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The Ladder To Heaven

Updated: Jun 13, 2022

Earlier this year, I mentioned that my Mom (age 81) decided to make some big changes. She wanted to make important decisions now, to avoid not being able to make them later, and burdoning her family. She put her condo up for sale in January and recently sold it in March. She also made a decision to revamp her portfolio. These changes were made in an effort to support a holistic plan to transition to a semi-assisted retirement complex around the block. Lately we’ve been putting the finishing touches on the financial aspects of the plan.

My Mom had some goals before she set up her new plan:

1. To convert her condo to cash

2. To eliminate volatility from her portfolio

3. To eliminate the high fees (2.3%) she was paying to Investors Group

4. To fund her retirement home choice and variable expenses

5. To have cash to maximize her TFSA contribution annually

6. To maintain income tax efficiency in her drawdown plan

7. To simplify her estate and financial plan

With the sale of her condo, the proceeds were apportioned equally into 1, 2, 3, 4, & 5 year term, laddered GICs (Guaranteed Investment Certificates) in non-registered accounts with CIBC. She also cashed her RRIFs (Registered Retirement Income Funds) out of the high-fee mutual funds held at Investors Group, transferred the funds to CIBC RRIF accounts, rolled her personal and spousal RRIFs together into one, and placed them in a 5 year term GIC. She had moved her TFSAs (Tax Free Savings Account) out of Investors Group the year prior, and also placed this money in a 5 year term GIC at CIBC. Simply put, she cashed out and moved everything away from Investors Group and their funds in the last year, and consolidated her portfolio at CIBC (her bank) in GICs.

Setting up 1, 2, 3, 4, & 5 year GICs initially in equal portions in her CIBC non-registered account will allow one GIC to mature every year for 5 years. That way, she can withdraw money annually to supplement her income plans while not being penalized on the interest portion. When her 1, 2, 3, 4, & 5 year GICs non-registered GICs mature they will each be renewed at 5 year terms. This will serve to stagger them annually going forward, so she can withdraw cash annually as required to meet her annual income goals while accruing maximum interest payments.

The 5 year RRIF GIC will also accrue interest annually, and will pay the annual election (paid monthly) based on the Dec 31 account value and her age, including the annual interest without any withdrawal penalties. This is a special allowance granted to RRIF GICs, that you can withdraw your annual, age-specific elections (payments) from them during the GIC term without any interest penalty.

The TFSA GICs will be added to every year per the annual allowance (currently $6000), and bought or renewed at 5 year terms on maturity.

Laddering your GIC investments is a common method of keeping up with inflation, as the rates from fixed interest assets will generally trend with inflation rates. The higher the inflation rate the higher the GIC rates offered, and the lower the inflation, the lower the GIC rates. This is because the cost of borrowing goes up as inflation rises. In effect, GICs are the way Banks borrow money (from you), so they can lend it to others. Higher bank interest rates will drag GIC rates higher. Also, the longer GIC term you take, the better rate is offered. However, rates can improve or deteriorate in any following year based on various economical factors, so you need to consider when you need the money, plus the current rate environments (rising or falling) when you purchase them. Currently in 2022 CIBC is offering bonus GIC rates between 2.5% and 3.3%, compounded annually, on 1-5 year term GICs. These rates, now offered, are already factoring in the central bank rate hikes this year, so not likely to go higher unless there are surprises. If inflation is curbed, they may even go down. Though GICs are not historically as effective as a good global, indexed ETF (exchange traded fund) at beating inflation, GICs are an effective tool to provide predictable and stable returns in retirement, and makes good sense when time horizons on your investments starts to shrink.

