Tag Archives: RRSPs

Age 60, retirement on a lower income – can I do it?

Posted By |

 

 

By Mark Seed

Special to the Financial Independence Hub

Retirement plans come in all shapes and sizes but retirement on a lower income is possible.

Not every Canadian has a house in Toronto or Vancouver they can cash-in on.

Gold-plated pension plans are dwindling.

There are people living in multi-family dwellings striving to make retirement ends meet.

Not every person is in a relationship.

Retirement on a lower income is (and is going to be) a reality for many Canadians. 

Here is a case study to find out if this reader might have enough to retire on a lower income.

(Note: information below has been adapted for this post; assumptions below made for illustrative purposes.)

Hi Mark,

I enjoy reading your path to financial independence and it has inspired me to invest better.  I’ve ditched my high cost mutual funds and I’m now invested in lower costs ETFs inside my RRSP.  I think that should help my retirement plan. 

So, do you think I’m ready to retire at 60?

Here is a bit about me:

  • Single, live in Nova Scotia. No children.
  • Own my home, no debt. I paid off my house by myself about 10 years ago.  No plans to move.  It might be worth $300,000 or so.
  • 1 car is paid for, a 2014 Hyundai SUV. Not sure what that is worth but I don’t plan on buying a new car anytime soon.
  • I have close to $50,000 saved inside my TFSA, all cash, I use that as my emergency fund.
  • I have about $250,000 saved inside my RRSP, invested in 3-4 ETFs now.
  • I have some pension-like income coming to me thanks to my time with a former employer. A LIRA is worth about $140,000 now.  I keep all of that invested in low-cost ETF VCN – one of the low-cost funds in your list here (so thanks for your help!)

I’m thinking of stopping work later this summer, taking Canada Pension Plan (CPP) soon and I will start Old Age Security (OAS) as soon as I can at age 65.

I plan to spend about $3,000 to $4,000 per month (after tax) including travel to Florida, maybe once or twice per year to stay with friends who have a condo there for a week or so at a time.

So …. do you think I’m ready to retire at 60?  Any insights are appreciated.  Thanks for your time.

Steven G.

Thanks for your email Steven G.  It seems like you’ve done well with the emergency fund, killing debt, and investing in lower-cost products to help build your wealth.

Whether you can retire soon (I think you can with some adjustments by the way … see below) will require a host of assumptions to be made in addition to your details above.  This is because all plans, including any for retirement, are looking to make decisions about our future that is always unknown.

To help me make some educated decisions if you can retire on your own with a lower income, I enlisted the help of Owen Winkelmolen, a fee-for-service financial planner (FPSC Level 1) and founder of PlanEasy.ca.

Owen has provided some professional insight to other My Own Advisor readers in these posts here:

What is a LIRA, how should you invest in a LIRA?

My mother is in her early 90s, she just sold her home, now what to do with the money?

This couple wants to spend $50,000 per year in retirement, did they save enough?

Can we join the early retirement FIRE club now, at age 52?

Owen, thoughts?

Owen Winkelmolen analysis

Mark, I echo what you wrote above.  When it comes to retirement planning there are a few important considerations that we always want to review.  You’ll see those assumptions for Steven below.  There are also tax considerations.  Taxes will be one of the largest expenses for many retirees and Steven’s case is no different. In fact, living in Nova Scotia unfortunately means that Steven will be paying the highest tax rate in the country for his income level.  Let’s look at some assumptions first so we can run some math:

  • Assume income (today) of $60,000 per year (pre-tax).
  • OAS: Assume full OAS at age 65 $7,217/year.
  • CPP: Assume 35 years of full CPP contributions (ages 25-60) and a few years with partial contributions
    • CPP at age 60 = $8,580/year.
    • CPP at age 65 = $13,967/year (assumes future contributions in line with $60,000 income and includes new enhanced CPP benefits as of 2019).
  • Assume ETF portfolio with average fees 0.16%. Good job on VCN Steven!
  • Assume $85,000 in available RRSP contribution room.
  • Assume $13,500 in available TFSA contribution room.
  • Assume birthdate Aug 1, 1959.
  • Assume assertive risk investor profile.

Based on Steven’s current employment income, I’ve gone ahead and estimated that he will be paying around $14,000 in income tax each year (give or take depending on tax credits, etc.) At this income level Steven is paying the highest tax rate out of any province in Canada. Ouch … but reality. Continue Reading…

Retired Money: Can an RRSP or a RRIF ever be “too large?”

Posted By |
MoneySense.ca

My latest MoneySense Retired Money column looks at a problem some think is a nice one for retirees to have: can an RRSP — and ultimately a RRIF — ever become too large? You can find the full column by clicking on the adjacent highlighted headline: How large an RRSP is too large for Retirement?

This is a surprisingly controversial topic. Some financial advisors advocate “melting down” RRSPs in the interim period between full employment and the end of one’s 71st year, when RRIFs are typically slated to begin their annual (and taxable) minimum withdrawals. Usually, RRSP meltdowns occur in your 60s: I began to do so personally a few years ago, albeit within the confines of a very conservative approach to the 4% Rule.

