My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with BDO. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, February 22, 2021

How much do you need to retire in Canada? (Part 3)

When we last talked about the amount of money you need to retire, we discussed the critical research from Michael Kitces, a pre-eminent retirement expert in the United States. His work looks at the 4% safe withdrawal rule first proposed by William Bengen, which helps investors map out their wealth strategy in retirement.

This week let’s dig deeper by presenting some dissenting opinions on the 4% rule and detailing what the 4% rule actually means. I’ll also offer my suggestions on how to implement the rule into your wealth strategy.

How accurate is the 4% withdrawal rule?


Whenever we hear universal rules about investing, we need to question how universal they truly are.

Fortunately for us, Mr. Bengen himself shares some key fine print. He has suggested that the 4% rule was a creation of the media and that he actually more often than not used 4.5% with his clients. In today’s investment climate, he says, he would use 4.5% or even slightly higher as a rule of thumb. He also says he would increase his equity holdings from 50% to 70% in dividend paying stocks given today’s low interest rates—if they can be purchased at reasonable valuations.

At this juncture, I need to make like an infomercial and disclaim that while Mr. Kitces and others research have shown the 4% withdrawal rule to be safe, there is no guarantee it will apply in the future, especially given the historically low interest rate environment.

In fact, Wade Pfau, who is profiled in my 2014 series and is still at the forefront of retirement planning, says that “the 4% rule does not apply today, as retirees face the lowest interest rate environment we have ever seen. It also was never meant to apply for those who were not willing to hold at least 50% stocks throughout their retirements.” Mr. Pfau suggests a withdrawal rate as low as 2.4% may be appropriate given the low interest rates.

It is interesting to note that Mr. Kitces and Mr. Pfau both agree that a rising equity glidepath in retirement—starting with a lower equity component and increasing equity exposure over time (which is counter intuitive and in contrast to the typical advice that one should decrease equity exposure as you age)—may be beneficial. I will discuss this in greater detail in Part 4 of this series.

While I have no illusion that I am a retirement specialist, my experience with clients and the studies above have made me believe that the 4% rule is a good starting point for your retirement nest egg planning (especially if you are willing to adjust your yearly withdrawal rate in poor markets). In fact, during multiple meetings with clients and their various Investment managers this year, the consensus is almost unanimous that future returns will be lower over the next 10 to 20 years, but in most cases, the expected return of an equity-tilted portfolio is still well above four percent. Again, I caveat, these expected returns by investment managers, may vary from actual results.

My takeaways

  1. Determine to the best of your ability your expected yearly cash requirements in retirement and use the 4% rule to give you an idea where you stand with your retirement planning. If you need $100,000 a year in retirement, the 4% rule says you will require a nest-egg of $2,500,000.
  2. Engage a financial planner to prepare a detailed financial plan. The 4% rule has been proven to be historically accurate, but a detailed personalized plan is always beneficial. Have your financial planner run alternative scenarios using, say, a 3% and 4% withdrawal rate. If you have an investment advisor, see if they will prepare a financial plan free of charge as part of your investment fee. Keep in mind: a report from your investment advisor in some cases may include suggestions for certain products their institution sells.
  3. If you have been retired involuntarily and were only a few years from your planned retirement date, use the 4% rule of thumb to determine what you need to earn to fund your retirement. As noted by Mr. Kitces, he has often found people forced themselves to work longer than needed, and if you can make up some of your missing salary with a part-time job or consulting gig, you may be okay to take “partial” retirement early. Again, I would suggest speaking to a financial planner to tailor your fact situation to your plan.
  4. If you retired voluntarily, consider working part-time or at something you love, to enhance your capital, keep your mind sharp and—at least in my case—your spouse from killing you.
  5. If the markets go down during retirement, always pre-plan what expenses you can reduce (or as Mr. Kitces suggests, consider reducing your inflation-adjusted spending going forward), so that you can reduce your withdrawal rate for a few years.

It has been a crazy last year and many retirement plans have been turned upside down. Whether you have been sideswiped by the topsy-turvy business climate of the pandemic or been one of the lucky ones to thrive, you should still revisit your retirement planning and nest egg objective.

