BY: FAZAAD BACCHUS
One of the worse things that can happen to an elderly person or retiree is outliving their savings.
Many years ago it was common practice that if you worked for a company long enough, they would have a Defined Benefit Plan. During your working years it may be contributory or noncontributory plan, however, you the employee never had to worry about the investment choices. Upon retirement, your employer would pay you an income for as long as you live. So, if you added your CPP, your OAS, and your Defined Benefit all together, you were basically set with a guaranteed lifetime income.
Today the Defined Benefit Plan is quickly becoming a thing of the past as more and more, companies are opting to go the way of a Defined Contribution Plan. In this type of plan, the company matches your contribution and the money is invested in a financial institution and managed by fund managers. In a Defined Contribution Plan, you make the investment decisions regarding what type of funds you would like to invest in. Upon retirement you would be presented with your defined contribution lump sum which must now last you until you pass on, the company is not responsible for paying you a retirement benefit for the rest of your life.
This is now where careful options must be exercised if you want your money to last you for a very long time. At retirement, you have a few options.
- Upon retirement, some retirees may need to take their first year in retirement in style, so they may wish to withdraw some of the money for a cruise or a trip of a lifetime etc. You can cash in part of your RRSP pay the CRA taxes in one lump sum and have the money now tax free to do as you wish. Some retires think of a gift that they would like to give either their children or grandchildren, if you take the money from your RRSP, taxes have to be paid, so be very mindful of this. One thing that I would never recommend is a full withdrawal of all your lump sum in one year, as you will pay full taxes in that year.
- Your next option is to reinvest the Defined Contribution lump sum until a time when you need it most. If you have another form of savings or you are still employed part-time, it might be better to let the money continue to grow. You should place in a less risky investment than when you were employed full time as this will be a major player in your retirement income. For example, if you retire at 63 with $150,000 in your lump sum and you invest it to age 71 at a rate of approximately 5% it will grow to $212,705. This is not bad considering that the lifespan for the average Canadian has now gone up, for males it is 79 and females 83. So, you may need a retirement income for 10 to 15 years depending on how long you live.
In next week’s article (Part Two), I will present you with three more options as well as how you can convert your lump sum to a guaranteed income.