As the piece points out, tax does start to become problematic upon the death of the first member of a senior couple. At that point, a couple no longer has the advantage of having two sets of income streams taxed in two sets of hands: ideally in lower tax brackets.

True, the death of the first spouse may not be a huge tax problem, since the proceeds of RRSPs and RRIFs pass tax-free to the survivor, assuming proper beneficiary designations. But that does result in a far larger RRIF in the hands of the survivor, which means much of the rising annual taxable RRIF withdrawals may start to occur in the higher tax brackets. And of course if both members of a couple die with a huge combined RRIF, their heirs may share half the estate with the Canada Revenue Agency.

For many seniors, the main reason to start drawing down early on an RRSP is to avoid or minimize clawbacks of Old Age Security (OAS) benefits, which begin for most at age 65. One guideline is any RRSP or RRIF that exceeds the $77,580 (in 2019) threshold where OAS benefits begin to get clawed back. Of course you also need to consider your other income sources, including employer pensions, CPP and non-registered income.

Adrian Mastracci

“A nice problem to have.”

But the MoneySense column also introduces the counterargument nicely articulated by Adrian Mastracci, fiduciary portfolio manager with Vancouver-based Lycos Asset Management. Mastracci, who is also a blogger and occasional contributor to the Hub, is fond of saying to clients “A too-large RRSP is a nice problem to have!”

Retirement can last a long time: from 65 to the mid 90s can be three decades: a long time for portfolios to keep delivering. A larger RRIF down the road gives retirees more financial options, given the ravages of inflation, rising life expectancies, possible losses in bear markets, low-return environments and rising healthcare costs in one’s twilight years. These factors are beyond investors’ control, in which case Mastracci quips, “So much for the too-big RRSP.”

 

Tax hacks: Top 5 tax filing tips to get the most out of this tax season

Posted By |

 

By Clayton Brown (Sponsor Content)

Are you leaving money on the table when it comes time to file your taxes? Lots of people do. They don’t bother applying for grants. They leave that ratty pile of expense receipts in the drawer (where they left it last year, too). And they don’t take full advantage of the deductions to which they are entitled.

Let’s get your taxes done right and get the biggest possible tax refund. Here are some tips about pitfalls to avoid, and easy things you can do to make that happen.

Tip 1. Don’t forget to deduct your deductions!

Remember, that tax refund you want isn’t a freebie from the government. It’s your money! They’re just holding it for you. So get it back, by claiming allowable deductions!

Hold on a second. What’s a deduction? It’s an amount you can deduct from your taxable income, thereby paying tax on a lower income.

We’ve noted a few common deductions here to save you some time.

RRSP contributions. You’ll need all of your RRSP slips … right? Actually, not so much! All you need is the dollar amount. Look at the transaction history for your RRSP contributions (which might just be a few lump sum contributions, or from an automatic savings plan) and add up all the contributions you’ve made. It’s a good idea to hang on to the receipts in case you’re audited but you don’t actually need them!

(You should have received them by now: see the timeline of forms below). Lower your taxable income by contributing to your retirement savings.)

Your annual contribution is limited to 18% of your previous tax year’s earned income, plus any unused carry forward room from previous years.

Child care costs. Did you pay someone else to look after your little ones while you went off to work or advanced your education?

The government lets you deduct up to $8,000 per child, for kids under 7. You can deduct up to $5,000 per child for those aged 7 to 16 (just guessing, but maybe there’s a government ratio in there that accounts for cuteness, which declines precipitously after age 6). For disabled or dependent children of any age, the maximum claim is $11,000.

Tip 2. Don’t forget to claim your credits!

A credit is an expense you can claim to reduce your taxes payable. It’s not the same as a deduction, which comes off the top of your income. But a credit is not a 1-to-1 deduction. A $500 credit is not the same as $500 off your tax bill. Check out this list of all available deductions and credits.

One example: interest paid on student loans. This is a pretty sweet deal. You can claim any interest on your student loans as a non-refundable credit. For student loans, the tax credit (federal and provincial) is calculated by multiplying the lowest federal/provincial/territorial tax rate by the amount of the loan interest.

Medical credits are another one that people forget about. You can apply credits to certain medical expenses. Charitable donations are also popular credits.

Credits can be non-refundable or refundable. A refundable tax credit means you’ll get the value for that credit, even if the tax bill is zero. But a non-refundable tax credit will only reduce your tax bill to zero.

Tip 3. Don’t file your taxes before you have all of the information you need

This is a super-common mistake. But filing too early could cost you extra time and money later, if you need to file all over again. Better to wait a bit and do it right the first time. Continue Reading…

Are current beliefs about RRSPs costing Canadians money in the long term?

Posted By |

By Edward Kholodenko

Special to the Financial Independence Hub

A recent study we conducted with Leger (www.leger360.com) asking what Canadians wanted in relation to their RRSP investments unearthed some compelling findings demonstrating that many Canadians have misconceptions that could be costing them money, especially in the long term.

Our research confirmed 78 per cent would be willing to switch to a lower-fee RRSP investment, if the lower fees could ensure a superior rate of return.  When we asked if they were able to move their RRSP easily, which factors would be most important, 66 per cent once again said they would move accounts for lower fees and better returns.

