Test 1- Retirement Planning, CPP, OAS

What are the two phases of retirement planning?

Accumulation = building wealth; decumulation = using assets/income in retirement.

Why is retirement planning becoming more complicated?

• Longer lives

• fewer traditional pensions

• changing returns

• inflation

• taxes

What are controllable retirement planning factors?

Retirement age, lifestyle, savings level and investment choices.

What are non-controllable retirement planning factors?

Longevity, inflation, investment returns and tax rates.

What are the four major retirement risks?

Investment, inflation, longevity and taxation risk.

What is investment risk?

Investments may not be worth as much as expected.

What is longevity risk?

Living longer than expected and running out of retirement savings.

What is inflation risk?

Inflation reduces the purchasing power of retirement income.

What is taxation risk?

Taxes or tax changes reduce income available to spend.

What is the 70% rule?

A rule of thumb: retirement may require about 70% of pre-retirement gross income.

Is the 70% rule exact?

No. Actual retirement expenses should be analyzed.

Why is retirement age so important?

Delaying retirement increases saving years and reduces years savings must support.

What happens when retirement is delayed?

More time to work, save and grow assets; fewer years of retirement spending.

Why is starting retirement savings early important?

More time for compounding and growth.

What expenses should be considered at retirement?

Expenses that disappear, decrease, appear or increase after retirement.

What are examples of expenses that may disappear?

Mortgage, commuting, children's expenses, education savings and RRSP contributions.

What are examples of new retirement expenses?

Travel, healthcare, hobbies, sports and clubs.

What are the six retirement planning steps?

1. Gather info

2. Prepare financial statements

3. Quantify goals

4. Prepare budgets & estimate retirement spending

5. Calculate required savings

6. Monitor and adjust

What is Step 1 of retirement planning?

Gather financial information.

What is Step 2 of retirement planning?

Prepare financial statements.

What is Step 3 of retirement planning?

Quantify retirement goals.

What is Step 4 of retirement planning?

Prepare budgets and estimate retirement spending.

What is Step 5 of retirement planning?

Calculate required retirement savings.

What is Step 6 of retirement planning?

Monitor the plan and make changes.

What is a Statement of Financial Position?

A snapshot of assets, liabilities and net worth at a point in time.

What is the net worth formula?

Net Worth = Assets - Liabilities

What is a Statement of Cash Flows?

A summary of money coming in and going out.

What is the accumulation phase?

The period before retirement when wealth is built through saving and investing.

What is the decumulation phase?

Retirement period when accumulated assets and income fund spending.

What factors determine required retirement savings?

• Lifestyle

• retirement age

• length

• inflation

• returns

• savings

• pensions

• benefits

• taxes

What is a life annuity?

An income stream that provides payments for life.

How does a life annuity address longevity risk?

It provides income for life, reducing the risk of outliving savings.

What is the difference between a life annuity and a lump sum?

• Annuity = lifetime income

• lump sum = more flexibility but money must last

What are nominal dollars?

Dollar amounts not adjusted for inflation.

What are real dollars?

Inflation-adjusted amounts expressed in today's purchasing power.

What is a nominal rate of return?

The stated return before adjusting for inflation.

What is a real rate of return?

The return after accounting for inflation.

What does indexed income mean?

Income that increases with inflation.

What does non-indexed income mean?

Income that does not automatically increase with inflation.

Indexed income uses which discount rate?

Real discount rate.

Non-indexed income uses which discount rate?

Nominal discount rate.

What is bracket creep?

Inflation raises nominal income into higher tax brackets without equal real gains.

What is registered retirement income?

Income from registered plans such as RRSPs/RRIFs, which is generally taxable when withdrawn.

What is non-registered retirement income?

Income from investments outside registered plans; tax treatment depends on the type of income.

What is the time value of money?

A dollar today is worth more than a dollar received in the future because today's dollar can earn a return.

What is an ordinary annuity?

Equal payments made at the end of each period.

What is an annuity due?

Equal payments made at the beginning of each period.

What is the beginning/end rule for annuities?

• Annuity due: payments at the beginning of a period

• Ordinary annuity: payments at the end of a period

What is CPP?

A contributory, earnings-based government retirement program that provides taxable monthly benefits.

What is the CPP contribution period?

Generally from age 18 to 70 when a person has pensionable earnings.

What are the three main CPP retirement benefit factors?

• Contributory period

• pensionable earnings

• age when CPP starts

What are the 2024 CPP earnings thresholds?

YBE = $3,500; YMPE = $71,300; YAMPE = $81,200.

What is the 2024 CPP1 contribution rate for employees?

5.95% on contributory earnings between the YBE and YMPE.

