One chief concern for retirees and the soon-to-be retired is when to convert their RRSP to a RRIF. A common misperception is that this conversion has to take place in the year you turn 71.

While it’s true that your RRSP must be closed by December 31st of the year you turn 71 and the funds withdrawn, converted to a RRIF, or used to purchase an annuity, you can choose to open a RRIF at any time. Once a RRIF is opened, you’re required to make minimum withdrawals from it starting the year after the RRIF was opened.

Why would anyone want to open a RRIF before age 71?

Save on withdrawal fees

Withdrawals directly from your RRSP are often subject to something called a partial de-registration fee. Depending on the financial institution, these fees can range from $35 to $50 per withdrawal. 

If you planned on making monthly withdrawals, that can add up to $600 per year in unnecessary fees.

Conversely, withdrawals from a RRIF are not subject to any such fees.

Better manage withholding taxes

Withdrawals directly from your RRSP are also subject to withholding tax.

• $1 to $5,000 = 10% withholding tax (5% in Quebec)
• $5,001 to $15,000 = 20% withholding tax (10% in Quebec)
• $15,001 and up = 30% withholding tax (15% in Quebec)

Conversely, the minimum required withdrawal from a RRIF is not subject to withholding tax (although it is of course still considered taxable income and you can elect to have taxes withheld).

Note that any amount withdrawn over and above the minimum is subject to the same withholding tax schedule as the RRSP.

Take advantage of pension splitting and a tax credit at age 65

Perhaps the best reason to convert your RRSP to a RRIF early is to take advantage of pension income splitting and the pension income tax credit.

Again, a withdrawal directly from an RRSP is simply considered taxable income.

But a withdrawal from a RRIF at age 65 and beyond is considered eligible pension income (just like defined benefit pension income) and up to 50% can be split with your spouse. Only the withdrawing spouse needs to be 65, so they can indeed split their pension income with a younger spouse.

Pension income from a RRIF also qualifies for a $2,000 non-refundable pension income tax credit, which can save you $300 in taxes.

Partial RRIF

There’s no need to convert your entire RRSP to a RRIF before age 71. A sensible strategy can be to open a RRIF and transfer a small balance from your RRSP.

This “partial RRIF” means lower minimum mandatory withdrawals. This can be handy for early retirees who think they may still earn some employment income from part-time work, for example, or for those who just want to maintain flexibility and not be subject to larger mandatory withdrawals.

Even a modest partial RRIF of $12,000 can give retirees a $2,000 per year withdrawal that qualifies them for the full pension income tax credit from age 65 to 70.

This Week’s Recap:

Last week I shared a guest post from insurance expert Glenn Cooke on advanced term life insurance strategies.

Next week I have another guest post from my good friend Kyle Prevost, who has put together an incredible resource on retirement planning. You’ll want to check this out!

I like to pick on the cookie cutter RBC Select Balanced portfolio and TD Comfort Balanced portfolio, but the other banks are just as bad for their closet index fund offerings.

Scotia Selected Balanced Portfolio. 1.99% MER. Will underperform index every single year. pic.twitter.com/ecth3zIXtB

— Boomer and Echo (@BoomerandEcho) January 26, 2024

If you’re still invested in one of these cookie cutter balanced mutual funds, and getting nothing more than a phone call once a year (if that) from your bank advisor at RRSP season then we need to chat about my fee-only financial planning service to see if it would be a good fit for you.

Or, check out my DIY Investing Made Easy video series where I walk you through the exact steps to take control of your own investments and reduce those fees by up to 90%.

Promo of the Week:

Part of my revenge travel escapades involves collecting a massive amount of American Express Membership Rewards that I can either transfer to Aeroplan to redeem for flights (preferred) or to Marriott Bonvoy to redeem for hotels.

That means optimizing my every day spending with credit card rewards points. I do this with the American Express Cobalt card – an absolute no-brainer for earning 5x points on groceries, dining, and take-out (eats and drinks). It’s the top credit card in Canada for earning rewards on everyday spending.