In addition to lower fees and higher returns, 31 per cent of people we talked to identified the ability to easily manage their RRSPs and make contributions online as a factor to consider in a switch (highest in those between the ages of 25 – 44 years), speaking perhaps to the rising appeal of newer fintech companies who offer the ability to do everything online.

When asked for other reasons they might consider switching their RRSPs, respondents cited frustrations including feeling like they’re being upsold (28 per cent), having to book an appointment and visit their financial institution in person (27 per cent) and not knowing what their RRSP is invested in (26 per cent).

This strongly suggests Canadians are far from content with their current RRSP contribution process and provider and would be willing to switch; however, there are misconceptions that are holding people back.  Most interesting — only 50 per cent believe their RRSPs can easily be transferred between financial institutions.

Common misconceptions

Why? Common misconceptions included high transfer fees (32 per cent), incurring a tax penalty (24 per cent) and even the fear of an uncomfortable conversation with their current advisor or financial institution (16 per cent).  While only 50 per cent of Canadians told us that they believe their RRSP can be easily moved between financial institutions, the reality is that RRSPs are easy to transfer.  There are no tax penalties incurred when an account is transferred and furthermore, most institutions would cover the cost of any transfer fee that may be charged and by consolidating your RRSPs at an institution with lower fees, you may reach your retirement goals faster. Continue Reading…

The Beginner’s Guide to RRSPs

Posted By |

More than sixty years after the federal government introduced the Registered Retirement Savings Plan as a vehicle to save for the future, RRSPs still remain one of the cornerstones of retirement planning for Canadians. In fact, as employer pension plans become increasingly rare, the ability to save inside an RRSP over the course of a career can often make or break your retirement.

Here’s a beginner’s guide to RRSPs:

The deadline to make RRSP contributions for the 2018 tax year is March 1st, 2019.

Anyone living in Canada who has earned income can and should file a tax return to start building RRSP contribution room. Canadian taxpayers can contribute to their RRSP until December 31st of the year he or she turns 71.

Contribution room is based on 18 per cent of your earned income from the previous year, up to a maximum contribution limit of $26,230 for the 2018 tax year. Don’t worry if you’re not able to use up your entire RRSP contribution room in a given year: unused contribution room can be carried-forward indefinitely.

Keep an eye on over-contributions, however, as the taxman levies a stiff 1 percent penalty per month for contributions that exceed your deduction limit. The good news is that the government built in a safeguard against possible errors and so you can over-contribute a cumulative lifetime total of $2,000 to your RRSP without incurring a penalty tax.

Find out your RRSP deduction limit on your latest notice of assessment or online using CRA’s My Account service.

You can claim a tax deduction for the amount you contribute to your RRSP each year, which reduces your taxable income. However, just because you made an RRSP contribution doesn’t mean you have to claim the deduction in that tax year. It might make sense to wait until you are in a higher tax bracket to claim the deduction.

When should you contribute to an RRSP?

When your employer offers a matching program: Some companies offer to match their employees’ RRSP contributions, often adding between 25 cents and $1.50 for every dollar put into the plan. Sadly, many Canadians fail to take advantage of this “free” gift from their employers: giving up a guaranteed 25-to-150 per cent return on their contributions.

When your income is higher now than it’s expected to be in retirement: RRSPs are meant to work as a tax-deferral strategy, meaning you get a tax-deduction on your contributions today and your investments grow tax-free until it’s time to withdraw the funds in retirement, a time when you’ll hopefully be taxed at a lower rate. So contributing to your RRSP makes more sense during your high-income working years rather than when you’re just starting out in an entry-level position.

Related: A sensible RRSP vs. TFSA comparison

A good rule of thumb: Consider what is going to benefit you the most from a tax perspective.

When you want to take advantage of the Home Buyers’ Plan: First-time homebuyers can withdraw up to $25,000 from their RRSP tax free to put towards a down payment on a home. Would-be buyers can also team up with their spouse or partner to each withdraw $25,000 when they purchase a home together. The withdrawals must be paid back over a period of 15 years; if not, the amount is added to your taxable income for the year.

You can claim a tax deduction for the amount you contribute to your RRSP each year, which reduces your taxable income. However, just because you made an RRSP contribution doesn’t mean you have to claim the deduction in that tax year. It might make sense to wait until you are in a higher tax bracket to claim the deduction.

When should you contribute to an RRSP?

When your employer offers a matching program: Some companies offer to match their employees’ RRSP contributions, often adding between 25 cents and $1.50 for every dollar put into the plan. Sadly, many Canadians fail to take advantage of this “free” gift from their employers, giving up a guaranteed 25-to-150 per cent return on their contributions.

When your income is higher now than it’s expected to be in retirement: RRSPs are meant to work as a tax-deferral strategy, meaning you get a tax-deduction on your contributions today and your investments grow tax-free until it’s time to withdraw the funds in retirement, a time when you’ll hopefully be taxed at a lower rate. So contributing to your RRSP makes more sense during your high-income working years rather than when you’re just starting out in an entry-level position. Continue Reading…