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Posts Tagged ‘retirement’

Benefits of Segregated Funds

Posted by GuruDan on March 27, 2013

Written by Independent Financial Concepts Group for Financial Advisors.

 

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When it comes to selling insurance, many advisors are heavily focused on the standard insurance products that they are comfortable with and that they are versed at selling. Sure, when a client calls you, the chances are they are usually looking to invest in some form of insurance – for a variety of reasons – but if you are only providing one product or a limited range of products, your ability to provide the service that best meets their needs may be limited.

If you work with a managing general agent, you already know the importance of maintaining your independence, and hopefully how to garner the benefits that should come from this type of partnership. But has your managing general agent discussed the benefits of selling segregated funds? If not, here are some things that you should know!

There are many benefits for your clients when they invest in segregated funds. Since segregated funds can only be sold by insurance advisors, it makes sense to diversify as much as possible and to add these important investment tools to your arsenal.

One of the major benefits of segregated funds is the low risk. For those clients who may be a bit hesitant when it comes to investing, either because they shy away from the risk or because they have no investment experience, segregated funds offer an important opportunity. Since they are low risk, and managed effectively by an outside source, segregated funds may leave clients much more open-minded since their capital is protected.

Another benefit of segregated funds is that they have maturity dates. Clients are often unsure of how to approach investing and being able to provide them with a product that offers a timeline for their returns is useful. Being able to tell them that they are guaranteed a return if they hold a segregated fund until it reaches maturity will help those conservative investors realize that investing doesn’t necessarily need to be stressful. Also important, segregated funds guarantee a return on principle, and clients can lock in the market value every 3 years for the death benefit.

Your clients will also be happy to learn that segregated funds are guaranteed at death, so if they pass away, their beneficiary is able to claim benefits from their investment. This can be an important product for those clients looking to provide for their loved ones in the event of their death.

If you work with a managing general agent and only sell insurance, you are limiting yourself. There are major benefits to your clients to selling segregated funds, and since being able to provide the best, most diverse service to your clients is what will set you apart, offering segregated funds will only increase your credibility and reputation.

 

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The cost of taking CPP early

Posted by GuruDan on August 27, 2012

By Bruce Sellery | Online only, 17/08/12

Tags: CPP, Power of Advice, retirement

Does it make sense to take a lower Canada Pension Plan payment now to get more later? Bruce Sellery weighs into the debate.

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Question

Does it make sense to take out CPP at age 60 and invest the amount into TFSA’s or to wait until one needs the money? I have been retired for a couple of years and will be soon approaching 60, but with the new changes in CPP I’m not sure what to do.

Answer

As the saying goes, patience is a virtue. But in your case, patience may mean a profit. By waiting until age 65 to take CPP you could see more money in your bank account, even if you invest the early withdrawals in a TFSA. To walk you through the rationale in detail I turned to Matthew Ardrey, a CFP at fee-based financial firm T.E. Wealth.

The critical assumptions

To answer this question Ardrey has to make a number of assumptions. The first one, of course, is that you can afford to wait. This is implied by your comment that you would save the money in a TFSA versus needing the money to pay a heating bill that’s six-months overdue.

Ardrey also has to consider how the CPP changes will work. “The changes to the CPP are going to see the early retirement reduction gradually move from 0.5% per month up to 0.6% per month over the period of 2012 to 2016,” he says. Ardrey assumes you will be able to receive CPP in the middle of this transition and have a reduction factor of 0.55%. Under this scenario you would see a 33% reduction in your CPP at age 60, he says. Ardrey also assumes you will receive the average benefit for CPP, currently listed as $528.92 per month at age 65 and that you are in a 30% marginal tax bracket.

As for inflation beyond the next two years, Ardrey uses a long-term average of 3% and rate of return in the TFSA is assumed to be at 6%. And finally, with regards to your TFSA, he assumes you have $5,000 in contribution room a year between ages 60 to 70, increasing to $7,000 by the time you’re in your 80s.

The cost of taking CPP early

Waiting to take CPP at age 65 instead of age 60 is more profitable. But by how much? Ardrey figures the difference by age 73 would be in the range of $1,500, and the amount will grow over time.

Adjusting for inflation of 2% per year for two years and a reduction factor of 33%, at age 60 your CPP payment would be $368.69 per month gross and $258.09 after tax, he says. If you wait until age 65, your CPP payment adjusted for inflation of 2% for two years and 3% for five years would be $637.94 per month gross and $446.55 after tax.

Saving in TFSA to offset differential

Provided you did what you said and put the money you received into a TFSA (and not into vacations and fine wine) you would offset some of that differential. But will it be enough? Nope, says Ardrey.

“By age 80, the combination of excess CPP payments and TFSA savings is greater under these assumptions by taking the pension at age 65 than at age 60. Though I agree with the principle that contributing excess funds to save in a TFSA is a worthy venture, the loss in future CPP income does not seem to warrant it, especially with today’s population living longer in most cases,” he explains. He says it’s worth noting that if you wait until you need the money after age 65, the rate of payment increases by 8.4% per year or 42% by age 70. The new CPP rules start to come into effect by 2013.

Of course, these calculations are based on some general assumptions. There may be other factors to consider, like longevity, how long you’ve been out of the workforce, or whether you’re receiving any other government support. You have an important decision to make. It would be worth consulting a professional for some extra assurances.

But in the meantime, here are a few additional resources to help you prepare for that conversation:

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