I am going to briefly interrupt our retirement series to bring you a timely post on claiming home office expenses on your 2020 personal tax return during COVID-19. Following that post, I will conclude this series with a quick recap of some of the factors that impact your retirement planning.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, February 15, 2021

New for business owners: Guide to Selling Your Business

Selling a business is one of the most important decisions any business owner can make. So, in a way it’s surprising how many leave the process not exactly to chance but at least to the relative last minute.

This procrastination around succession carries with it huge consequences. Planning a sale takes time–we usually say about two years from plan to fruition. And there’s a lot to do–from enhancing the value of the business, to a valuation, to navigating the due diligence by the buyer, to tackling the final negotiations on sale price.

The process can become nuanced and technical. The tax implications are steep and long-lasting–but taking action before the sale closes helps you control the process and protect yourself, your family, and your legacy.

My colleagues at BDO put together a handy guide to help business owners sell their business. It covers the main topics that you should get a handle on–plus it gives tailored tips for several key industries. You can download the new guide here.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, February 8, 2021

How much do you need to retire in Canada? (Part 2)

Two weeks ago, I reminisced about a six-part retirement series I wrote in 2014—and how COVID-19 has affected many people’s retirement. I noted that in some cases people have lost jobs, had the value of their small business eroded, or realized they would need to invest in technology for their business to compete in a new normal. In other cases, people have become contemplative and decided to retire early (such as I am doing on December 31st) or switch careers.

Today, I discuss a study on the subject by Michael Kitces, a pre-eminent retirement expert in the United States. We’ll analyze his views on a safe withdrawal rate in retirement. Keep in mind that the safe withdrawal rate is then used to reverse-engineer your required nest egg for retirement.

Markets


Over the six years since I wrote the retirement series, unless you were GIC centric or Canadian-equity centric, you likely would have had above average stock market returns. Consequently, your sequence of returns (whether your returns are strong or weak at the beginning of your retirement, discussed in greater detail in Part 4 of this series) would have likely been advantageous to your retirement. I personally have not seen anyone fall off the rails from their retirement plan, but six years of relatively good markets is not exactly a great sample size.

The famous 4% withdrawal rule


My 2014 series centered around what is the most commonly accepted rule of thumb for retirement, the 4% withdrawal rule. Created by William Bengen, this rule says that if you have an equally balanced portfolio of stocks and bonds, you should be able to withdraw 4% of your retirement savings each year, adjusted for inflation, and those savings will last for 30 years. So if you need $100,000 a year to live in retirement, you will need a nest egg of $2.5 million ($100,000/.04).

The 2014 series discussed some of the deficiencies experts feel are inherent in the 4% rule: the withdrawal rate doesn’t take income tax into account; it ignores management fees; the equity portfolio lacked international diversity (as it was US centric); that it was premised on a historically higher interest rates for the fixed income (bond) portion of the portfolio and used a constant set 4% withdrawal rate.

Since I wrote the initial series, Michael Kitces has come to the forefront as one of the great retirement researchers and planners in the United States. He has written several articles on the 4% withdrawal rule. Mr. Kitces is not only a great researcher, but he is also a very engaging speaker, who is able to passionately break down a complicated topic into plain English. I will therefore link to three YouTube podcasts that I think you will find highly informative and should listen to if you are interested in what your withdrawal rate should be in retirement.

