If you are newly or nearly retired, the COVID-19 pandemic may have shaken your financial confidence. Kim Parlee speaks with TD Wealth’s Tannis Dawson about what impact the coronavirus could have on pension plans, RRSPs and other retirement income streams, whether you’re an employee or a business owner.
- Hello, and welcome to the MoneyTalk COVID-19 daily bulletin for Thursday, April 2. I'm Kim Parlee. In a few moments we're going to be talking to TD Wealth's Tannis Dawson on what to do if you think your plans for retirement have fallen apart because of COVID-19. But first, let's wrap up today's news.
Crude oil prices are surging, up 35%, after President Trump tweeted that he expects Saudi Arabia and Russia will cut production. Oil also getting a boost on news China plans to increase its reserves. US weekly jobless claims doubled to 6.6 million, well past the 3.1 million expected. Initial jobless claims soared by 10 million in the past few weeks. That exceeds the peak during the tail end of the 2007-2009 recession. The number of confirmed global cases of COVID-19 are at 938,000 and are expected to cross 1 million this week, with 47,000 deaths and 186,000 recoveries. In Canada, there are over 10,000 confirmed cases and 109 deaths.
And for Italy, the country recorded its lowest coronavirus death toll for a week, reinforcing hope that the coronavirus epidemic might be reaching a plateau. And, finally, Boeing is offering some early retirement and buyout packages to 161,000 employees. The embattled airline maker continues to grapple with the financial fallout as demand from airline drops. And that is a wrap of today's news. Now, as promised, Ask MoneyTalk with Tannis Dawson.
Tannis, there are a lot of people who have plans to retire soon, only to face the chaos that coronavirus has brought. Your investments could be down. You could be laid off. And you could have a business that has had to temporarily shut down. So I wouldn't mind if we could walk through some of these situations. So let's start with what you should be thinking about if you've been laid off.
- So if you've been recently laid off, you need to really look at your plan. And you may have a company pension, and how does that affect it? So if you have a company pension, you're not putting money into the pension plan, your company is not paying into the pension plan if you're not working and you've been temporarily laid off.
When we're looking at that, those pensions may be affected. So if you have a defined benefit pension plan, now your income for 2020 is lower, and usually those defined benefit plans are based on a five-year-- either your best five years or your last five years. And usually your last year would be a higher year. So this may affect your pension, and you'd really want to look at it to see, does it make sense to maybe work another year. How does the average work?
If you have a defined contribution plan, then it's based on the money that's going in and the investment's growth over time. So, again, if you're laid off, you're not putting money into it as much in 2020. Depends how long you're laid off for. Your investments in your defined contribution now are down, so you have less money inside the defined contribution to pull from.
Then we look at your Canada Pension Plan. If you're laid off, EI does not contribute to your CPP. Any of those other benefits that the government is giving will not help make contributions to your Canada Pension Plan. You may have maxed out already this year depending on your income. But if you haven't, you really need to look at your CPP over your lifetime. And does it affect it?
There is-- they take off 15% of the lowest years. You can go to Service Canada or your MyCRA account to see what the history is and how that may affect. Remember, when you're on EI, that is not pensionable earnings, so it is not going to help your pension plan or your CPP contributions.
You may have your RSP, and you might have room. So if you have cash flow, you can put more money in there to grow tax-free. But then again, it's your savings. And what savings do you have? And do you need to maybe increase that? Or even on your retirement plan, were you putting money aside into your non-registered and maybe you're not able to do that now? So, again, the key point is revisit your plan, meet with your financial advisor, review how does this effect.
- Great information there. And you're so right. So much of this, it's all the knock-on effects of how it affects all of these other plans that could help you. Let me ask you-- you talked about RSP and investments. And a lot of people are just holding their breath and not wanting to take a look, quite frankly, of what's been happening with the markets right now. But should we take a deep breath and start taking a closer look?
- If you're near retirement and you're going to retire, you absolutely want to look at your investments and where you're at. Because in different stages of your life-- when you're younger and you're in a growth stage, it might be more in equities, less in fixed income. You're looking for that growth. You're not touching your money for a long period of time. It might be stressful for markets going up and down.
But unless you're actually needing the money or the market, it doesn't really matter as long, as it recovers by the time that you are accessing those funds. So now we're at that stage. And if you're looking to retire within the next year or so, how does that affect? You want to review your holdings.
So, hopefully, you had been planning for this and you've put money aside into more fixed incomes. So it might be GICs, money markets. There's lots of different investments that give you a more secure fixed income and doesn't have the risks of going up and down with the market. And so when you want to look at it to see what you have-- what money can assess without realizing losses, it's only when we actually have to take capital out to realize the loss that then now that affects our plan.
And so we just want to look at how long is your emergency fund going to last. Can we reduce some of the expenses? Can we defer our vacation that we were going to take, some big expenses-- renovations, buying a car, maybe all these things that were going to be done in retirement? So can we just defer that, reduce our expenses, live off of the income?
So our investments that are inside our RSP, our savings-- there's still income being produced off of it. So that income's probably not changing, as long as the investments were very good companies. The cash flow would still be there. The dividends would still be paid. And so you can see if you use the income of those without touching your capital-- so how long can you do it? So it's important to look at the income of it, what investments you have, what can you access without realizing those capital losses. And so only when cash is taken out is it really an issue.
- Yeah, when you crystallize any of those gains and losses. And unfortunately, right now, there's probably more losses than there are gains for many of these stocks.
Let me run through another scenario we talked about. I said if you were laid off and you don't want to look at your investments, what if you own a business or you're a sole proprietor and, again, you're getting ready for retirement? What do you need to be thinking about?
- Yeah, so usually self-employed people, either incorporated or non-incorporated, won't have a formal pension plan. So they're not going to have that defined benefit, the defined contribution that we talked about. So they probably have RSPs, maybe, and have their business. So if they're self-employed and not incorporated, they'll have RSPs in savings. If they are incorporated, their money could be inside the corporation or the sale of the business that they're looking at. So when we're looking at it, how does this affect it?
So, say, RSPs, what are the limits? Maybe you need to use-- if you have more room, maybe topping off your RSP more, putting it in, and having that tax-free growth so you're not getting taxed on your income. Is there an IPP or an RCA that's inside the company? Those are Individual pension plans or retirement compensation arrangement. And in there, the value of those investments might be down.
So the same thing, kind of what we talked about before, is just looking at what's the value in there. Is there more fixed income that we don't have to realize those losses? Can we access that? There's still income that would be producing on those investments, but the amount that we can pay out might be different because of the value in there.
For the corporation part, we have to look at, if they were relying on selling their business, is this the time to sell. The buyers might not be out there. There might not be as many buyers willing to pay, so might need to wait. Did you have to close your business down? So you might wait till the markets reopen, kind of, and that you can re-establish your business and show your growth and your income. And it might be a blip in there, hopefully for not too, too long.
And then if you're lucky enough maybe your business was able to adapt. You changed your product line, you were an essential service, and your income was fine and through. So then it shows the value of your company might even be higher, because now they know that you were able-- your business withstood or withstands this event.
But the big thing on there is, probably, people might not have the funds to pay upfront like they were before for it. So they might want to take a vendor take-back, or it might be paying it over time-- so all things to consider because of the cash flow. And so in retirement, really, you can have wealth, but how is that-- does that react in cash and the cash flow of it?
- Tannis, thanks so much. Great information. And a reminder, everybody who's watching, you need to think about your own situation and talk to an advisor about what's best for you before you act. Any other questions, please send them our way. Send them to MoneyTalk@td.com. We'll get to work in finding the answers for you. Thanks so much for watching, and be well.