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Older friend's dilemma (how to spend money!)
May 2, 2024
8:38 am
AltaRed
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I agree much of that was a distraction and not relevant to the subject matter at hand. I don't quite know what the point was.

The advice to get a financial planner for a few $k to run a number of scenarios for this couple is the best that can be offered. CAD has been silent on where the spouse of this couple fits into all this, a critical part of the equation.

1. Ultimately, it is the after tax cash flow options run by a financial planner that the couple needs to wrestle with. The tax component, including clawback of social benefits, is a distraction to what really matters, i.e. the overall after tax cash flow for the various scenarios. It is AT cash flow stream that buys the groceries and pays the utility bills.

2. Scenarios need to include draw down of RRSP/RRIF investments early, e.g. pre-age 70 and deferment of OAS and CPP vs classic taking of OAS/CPP at 65 plus RRIF minimum annual withdrawals starting at age 72.

3. They also should include a scenario of annuitizing some of the RRIF at a certain age, e.g. 75 or 80, for longevity insurance.

4. Mixed in with all the above is playing with age longevity, e.g. perhaps age 80, actuarial age of 87 or so, and age 95... plus the permutation of a 'last to die' scenario which may easily be age 90 or 95 plus the loss of one OAS and some of CPP.

5. A competent planner should run all these in any event without even asking. S/he will either use the planning assumptions of https://www.fpcanada.ca/docs/default-source/standards/2024-pag---english.pdf or tweak them a bit for unique conditions.

6. Investments need to be whatever mix of equities and fixed income the couple is comfortable with. It may be all fixed income, or perhaps the classic 60/40 balanced fund that has stood the test of decades of investing....provided it is a low MER cost product and provided the couple can look at this on a long term 5-10 year basis. Too many investors chase performance and too many investors knee jerk at short term (<5 year CAGR) performance.

What makes no sense, which is where post #1 started, is to purposely avoid taxable income by sticking funds in a non-interest bearing account. That is definitely guaranteed to result in reduced AT cash flow.

May 2, 2024
11:15 am
Norman1
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AltaRed said

What makes no sense, which is where post #1 started, is to purposely avoid taxable income by sticking funds in a non-interest bearing account. …

I agree. Unless some benefit will be clawed back by 100% or more, it is better to earn the interest and pay the clawback. GIS clawback is 50%. OAS repayment is 15%.

Earning too much income is really not a problem. One can easily get rid of extra money. There are lots of challenges that can be helped with money. For example, donate the extra interest earned to a local food bank and claim the federal and provincial donation tax credits to offset the income taxes on the interest.

That extra money may not turn out to be extra. One friend warned me about what happens if one loses the ability to drive and is not steady enough to take regular public transit. His trips by taxi to his cardiologist cost $50 each way! Couldn't book para-transit because the booking line is often busy. Once he gets through, the agent tells him there are no longer any slots available for that day.

May 2, 2024
8:01 pm
mordko
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Loonie said
Mordko has amply illustrated the problem with using information to mislead.

The returns on certain investments over X years are simply irrelevant to the question of what percentage of investors gain or lose money during their period of investment.
If you object to the Financial Times "partnered" article, there are lots of other articles and books that claim similar statistics. If there was advertising, I didn't notice it, but it hardly matters.

I don't always bother to respond to anecdotes and misleading claims made. Unfortunately, it's just too time-consuming, and the response is often more vitriol.

I did bother in this case because OP suggested that the person on whose behalf they are inquiring really lacks info, and said that this entire thread was being passed along. This person is not engaging with us so there is no other opportunity to correct any misunderstandings.

However, I am done with trying to help someone who doesn't respond. For all we know, he plans to ignore everything we've said. Or maybe he finds the prospect of being told his IQ is less than 10 rather off-putting.  

1. Its a very simple rule. Anything called “Partner Content” is a paid for ad. Every single word of it. Now you know. You are welcome.