What Michael Kitces says about the 4% withdrawal rule


Mr. Kitces has written and been interviewed about the 4% rule many times over the years. He has noted the following findings in respect of the 4% rule:
  1. The three worst retirement start dates in history were 1907, 1929 and 1966, and these form the floor of the 4% rule. It is extremely important to understand that the historical safe withdrawal rate of 4% is not based on historical averages (if they were, he notes the withdrawal rate would be much higher), but they are based on the three worst historical 30-year retirement periods noted above. These three worst periods would have allowed a retiree to just barely meet the 4% withdrawal scenario. That is why he and others consider the 4% rule a safe withdrawal rate; it is a historical worst-case scenario, not an average.
  2. The safe withdrawal rate has a 96% probability of leaving more than 100% of the original principal (these are nominal returns, not inflation-adjusted returns, but still your original principal is almost all intact in historical dollars - this was startling to me).
  3. The median value (50% of the time) is 2.8 times the original principal. Thus, you have a high likelihood of having more money by the time you die, not running out of it.
  4. Only one time does the retiree run out of money and that is in Year 31 of retirement.
So despite the inherent flaws in the 4% rule, I note in the fifth paragraph of this post, Mr. Kitces is of the view that because historical safe withdrawal rates are not based on historical averages but rather on historical worst-case scenarios, the 4% rule is more than an excellent rule of thumb.

Where to hear directly from Kitces


If you are serious about understanding the 4% rule and Mr. Kitces’s views on it, you need to listen to at least one of these YouTube/podcasts:
  • I like this April 2020 interview of Mr. Kitces by the bloggers behind the BiggerPockets blog, because it was in the midst of the COVID stock crash and Mr. Kitces was unfazed. He just analyzed the situation and explained everything clearly but still passionately. I would scroll down to the YouTube video in lieu of the podcast. One quick comment about this podcast. There are some references to “FIRE.” FIRE is an acronym for “financial independence retire early” and is only applicable if you plan to retire early.
  • Another excellent and current podcast, this one with a Canadian bent (and a different focus from the above podcast), is this August 2020 interview of Mr. Kitces by the Rational Reminder team of Ben Felix and Cameron Passmore. You may recall that the same pair interviewed me last year on various financial topics.
  • Finally, for the diehards, another interesting listen is this October 2020 podcast, in which Mr. Kitces interviews the father of the 4% rule himself, Mr. Bengen (he was actually a rocket scientist before becoming a financial planner). This podcast includes a bit more about Mr. Bengen’s history, so you may want to peruse the index to listen to the parts you are interested in if you are not interested in Mr. Bengen personally.
If you prefer reading to watching, you might want to have a look at this 2015 blog post by Mr. Kitces. It should be noted that Mr. Kitces uses a 60% equity and 40% fixed income model in this study, whereas Mr. Bengen used a 50/50 model.

Have a watch (or least a look if you don’t have time to listen to any of the podcasts) at some of the links above. We’ll pick up the conversation on this series next time by fleshing out some perspective (including dissenting opinions on the 4% rule) on what the 4% rule actually means and offering my suggestions on how to implement the rule into your wealth strategy.
 
The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, January 25, 2021

How much do you need to retire in Canada?

In 2014, I wrote a six-part series on retirement called “How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does!” The series was not only six parts but also over 10,700 words and I am sure over 60 hours of research, writing and editing. I recall telling myself, “Never again,” after completing this series. If you wish to read the series in full, you can find the links to the six posts on the right-hand side of my blog under the retirement planning category.

I also recall it was somewhat depressing to realize that after all that work, I couldn’t come up with a definitive determination of the actual nest egg you require. No one can. There are simply too many inputs, variables, models, simulators and varied expert opinions.

That being said, there was still a ray of sunlight in the series. I found that after using multiple models for my sample calculations, I was able to map out a range of retirement savings that likely would provide a realistic retirement goal, especially if twinned with a financial plan that is updated every few years. So, while it is likely impossible to determine your retirement nest egg to the nth degree, you can provide yourself a realistic retirement savings objective with some work and planning.

At this point you’re likely saying, why is Mark rambling on about a series he wrote almost seven years ago? The reason is COVID.

The pandemic has brought retirement savings front and centre for far too many of us.

In some circumstances, people have lost jobs or their own small businesses that they expected to work at until retirement.

In other cases, people may be succeeding financially but have become more contemplative during COVID. They have begun to think about the long term and what they really want out of life. Maybe it is time for a change in career or time to retire early while healthy and still invigorated. (Full disclosure: I am one of the people in this group and made the decision to retire from public accounting at the end of 2021.) Some have even decided to retire early and follow the advice of Mike Drak and Jonathan Chevreau in their book Victory Lap. They say people should leave their day job behind once they’ve reached financial independence, and work at something they love or always wanted to do to make some supplemental income.