There are some key tax considerations between market returns and GIC returns, specifically when you hold them outside registered accounts (RRSPs, LIRAs, TFSAs, RRIFs, LIFs, etc), and in non-registered, taxable investment accounts. Investments that generate income in non-registered accounts will not be sheltered from tax, or in other words, these non-registered account investments will generate accrued income that will be taxed in that year. At tax time, you will recieve T3s to declare dividend income (e.g. if you hold shares) and T5s to declare interest income (e.g. if you hold GICs) in these accounts. However, specifically in my Mom’s case, she will now only receive T5s for each GIC in her non-registered accounts that states the interest accrued in that tax year. An important note, this interest amount will be taxed regardless of whether the GIC matured in that year or not, so you need to plan to pay tax on this amount. Another tax difference and consideration, is that eligible share dividends receive a dividend tax credit, in which investors will only pay 50% of the tax owed at their marginal tax rate. Eligible dividends are basically sovereign (Canadian) company stocks that generate dividends. In the case of GICs, they generate interest payments, which are taxed at your full marginal tax rates, making them less tax-efficient then income from eligible shares. To put this in perspective, if you had $1mm in eligible shares generating dividends at 3.3% a year you would have income of $33,000, but only be taxed at your marginal tax rate on half, or $16,500. Whereby, if you had $1mm in GICs generating 3.3% a year, you are taxed at your marginal tax rate on the full amount of $33,000.

This exercise has been a bit of a learning experience for me. I think there’s a point in your life where your portfolio may be small enough, and your time horizon has shrunk enough, that moving into more secure investments like GICs makes good sense. You may not want your capital or earnings to unexpectedly erode by 25-50% due to a market crash. Due to your age, you likely have less time to recover from it, plus you may not want your portfolio subject to these unpredictable losses in your estate settlement. This exercise also reinforced the “high fee problem” with many of the financial organizations that manage your money in actively-managed mutual funds. While my Mom’s portfolio was in a steady decline with Investor’s Group, by my calculations it should continue to grow, or at very minimum hold it’s value in this new plan. Furthermore, it will pay her adequately to live comfortably in the retirement centre she chose, meeting all her future income, expense, and estate planning goals, … and with annual savings to spare!

For the first plan year, she had to keep enough cash in her savings account to bridge the first year of income from her Non-Reg GICs and RIF. She had to do this to allow the first 1 year non-registered GIC to mature, and cannot set her monthly RIF elections to start til Jan 2023. When you transfer your RRIFs to another institution, they will first pay you a lump sum equal to your remaining elections (payments) for that year, before they transfer the remaining balance to your new RIF account. You will need to keep this money (lump sum) available to provide income in the year it was intended, and not lock it up in a GIC or otherwise. She also had to hold enough cash back to mimic her new income plan from the non-registered account for the first year. She is currently staying with us and on a waiting list for the new retirement centre, but will need to start paying these expenses when a unit becomes available and she moves over to the new place.

Timing is everything too. GICs offering +3% per year compounding interest have not been seen for many years, so it was a really good time to turn her real estate asset into funds that generate respectable returns through GICs for her next phase of retirement living. Also, real estate in our area has increased in value by 25-35% in the last year due to inflation and demand, making it an ideal time to sell your home if you don’t plan on buying another one. She also beat the rising bank interest rate environments that are being applied through 2022, so the housing market was still hot and people were still in bidding wars and paying top dollar. Now, a couple months later, it is starting to cool off.

I’m not advocating that everyone who is +80 years old should jump on this plan, as everyone’s situation is unique. But, for my Mom, this plan and the timing of it made perfect sense. Maintaining her own home and the daily routines was getting harder and harder, her investment horizon is shrinking, and she didn’t really understand her fund investments at Investors Group. Following my Dad’s passing six years ago, she wasn’t exactly sure of their performance, her risks, the DRIP/election schemes, or her options for change. She didn't know how to get the changes (goals) she wanted done. Now, I think she can understand GICs and her new plan. She keeps her GIC principal and gets interest payments every year plus any (small) principal withdrawals to fund her annual retirement income, and flips the rest back into a 5 year GIC. She’ll pay marginally more tax because she earns more to support her new plan and also is in fixed interest investments which are taxed higher in her non-registered account, but also has an overall higher net income and zero volatility.

For her, this was all a good change and she will sleep much easier at night not worrying about any of this stuff. She just needs to visit the bank once a year, make a withdrawal to meet her income plan, and renew her GIC terms.

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