The secret is looking at retirement travel as fundamentally different from the vacations you took while working. Now time is on your side. You no longer need to turn vacations into short, intense bursts of one week or less. You don’t need to travel at high season because of work or school schedules. With a more relaxed schedule, you can let go of conveniences like expensive hotels and restaurant meals. Now you can travel off-peak, find cheaper long-term accommodation, and prepare most of your own meals.

But don’t take our word for it. We spoke to four couples who are retired (or close to it), and who have learned to enjoy adventurous travel on a budget. You’ll hear how one couple visited Sweden just for the cost of two plane tickets, and how you and your partner can spend two weeks in a villa in Provence for just over $5,000, or a month in Tuscany for less than $10,000. If learning about life in exotic locales is more of a priority, you’ll hear from a couple who enjoyed a packaged vacation to South Asia for $10,000. The truth is you can get a great travel experience on just about any travel budget with a little creativity and flexibility.

Swede surrender

In July, Maureen and Garth Holloway spent a two-week vacation in Sweden, and it only cost them the price of two airline tickets—plus the normal living expenses they would have had at home. Their secret? The retired teachers in their early 60s swapped homes (and cars, computers, even golf clubs) with a Swedish family.

The Holloways took up residence in a four-bedroom townhouse in a suburb of Stockholm, while the Swedish family lived in the Holloways’ 150-year-old four-bedroom heritage house in Cobourg, Ont. Airfare cost the Holloways a combined $2,800. Other than that, “it was no more costly than if we stayed in Cobourg,” says Garth.

The Holloways are veteran travelers who have seen a lot of the world over the last 40 years. They have tried everything from moderately luxurious hotels to travelling around Europe in a Volkswagen camper. They had long wanted to go to Sweden, but they knew the country was expensive. Then they discovered Intervac Canada (www.intervac.ca), part of a global home exchange organization with 30,000 listings in about 50 countries. They met the Swedish family online and arranged the swap. Then they flew to Stockholm on the appointed day, picked up the Swedish family’s car at the airport and drove to their townhouse. “It was so easy. Within half an hour of leaving the airport in Stockholm we were sitting in the backyard drinking the wine they left us and heating up the dinner they had left in the fridge,” says Garth. “Maureen and I looked at each other and said, ‘Why didn’t we do this sooner?’”

The Holloways used the townhouse as a base to take day trips around the southern part of the country. The couple are avid readers of Swedish mystery writer Stieg Larsson, and they followed a self-guided tour of the district in Stockholm where much of Larsson’s Millennium trilogy is set. Maureen says the tour included many of the settings for episodes in the books, right down to the local store where Lisbeth Salander (the fictional “girl with the dragon tattoo”) was supposed to have bought her pizzas. They also enjoyed seeing galleries, museums, and the lush farming landscape of southern Sweden.

The Holloways generally ate modest lunches at local restaurants while on day trips, and later prepared supper back at the townhouse. They shopped for food at local stores and Maureen enjoyed preparing typical Swedish dishes, like meatballs. (She says everyday Swedish cuisine is pretty much what you see in the cafeteria at Ikea.) The couple liked just hanging out at the townhouse, watching a bit of television or listening to music. “You get to experience how people live, not how hotels and the tourism industry presents a place,” says Maureen.

The usual advice is to draw income from your non-registered accounts, such as regular savings accounts, first. When that money runs out, then you can go after the funds in your RRSP or Registered Retirement Income Fund (RRIF). That’s because the money you withdraw from an RRSP or RRIF counts as income, and you have to pay taxes on it. So you want to put off drawing down that money—and paying those taxes—as long as possible.

But the Franklins (whose names we’ve changed to protect their privacy) ran their own figures using that strategy and got dubious results. So we talked to several experts who have thought carefully about the most tax-efficient way to draw down a retirement portfolio—and guess what? It turns out the conventional wisdom is dead wrong. “The conventional advice definitely does not constitute ‘wisdom’,” says Daryl Diamond, a financial planner with Diamond Retirement Planning in Winnipeg. He says retirees need to take a more balanced approach when drawing down their portfolios.

To see why, consider that if you draw down all your non-registered accounts first, you will eventually be left with a nest egg made up entirely of RRSP or RRIF money. Then when you reach 71, you’re suddenly forced to convert your RRSP to an annuity or RRIF and start taking minimum withdrawals. This can drive up your income, and because higher incomes are taxed at higher rates, you are liable to pay much more tax than you would have if you’d spread out your RRSP withdrawals more evenly.