But I also need to take advantage of new credit card sign-up bonuses from time-to-time to boost my rewards.

The best one on the market right now by far is the American Express Business Gold Rewards Card, where you get a welcome bonus of 75,000 points when you spend $5,000 within the first three months.

Don’t you need a business to apply? Technically, no. With the growing gig economy from side hustles and small entrepreneurial endeavours, your business can simply be First Name Last Name Inc.

Want another travel hack? Sign up for the American Express Business Card and meet the minimum spend requirements to get your 75,000 point welcome bonus, then use your own Amex referral link to refer your spouse or significant other.

You’ll get up to 30,000 more points as a referral bonus, and your partner can get the 75,000 point welcome bonus as well (after meeting the minimum spend requirements). That’s 180,000 Membership Rewards points!

Transfer those points to Aeroplan where they can typically be worth 2 cents per mile. That’s $3,600 worth of flight rewards.

Yes, there’s a $199 annual fee ($398 if you each have your own card). But that’s still a net gain of $3,202. Travel hacking at its finest!

This strategy is called activating Player Two, so instead of having a secondary credit card for your spouse on the same credit card file, each spouse opens their own account.

Deploy the same strategy for the American Express Cobalt Card.

Weekend Reading:

Congratulations to long-time My Own Advisor blogger Mark Seed for paying off his mortgage. Now for the difficult decisions around what to do with the extra cash flow. Continue working full-time and save more? Continue working full-time and spend more? Reduce to part-time work? All good options to consider.

I appreciate the transparency from the recently retired Michael James, who shares his investment returns from 2023.

Here’s another one from Michael James, with some tough questions for the retirement experts that were recently interviewed on the Rational Reminder podcast.

Rob Carrick on why the first four months of the year are a ‘danger zone’ for TFSA contributors. I agree. All the more reason to keep good records of your own TFSA contributions and withdrawals.

Investors are worried whenever stocks reach all-time highs. But, as PWL Capital’s Ben Felix explains, saying that stock market valuations are high misses a lot of nuance. Which stocks are we talking about, and even more broadly, which markets?

A Wealth of Common Sense blogger Ben Carlson answers a reader question about whether you can live on dividends from the stock market?

A great post from The Loonie Doctor about his wealth journey, including a warp-speed trip along the hedonic treadmill – a common occurrence for high earning physicians and other professionals.

The human trait that causes Canadians to take their CPP benefits early (subs):

“It’s such a common phenomenon that it has a name in behavioural science: present bias. It’s the tendency to focus more on the present than the future when making decisions. It can lead us to overvalue immediate rewards and undervalue longer-term ones. Scientific studies show that most people prefer to receive money sooner, even if we know that we could get more if we wait.”

I also think the eligibility letter that Service Canada sends out to 59.5 year-olds saying they can apply for their CPP is a poorly designed “nudge” that leads people to take their benefits earlier than needed.

Here’s A Wealth of Common Sense blogger Ben Carlson again with the historical rate of return on housing. Hint: not as good as you’d expect.

In Fred Vettese’s Charting Retirement series at The Globe & Mail, he answers whether gold is a good hedge against inflation (subs):

“As for the most reliable hedge against inflation, it just might be a traditional portfolio of stocks and bonds.”

Finally, advice-only planner Anita Bruinsma smartly explains why it’s a good thing that bank cards and digital payments are the norm for teenagers today.

Have a great weekend, everyone!

Readers of Boomer and Echo are likely familiar with term life insurance (see B&E’s previous article on insurance). In years past, simply going to a life insurance shopping website and comparing premiums was sufficient – and that article talks about doing exactly that.

But things have changed. Companies are tinkering with their term life insurance policies, resulting in a marketplace where different policies may have different options that may have value. Further, a variety of strategies are available that can result in additional cost savings above and beyond just ‘the cheapest’. 

Note: Unlike many products and services, premiums are actually poorly correlated with policy benefits. That means that policies with lower premiums may actually have more benefits than other policies. 

Here’s a collection of things you should be considering when purchasing term life insurance; some are important policy provisions that don’t cost anything, others are strategies that can save you money.

