All posts by Robb Engen

Can you retire on a million dollars?

In your 20s and 30s, retirement is so far away that you can barely see it on the horizon. The best way to get there is to save what you can afford – say 10 per cent of your income – and then readjust your financial compass as you get closer and have more information.

You might start the journey with the idea that you need a million dollars or more once you reach your destination. To get to one million by age 65, a 30-year-old would need to save $8,500 per year for 35 years, assuming a 6 per cent annual return.

Saving for Retirement

It’s not easy to save $700+ per month in your thirties. Competing priorities like a mortgage, car payments, and raising children often means that retirement savings are put on hold.  Put off saving until you reach 40 and you’re now faced with the daunting task of saving more than $1,400 per month for the next 25 years to reach that million dollar mark.

Some might feel it’s prudent to pay off the mortgage and max out children’s RESPs before ramping up their own retirement savings. By age 50, most of those obligations should be taken care of which should now free up significant cash flow to save for retirement. It’ll need to be significant to reach a million. With only 15 years to go now, compound interest is not on your side, and so you’ll need to save nearly $3,400 per month – or $40,000 per year – to get to your retirement goal.

A tempting alternative at this point is to adjust your expected rate of return. After all, with an 8 per cent return you’d only need to save $2,800 per month, and at 10 per cent you’d need to put away less than $2,400 per month.

But the more realistic approach would be to adjust your expected retirement age and then figure out if a million dollars is really the amount you need to enjoy a comfortable retirement. You’d be surprised to learn you can live off much less.

Related: Have you considered a permanent retirement overseas? Read this:

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How CDIC would protect Deposits if Home Capital goes bankrupt

Canada has not seen a bank failure since Security Home Mortgage Corporation, a Calgary-based company, went bankrupt in 1996, putting $42 million in bank deposits at risk.

Two decades later we have another mortgage company, Home Capital Group, teetering on the brink of bankruptcy. Deposits at Home Capital were expected to fall to $192 million this week, down 90 per cent from the roughly $2 billion it held at the end of March. To stay afloat the embattled company took out a $2 billion lifeline (at a punitive interest rate) and suspended its dividend.

It truly is a run on the bank, and clients of Home Capital, which includes subsidiaries Home Trust and Oaken Financial, are concerned about their deposits. Should they be? Perhaps not. Home Trust is a member of Canada Deposit Insurance Corporation (CDIC), which handled the Security Home Mortgage Corporation collapse in 1996 and restored client deposits within three weeks.

But clients aren’t taking any chances. As Rob Carrick pointed out on Twitter, even GIC deposits are being redeemed early:

@rcarrick Am surprised at the number of people who say they’re considering paying a penalty to redeem CDIC-protected GICs from alt banks, trusts etc.

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The Long & Short of it: Long vs. Short-term Mortgages

Interest rates have nowhere to go but up. No doubt you’ve heard this line if you’ve bought a home or had to renew your mortgage at some point in the past decade, followed by an eager banker or mortgage broker urging you to “lock in” now.

Most homeowners in Canada prefer fixed-rate terms for predictability and peace of mind, with five-year terms being the most popular.

Yet despite its popularity, the five-year fixed rate is likely the least advantageous term for borrowers.

Going Long: 10-Year Mortgage Term

For those looking for greater protection against (eventual) rising interest rates, a longer term is worth a look. A 10-year fixed rate mortgage today can be had for as low as 3.69 per cent.

Another reason to consider a longer mortgage term: a safeguard against the possibility of a housing crash. What happens if prices fall 20 per cent or more in the next few years, wiping away your home equity before it’s time to renew? A 10-year term, while more expensive than a shorter term, does offer a double-dose of protection in case prices fall or interest rates rise substantially. Continue Reading…

Which accounts to tap first in Retirement?

Retirees, or those close to retirement, may have several buckets from which to withdraw income in retirement.

There may be assets in RRSPs, taxable or non-registered investment accounts, TFSAs, and possibly corporate or small business assets. At retirement you need to consider which of these accounts to tap into first.

To further complicate matters you might also have income from a workplace pension, not to mention government benefits such as CPP and OAS (and when to apply for these benefits).

The natural inclination, both from a behavioural and a tax planning perspective, is to put off paying taxes for as long as possible. For Canadians, that means leaving assets inside their RRSP(s) until age 71, converting their RRSP into a RRIF, and beginning RRIF withdrawals in the year they turn 72.

Delaying CPP and OAS

Also worth consideration is the incentive for retirees to delay their application for CPP and OAS until age 70. Do this and your CPP benefits will increase by 42 per cent and OAS benefits will rise by 36 per cent versus taking these entitlements at 65.

Tax-Free Savings Accounts (TFSAs) have been around for less than a decade but already play a critical role in retirement planning. Money saved inside a TFSA grows tax-free and you pay no tax on withdrawals. For retirees, an added benefit of TFSAs is that any money withdrawn does not affect means-tested programs such as OAS and GIS, so there’s no chance that a clawback will be triggered by this income.

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Tax Deductions and Tax Credits: What’s the Difference?

Canadian taxpayers have until May 1, 2017 to file their 2016 taxes. However, before the calendar turns over to a new year many Canadians want to know how best to maximize their tax refund or minimize what they owe the government.

The two main ways to reduce taxes owing are through tax deductions and tax credits. What’s the difference between a deduction and a credit? Let’s explore:

Tax Deductions

A deduction reduces your taxable income. The value of a deduction depends on your marginal tax rate. So, if your income is more than $200,000, you are taxed at the federal rate of 33 per cent and a $1,000 deduction would save you $330 in federal tax. On the other hand, if you were earning $30,000, you are taxed at the federal rate of only 15 per cent and a deduction of $1,000 would only save you $150 in federal tax.

An example of a tax deduction is your RRSP contribution.

Deductions checklist

  • RRSP contributions
  • Union or professional dues
  • Child care expenses
  • Moving expenses
  • Support payments
  • Employment expenses (w/ T2200)
  • Carrying charges or interest expense to earn business or investment income

Tax Credits

There are two types of tax credits: refundable and non-refundable. A non-refundable tax credit is applied directly against your tax payable. So if you have tax owing of $500 and get a tax credit of $100, you now only owe $400. If you don’t owe any tax, non-refundable credits are of no benefit. For refundable tax credits such as the GST/HST credit, you will receive the credit even if you have no tax owing.

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