Planning for Retirement - Personal Financial Planning - Lecture Slides, Slides of Finance

Download Planning for Retirement - Personal Financial Planning - Lecture Slides and more Slides Finance in PDF only on Docsity! Planning for Retirement Docsity.com Agenda • Review of learning goals • Key chapter terms and definitions • Overview of retirement planning • Government-sponsored pension plans • Employer-sponsored pension plans • Registered retirement savings plans • Annuities • Summary • Internet links and on-line resources Agenda Docsity.com Overview of Retirement Planning Role of retirement planning in personal financial planning • Retirement planning is an integral component of all personal financial plans – Most people want to and look forward to the day when they don’t have to work – With age, most people’s physical and mental capacity eventually makes it more difficult to work and therefore, sound retirement planning is a way to deal with that risk. LG 1 Docsity.com Overview of Retirement Planning Three Biggest Pitfalls to Sound Retirement Planning • Starting too late • Putting away too little • Investing too conservatively LG 1 Docsity.com Retirement Planning Set Your Goals: – At what age do you want to retire? – Start early in your career devoting money toward your retirement goals. LG 1 Docsity.com Establish Investment Program • Create systematic savings plan. • Identify appropriate investment vehicles. • Consider tax implications. • Consider the impact of inflation. • Develop investment plan. Docsity.com Sources of Retirement Income • Government-sponsored sources – Old age security – Canada Pension Plan – Guaranteed Income Supplement • Employer-sponsored plans – Registered pension plan (RPP) • Personal savings – Registered Retirement Savings Plans (RRSPs) – Non-registered investments in savings vehicles (savings accounts, term deposits, GICs, Canada Savings Bonds), stocks and bonds. Docsity.com Social Programs for Seniors • Canada Pension Plan (CPP)Benefits are provided by payroll taxes you and your employer pay (you pay both halves if you are self-employed). • Amount of benefits may be insufficient by the time you retire. • Think of it as an insurance system rather than a retirement plan. • Additional Federal Programs for Seniors: – Old Age Security (OAS) – subject to clawback provisions for higher income seniors – Guaranteed Income Supplement (GIS) for low income seniors only Docsity.com Canada Pension Plan What is it? • A contributory, earnings-based, government operated retirement and social insurance program. • It provides: – Disability benefits for disabled contributors and benefits for dependent children – Death benefits including a survivor’s pension and children’s benefits. – Retirement benefits • Current rate of premiums is 9.9% of earnings in excess of $3,500 per year up to maximum pensionable earnings (YMPE) of $41,100. Docsity.com Canada Pension Plan What are the Retirement Benefits?  Benefits depend on: • Contributory earnings that you have had over your working lifetime in Canada, • The contributory period – the number of years • At what age you apply for benefits.  In 2005 – the maximum retirement pension at age 65 was $844.58 per month or $10,135 per year.  Benefits are indexed to the CPI and are fully taxable. Docsity.com Old Age Security Eligibility • Provides all resident individuals aged 65 and over who have resided in Canada for at least 10 years with a monthly pension. • You must apply to Social Development Canada to receive OAS. • You should apply 6 months prior to your 65th birthday. Docsity.com Guaranteed Income Supplement Amount and Qualification • If GIS is paid to low-income seniors receiving OAS. • It is paid in addition to OAS if the recipient’s income is less than a maximum amount ($14,256 for a single individual in 2006). • Maximum GIS in January 2006 was $593.97 or $7,127 annually. • You must apply for benefits and you must renew your application annually by filing a tax return. Docsity.com Pension Plans and Retirement Programs Employer-sponsored retirement programs Self-directed retirement programs Docsity.com • Participation requirements — are you eligible to participate in the program? - Do you qualify? (minimum age and years of service) • Contributions — am I required to contribute to my own plan or not? ( a contributory plan or a non- contributory plan?) • Vesting, Locking In and Portability — how long before I can take the money with me if I leave? • Retirement age — when can I retire? Employer-Sponsored Pension Plans Pension Plan Basics Docsity.com • The risk of underperformance of the fund is borne by the employee. • The annual pension that the accumulated fund will buy at the time of retirement will be a function of: – Accumulated value of in the plan – Level of interest rates (the conversion factor) at the time of retirement – The type of pension payout • Life annuity • Term certain annuity • Joint life annuity • Joint and last survivor annuity. Types of Registered Pension Plans Defined Contribution Plan (Money Purchase) Docsity.com Registered Retirement Savings Plans • RRSPs are trust arrangements approved by CRA. • Individuals can make contributions to the plan and those contributions are free of income tax. • Investment returns in the plan grow tax free. Docsity.com Registered Retirement Savings Plans Contribution Limits • 18% of earned income to a limit in 2005 of $18,000. • Earned income includes: – Income from employment – Income from a business – Rental income • Earned income does not include interest, dividends or capital gains. • Annual contribution limits can be found on the last tax year’s Notice of Assessment issued by CRA and is affected your pension adjustment. • Annual contribution limit is equal to the maximum contribution less the pension adjustment. Docsity.com Before Retirement: • Accumulation Period — annuitant purchases annuity by paying premiums into the account. During Retirement: • Distribution Period — insurance company makes payments to annuitant. Portion not returned to annuitant prior to death goes to beneficiaries. Docsity.com • Single Premium vs. Installments — one large lump-sum payment or a series of payments to purchase the annuity. • Immediate vs. Deferred — begin receiving payments immediately or wait to receive payments after purchasing annuity. • Fixed vs. Variable — investment grows at a low guaranteed fixed rate or at a presumably higher variable market-based rate with no guarantee of return. Classification of Annuities: Docsity.com • Life annuity with no refund — payments made for life of annuitant; nothing to beneficiaries. • Guaranteed minimum annuity — at least a total minimum amount will be paid out; beneficiaries receive any remainder. • Annuity certain — payments made for a set number of years and cease, regardless of life span of annuitant. Common Disbursement Options: Docsity.com In summary you have … • Learned to recognize the importance of retirement planning and identify the three biggest pitfalls to good planning. • Learned how to establish your income needs in retirement, and estimate your retirement income. • Gained an understanding of the government pension plans available in Canada. • An understanding of the types of employer-sponsored pension plans. • An understanding of various types of self-directed retirement plans, and • An understanding of the types of annuities that may be chosen for your retirement plan. Summary Docsity.com Internet Links and On-Line Resources • Life Expectancy Calculator at Dinkytown. • Canada Online Retirement Finances site includes articles and resources on key topics affecting retirement plans. • Services Canada comprehensive retirement income calculator. • Social Development Canada website for more information concerning the Canada Pension Plan. • See your Statement of Contributions to the Canada Pension Plan at Social Development Website. • Retirement planning and pension decisions information on the Investor Education Fund Website. • A good introduction to annuities from Hughes Trustco Group Ltd. • Loan calculator at Dinkytown to calculate the size of the payment you will need to create a certain monthly annuity payment. Web Links Docsity.com THE END! Docsity.com Definitions Contributory Earnings • The employment earnings of an individual for the purpose of calculating benefits under the Canada Pension Plan. Terms Docsity.com Definitions Registered pension plan • A pension plan that has been registered with the Canada Revenue Agency and the appropriate federal and provincial pension regulatory agencies. Terms Docsity.com Definitions Non contributory pension plan • A pension plan in which the employer pays the total cost of the benefits. Terms Docsity.com Definitions Locking in • The requirement under a pension plan that accumulated benefits for an individual must only be available as a pension. Terms Docsity.com Definitions Portability • A provision of a pension plan that permits the transfer of benefits under the plan to be transferred to another pension plan. Terms Docsity.com Definitions Defined contribution pension plan • A pension plan that specifies the amount of the contributions that both employer and employee must make; it makes no promises concerning the size of the benefits at retirement. Terms Docsity.com Definitions Earned income – Income from employment, business and rent for an individual, the sum of which is used to calculate amounts that may be contributed to an RRSP. – Does NOT include investment income – capital gains, dividends or interest. Terms Docsity.com Definitions Pension adjustment – The amount contributed to a registered pension plan in a year by employee and employer. Terms Docsity.com Definitions Contribution room – The term used to describe the allowable amount that an individual could have contributed to an RRSP in prior periods that remain unused and is carried forward from the preceding tax year. Terms Docsity.com Definitions Distribution period – The period during which annuity payments are made to an annuitant. Terms Docsity.com Definitions Registered annuity – An annuity purchased with the proceeds from a registered retirement plan (RPP or RRSP) Terms Docsity.com Definitions Term certain annuity – An annuity where payments are made for a fixed period of time that is independent of the age of the annuitant. Terms Docsity.com Definitions Joint life annuity – An annuity based on the age of two individuals that will make payments for as long as both of the individuals are alive. Terms Docsity.com Definitions Joint and last survivor annuity – An annuity based on the age of two individuals that will make payments for as long as one of the individuals is alive. Terms Docsity.com