I don’t object to silly ads. I just ignore them. Does not get more “misleading” than claiming than an ad in FT is authored by FT. Like claiming that “get a flexible line of credit” is authored by HighinterestSavings, even though I am seeing this message on the screen right now.

2. Dalbar provides ACTUAL investor returns accounting for their behaviour (eg selling at the wrong time) rather than “returns on certain investments”. That said, they are limiting their analysis to mutual funds and investors in ETFs do better due to lower costs.

https://i.ibb.co/stZTthx/IMG-4503.jpg

May 2, 2024
11:37 pm
Loonie
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AltaRed said
I agree much of that was a distraction and not relevant to the subject matter at hand. I don't quite know what the point was.

The advice to get a financial planner for a few $k to run a number of scenarios for this couple is the best that can be offered. CAD has been silent on where the spouse of this couple fits into all this, a critical part of the equation.

1. Ultimately, it is the after tax cash flow options run by a financial planner that the couple needs to wrestle with. The tax component, including clawback of social benefits, is a distraction to what really matters, i.e. the overall after tax cash flow for the various scenarios. It is AT cash flow stream that buys the groceries and pays the utility bills.

2. Scenarios need to include draw down of RRSP/RRIF investments early, e.g. pre-age 70 and deferment of OAS and CPP vs classic taking of OAS/CPP at 65 plus RRIF minimum annual withdrawals starting at age 72.

3. They also should include a scenario of annuitizing some of the RRIF at a certain age, e.g. 75 or 80, for longevity insurance.

4. Mixed in with all the above is playing with age longevity, e.g. perhaps age 80, actuarial age of 87 or so, and age 95... plus the permutation of a 'last to die' scenario which may easily be age 90 or 95 plus the loss of one OAS and some of CPP.

5. A competent planner should run all these in any event without even asking. S/he will either use the planning assumptions of https://www.fpcanada.ca/docs/default-source/standards/2024-pag---english.pdf or tweak them a bit for unique conditions.

6. Investments need to be whatever mix of equities and fixed income the couple is comfortable with. It may be all fixed income, or perhaps the classic 60/40 balanced fund that has stood the test of decades of investing....provided it is a low MER cost product and provided the couple can look at this on a long term 5-10 year basis. Too many investors chase performance and too many investors knee jerk at short term (<5 year CAGR) performance.

What makes no sense, which is where post #1 started, is to purposely avoid taxable income by sticking funds in a non-interest bearing account. That is definitely guaranteed to result in reduced AT cash flow.  </blockquote

I agree with all this. Some of it echoes my first post in this thread, I think.
Some people are irrational in their hatred of paying taxes, even to the point of being self-defeating. I'm not very sympathetic to this view. We all have to pay taxes. None of us is ever going to agree with everything in government budgets or the tax code. In a democracy, we all have to bend somewhat and recognize that we don't always get our way, but we have the right to raise our voices. The alternative is much worse.

We probably wouldn't all draw the line at exactly the same spot with tax avoidance. I think giving people free OAS with incomes up to 91K per person is ludicrous. I also think TFSAs are really poor government policy But I take advantage of these things because I know pretty well everyone else who can do so is doing so and there is no point in disadvantaging myself. When the government is ready to change these, it will. But I would not go to the length of avoiding income because I preferred to be paid by other taxpayers through government. If it comes down to it, I'd rather take interest from a financial institution.

The more I think about it, the more I realize that, although I am quite aware of other reasons, the biggest reason I am actively paying out our RIFs is simply because I absolutely hate owing money, especially money whose amount can only be guessed at and is subject to change. It's even possible it's costing me a bit to do it this way as I never did ALL the math. It's a matter of personal comfort and satisfaction, and they matter more to me.

Although a good financial planner would be invaluable in this case (and running TurboTax or similar doesn't cut it because it is at best an annual tool and cannot do the kind of planning required), I doubt this advice will be taken. Two reasons: 1. it costs money, and people who don't want to pay tax are less likely to want to pay for the advice; 2. a good plan requires active involvement, thinking and clear priority setting from the individual, and, quite frankly, this is difficult, often a deal breaker. People want easy canned solutions more often than not. Sadly, there are planners out there who are quit happy to give them this boilerplate without asking all the right questions, and then hand them a bill for $2000 or more.