It’s usually especially wise to draw on your registered accounts first if you retire before age 65, since you’ll need to bridge your income needs before Old Age Security and other benefits kick in. This can also help you avoid OAS clawbacks later, says Camillo Lento, a chartered accountant and lecturer at Lakehead University in Thunder Bay, Ont.

The bottom line is, it often makes more sense to withdraw some RRSP money before exhausting your non-registered accounts, even if you take a small hit, because it can help you avoid a much bigger tax bill later. Overall, Canada is quite generous to seniors, thanks to Old Age Security and tax breaks such as the Age Credit. But for higher-income seniors, the system often gives benefits with one hand and claws them back with the other. So any time you consider how much tax you’ll pay when you draw down your portfolio in retirement, you also need to consider the clawback of these benefits.

Determining the right drawdown strategy depends on your personal situation—in particular, the amount of income you expect to receive in retirement. Let’s look at the opportunities for retirees with low, moderate, and high incomes and help you determine what’s right for you.

Low-income seniors

If you don’t have much saved up for retirement and you expect to depend on the Guaranteed Income Supplement, then your best bet is to draw down any RRSPs quickly, preferably before you turn 65 and become eligible to collect GIS. That’s because each $1 of RRSP income after age 65 results in a clawback of roughly 50 cents from your GIS—equivalent to a 50% marginal tax rate. Since this clawback rate is so high, you’re better off pulling out RRSP money earlier, even if you have to pay some tax on it. It will undoubtedly be at a much lower rate than 50%. If you don’t immediately need the money to live on, transfer your early RRSP withdrawals to a Tax-Free Savings Account (TFSA). When you take out TFSA money later, it won’t have costly GIS consequences.

Moderate-income seniors

If you’re a senior with less than about $30,000 a year in income, you can earn a surprisingly large chunk of that income tax-free. That’s because the combination of the Age Credit and the Pension Income Credit (which only seniors get) plus the basic personal credit (which every taxpayer gets) can shield you from federal taxes on the first $19,000 of your taxable income. (The provinces offer similar credits, but their tax-free zone is not usually as large.) Once your income moves beyond $19,000, you leap into the first federal and provincial tax bracket. There you will pay a combined rate of 20% to 28%, depending on your province.

Because of that jump in your tax rate once your income crosses the $19,000 a year threshold, the objective for seniors with moderate income is pretty simple: take out as much of your RRSP and RRIF money as you can while remaining in the tax-free zone.

The following example shows how it can work: Say you’re a retired senior living in a province where the tax-free zone is your first $19,000 of income, and you need $28,000 (after taxes) to cover your expenses this year. You receive $12,000 in income from Old Age Security, the Canada Pension Plan, and interest from bonds and GICs in non-registered accounts. That means you will need to withdraw an additional $16,000 from your portfolio to cover your cash flow needs. So, do you take that $16,000 from your non-registered account (which isn’t taxable) or your RRSP or RRIF (which would be reported as income in the current year)?

If you followed the conventional advice and took everything from your non-registered account, then you’d be passing up a golden opportunity to take out some of your RRSP or RRIF money tax-free. Here’s why: because your income from other sources is just $12,000, you can withdraw up to $7,000 in RRSP and RRIF money and still stay within the $19,000 tax-free zone. If you don’t make that withdrawal now, you may have to pay a substantial amount of tax down the road, when your non-registered funds are depleted and you’re forced to make larger concentrated RRSP and RRIF withdrawals. You can meet the rest of your spending needs by taking another $9,000 from your non-registered accounts.

By taking this balanced approach, you not only pay no income tax in the current year, you also shield yourself from tax that would have been payable on future RRSP and RRIF withdrawals. Pretty neat, huh?

High-income seniors

When you’re a retired senior with taxable income beyond $30,000 or so, you have left behind the pleasant vistas of the first tax bracket and entered more rugged fiscal highlands. Now the tax rates increase, and the clawbacks of government benefits begin.

There are several major tax bumps to look out for. The specifics vary depending on your province, but in most cases you will cross into the second provincial tax bracket somewhere between $30,000 and $41,500, at which point your marginal tax rate jumps two to five percentage points. As well, you will see some of your federal Age Credit clawed back starting at about $33,000. This clawback is equivalent to increasing your marginal tax rate by more than two percentage points. You jump to the second federal tax bracket around $41,500, causing you to suddenly pay an extra seven percentage points in taxes.

In short, the next big income threshold you’ll hit after $19,000 is at $41,500. “That’s a number we want to keep our eye on,” says Ross McShane, director of financial planning at McLarty & Co. Wealth Management of Ottawa. For example, at about $41,500 you go from a 24% to 31% tax bracket if you live in Ontario. In other provinces, your combined marginal tax rate at $41,500 jumps to somewhere between 30% and 38%. So your goal should be to smooth out your taxable income from year to year in order to keep it below that threshold.