Canadians who pivoted to retire early caused many a financial advisor to pull their hair out. They typically advised clients to just push through the next couple years, as there is too much financial uncertainty to retire early. But based on what I have seen and heard, early retirements have not been uncommon, despite not necessarily being the financially prudent thing to do. (Although if you listen to the Michael Kitces podcasts, I will reference in this series, you will hear his research that many people should have been retiring early for years, assuming they continued to work part-time at a minimum.)

And that’s why COVID has prompted me to revisit this series. For those retiring soon, or just planning for the future, it’s a great time to rejig these topics with some new research and expert opinions. You will be pleased to know that I have learned restraint over the last six years: The 2021 series will be “only” a few parts and a mere 3,200 words give or take.

I will stop here today. The next 1,600 words or so require a clear mind, as retirement planning and determining a safe withdrawal rate in retirement are surprisingly academic topics. I will discus this methodology in Part Two of this series and am also looking forward to reviewing a couple of the top retirement experts’ studies and suggestions.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, January 11, 2021

My Top Five TV Series During COVID

In the old days of this blog, I would occasionally veer off from the financial focus of The Blunt Bean Counter and write about travel (like my trip to Africa with my wife), general business topics (like the four Ps of public speaking), and other topics like sports and food. Over the last while, I have kept on topic. To start the new year, I thought I would lighten it up and write about TV series or mini-series I watched during COVID. Don’t fret: my next post will get back to finances when I revisit my 2014 six-part series on how much money you need to retire.

At the start of the pandemic, I was busy assisting my clients with the various new or updated government programs and helping them manage their businesses through the lockdown—so I did little TV watching. And after that I was busy with personal taxes and corporate filings until July. But since August I’ve accelerated my TV watching in between summer golf games.

Below I list my favourite series during the pandemic—some old, some new and some just released. We all have personal preferences in what we want on TV (and we also may be limited what we can watch by our TV subscriptions, as there seems to be unlimited subscription options). I like TV series that are so compelling or gripping that I can’t stop watching or cannot wait until next week’s episode. I also like a great comedy (few and far between, although I really enjoyed Schitt’s Creek the first couple of years and watched it when it came out on CBC) or, alternatively, something very unexpected, such as the The Queen’s Gambit on Netflix, which I discuss below. Here are my top five: 

Game of Thrones


I know Game of Thrones (GOT) is one of the most popular TV series ever, but I am not a fantasy fan (nor am I a sci-fi or horror type of guy) so I was never that keen to tune in. A couple years ago I watched 10 minutes of an episode to see what the fuss was about, and that show happened to be heavy on dragons and various fantastical things. So I decided GOT was not for me. But my wife and I agreed to give the series one more try, and to my surprise, the first season was gripping and had very little fantasy or dragons. By the time the series became more fantastical, I was hooked, and the dragons and fantasy felt natural in the normal course of the show. Like many, I did not love the ending, but eight seasons filled a lot of COVID time. I watched this on Crave.

The Queen’s Gambit


Per Wikipedia, “The Queen's Gambit is a fictional story that follows the life of an orphan chess prodigy Beth Harmon, during her quest to become the world's greatest chess player while struggling with emotional problems and drug and alcohol dependency.”

Beth is played by Anya Taylor-Joy, and she is awesome in the role. I loved this Netflix show because I had no idea what it was about and figured it was some boring chess show. Far from it. Beth is an extraordinarily complex and compelling character, who is super-cool, albeit with some issues, yet still a chess “nerd” at heart. This show was so unexpected, and I really enjoyed it.

It is my understanding that the show and the complex chess strategies it reflects, together with the hip character created by Anya, have created a chess craze across the world. Chess memberships are reaching record highs and chess boards are becoming scarce. Perhaps I’ll move from chess-watching to chess-playing in 2021. 

