Posts Tagged ‘retirement’

Retirement Planning – Did I practice what I preached?

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As accounting and tax professionals helping clients with their challenges, we don’t often think about our own situation all that much.  It’s the old “the cobbler’s children go shoeless” situation.  And I find myself in that position now as I go into retirement.

If you don’t have a clear idea of what retirement actually means for you, then how could you possibly plan for it?  And furthermore, if you are supposed to start “planning early” – like when you are a younger person starting to make money, how could you possibly plan for a stage of life that you can’t really even put your head around.  I would admit to suffering from this difficulty right up to and including the present.

We need new terminology…

At the risk of being a little bit contrarian, I am going to suggest that we need new language around all of what professional advisors call “retirement planning”.  The term is just not helpful and most of us can’t really get started on the planning. It seems there are two main components as I see it – financial aspects and life stage aspects. Unfortunately, the two aspects are intertwined, and this makes it messy. 

On the financial side, I believe the objective is financial security and independence/freedom and the lingo should reflect that. And once the lingo reflects that, then perhaps we can be more settled in how to go about it.  How about “Post Work Financial Model”?  It’s a mouthful, but a financial model can be tweaked as the future real life events unfold, generally not according to plan. What you need is flexibility to re-set and re-forecast.

On the life stages side of things, you alone have to figure this out with relevant family members etc. How about calling this the “Post Work Lifestyles Plan”?  If you are not clear on what this looks like (THAT WOULD BE ME!), you will not be in a position to bring data to the table that is a necessary part in completing the financial side.  Most of us are a little fuzzy on what exactly our post working lifestyle will be and the related spending and costs through to “the end” (of your life!).

Where to start?

  • You have to at least try to start with the Post Work Lifestyles Plan.  I’m personally finding that a little tricky, but if you can articulate this with some degree of certainty, then you are off to the races.  But let’s assume you only have a vague notion of what this looks like – you would be in good company!
  • If you cannot bring any detail to the Post Work Lifestyles Plan, then in my view, you have to make an assumption that nothing will change on the spending side of things. Spending will therefore be the same in the post work years as they were in the year(s) before retirement.  Many will object to this approach.  If you say, “my spending will be less, but I’m not sure how much less”, you are introducing conjecture into the next part of the exercise, namely the Post Work Financial Model. There should be minimal conjecture permitted into that model.  So if you are not comfortable assuming that the post work spending will remain the same, the you must loop back and do a better job of fully flushing out the Post Work Lifestyle Plan and the related costs. To be frank, most of us cannot do this with any degree of precision – not even close.  So let’s assume we take the easy route.

Now it looks like this….

  • You don’t have a well defined Post Work Lifestyles Plan,
  • You now must assume post work spending and financial requirements are identical to the most recent years of normal spending, and
  • You are ready to start the Post Work Financial Model.

What is the first step to completing the Post Work Financial Model

You have to figure out how much you are spending on an annual basis, and then plug in any major “out of the ordinary” expenditures like possible family weddings, and other major capital purchases you know are coming up or might come up.

The good news about that first step…

  1. I have rarely seen a client who knows what the family spending is, much less what they spend it on.  I have seen all manner of spreadsheets and tracking documents.  All estimates and calculations brought to me are suspect in my view.
  2. Even though I have been tracking my own family spending on Quickbooks for 20+ years, I personally still don’t know the numbers off the top of my head – I need to look at the data.  So don’t feel bad that this whole spending thing is a mystery.  And I don’t recommend tracking things in as much detail as I do on Quickbooks, unless you are obsessed about it or an accountant…
  3. But here’s the good news:  There is a simple and inescapable way to figure out the family spending – in less than a few hours. You may not like to see the $ results, but it’s pretty much fool-proof.
    1. Calculate your gross earnings.
    2. Figure out your total final income taxes that you had to pay.
    3. Both a. and b. can be taken off your recent tax returns – hard cold facts!
    4. Calculate how much money you saved:  Start with what you sent to your investment advisor, or the funds you bottled up in bank accounts during the year in question.  Perhaps you opened a new savings account and the balance increased over the year by $28,000.  Or you sent a total of $57,000 to your investment accounts for RRSP and non-registered account investing.  Mortgage principal paydown is also a savings item to be added into this total, and so is any other type of debt reduction.
    5. Now make this simple calculation:  a-b-d = How much $ you spent.
    6. Sorry folks it’s just that simple:  What you earned, less the taxes you pay, less what you saved equals what you spent.  Most people are not happy with the resulting figures (it’s impossible!!), but there is no way around this simple calculus.

