipt of the Canada Pension can be deferred up to age 70. This has the effect of increasing the pension by one-half of one per cent per month until the age of 70 is reached. The important fact to remember is that, whatever you choose, you must apply for the pension. The government does not seek you out to pay you the pension. The amount of benefit you receive is based upon how much and how long you have contributed to the CPP up to a specified maximum.
If you are thinking of retiring for reasons of significant ill health, you ought to consider applying instead for a CPP disability pension. You must be under 65 years of age at the time of applying for a disability pension and you must not already be in receipt of a CPP pension. The disability benefit is payable when an employee’s health prevents him or her from performing the tasks of their position. The disability payment is significantly more lucrative than the CPP retirement pension benefit. When the disabled employee turns 65, then the disability pension stops and application can be made for the CPP retirement benefit.
It is interesting to note that Canada Pension benefits can be equalized between married or common-law spouses for the years that they were together and this can result in tax savings where the tax brackets of the two pensioners are different. Both spouses must be at least 60 years of age to be eligible for equalization.
Registered Retirement Saving Plans
If you are not a member of a group plan, then you probably have been contributing to a Registered Retirement Savings Plan (RRSP). The federal government has recently extended the time by which you must convert your RRSP to a Registered Retirement Income Fund (RRIF). The former conversion date was the 69th birthday of the pension holder and this has now been extended to the 71st birthday. What this means is that the period during which you can contribute to an RRSP is also extended, but this presumes that you still have an income upon which to calculate your RRSP contributions. Any money left in your RRSP or RRIF at the time you die is all brought into income in the year of death. Since your life expectancy is not likely to have changed, this new legislative endeavour of the federal government may simply be our government’s anticipation that you will die with a larger balance in your RRIF.
If you are lucky enough to have a group pension plan and an RRSP, then after you have converted your RRSP to a RRIF you should consider drawing money out of your RRIF as rapidly as you can to convert it to other investments. This avoids having a huge balance in your RRIF at the time you pass away. This strategy works best when your annual withdrawals from your RRIF do not cause you to move into a higher tax bracket.
Old Age Security
Old Age Security (OAS) benefits have been with us for many years. This is a benefit that a 65-year-old Canadian citizen or legal resident of Canada, who has resided in Canada for at least 10 years after the age of 18, is entitled to receive from the federal government. You do not have to retire to get this pension and it is taxable in the same way that the Canada Pension is taxable. If you do have another significant pension income, then receiving your CPP and your OAS will entitle you to give back a serious portion of these pensions to the government in the form of taxes.
It is apparent that in Canada many seniors arrive at their retirement date with more money than is necessary to meet their basic needs. Usually this means they own an unencumbered residence, a car and are in receipt of a regular pension and have some other monies set aside in a registered or unregistered portfolio.
Before you can decide what is excess to your needs, you need to make sure your health is looked after. The cost of medical treatment and drugs is protected to a limited extent by the provincial government through drug programs that facilitate the delivery of lower cost medications to seniors. There are also some employee benefit plans that extend into retirement at the cost of the retiree. Such plans help to further cope with expensive dental repairs or rehabilitation costs, but many of the most expensive costs of long-term health problems are not covered by any plans and the senior may need to look at critical care insurance or long-term disability insurance.
Your retirement planning therefore has to include planning for your physical care. A senior who is no longer capable of living independently usually requires a supportive living environment, which may include long-term care facilities. Depending on the level of care required, an expenditure of $3,000 to $5,000 per month is quite possible. There are obviously many people who cannot afford this kind of assistance, so the provincial government does step in and provide a basic level of care for those who do not have the resources to pay for their care. One truly valuable resource subsidized by the provincial government is your local Community Care Access Centre (CCAC). CCACs provide quality visiting and health services at home and enable seniors with some degree of physical disability to live at home for as long as possible. When it comes time for the senior to vacate his or her residence, the house is then freed up to be sold to provide for the cost of long-term care. CCAC case workers can advise on which services are covered by the Ministry of Health and Long-Term Care. There are many services provided for free, without regard to your financial ability.
Other investment vehicles
There are other estate planning tools that may be of interest to senior citizens who are well off. The use of alter-ego trusts or joint-survivor trusts is available to persons age 65 or older. These trusts, unlike other intervivos trusts, are revocable and the income in the trust must revert to the person who created the trust, i.e. the person who put the assets in the trust. The provisions of the trust usually mirror the provisions of a Will but the assets of the trust do not pass through probate Therefore, the primary reason for using an alter-ego trust is to avoid probate fees for some of the assets of the estate.
The joint-survivor trust is similar to the alter-ego trust except that the assets remain in the trust until both spouses are dead. (While the spouses are alive, the income of the trust can be paid out to either spouse.) This option will be attractive to only wealthier senior citizens due to the cost of creating the trust and maintaining the accounting and tax filing on an annual basis — as if the trust were a separate individual. These costs may actually exceed the probate fees sought to be avoided unless the assets are in excess of $1,000,000, which, for example, would generate approximately $14,000 in probate fees (also known as Estate Administration Taxes). The second reason for the trusts is privacy. A trust is a private instrument and disclosure of the assets is not available to public scrutiny whereas an application for probate exposes the Will and the assets of a deceased person as a matter of public record.
A senior with substantial assets will be interested in saving taxes and preserving assets for the next generation. Many people of substance, when planning their estates, are astonished to learn that one of the best estate plans is simply to give the money away during their lifetimes. Delivering cash to one’s heirs is a simple way to dispose of an estate and ensure that the money is put to good use. It also allows the donor of the gift to supervise the delivery of these monies. It may not be prudent to deliver a fortune on death to heirs who have no previous experience managing money. Giving money away during your lifetime allows the heirs to be introduced to your financial advisors and control can be maintained by having joint signing authority (for the donor and recipient) on withdrawals from any investment. Cash is the easiest commodity to give away and it is almost always well received. You can watch the smiles on their faces and ensure years of devotion to your undoubtedly pleasant company.
John Johnson is a partner with the law firm of Nelligan O’Brien Payne LLP (www.nelligan.ca), with offices in Ottawa, Kingston, Vankleek Hill and Alexandria.
[This article was originally published in the June 2011 issue of Fifty-Five Plus Magazine.]