Low interest rates can be good for some things like buying a home. But they can really hinder your ability to save and invest effectively. If you plan to retire soon, Chris Gandhu, a High Net Worth Planner with TD Wealth, joins Kim Parlee to discuss what these low rates may mean for you and your savings.
Originally published July 2020
Print Transcript
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- Well, low interest rates can be good for some things, like borrowing money. But it can also really hinder your savings and your investing when it comes to returns. If your retirement is imminent, you may be wondering how these low rates might be affecting you.
Chris Gandhu is a High Net Worth Planner with TD Wealth. He joins us from Calgary for this edition of Ask MoneyTalk. And Chris, our question is, I'm looking to retire in a few years. How will low interest rates impact my plans?
- Kim, good to be here. Kim, what we noticed is that as individuals approach retirement, their investment mix changes to focus more on fixed income. And of course, low interest rates mean that there is lower return on fixed income.
And just to give you an example-- I checked this this morning here-- in late 2018, the Government of Canada five-year bond was yielding close to 2 and 1/2%. And today, that same yield on the same bond is less than half a percent. So there is a significant difference here. And of course, these reduced interest rates then translate into lower income for the retiree.
- So what can you do if you're trying to deal with this low interest rate environment, and especially if you are retiring soon?
- I guess the first thing, Kim, is review your financial plan. Although the interest rates may be low and that may generate less income for you, does that actually derail your plan? And if it doesn't, you don't really need to worry.
The next thing I would suggest is talk to your investment advisors about some alternative options that may be out there. Of course, that's not my forte. So we won't focus on that.
But there's also other options for you to consider. The most obvious one is that you should be spending less and saving more because the greater the savings you have, the more ability to generate income in retirement. I think we will see a subset that chooses to delay retirement and simply work longer to make up that deficit.
I think something else that, perhaps, you should consider and may be underappreciated is-- are you taking advantage of all savings options out there? Are you maximizing your TFSA and RSP? Perhaps there is some employer-sponsored plans that you should maximize because generally with these plans, the employer's always matching some contributions. That's free money that you shouldn't be saying no to.
- What about tax efficiency? We talk a lot about tax. Is there a way that can help?
- Yeah. Of course, a dollar saved is a dollar earned. And the silver lining with the low interest rates, of course, is that all interest rates have dropped, including the prescribed rate that's set by CRA to facilitate income splitting.
So this rate is changing to 1%, effective July 1, 2020. And what that means is that if, in your family, you have an individual taxpayer that's paying tax at a rate lower than yours, well, you now have an opportunity to lend them some money at 1%. And whatever they earn in excess of 1% is now their income taxed in their hands at a rate that's lower than yours. So effectively, as a family, now you've shifted the tax burden to somebody else, lowered the tax burden overall, and saved yourself a bunch of money.
- Chris, always a pleasure-- thanks so much.
- Thank you, Kim.
- That is Chris Gandhu. And if you have any questions or if you would like to ask MoneyTalk a question, send an email to moneytalk@td.com with "Ask MoneyTalk" in the subject line. Then ask your question. We'll find the right person to get your question answered. And then you can check on moneytalkgo.com, where you can find answers to so many questions about life and money.
[MUSIC PLAYING]
- Well, low interest rates can be good for some things, like borrowing money. But it can also really hinder your savings and your investing when it comes to returns. If your retirement is imminent, you may be wondering how these low rates might be affecting you.
Chris Gandhu is a High Net Worth Planner with TD Wealth. He joins us from Calgary for this edition of Ask MoneyTalk. And Chris, our question is, I'm looking to retire in a few years. How will low interest rates impact my plans?
- Kim, good to be here. Kim, what we noticed is that as individuals approach retirement, their investment mix changes to focus more on fixed income. And of course, low interest rates mean that there is lower return on fixed income.
And just to give you an example-- I checked this this morning here-- in late 2018, the Government of Canada five-year bond was yielding close to 2 and 1/2%. And today, that same yield on the same bond is less than half a percent. So there is a significant difference here. And of course, these reduced interest rates then translate into lower income for the retiree.
- So what can you do if you're trying to deal with this low interest rate environment, and especially if you are retiring soon?
- I guess the first thing, Kim, is review your financial plan. Although the interest rates may be low and that may generate less income for you, does that actually derail your plan? And if it doesn't, you don't really need to worry.
The next thing I would suggest is talk to your investment advisors about some alternative options that may be out there. Of course, that's not my forte. So we won't focus on that.
But there's also other options for you to consider. The most obvious one is that you should be spending less and saving more because the greater the savings you have, the more ability to generate income in retirement. I think we will see a subset that chooses to delay retirement and simply work longer to make up that deficit.
I think something else that, perhaps, you should consider and may be underappreciated is-- are you taking advantage of all savings options out there? Are you maximizing your TFSA and RSP? Perhaps there is some employer-sponsored plans that you should maximize because generally with these plans, the employer's always matching some contributions. That's free money that you shouldn't be saying no to.
- What about tax efficiency? We talk a lot about tax. Is there a way that can help?
- Yeah. Of course, a dollar saved is a dollar earned. And the silver lining with the low interest rates, of course, is that all interest rates have dropped, including the prescribed rate that's set by CRA to facilitate income splitting.
So this rate is changing to 1%, effective July 1, 2020. And what that means is that if, in your family, you have an individual taxpayer that's paying tax at a rate lower than yours, well, you now have an opportunity to lend them some money at 1%. And whatever they earn in excess of 1% is now their income taxed in their hands at a rate that's lower than yours. So effectively, as a family, now you've shifted the tax burden to somebody else, lowered the tax burden overall, and saved yourself a bunch of money.
- Chris, always a pleasure-- thanks so much.
- Thank you, Kim.
- That is Chris Gandhu. And if you have any questions or if you would like to ask MoneyTalk a question, send an email to moneytalk@td.com with "Ask MoneyTalk" in the subject line. Then ask your question. We'll find the right person to get your question answered. And then you can check on moneytalkgo.com, where you can find answers to so many questions about life and money.
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