Then it’s simple

From this point onward it’s easy sailing.  Your advisor can make a calculation of the income you could expect in retirement based on pension income, investment income etc., and by making assumptions about rates of return, life expectancy and all sorts of other VERY SIGNIFICANT variables that can skew the financial model wildly back and forth.  That’s the “dark art” component of the Post Work Financial Model.  But at least the spending part of the model will be based in reality and can be tracked back to hard facts.

Then these income streams and rates of return are merged with the spending and bingo – you find out if and when you will be running out of money.  How comforting is that?  Hmmm, maybe that’s why few people have the stomach for this Post Work Financial Model/Post Work Lifestyles Plan exercise!

But those that are brave enough to give a good try are rewarded with a little bit of guidance and a really useful tool.  It can easily be updated from time to time as better information comes in about that not-so-well-done Post Work Lifestyle Plan.  If you can do some of the heavy lifting on this, you will no longer be running blind in an area of your life that really does require a little clarity!

Why Your Retirement Plan Needs a “Checkup”

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Let’s face it, your annual physical may not be your idea of a good time. However, regular visits to a GP can help you assess your health, review what’s happening in your life, and guide you in making healthy choices and lifestyle changes with the goal of being as healthy as possible.

What about the health of your Retirement Plan? Can the same principles for physical checkups hold true? We think so. Here are some reasons why.

Why a check-up is necessary

Sometimes underlying medical conditions are not always evident. Similarly, your retirement plan may have some flaws that you’re not aware of. Just as early diagnosis of a medical condition can even be reversible with proper treatment, a professional assessment of your retirement plan can help pinpoint areas of concern that can be tweaked and/or revised to ensure you stay on track and reach your retirement goal.

Navigating the winds of change

Good or bad, life changes equal stress. As bad as stress can be for our health, it can also wreak havoc on your financial plan. For example, while starting a family, purchasing a home or moving are all exciting milestones, they could bring financial repercussions you may not be aware of. A financial advisor can help you navigate the road of change and prepare you for the effects to your retirement plan.

Expect the unexpected

Just as an unexpected event like an accident, natural disaster or sudden allergy can affect our health, unexpected changes in tax laws, interest rates and the housing market can all have an impact on your retirement plan. A financial professional is up-to-date with these changes and can keep you in the know. Being supported through these changes can go a long way in helping you move forward.

Search engine overload

So, we’ve all done it. Had a physical symptom and “Googled” our diagnosis only to find an overwhelming sea of information. Admittedly, search engines are great tools, but following advice on the Internet is not without risk. How many hours have you spent researching the best retirement strategies? Is it current information? What if you miss something important? Financial professionals have the software, publications and experience necessary to guide you through this information age with a minimal investment of your time and energy.

Whether it’s physical or financial health, we believe that “prevention is the best medicine”. We would be happy to sit down with you to assess the overall health of your retirement plan, review what’s happening in your life, and assist you to make the right choices to ensure your financial plan is on track. A little investment of your time and energy now can reap great rewards later. Call us today!

RRSP Season For The 2016 Taxation Year is Ending Soon!

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A Registered Retirement Savings Plan (RRSP) is a personal savings account registered with Canada Revenue Agency (CRA) to help you save for retirement and reduce your current income taxes. RRSP contributions are tax deductible and the earnings are tax-free as long as the money stays in the plan. Once the funds are withdrawn or payments are made from the plan, you will be taxed. You are able to contribute to your RRSP up to a certain limit for any tax year and any unused RRSP contribution room will be carried forward until December 31st of the year you turn 71.

