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How am I Going to Retire?
Statistics suggest we will spend fewer years working than previous generations and that we anticipate longer, more active retirements. However, as retirement approaches you may rightly feel concerned about whether you have saved enough.
One couple in their late 40s – both income-earners who enjoyed their lifestyle - had been clients of mine for years before becoming concerned that they had not saved enough for retirement.
The first thing we did was prepare a detailed retirement analysis using BMO Nesbitt Burns sophisticated planning software. The results suggested that their dream of early retirement would not be possible unless some changes were made. We made some immediate investment decisions, and will continue to regularly review and update their investment portfolio and retirement plan.
The hardest part of retirement planning – determining what you want your retirement lifestyle to be – is often the most fun. This couple now looks forward to spending time at their cottage, golfing, and with their grandchildren. Once they knew where they wanted to be, it was a lot easier to plan how to get there.
RRSPs and RRIFs - Did You Know…?
An RRSP is one of the few remaining tax shelters available to Canadians. The benefits from investing in an RRSP can be substantial.
RRSP versus Non-RRSP Savings
Why does your money work so much harder in an RRSP? First, your contributions are tax-deductible. The following example shows the benefit of using an RRSP to save for retirement.
In our example, two individuals with earned income each have $5,000 to invest each year. Mary chooses to put her $5,000 in an RRSP and John chooses a non-RRSP investment. If we assume they are both in the 46% tax bracket, even though both investments earn 8% per year, after 25 years Mary has over $272,000 more money that John. The reason the RRSP investment came out so much further ahead is because the income tax is deferred on both the capital invested and the income earned.
Unfortunately for John who chooses to invest his $5000 outside the RRSP, his $5,000 must be taxed before it can be invested. That leaves him with only $2,700 to invest. In addition, all of the income his investment earns is taxed each year. Instead of earning 8%, the non-RRSP investor is earning only 4.32% after tax.
After 25 years, mary’s tax sheltered RRSP investment has grown to $394,772 while John’s non-RRSP investment has grown to only $122,488.
"Assumes a 46 per cent tax bracket; $5,000 invested annually in an RRSP at 8 per cent per annum; $2,700 after tax invested annually at 4.32 per cent per annum after tax. In both scenarios the return is comprised of 100% pure Interest.”
Concerned about saving enough for retirement? Make RRSPs the foundation of your savings program. Contact me to make your RRSP contribution, or to discuss how we can help you achieve your retirement goals.
Advantages of a Spousal RRSP
Spousal RRSPs make a lot of sense if there will be a significant difference between you and your spouse’s income in retirement. Here’s why:
With a Spousal RRSP, the spouse who anticipates a higher retirement income uses his or her RRSP contribution room to make a contribution for the spouse with the lower expected retirement income. A Spousal RRSP is just like a regular RRSP except:
A Spousal RRSP is an ideal way to make sure you and your partner have more equal incomes in retirement, lowering overall income tax and possibly retaining more of government benefits.
Contact me directly : Alex Kastanis (416) 224-2250 to make your RRSP contribution, or to discuss how we can help you achieve your retirement goals.
The comments contained herein are not intended to be a definitive analysis of tax or estate law, and are general in nature. Professional advice regarding an individual's particular tax position should be obtained.