Renewable and convertible term life insurance

Renewable policies are term policies which continue in force after the term, but at a higher premium. Convertible term policies have a provision that lets you exchange the term for a permanent life insurance policy, without taking a medical exam. Both of these are provisions that impact what happens at the end of the term, not the start of the term.

Initially we assume that we need life insurance coverage for the term. At the end of the term we’ll cancel because we don’t need the life insurance any longer. But over the course of the next 20-30 years we split into three groups:

1. The first group are those where everything went well. No need for insurance, no desire for insurance, so we cancel.
2. The second group are those that change their mind and decide they want permanent insurance. For those, conversion is an easy switch over to permanent since there’s no medical exam.
3. The third group are those that become uninsurable during the term. If that’s you, the guaranteed ability to purchase permanent life insurance, at healthy rates, without a medical exam using the conversion option, is huge. 

Related: When life insurance is sold, not bought

We don’t know know which group you will fall into 20-30 years from now, so make sure your term policy is renewable and convertible when you purchase it – that’s your guarantee that if you become uninsurable, you can actually still get life insurance at the end of your term.

Term Layering

A typical term policy assumes both coverage and premiums are level for the term. But what if you want a decreasing amount of coverage over time? Rather than purchasing a term policy and decreasing the coverage later, it’s cheaper to purchase two types of term insurance in one policy (i.e. a term 10 and a term 20). 

Example: We want $1,000,000 for 10 years, and then reducing to $500,000 for the following 10 years. Assume a male 45 nonsmoker:

No Layering:

• First 10 years: $137.61 for Term 20 $1,000,000
• Second 10 Years: $71.87 by reducing the coverage from $1MM to $500K.

Layering:

• First 10 Years: $106.30 ($500K Term 20 + $500K Term 10)
• Second 10 years: $71.87 (Cancel the $500K Term 10 Layer, leaving only the $500K Term 20)

That’s $30/month over the next 10 years!

Backdating

Backdating is a process where you reset the start of a life insurance policy to a date in the past. This is as opposed to starting the policy when it’s issued. 

With backdating, you’ll also pay the premiums for the policy starting from the date you backdated the policy to – so you’re paying premiums for coverage you never had. Why would anyone do this? A: To save premiums based on your age.

Most life insurance companies use your closest date of birth for premium calculation. If you’re 45 on January 1, then on July 1 (six months later) your life insurance premiums will be calculated at age 46. 

So what if we’re purchasing a policy on July 2^nd (now you’re 46 for life insurance purposes), and know that the policy won’t actually be issued for another few weeks? Well, if you’re close to this six months since your last birthday, here’s where backdating comes in. When you purchase your term 20 policy, you request that the policy be backdated to July 1^st – back to when your life insurance age was still age 45. 

Say the policy gets issued on August 1st. If you don’t backdate, your premiums for your policy are $153.45 for 20 years.

But instead, we backdate and tell the company to start the policy on July 1. Now your premiums are $137.61 for the next 20 years – but you had to pay an extra $137.61 upfront for the month of July. You’ve paid $137.61 upfront to reduce your premiums by $16/month for the next 20 years. That’s a fair bit of savings over many years.

My general rule of thumb is that backdating is worthwhile for most people for up to a maximum of two months premiums. After that, most people are unwilling to pay that large of an upfront cost to lower their premiums. But less than two months – absolutely something you should consider if you’re about six months since your last birthday.

Smoking and Temporary Ratings

If your premiums are higher due to smoking or to a rating that could be reconsidered (weight, some activities, etc) then you can take advantage of the ‘exchange option’ available with some companies term policies. The exchange lets you switch from a short term policy to a longer term policy, generally in the first 5 years.

The strategy is as follows; rather than purchasing your preferred longer term at smoking premiums or with the rating, instead go with the shortest term policy you can obtain (which will be a term 10). The term 10 policy at smoking premiums will be cheaper than a term 20 or term 30 at smoking premiums. 