Contribution Limit

The RRSP deduction limit, which is the maximum annual contribution limit, changes annually and it is calculated as follows:

  1. 18% of your earned income[i] from the previous year, up to a dollar limit which for 2016 is $25,370 (2017 – $26,010), less
  2. the pension adjustment (PA) that was reported on your previous year’s T4.

If you have unused RRSP contribution room at the end of the previous year, you can increase your current year contribution accordingly. A quick way to find out your contribution limit is to look it up in the “RRSP Deduction Limit Statement” section of your latest notice of (re)assessment from the CRA.

Over-contributions and Penalties

RRSP contribution is a great retirement saving and tax deferral tool, but if you over-contribute you may be subject to penalty taxes. Over-contribution in excess of $2,000 is subject to a 1% penalty tax per month, until you withdraw the excess amount. A T1-OVP tax return is required for reporting the penalty tax. This return must be filed with the CRA by March 31st of the following tax year to avoid a late-filing fee.

If the excess RRSP contribution is $2,000 or less, there is no penalty tax, but the excess contribution is not deductible until a new RRSP contribution room is available.

Contribution Deadline for 2016 Tax Year

The last day to make RRSP contributions that are eligible for the 2016 deduction is March 1st, 2017 (60 days from December 31, 2016). Therefore, it is important to include and report all the RRSP contribution tax slips up to March 1, 2017 on your 2016 tax return.

Other RRSP tax planning opportunities, such as spousal RRSP contribution, home buyer’s plan or lifelong learning plan, are available. Please contact us for more information.


[i] Earned income includes salaries, wages, and rental income, but excludes investment income.

How RRSP Contributions Work

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A registered retirement savings plan (RRSP) is an account you can set up to save money for the future. There are immediate tax benefits in the year that a contribution is made to the plan. Also, RRSP investments can grow and not be taxed until the funds are withdrawn, often many years later.

But the big question is: how do RRSP contributions work?

Any taxpayer is entitled to contribute to an RRSP if they have “contribution room” (also called the deduction limit), although the contribution room is subject to an annual maximum limit.

The RRSP annual maximum limit for 2012 is $22,970 and for 2013, it is $23,820. In order to be eligible for this maximum limit, you must have had sufficient earned income in the previous tax year.  So this year’s limit is based in part on last year’s earned income (primarily employment or business income). Your deduction limit can exceed this amount if you have unused contributions carried forward from previous years.

The Canadian Revenue Agency (the “CRA”) calculates the RRSP deduction limit for the following year on every Notice of Assessment (“NOA”), which you receive each year after you file your income tax return (i.e. your 2013 annual limit will be reported on your 2012 NOA). Therefore, a taxpayer can simply refer to their NOA to determine their limit.

Excess Contributions

Excess contributions occur when you contribute more that you are permitted by more than $2,000. When contributions have been made of more than $2,000 over the contribution limit, a penalty of 1% per month is charged on this excess amount, until the excess contribution is removed from the plan.  Excess contributions are to be avoided at all costs, so if you are in doubt about how much to contribute to your RRSP, check it out carefully before you contribute.

When is the deadline for contributions?

The RRSP contribution deadline for the 2012 tax year is March 1, 2013. Therefore, if you contribute to your RRSP on March 1, 2013 or earlier, you can take the deduction on your 2012 tax return.

The very last contribution you can make to your RRSP is December 32 of the year you turn 71. However, it is possible for taxpayers over 71 to contribute to the RRSP of a spouse until December 32 of the year that their spouse turns 71.

The earlier you contribute to your RRSP, the more time you have for investments to grow tax free – so don’t wait until the deadline to contribute! Also the younger you start your RRSP account the better – compounding of income really takes off if you have a long period of time to run your RRSP.

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