Ted Lasso


I watched this Apple TV (thanks to a free year due to an ipad purchase) show on the recommendation of a friend who is a Manchester United soccer fanatic, so I expected to watch one episode and report back it was boring. To my pleasant surprise, this show about an American football coach brought in to coach a premier English soccer club (the owner wanted the team to be poorly coached and play poorly to get back at her ex-husband, the former owner) was very funny and heart-warming without going over the top. Apparently, the star, Jason Sudeikis, first conceived the idea as an actual Premier league promo for NBC. In any event, it’s a fun, light series. 

Mindhunter


Mindhunter is the story of FBI agents Holden Ford and Bill Tench and psychologist Wendy Carr, who operate the FBI's famed Behavioral Science Unit at the FBI Academy in Quantico, Virginia. In the unit's earliest days, they pioneer the study of serial killers by interviewing some of the most depraved in American history. They visit prisons around the U.S. to talk to men such as Charles Manson and understand how they think. Knowledge will help them catch future serial killers, they hope. 

Based on a true story, Netflix's Mindhunter boasts the involvement of A-list movie director David Fincher. While the show is a bit slow at times, I found it compelling and enjoyed both seasons (supposedly a third will not happen or not happen again for several years). Some of the criminal characters were so intriguing that you almost forget they committed heinous crimes. 

Morning Show


This Apple TV show was again a bit unexpected for me. I figured it was about a morning news show and would be light and fluffy, with Jennifer Aniston (playing co-anchor Alex Levy) as the star. I was taken aback when I quickly realized this show was about a current social issue, with co-anchor Mitch Kessler (played by Steve Carell) being fired for sexual misconduct at the network. Viewers see the insidious acceptance of this behaviour and culture of fear that news media have analyzed in the last few years when high-profile men were accused of sexual misconduct.

A couple of shows that just missed the list were the Undoing, a mystery psychological thriller starring Nicole Kidman and Hugh Grant, and You, a dark series about a bookstore manager who is also a serial killer (it reminds me a bit of Dexter, one of my all-time favourite shows, if you have ever watched that series).

Feel free to let me and the other readers of this blog know your top five series during COVID by posting them in the comments below. That way others can check them out.

 
The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, December 21, 2020

2020 year-end financial clean-up

This is my last post for 2020 and I wish you and your family a Merry Christmas and/or Happy Holidays and a Happy New Year. Let us hope, 2021 brings a successful vaccine rollout and some return to normalcy.

As in many prior years, my last post of the year is about undertaking a "financial clean-up" over the holiday season. I feel this "clean-up" is a vital component to maintain your financial health. This year I will consider the effects of COVID on your clean-up.

So what is a financial cleanup? In the Blunt Bean Counter’s household, it will entail the following in between eating and watching the 2021 IHF World Junior Championship (it looks like the tournament will be a go and will have an all Canadian referee contingent, which will make many people very happy).

Yearly spending summary


I use Quicken to reconcile my bank and track my spending during the year. If I am not too hazy on New Year’s Day, I print out a summary of my spending by category for the year. This exercise usually provides some eye-opening and sometimes depressing data, and often is the catalyst for me to dip back into the spiked eggnog.

But seriously, the information is invaluable. It provides the basis for yearly budgeting, income tax information (see below), and amongst other uses, provides a starting point for determining your cash requirements in retirement. Whether you use Quicken, Excel or just a bunch of hand-written sheets, it is important to summarize your yearly spending. If you do not track your spending in any manner, maybe for this year, select January, February, April, May, November and December to get a mix of pre-COVID months, COVID-adaptation months and living-with-COVID recovery months. Next, go through your bank account and summarize your expenses for those months, and extrapolate them for the year accounting for any other large out-of-the-ordinary expenses in the other months.

Most of us will have spent significantly less in 2020 due to COVID. If you have a summary of your 2019 spending, a comparison will likely reflect a large drop in your discretionary spending. Review these expenses and consider whether you can keep your spending somewhere between 2019 and 2020 when we return to “normal.” Your fixed expenses are likely fairly similar, but you may be able to reduce some of those expenses.