May 3, 2024
10:49 am
HermanH
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mordko said
1. Its a very simple rule. Anything called “Partner Content” is a paid for ad. Every single word of it. Now you know. You are welcome.

I don’t object to silly ads. I just ignore them. Does not get more “misleading” than claiming than an ad in FT is authored by FT. Like claiming that “get a flexible line of credit” is authored by HighinterestSavings, even though I am seeing this message on the screen right now.

Same here. Anything that says 'Sponsored content' can just be skipped. I find it insulting on the morning TV 'news' shows. They think that I would waste my valuable time to watch someone's commercial advertisement.

May 8, 2024
7:58 am
Alexandre
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Norman1 said

AltaRed said

What makes no sense, which is where post #1 started, is to purposely avoid taxable income by sticking funds in a non-interest bearing account. …

I agree. Unless some benefit will be clawed back by 100% or more, it is better to earn the interest and pay the clawback. GIS clawback is 50%. OAS repayment is 15%.

Earning too much income is really not a problem.

Surprisingly, not everyone sees it that way. That old friend of OP apparently is not alone: Seniors scramble to manage tax impact of higher GIC returns

Investors who stocked up on guaranteed investment certificates (GICs), lured by higher rates not seen in years, are now facing the aftereffects of higher income tax bills.

Advisors say retired seniors, many of whom are on a fixed income and have fewer write-offs and deferrals than working Canadians, have been hardest hit this tax season. Some owe a lot more taxes and face a clawback of their Old Age Security (OAS) benefits because of their GIC investment returns.

“Some of my clients who are seniors are shocked by their tax bills this year. They’re saying, ‘I can’t possibly have to pay that much.’ They just weren’t expecting it,” says Debbi-Jo Matias, a chartered professional accountant in Vancouver. “It was a tough tax season.”

I wish I had their problems.

Mr. Heath notes that higher GIC rates may not last long, given expectations the Bank of Canada will start reducing interest rates, possibly starting as early as June.

What a relief, saying me sarcastically.

May 8, 2024
9:21 am
AltaRed
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It is so sad how so many people focus on the tax bill rather than their after tax cash flow. While we all wish/want to minimize income taxes paid, I am not about to give up the joys of higher after tax cash flow to reduce income taxes.

May 8, 2024
9:40 am
MG
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Is it not possible that some of these seniors have a 5 year GIC that does not pay out annually but, nonetheless, they must still report interest annually and pay income taxes on funds which are not "technically" at their disposal? In their cases, cashflow management is more important. When you are just getting by on CPP and OAS or a small pension, this could be a problem. Especially with all the other increases in day to day living.

May 8, 2024
9:51 am
AltaRed
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I doubt seniors with cash flow constraints would (should not) make the mistake of using compound GICs. I think it is primarily a matter of them not understanding that all that gross (before tax) interest is not theirs to begin with.

May 8, 2024
12:58 pm
Alexandre
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MG said
Is it not possible that some of these seniors have a 5 year GIC that does not pay out annually but, nonetheless, they must still report interest annually and pay income taxes on funds which are not "technically" at their disposal? In their cases, cashflow management is more important. When you are just getting by on CPP and OAS or a small pension, this could be a problem.

Seniors complaining of OAS clawback must have income above $81,000. While I am sympathetic to people misjudging their tax liability, living on $81K+ is not equivalent to "just getting by." Should not be.

Seniors facing OAS clawback can afford better financial advisors.

May 8, 2024
3:54 pm
Bill
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This might work for others too: Whatever interest I receive in a month, from all non-registered sources such as HISAs, matured GICs, ISA accounts, etc, I send about 50% to CRA the next month as instalment payment, reinforces to me that it's not all mine to keep plus makes tax season payment to CRA not so drastic. I do the same with other taxable sources of income that to my eyes have not had sufficient taxes applied.

