Don't Let Critical Illness Impact Your Retirement Savings

Getting sick isn’t something any of us like to think about. But it can happen. In fact, your risk of being diagnosed with a critical illness before age 65 is higher than your risk of dying in that time. As Joe discovered, treating and coping with illness can mean significant and often unexpected costs that may not be covered by provincial or employer health plans. Critical illness insurance can help you pay the expenses associated with getting sick by providing a cash benefit. If you’re diagnosed with one of the conditions defined in your contract and you survive the waiting period. With the cash benefit you can:

• Hire a nurse or caregiver to help you at home
• Pay off your mortgage
• Receive income when you can’t work or your partner takes a leave of absence from his or her job to assist you
• Help protect your retirement plans
• Help manage business expenses
• Take a vacation or reduce your workload to help you recover

Planning for the unexpected is critical
Critical illness insurance is part of a good financial strategy as it helps you to plan for the unexpected. No one anticipates getting sick. And, if you’re fortunate enough to live a long and healthy life, many critical illness plans offer Return of Premium options that can give you some or all of your money back.

The critical illness insurance market is growing in Canada and many companies now offer this type of “living benefit” insurance. With so many plans to choose from, how can you decide which one is right for you?

As you evaluate the various options, consider choosing a critical illness policy that offers:

• Coverage for the conditions that pose the greatest threat to your health and present the most significant recovery demands and the greatest financial challenges
• A partial benefit if your condition isn’t life threatening, but is life altering. There are plans that give you 25 per cent of your coverage (up to a maximum of $50,000) for conditions not normally covered by other critical illness products
• The ability to receive a portion of your benefit up front so your recovery can begin sooner; some plans offer a recovery benefit of 10 per cent of your coverage (up to a maximum of $10,000) that helps you get some benefits faster, without having to fulfill the waiting period.

Significant impact on retirement savings
Many people who get sick have no choice but to turn to their savings to pay their medical costs. For some, this means tapping into their retirement savings to finance their recovery. As you can imagine, this can significantly impact your financial plan and retirement strategy. It may mean working longer and putting off retirement or accepting a diminished lifestyle during retirement. The point is that many people do not plan to get sick and, therefore, may not budget for it.
Joe had planned to retire comfortably at 65

The cost of Joe’s recovery exceeded $100,000. The price of new therapies and other medical costs, and Joe’s inability to work full-time for an extended period, contributed to his soaring expenses. Joe came up with the money to pay the bills, but only by dipping into his retirement savings. Joe and his wife, Mary, had a plan in place to retire, but Joe’s unexpected illness took them off course.
Joe and Mary had intended to retire comfortably when Joe turned 65. They had contributed to their Registered Retirement Savings Plans (RRSPs) each year and had started accumulating money in non-registered savings accounts as well. Unfortunately, their plan is now unrealistic. With additional unexpected expenses and the RRSP withdrawals they made because of Joe’s illness, Joe and Mary won’t be able to live the lifestyle they expected in retirement.

Tax Free Savings Accounts

Tax free savings accounts were first made available in 2009 and allow Canadians a way to invest money and have the growth grow tax free. Future withdrawals are also tax free. Unused contribution room can also be carried forward to future years, you need to be at least 18 years old and have a valid social insurance number.

Many people do not understand that a TFSA is not in itself an ‘account’, just like an RRSP is not in itself an investment. Both of these are ways to register an investment which can be many types including a daily savings account, GIC’s, mutual funds, or stocks, to name a few.

If you register an investment as a RRSP you can deduct the money you invest from your income that year but the money withdrawn is taxable.

If you register an investment as a TFSA you cannot deduct that contribution but the money withdrawn is tax free.

The primary purpose of a TFSA is to provide a tax-sheltered way to save money, which can be used for any medium or long-term purpose. For example, you may want to lay away funds for unexpected emergencies or save up for a large purchase.

In comparison RRSP’s are primarily intended to help Canadians save for retirement, but it’s important to understand that TFSAs and RRSPs can effectively complement each other in a comprehensive investment portfolio. In fact, you may benefit greatly from contributing the annual maximum to each in order to meet different savings goals.

Investment earnings within a TFSA and any withdrawals won’t affect other government programs such as GIS, old age security, or Canada child tax benefits, so it still may be advantageous to use this as a retirement program.

Many studies have been done as whether to register your investment as a TFSA or an RRSP, and the answer cannot be given until many questions are answered, such as your tax bracket today versus your expected tax bracket when you retire, as well as the type of investment you’re willing to hold. It’s best to talk to an advisor first to determine your unique situation.

Need more information?
You can visit the Government of Canada’s website at www.tfsa.gc.ca to learn more about TFSAs. To understand how TFSAs can benefit your unique situation and financial strategy, speak with an advisor.

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For a thorough evaluation of your insurance needs, please speak with our advisor.

Tax corner-Pension income dividing

At first glance, it would appear that spousal Registered Retirement Saving plans (spousal RRSPs) are no loner required because the retirement living income dividing policies allow partners to divided their income in any case when their Registered Retirement Savings Plans (RRSPs) become Registered Retirement Income Funds (RRIFs). However, there are a several conditions in which spousal RRSPs can offer some benefits.

Income dividing at any age

Under the retirement living income dividing policies, you must be at lease age 65 to divided income and you must convert your RRSP into a RRIF. Regular RRSP withdrawals do not qualify for pension income splitting. However, with spousal RRSPs, you can divided income anytime that the attribution policies don’t apply. If a spousal contribution hasn’t been made in the current year or the two previous calendar years, any withdrawals from the RRSP will be taxed to your spouse. Read More