What is the 2024 CPP2 contribution rate for employees?

4% on earnings between the YMPE and YAMPE.

What is the 2024 CPP2 maximum employee contribution?

$396.

What earnings are subject to CPP1?

Earnings above $3,500 up to the YMPE of $71,300.

What earnings are subject to CPP2?

Earnings above the YMPE of $71,300 up to the YAMPE of $81,200.

What happens to earnings above the YAMPE?

No additional CPP contributions are required on earnings above the YAMPE.

What is the CPP1 pensionable earnings formula?

CPP1 PE = MIN(EI, YMPE) - YBE.

What is the CPP1 contribution formula?

CPP1 = CPP1 PE × 5.95%.

What is the CPP2 pensionable earnings formula?

CPP2 PE = MIN(EI, YAMPE) - YMPE.

What is the CPP2 contribution formula?

CPP2 = CPP2 PE × 4%.

What is the total CPP contribution formula?

Total CPP = CPP1 + CPP2.

How is CPP different for self-employed individuals?

Self-employed individuals pay both the employee and employer portions.

What is the self-employed CPP1 rate?

11.90%.

What is the self-employed CPP2 rate?

8%.

What is the earliest age CPP retirement benefits can start?

Age 60.

What is the standard age for starting CPP?

Age 65.

What is the latest age CPP retirement benefits can start?

Age 70.

What is the CPP early adjustment?

CPP is reduced by 0.6% per month, or 7.2% per year, before age 65.

What is the maximum CPP reduction for starting at age 60?

36%.

What is the CPP late adjustment?

CPP increases by 0.7% per month, or 8.4% per year, after age 65.

What is the maximum CPP increase for starting at age 70?

42%.

What is the CPP reduction formula?

CPP Reduction = 0.6% × months early.

What is the adjusted CPP formula when starting early?

Adjusted CPP = CPP at 65 × (1 - reduction).

What is the CPP increase formula?

CPP Increase = 0.7% × months deferred.

What is the adjusted CPP formula when starting late?

Adjusted CPP = CPP at 65 × (1 + increase).

What are CPP dropout provisions?

• General dropout

• over-65 dropout/swap

• disability dropout

• child-rearing dropout

What is the general CPP dropout?

The lowest 17% of months in the contributory period can generally be excluded from the calculation.

What is the CPP child-rearing dropout?

Allows eligible months spent raising children under age 7 to be excluded from the calculation.

What is the CPP disability dropout?

Allows eligible periods of disability to be excluded from the calculation.

What is the CPP over-65 dropout/swap?

Allows eligible low-earning periods after age 65 to be excluded or replaced under CPP rules.

What is the original CPP replacement rate?

Approximately 25% of average pensionable earnings.

What is the enhanced CPP target replacement rate?

Approximately 33.33% of average pensionable earnings.

What is the CPP Post-Retirement Benefit (PRB)?

An additional lifetime CPP benefit earned by eligible CPP recipients who continue working and contributing after starting CPP.

What are the CPP contribution rules from age 60–64?

CPP contributions are generally mandatory when working and earning above the YBE.

What are the CPP contribution rules from age 65–70?

• If already receiving CPP, contributions are optional

• if working and not receiving CPP, contributions are generally mandatory

What happens to CPP contributions after age 70?

CPP contributions stop.

What is CPP pension sharing?

Redistributing CPP retirement pension between spouses/common-law partners to potentially equalize taxable income.

What is CPP credit splitting?

• After separation or divorce

• CPP contributions made during the period of cohabitation

• may be divided equally between former spouses/common-law partners

What are the three main CPP survivor benefits?

1. Survivor pension

2. death benefit

3. children's benefit

What is the CPP death benefit?

A taxable lump-sum payment of up to $2,500 to the estate or eligible recipient.

What is the CPP survivor pension?

A taxable monthly benefit paid to an eligible surviving spouse/common-law partner.

What is the CPP children's benefit?

A monthly benefit for eligible dependent children of a deceased or disabled CPP contributor.

What factors should be considered when deciding when to start CPP?

• Income needs

• longevity

• financial stability

• disability

• taxes

• survivor benefits

• OAS recovery tax

• personal preferences

What is OAS?

• Federal social assistance program

• funded by general government revenues

• based primarily on age and residency

• not CPP contributions

What are the four OAS benefits?

OAS Pension, GIS, Allowance and Allowance for the Survivor.

What is the OAS Pension?

A taxable benefit generally available starting at age 65, based primarily on Canadian residency.

What is GIS?

A non-taxable, income-tested benefit for low-income OAS recipients.

What is the Allowance?

• A benefit for eligible low-income people

• age 60–64

• whose spouse/common-law partner receives OAS and GIS