Later, quit smoking and requalify your term policy to non-smoking (or non-rated) premiums. At the same time, take advantage of the exchange option and jump to your longer term. That results in a non-smoking policy with the correct 20 or 30 year term, but until you’re a nonsmoker you’re paying much lower term 10 premiums.

Example: 

You purchase a term 20, $1mm at age 35, smoking premiums, then qualify for nonsmoking premiums at age 37.  Your premiums start at $185/month, then reduce to $54/month for the remainder of the term after you qualify for nonsmoking premiums.

Versus:

You purchase a term 10 at smoking premiums then at age 37 qualify at nonsmoking premiums and at the same time exchange to a term 20. Your premiums are $82/month, then change to $65 for the next 20 years. That’s about $100/month savings until you quit smoking, for the same level of life insurance coverage.

Term Stacking (by The Term Guy)

This is a strategy that I’ve developed recently, and Boomer and Echo is the first place you’ll have seen it. It takes advantage of the exchange option and a peculiarity of some companies pricing – the ones that use your actual age instead of your ‘nearest’ age as I mentioned above. 

So for this strategy, we will assume that you’re 45 on January 1. The strategy works best if you recently had a birthday, so we’ll assume that you’re purchasing a policy on January 2.

What we’re going to do is instead of purchasing a term 20 or term 30, is instead purchase a term 10 policy. Then just prior to your next birthday, we use the exchange option to jump to the desired term 20 or term 30. 

Since your age hasn’t changed for insurance purposes, your premiums are still for a 45 year old. But until your next birthday, you’ve paid term 10 premiums for the same coverage – often a 50% premium savings in the first year.

Example:

Standard Term 20:

You become age 45 on January 1. On January 2 you purchase a term 20 policy for $1mm. Your premiums are $149.40 for 20 years.

Term Stacking:

You purchase a term 10 today and your premiums are only $81.90 until just prior to your next birthday, then exchange to a term 20 – and since you’re still 45, your premiums are now again $149.40. So with term stacking, we have the same coverage, same premiums long term, but we’ve saved $67.50 for about 11 months. 

Bonus: When you exchange to a term 20, you’re getting a new 20 years at that point. So with term stacking not only do you save money, but your term 20 starts in a year and thus extends out another year at the end versus the first scenario. (i.e. you’ve got almost a term 21). 

Or, to rephrase it, 20 years from now you have the option of continuing your life insurance at the same $149.40 for almost another year. And that’s a deal a lot of people would take at the end of their term. 

Note: To implement term stacking, you need three things:

• a recent birthday
• life company uses actual age not age nearest
• life company allows for the exchange option in the first year

It may make sense to do term stacking for two years (i.e purchase a term 10 and the exchange to a term 20 or term 30 in two years instead of one), but you’ll have to run the numbers for your situation to find out for sure.

I’d suggest that readers of Boomer and Echo who are considering using a term life insurance policy use the above strategies as a checklist, run through each one and see which ones make sense for you – and then enjoy your savings on what you may have thought was just a commodity!

Glenn Cooke, BMath, MMT is The Term Guy. He’s an independent life insurance broker in the insurance business since 1986, and working with clients directly since 2006.

Over the holidays I made a spending and savings plan for the new year. I reviewed our previous year’s finances and incorporated our new financial goals for the year. My wife and I discussed our “rich life” vision – what we want to do more of, what we what to do less of, what new things we want to try – all in an effort to ensure we continue funding a good life for our family.

As business owners, we start by estimating our expected revenue and expenses for the year. Next, we look at our personal spending and saving needs (I use this annual budget spreadsheet).

For instance, we want to catch up on one year of RESP contributions for our oldest daughter. We have big travel plans for which we need to appropriately budget. We also started using Fresh Prep and getting two meal kits delivered every week to save time.

That gives us a good sense of how much to pay ourselves for the year to make all of that work. Having everything planned out in advance is helpful for business owners, who too often dip into the piggy bank known as their corporate chequing account throughout the year without much thought to tax consequences.

We know exactly how much we’ll pay ourselves, which means we can properly estimate our personal taxes and pay the appropriate quarterly instalments to match.

