The Reminder is making its archives back to 2003 available on our website. Please note that, due to technical limitations, archive articles are presented without the usual formatting.
Today's topic: Live like you were dyin', or plan for retirement? Tim McGraw's song "Live Like You Were Dyin'" tells us to forgive more quickly, love more deeply, and perhaps to NOT put off to tomorrow what we might want to passionately do today. If we only knew when we were going to die. Good advice in non-financial termsÉ however, enjoying things today (that cost money) can be in conflict with retirement planning. The government of Canada gives us an incentive to help save for retirement. We can save up to 18 per cent of our "earned income" per year in the Registered Retirement Savings Plan program (with annual limits, aka RRSP room), and tax deduct the savings in the year of deposit, or in a future year. All proceeds (deposits and growth) are fully taxable when the money is withdrawn in future. Altogether, the Canada Pension Plan, Old Age Security, and RRSP programs are designed to provide Canadians with approximately 70 per cent of their pre-retirement income. If you contribute to an employer-sponsored pension plan (RPP), your annual RRSP room is reduced by the Pension Adjustment (PA) Factor which is reported on your T4 annually, because you are already receiving some tax deferral benefits through the employer's pension plan. Your RRSP room is annually summarized to you on your Notice of Assessment from the Canada Revenue Agency. You can accumulate RRSP room over the years for purchase in future, or buy RRSPs early and tax deduct later when you expect to have a higher marginal tax rate. Most types of investments "qualify" for RRSP eligibility, but there is a 30 per cent foreign content limit. You may hold in your RRSP: cash, guaranteed investment certificates, bonds, stocks, mutual funds, labour-sponsored venture capital funds, and even shares of private Canadian businesses (if valued according to regulations). See 'RRSP' P.# Con't from P.# In a self-directed RRSP, you can combine investments from different issuers under one account, which simplifies keeping track of your overall "asset allocation". However, there are annual trustee fees for these plans because the trustees have more issuers to interface with, as well as the government reporting to do. Here are five significant factors for you to consider in investing for retirement: 1. How much do you need? Jim Otar's book "High Expectations and False Dreams" says that if you plan on retiring early, you should withdraw no more than 3-4 per cent per year from your savings, especially if you expect to be able to increase your withdrawals to keep up with inflation, and in case you live to 90 or beyond. 2. The Rule of 72: Divide your rate of return into the number 72. The answer is the number of years it will take your investment to double. 3. RRSP or not? Investing in RRSPs is akin to "borrowing to invest", because in reality you are borrowing your own tax money from the government to invest until you choose to withdraw it in retirement. The objective is to withdraw in a lower tax bracket, or at least the same tax bracket in retirement. If you expect to have higher retirement income than during your working years, then it makes sense to NOT buy anymore RRSPs, and invest in conventional accounts, especially since capital gains are now 50 per cent tax free. 4. Asset allocation: If you have both RRSP savings and non-registered savings, the conventional wisdom is to hold your interest earning investments inside your RRSP (most highly taxed), and dividend- and capital gains-earning investments outside your RRSP. This would not be the case if the non-registered savings are for short-term needs such as saving for 1-5 year goals. 5. Income splitting: The high-income spouse can buy RRSPs in the name of the low-income spouse. The contributor gets the tax deduction, but in retirement the money is taxed to the owner which is the lower-income spouse of prior years. Some uninformed couples avoid this tax planning because of fear of marriage breakdown, but it matters not in whose name the monies are if there's a marriage breakdown without a marriage contract.É these monies are still 50/50 in the shakeout. This fear should not be a barrier to tax planning. RRSP purchase deadlines are 60 days after the end of the calendar year, to give you time to look at your tax situation from the prior year, and your cash situation. In general, it's not good to borrow to buy RRSP unless you anticipate to pay off the loan within 1-2 years or unless investments are perceived to be "on sale". This is because the interest paid is not tax deductible. It is good to get in the habit of contributing to RRSP monthly, by electronic funds transfer from your bank account, and most financial institutions can accommodate this type of savings plan for you. Take advantage of this government retirement savings incentive! Julie Leefe is a Certified Financial Planner and Investment Advisor with Bieber Securities Inc. in Winnipeg (website www.biebersecurities.com, toll free 1-800-205-9070). Bieber Securities Inc. is a member of the Canadian Investor Protection Fund. Questions or comments submitted to the publisher, or by e-mail directly to Julie at [email protected] may be answered in a future column if they will benefit the general readership. Otherwise, the writer will try to answer your queries directly.