Beyond $41,500, there are two more thresholds to keep in mind. The next is when your income reaches $67,700, because that’s when Old Age Security begins to be clawed back. Each dollar of income over that amount results in a clawback of 15% from OAS benefits, so it’s equivalent to adding 15% to your overall tax rate.

The final threshold we’ll look at here hits at $83,000. At that point, you’ll have reached the third federal tax bracket and you’ll begin paying a combined marginal rate of somewhere between 36% and 46%, depending on your province. When you add in the impact of the OAS clawback, you’re in for a shock. At $83,000, you’re effectively paying a 51% to 61% marginal tax rate. “You want to avoid that situation by any means possible,” says Lento.

You may think that you’ll never have to worry about finding yourself in these high tax brackets. But not so fast: if you draw down your non-registered accounts first, then your untouched RRSPs can grow remarkably large. Then you’re forced to convert them to an annuity or RRIF at age 71 and start taking minimum withdrawals. (You have to withdraw 7.4% from your RRIF the year you turn 72, and the percentage rises with your age.) That can easily push you into a much higher tax bracket than you anticipated.

What’s more, when one spouse dies, his or her RRSPs and RRIFs are typically transferred to the survivor. The prescribed withdrawals could now apply to a combined amount that’s suddenly twice as large, which effectively doubles the minimum drawdown. “Many people have large accumulations of RRSPs which they’ve deferred, deferred, deferred, and then bang. They lose flexibility, they lose control,” says financial planner Diamond.

When the surviving spouse dies, then any remaining RRSPs or RRIFs become taxable. If these balances are large, the estate will pay a hefty tax bill.

In the Franklins’ case, drawing down all their non-registered money first before touching their RRSPs and RRIFs doesn’t make any sense. A balanced drawdown strategy will work much better. With two above-average professional incomes, no kids, and moderate spending, they expect to accumulate about $3 million by the time they retire in eight years at age 55. They plan to have about half of their savings in registered accounts. Then they envision spending about $84,000 a year (net of tax, in 2011 dollars) on a very comfortable, but not lavish, retirement. “We’re not big spenders in terms of expensive cars, clothes and jewelry, but we like to spend money on dining, travel, theatre,” says Kathy.

According to Diamond, by adopting a balanced drawdown strategy, rather than drawing on all their non-registered accounts first, the Franklins can expect to save a lifetime total of about $170,000 (in 2011 dollars). The Franklins’ situation won’t be the same as yours, but it’s an example of why it pays to look closely at how drawdowns will impact your taxes. “A lot of people don’t think about taxes, and it is often the largest expense for someone in retirement,” says Diamond.

Whatever your withdrawal strategy, keep in mind that you should draw down your savings in a way that doesn’t skew the asset allocation in your nest egg away from your target by drawing too heavily on stocks or bonds. As long as you keep that allocation where it should be, smoothing out the mountains and valleys in your income could help you save big on taxes—and add tens of thousands of much-needed dollars to your retirement savings.

Analysts agree that aging parents are seldom versed on the full consequence of adding an adult child to their account. They warn pensioners considering this option to consult a lawyer, document their intentions and provide copies of this documentation to multiple trusted individuals.

Two key things to note if a joint account is unavoidable: prevent the joint account holder from setting up a line of credit, and make sure there are no overdrafts on the account.

Seniors should be aware that adding adult children to their bank accounts simply to assist with frequent banking operations such as bill payments and account management means both party’s lives are now legally entangled.

Adding another person to their account could result in seniors legally signing away their savings.

]]> http://www.moneysense.ca/2011/03/25/perils-and-pitfalls-of-joint-accounts/feed/ 46 http://www.moneysense.ca/2010/03/03/borzykowski-dont-expect-much-from-tomorrows-budget/ http://www.moneysense.ca/2010/03/03/borzykowski-dont-expect-much-from-tomorrows-budget/#comments Wed, 03 Mar 2010 20:08:04 +0000 Bryan Borzykowski http://www.moneysense.ca/?p=3359 Anyone else planning to watch the budget announcement with a big back of chips and heaping bowl of salsa? I would be if I didn’t have to work. Unfortunately, the announcement likely won’t be as spicy as your snack.