Investment portfolio review


The first couple weeks of the new year is a great time to review your investment portfolio, annual rates of return (for 2020, but also 3-, 5- and 10-year returns if you have the information) asset allocation and to re-balance to your desired allocation and risk tolerance. The million-dollar question is how your portfolio or advisor/investment manager did in comparison to appropriate benchmarks such as the S&P 500, TSX Composite, an International index and a Bond Index. This exercise is not necessarily easy (although all investment managers and some investment advisors provide benchmarks, they measure their returns against). The Internet has many model portfolios you can use to create your own benchmark if you are a do-it-yourself investor.

While the markets bounced back strongly from the initial COVID drop in March, the returns I am seeing from clients are varying widely. Thus, it is especially important this year to review your returns against the appropriate benchmark. This means that if you have a conservative portfolio, you should not expect to have some of the large technology gains a more aggressive investor would have. However, if your returns are way off your conservative benchmarks, you need to discuss with your advisor the reasons for the variance.

It may be a good year to look at the returns of certain balanced funds (various banks and private funds such as Vanguard offer these funds) as a comparable for 2020. These funds can be 60%/40% equity to fixed income or vice versa—or other combinations. You just need to do a bit of digging to find the appropriate fund to compare to your portfolio allocation (it will never be an exact comparison).

The reason you would look at these balanced funds is because they are typically low cost and you would hope your advisor at worst achieves returns similar over 3-, 5 and 10-year periods and provides some value-added services to you.

Tax items


As noted above, I use my yearly Quicken report for tax purposes. I print out the details of donations, medical receipts (also useful for your medical insurance re-imbursements I discuss below) and other expenses that may be deductible for tax purposes such as auto expenses (this acts as checklist of the receipts I should have or will receive). Almost all of us used our home office for business or employment purposes this year, so you should print out or summarize your home-related expenses. Also stay tuned for news on Form T2200 from the CRA, which is finalizing its protocols for the form during this time of increased work from home. See this CRA press release for information on the simplified T2200 for home office expenses.

Where you claim auto expenses, you should get in the habit of checking your odometer reading on the first day of January each year (since, if you are like most people, you probably do not keep the detailed daily mileage log the CRA requires). This allows you to quantify how many kilometres you drive in any given year, which is often helpful in determining the percentage of employment or business use of your car. This year, many people will have only used their car three months of the year for employment or business, so your odometer reading on January 1, March 31, and December 31, 2020 would be the three most important readings (see if you have an oil change or car repair around these times that noted your kilometres on the service invoice). 

Medical/dental insurance claims


As I have a health insurance plan at work, I also start to assemble the receipts for my final insurance claim for the calendar year. I find if I don’t deal with this early in the year, I tend to get busy and forget about it.

To facilitate the claim, I ask certain health providers to issue yearly payment summaries. This ensures I have not missed any receipts and assists in claiming my medical expenses on my income tax return. You can do this for physiotherapists, massage therapists, chiropractors, and orthodontists, and even some drug stores provide yearly prescription summaries. This also condenses a file of 50 receipts into four or five summary receipts.

Year-end financial clean-ups are not much fun and somewhat time consuming. But they ensure you get all the money owing back to you from your insurer, ensure you manage the amount of taxes you pay to the CRA, and jump-start your budget planning. 

As noted earlier, this years summary will provide very telling data on your level of discretionary spending, pre-COVID and during COVID. Use this information to budget your discretionary expenses going forward. Finally, a critical review of your portfolio and investment advisor could be the most important thing you do financially as you prepare for 2021. 

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, December 14, 2020

When should I start receiving my CPP?

People often ask: “When should I start my Canada Pension Plan ("CPP") retirement benefits?” Unfortunately, the answer is not necessarily black and white. Between government rules on CPP withdrawals and the many nuances of an individual’s life, planning when to start receiving CPP can get complicated quickly. While the program actually gives you a fair bit of control over when and how much CPP you receive, that control can leave your head spinning.

