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Q: M Liz Beisel:  Is it better to buy back pension years that one did not contribute to or buy RRSP's or TFSA's?

A: Pension buy back really applies to those individuals who are part of a defined benefit pension plan and who may have missed out on some years of contribution service. Some examples might include a maternity leave, sabbatical, leave of absence or war service. When it comes to the buyback dilemma, the numbers will be the biggest determining factor. That being said, there are many other issues that will affect your decision to buy back pension:

-     Length of tenure.The longer you work for the same employer under a defined benefit plan, the more likely it will be that buying back pensionable years will be the best investment you can make. Defined benefit plans reward longer-term employees.

-     Employer contributions.In most cases, buying back years of service also means that your employer will be making some contributions to your pension.

-    Can you afford the cost?Obviously, this is one of the biggest issues. Often employers will help by allowing you to buy back the pension over a period of time rather than being forced to come up with one lump sum. If you have money in your RRSPs, you can also transfer the RRSP into the pension to buy back years of service.

-    Estate planning.Pension plans will often provide some income to a spouse but the pension will not be passed on to your children. With RRSPs, there is an estate provided to beneficiaries other than your spouse.

-     Flexibility and liquidity.As much as pensions are the cornerstone of retirement income for those belonging to a defined benefit plan, you will have greater flexibility and liquidity with other types of retirement savings like RRSPs. Pension funds are more restrictive.

-    Time.Buying back pension later will result in a higher cost. The sooner you buy back pension, the less costly it will be. This is simply the time value of money.

-     Life expectancy.Remember that pension income will pay for as long as you live no matter how long you live for. Although no one knows when they are going to die, keep in mind that if you think longevity is on your side, anything to do with the pension will weigh in your favour.

There you have some important considerations to think about if you are faced with the decision to buy back your pension. Most employers have calculators to help you make this decision. Alternatively, look for a retirement expert to help you make the best decision for your circumstances.  When we have reviewed these types of arrangements in the past there has often been more advantage than disadvantage to buy back the years.

 

Q: Vanessa Froese: How would one invest money if they took a work severance package during lay offs? And, would one leave their RRSP contributions in the former work plan or take out and put in a mutual fund? 

A: It is important that when considering to invest a lump sum from something like a severance package there is a careful analysis of the individual investor’s objectives, risk tolerance, cash flow needs and tax situation.In the case of severance, typically we are dealing with an emotional time for the investor and if there is future job uncertainty it is even more important to use a cautious and systematic approach as cash flow needs may be quite different at this time. 

When we work with people in this situation we would always do an analysis on the former work plan to see what the investing options, performance and flexibility would be before we would make suggestions as leaving it in the former work plan or transferring into an individual account where the investor would have more control over how the account would be managed going forward.Once a person leaves employment of a firm it is often more cumbersome to try and manage the investments but it is totally dependent on the firm and the structure of the former plan.If you were take the assets out of the former plan and invest then generally there are more options available to the investor and the choices would be dependent on what the investor/advisor would like to use going forward ie. Mutual funds, stocks, bonds, etc.We have seen more people move them then keep them with the former employers plans. 

Our best advice is to see a qualified Financial Planner, as there are so many variables to look at depending on age, personal situation, dependents, your goals and more. 

Q: Sheila Benesocky: I'm two steps away from building a business I'm short on equity, how can I go about finding an investor in my project? I am a member of the Woman's Entrepreneur’s.

A: Women Entrepreneurs of Saskatchewan Inc. is an excellent organization and has the ability to provide a number of services that may assist you in building your business – Business Advising, Networking, Lending, Mentoring are all services that are accessible to members.  Depending on the scale of the new business and how much investment would be needed we quite often see these type of investments come from “Angel” investors. 

According to Wikepedia the definition of an angel investor: An angel Investor or angel (also known as a business angel or informal investor or angel funder) is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital, as well as to provide advice to their portfolio companies.[1]

There are a number of angel investor organizations that you may want to have a look at in the province:

            Saskatoon Capital Network: http://saskcapitalnetwork.com/

            Saskatchewan Angel Investor Network: http://www.saint.sk.ca/

 

Q: Kathleen Rose: At what age should you stop contributing to RRSP and begin to spend them without penalty? Is there a certain allowable percentage that won't result in paying a large amount of taxes per year?

A: The age at which investors should stop contribution to RRSP’s and begin withdrawing is unique to every investor depending on household cash flow needs, tax situation, employment situation, goals and objectives, etc.  These factors may change from year to year and should always be part of the annual planning review that you do with your advisor or if a do-it-yourself investor that you look at yourself.  You are required to start withdrawals in the year after you turn 71 but before that you can make that choice depending on your circumstances.   Ideally in years when incomes are highest you want to be making RSP contributions and you would want to wait for lower income years (if that was an option) to make withdrawals but every situation is unique.

In our office we start tax planning for this type of thing with our clients in October/November of every year and not only is it different with each individual, it can change every year!  While people are working we are often used to only one source of income from employment;  in retirement we can have over 6 different sources of income that now need to be managed for the best tax efficiency to meet your needs.  

Q: Mike Maille: Is it better to invest in RRSP's or mutual funds?

A: RRSP’s stand for Registered Retirement Savings Plan’s and this is a type of retirement account that can be setup for clients.  There are also Locked In Retirement accounts(LIRA), Tax Free Savings Accounts(TFSA) and Non Registered accounts.  Mutual funds are a type of investment that can be used inside the RRSP or other accounts.  Other types of investments that could also be used are individual stocks, Exchange traded funds(ETF’s), bonds, GIC’s, segregated funds.  Each type of investment has their strengths and weaknesses depending on the individual client situation. 

What you should be invested in should be determined based on your goals and objectives.  If using an investment advisor, they will assist and help you stay within your appropriate portfolio. If doing yourself, a lot of the direct investing websites have questionnaires to help you, but then you are responsible for watching and staying within your appropriate portfolio mix.

Q: Chris Mercereau: Am I better off buying more RRSP's every month or putting that money towards paying off my mortgage faster?

A: The pay down mortgage versus contribute to your RRSP is a common question that we get. Your best option depends on the following factors which are unique for each individual:

-          Mortgage rate

-          Remaining term on mortgage

-          Years to retirement

-          Future rate of investment return

-          Marginal tax rate 

 

What happens if you put the money in your RRSP?

 

You get tax-free compounding of your investments and a tax refund that you can re-invest in the

RRSP or could be used to make an additional mortgage payment. 

 

What happens if you pay down your mortgage?  


You get reduced mortgage payments and you could invest the monthly savings back into your RRSP. We will typically get all the information from the clients and then can use our planning software or an online calculator 
to put some numbers around the exercise which are individualized for the client.

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