To me you're being willfully blind if you're ignoring that you might owe taxes on any income, high or low. If you're a senior you've been around long enough, you should know that.

May 8, 2024
11:21 pm
Loonie
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Our GIC income went up a fair bit last year too.
We both got four figure CRA refunds due to tax credits, mostly for donations.
It's all about planning.

May 9, 2024
5:09 am
mordko
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Bill said
This might work for others too: Whatever interest I receive in a month, from all non-registered sources such as HISAs, matured GICs, ISA accounts, etc, I send about 50% to CRA the next month as instalment payment, reinforces to me that it's not all mine to keep plus makes tax season payment to CRA not so drastic. I do the same with other taxable sources of income that to my eyes have not had sufficient taxes applied.

To me you're being willfully blind if you're ignoring that you might owe taxes on any income, high or low. If you're a senior you've been around long enough, you should know that.  

I am always happier when I have to pay CRA in April than the other way around. If they pay me, it usually means that I gave CRA an interest free loan. But I track which portion of my assets needs to transferred to CRA next year and invest it conservatively (short term bonds or HISA).

May 9, 2024
7:14 am
Bill
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That certainly makes more sense financially, mordko, and is probably what most people would do.

May 9, 2024
8:19 am
AltaRed
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Because I have to pay by installments, the amount I have to pay (or get a refund) in April is usually nominal, in the order of +/- 10% of total tax bill. Capital gains taxation being the most significant variable from year to year.

May 9, 2024
10:07 am
Alexandra
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On 31 Dec 2023 (New Years Eve), I had a CT Scan. A couple of days later my doctor informed me that I had a (huge) tumour. 5 weeks later it was removed. The cancer was at Stage 2. After a myriad of tests since, it would appear the cancer had not spread, thus no chemo needed at this time. Every three months I'll be doing Dr. check ups and blood work.

I remember thinking before the surgery, if I make it through all of this, I will no longer worry so much about my finances. Luckily, I spent 50 years of worrying and planning, so really don't need to anymore. I will however, continue to calculate my income over the year and make the appropriate quarterly payments so there won't be any surprise at income tax return time. sf-embarassed

May 9, 2024
12:37 pm
MG
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Sorry to hear Alexandra but so glad it was caught in time. Hope you have many more years ahead of you! I always enjoy reading your perspective, whether I agree or not. Life has a way of throwing out some real curveballs and wake-up calls. Best to you.

May 9, 2024
10:38 pm
RetirEd
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Good luck, Alexandra. May the future go well.

RetirEd

May 12, 2024
2:05 am
rodeworthy
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Alexandra, I have missed your thoughtful and upbeat posts on this forum for some time now. I was concerned by your absence and on the verge of posting to see if anyone had any news about you.

In your usual efficient manner, you have not only taken the right steps to detect and deal with a serious health issue but you have let us all know about the situation. I thank you for that.

I am very sorry for what you have been through but your message is encouraging in that the problem has been dealt with in time for you to have a good recovery.

As one of the oldest, if not ‘the’ oldest, members on this forum (my spouse and I are both full-fledged octogenarians) I concur that it is time to back off somewhat from chasing after the ‘last buck’ and deal with other matters that come with getting older.

You have done a masterful job of managing your affairs and I have learned a lot from your postings. I can’t recall any one of them containing a complaint.

Thank you for your contributions and I look forward to seeing more of your postings to let us know how you are doing and keeping this forum informed with positive ideas and news.

All the best to you.

May 12, 2024
5:20 am
Lodown
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Loonie said
Our GIC income went up a fair bit last year too.
We both got four figure CRA refunds due to tax credits, mostly for donations.
It's all about planning.  

Other then using deferred or no taxation registered plans, and donations, what other planning are you referring to, for offset of higher GIC income? And what type of donations are worth so much?

Please write your comments in the forum.