We’ve always spent below our means, but now that our “means” have increased we want to make sure we’re maximizing our life enjoyment. That requires a delicate balance of spending and saving.

I’ve learned a lot working with hundreds of retirees over the years. Many have over-saved throughout their careers and can’t bring themselves to spend more in retirement. I don’t want to go through life spending a certain amount, only to discover I can safely spend double that amount in retirement. I’m looking for more of a balance.

I’ve also been influenced by Ramit Sethi’s rich life mantra, and more recently the Money Scope podcast’s early episodes on planning and living a good life.

It sparked our decision to move into a new home, custom built in the exact location we wanted to live. We wanted a dedicated home office and gym for our new work-from-home life.

It’s also the reason behind giving ourselves a raise both last year and this year. Business owners have a tendency to keep their compensation level from year-to-year. But we can’t pretend inflation and lifestyle creep don’t exist. We have to be honest with ourselves.

Funding a good life also includes a healthy budget for annual travel. We talk about the places we want to go, both new trips and return visits. Since we know that we’ll travel extensively every year, there’s less pressure to see it all in one trip. Slow travel is more our style, anyway.

As a former cheapskate frugal person I’ve had to give myself permission to spend more without the guilt and anxiety. I know that if I don’t start exercising my spending muscles now, it will be even more difficult to do so in retirement.

That’s where the spending and savings plan comes into play. I’m a planner, and always will be. By mapping out our expected income, expenses, and savings contributions I have a clear view of our finances for the year.

I know that we can meet our personal spending goals to fund a good life while still achieving our savings goals for the year. We’re not going to trip and fall into bankruptcy because we took an extra vacation or paid for one of the kids to get braces.

This Week’s Recap:

I updated our net worth for the end of 2023.

I also posted our investment returns for 2023.

Zoo(m) calls pic.twitter.com/gREdTr3uiN

— Boomer and Echo (@BoomerandEcho) January 12, 2024

Promo of the Week:

The past year or so has been tough sledding for credit card churners looking for attractive new sign-up offers and welcome bonuses. Many lucrative credit card deals dried up last year, with credit card issuers increasing minimum spend requirements and also the length of time it takes to reach those minimums.

The best offer I’ve seen is for small business owners and it’s the American Express Business Gold Rewards Card (<–scroll to the bottom and click “explore other cards”).

Earn a whopping 75,000 Membership Rewards points when you spend $5,000 within the first three months.

Transfer those points to Aeroplan where you can typically redeem them at 2 cents per mile. That’s $1,500 in value ($1,301 when you subtract the $199 annual fee). Not a bad return on $5,000 spending.

Do you need to have an incorporated business to qualify? No! Sole proprietors and side hustlers are welcome.

Sign-up for the American Express Business Gold Rewards Card here.

Weekend Reading:

A good one to start the year from Dr. Preet Banerjee. Want a financially healthy 2024? Add these six items to your to-do list.

A Wealth of Common Sense blogger Ben Carlson updates his favourite performance chart for 2023. I always love to see the asset class quilt of returns.

Emily Stewart at Vox says our expectations around money are all out of whack – why you don’t need everything you want.

Visual Capitalist charts the top 10 retirement planning mistakes. Number one – underestimating the impact of inflation, followed closely by underestimating how long you will live.

Paul Samuelson on the 4% rule – neat, plausible, and wrong:

“I can think of one case that supports a “withdrawal rule.” It is a single retired person with safe investments and consistent Social Security, pension and/or annuity payments.”

Speaking of flawed rules, here’s Ben Carlson’s take on Coast Fire – the strategy of front loading your retirement contributions early and then “coast” to retirement.

PWL Capital’s Ben Felix helps investors decide how to invest a lump sum of money:

Rob Carrick says people keep making this costly TFSA mistake – and paying penalties averaging almost $1,500.

Millionaire Teacher Andrew Hallam shares a retirement haven for the rich and the budget conscious.

Finally, Aaron Hector shares these tax planning quick facts and common strategies for the upcoming 2023 tax season.

Have a great weekend, everyone!