How to fund retirement

The aging of the Canadian population is common knowledge as the boomer generation begins to enter its senior years.

The median age of the Canadian population was 40 years on July 1, 2012. In the past 20 years, between 1992 and 2012, the median age in Canada has increased by 6.4 years.

As of July 1, 2012, the number of seniors older than 65 was estimated at 5.17 million out of a total population of 34.88 million. They represented 14.9 percent of the total population, up from 11.6 percent in 1992. The number of seniors is approaching the number of children.

The number of seniors increased almost 58 percent between 1992 and 2012, while the number of children fell about four percent. That means that children outnumbered seniors by 476,300 on July 1, 2012, compared with close to 2.6 million on the same date in 1992.

What is even more remarkable is the aging of the farm population. For the first time, operators older than 55 represented the largest share of total operators. They accounted for about 48 percent, up from 41 percent in 2006 and 32 percent in 1991.

One impact of this is that tens of billions of dollars of farm assets will be transferred to fund the retirement years of the aging farm generation. However, there are other ways to fund that retirement, rather than just depending on the sale of land.

For example, owners of incorporated farms who have T4 income can fund their retirement out of the corporation using an Individual Pension Plan.

There are also insurance-based solutions, particularly if there is an existing need for insurance. Components of the insurance policy can be tax deductible to the corporation while providing the retiree with a way to tax shelter savings to fund future retirement. Insurance funded solutions could also be used as collateral for a loan to avoid tax implications on withdrawal from the corporation, or they could simply be withdrawn from the policy directly.

If a full or partial sale of the farm is contemplated, retiring farmers could also use the proceeds to buy a life annuity to pay a fixed annual amount. Life annuity payments receive preferential tax treatment because they’re taxed at a prescribed rate.

Insured life annuities provide a maximum guaranteed income while preserving the value that is passed to the estate on a tax exempt basis. The principal is protected through insurance and premiums are generally paid from the income generated by the life annuity.

You may want to shop around because attractive rates of return can still be achieved using this strategy.

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