This week I invited Jason Claydon, a Winnipeg-based senior advisor in our Wealth Advisory Services at BDO, to share some of the issues and factors he considers with clients.
________________


By Jason Claydon

The regular age to start receiving CPP retirement benefits is 65, and the amount you receive is based on your contribution history to the CPP program. You can receive a Statement of Contributions from the government by logging into your My Service Canada account or requesting a copy by mail. This statement provides an estimate of your retirement benefit.

You can start receiving CPP benefits as early as age 60 or as late as age 70. The benefit is reduced by 0.6% for each month (7.2% per year) that you start receiving CPP prior to age 65. The maximum reduction is 36%, which happens if you start receiving CPP at age 60.

Conversely, if you delay the benefit past age 65, you receive an increase of 0.7% for each month you delay (8.4% per year). This can reach a maximum of a 42% increase in the benefit if you wait until you are 70.

Is there a formula that calculates when to start receiving CPP?


There are actuarial calculations to help you determine when to start CPP. For example, if two people have the exact same financial situation, one person starts receiving CPP at age 60, and the other person starts at age 65—it would take the individual starting at age 65 until at least age 74 to catch up in the total amount of benefits received. Various factors affect this “breakeven” age.

I should note that many people disregard the actuarial calculations and take CPP early or at 65 simply because they feel a “bird in the hand is worth two in the bush” when it comes to guessing their mortality.

In any case, it’s not just health that should guide your decision on when to start receiving CPP benefits. It’s also important to review your overall financial situation, other sources of retirement income, and your tax situation.

When to receive CPP: An example


Let’s look at John and Jane Smith as an example. They are small business owners, both 62 years old, and want to retire at age 63 with $72,000 per year ($6,000/month) of after-tax income. They have saved $1.2m in their RRSPs, have $80,000 in each of their TFSAs, and have a $750,000 investment account in their holding corporation. Jane is also receiving a $20,000/yr pension from a previous employer.

They have had some past health issues but consider themselves relatively healthy. However, John has a family history of premature death—both his parents died in their late 60s. Jane’s parents both lived into their late 80s.

They are no longer contributing to their RRSPs but want to know if they should continue to let their RRSPs grow and delay withdrawals to the calendar year in which they turn 72 or if they should start withdrawals earlier when they retire at age 63. They are concerned about taxes and the significant tax liability on their RRSPs, which could leave their estate with a hefty tax bill.

Options for John and Jane


John and Jane could defer CPP benefits to age 70 and instead replace that income by starting withdrawals from their RRSPs at age 63. They could each withdraw funds each year to help meet their retirement income objective while staying within the lower tax brackets. They might even consider additional RRSP withdrawal amounts (within the lower tax brackets) to fund their annual TFSA contributions in retirement.

By deferring their CPP past age 63, they would receive annual increases to their CPP benefits, as noted above.

What John and Jane did


John and Jane decided to defer their CPP benefits (for now) and will start RRSP withdrawals at age 63. They realize there is an opportunity cost of starting RRSP withdrawals earlier and not continuing to maximize their future growth, but managing the tax liability on their RRSPs through tax-efficient withdrawals at lower tax rates is important to them. Essentially, they want to pay a little more in taxes now to help reduce taxes later on.

They made this decision as part of a comprehensive financial plan to address their entire financial situation, including their other assets. This included gradually withdrawing assets from their corporation in retirement. They are financially independent with the amount of savings they have accumulated for their retirement. This factored into their decision to defer CPP, and they will review their decision on an annual basis.

They will also have to make a decision in three years when they turn age 65 on whether they want to start or defer Old Age Security (OAS) benefits. OAS benefits are eligible to be received at age 65, and similar to CPP benefits, OAS benefits can be deferred past age 65 at an annual increase of 7.2% up to age 70.

The answer to when to take CPP benefits (and Old Age Security for that matter) is not a clear black-and-white answer. Like John and Jane, you should consult with your advisor to review your overall financial situation, your financial priorities, and the various options available to you. And then monitor and review your situation on a regular basis with your advisor.

Jason Claydon is a senior advisor in BDO’s Wealth Advisory Services practice. He can be reached at 204-956-7200 or by email at jclaydon@bdo.ca.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

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