As has been customary the last few years, much of the budget — or at least the Conservative’s intentions — has already been revealed. The main talking point has been that Canadians can expect a dearth of new spending. On Monday, Stephen Harper revealed that he had to say “no” to many requests and that it was the hardest budget he’s had to produce. It’s also the smallest one. The priority, he says, is to focus on the second wave of the stimulus spending — about $19 billion — he announced in last year’s budget, while keeping costs under control so the government can start paying down the deficit.

In other words, don’t expect anything shocking on Thursday. It’s highly unlikely the Conservatives will raise taxes, but it’s also a safe to say they won’t offer many tax cuts either. In the past the Government has unveiled small, but helpful tax breaks — last year we got the Home Renovation Tax Credit; in 2007 Flaherty introduced the Children’s Fitness Tax Credit — so it’s possible something small will be included.

Another priority is to create jobs. Today’s Throne Speech will deal with that, as will the budget. It’s rumoured that $4 billion will be set aside to help people get back to work. He’s also planning to up the Fed’s portion of its Own The Podium contribution from $11 million to $22 million, which is kinda neat. (I’m still not over the 14 gold medals Canada won.)

While it’s probably unlikely, we could see some help for reitrees who are having difficulty making ends meet. The Investment Industry Association of Canada wants the government to allow older Canadaisn to make retroactive payments to their tax-free savings accounts, while abolishing the RIFF’s minimum withdrawal limit.

It would also be nice to see some talk on pensions. At the end of last year the government promised to continue discussions on pension reform. Nothing’s been worked out yet, and I don’t expect some major announcement tomorrow, but you never know.

What I’m looking most forward to is Flaherty and Harper’s plan to pay down the deficit — if they outline one. They’ve been mostly silent on that front, but with mounting pressure to come up with a road map, and a quiet budget that will leave plenty of time for the Conservatives to talk up Canada’s financial future, we very well could get some insight into how the government hopes to proceed.

Beyond that, Canadians won’t feel much different on Friday morning. Transfer payments to provinces are expected to stay the same, and without drastic spending cuts or increases, and no new tax initiatives, it should be business as usual in the months ahead.

Check MoneySense.ca tomorrow for in-depth budget coverage. We’ll have analysis and an overview so you can find out exactly how the budget affects you.

Follow MoneySense on Twitter @moneysensemag and Bryan @_inthemoney.

Six years later, Mike, 66, has fallen in love with his new home town. He and Heather live in a house that backs onto water, and Mike, who used to put in 12-hour days at a demanding job at a bank, enjoys the leisurely pace of Peterborough, a 90-minute drive northeast of Toronto.

If you’re a city dweller who is close to retirement, it’s tempting to follow the Evanses’ lead. Toronto, Vancouver, Montreal or Calgary are wonderful places to earn a big salary, but once retirement comes, the charms of the metropolis begin to wane. Why not ditch the traffic and move to your own Green Acres? Especially if doing so can put a couple of hundred thousand dollars in your pocket?

Consider the numbers if you live in Toronto and decide to retire to Tillsonburg, Ont. This farming town two hours west of Toronto is becoming a magnet for big-city retirees, but still has small-town real estate prices. While the average house in Toronto sells for a hefty $385,000, the typical home in Tillsonburg costs a mere $170,000. Even after moving costs, you should be able to sell your Toronto home, buy in Tillsonburg and pocket $180,000.

Few of us can afford to ignore a six-figure payday, but experts say moving to a small town can be a shock. Crime is often higher than in big cities and winter driving on rural roads can be treacherous. Then there’s the challenge of finding a doctor. “We’ve had people tell us, ‘I’ve moved and can’t get a family doctor. I can’t even get on a waiting list to get a doctor,’ ” says Susan Eng, vice-president of advocacy at CARP, the association for people over 45.

Another problem is isolation. “Frankly, some people in small towns have a negative opinion of people who move there from the big city,” says Lynn Biscott, a certified financial planner in Toronto and author of The Boomers Retire. It’s not easy to break that wall down.

Biscott suggests you test drive a small town before committing yourself. Rent a place in the town you’re considering — in November. Spending a month there in winter will provide you with a realistic picture of what life there islike, Biscott says.

If you do end up falling in love with the place, Evans has his own piece of advice: join a couple of clubs to make friends. When he and his wife moved to Peterborough they knew no one. “But our new neighbor told us to join the Rotary Club, which we did. Suddenly we knew 100 people,” Mike recalls. Then he became a member of the local United Church and the curling club. Heather joined a choir and together they signed up for a seniors group that teaches people to play instruments. Heather took up the trumpet and Mike, the tenor sax. “I like to keep busy,” says Mike. “Honestly I don’t think I have a spare moment most days.”