by Thomas Johnson
I’ve met with many Manitobans who have gone decades of adult life without hiring a Financial Advisor. Some haven’t felt the need (minimal debt and savings, no kids, healthy pension) and a few DIYers simply enjoy researching all things personal finance! No matter the situation, there always seems to come a time when professional advice is a must. So when is the right time to get advice?
Listen to your gut:
The best tip I can give for beginning to work with a Financial Advisor is to listen to your gut. If you’re feeling an inkling of ‘doubt’ in your current plans you likely need some assistance. One of the biggest value adds from working with a good Financial Advisor is confidence! Even if you’re on the right track already, assurance from an experienced professional can go a long way to avoid losing sleep!
A second gut signal may be the sensation that you’re “spinning your tires” when it comes to financial progress. If you don’t feel like you’re on the right trajectory with your current plans, a Financial Advisor can give you direction. Or at the very least some perspective on the actual progress you’ve made.
Watch For These Signals:
What if you’re not feeling like anything is off in your plans? Are there any events or triggers that should inspire a conversation with an Advisor? Watch out for these “red flags” as they may be a sign that it’s time to consult with a professional:
- You’re getting serious about a retirement date. Don’t wait until you’ve handed in your notice to start planning the financial side of your retirement! Even if you’re 10 or 15 years away from actually retiring, you will find tremendous value in being financially prepared. Your Financial Advisor can model a variety of scenarios and outcomes to help you pick the right path for your family.
- You’re undergoing a BIG life event. A major milestone or life event can necessitate a chat with a professional. Changing careers, having kids, separating from a spouse or losing a loved one can trigger a myriad of financial decisions. Having someone in your corner to help work through the details can really save you time and stress.
- Stuff is getting complicated. Blended families, family trusts, holding companies. Sometimes accounting and legal affairs creep into our lives and the complexity can really stack up. If you find your life is getting too complicated to keep track of, a Financial Advisor can organize and simplify your financial picture.
Where To Start:
Figuring out you’re ready for a financial planning relationship is hard enough as it is. The next steps are to find an Advisor who is right for you! Consider asking friends and family for a quality referral and make sure you interview more than one.
No two Advisors are alike in their processes, experience, expertise or personality. Retirement is a long-term commitment and hiring the right Advisor to work through it with you can make all the difference!
by Thomas Johnson
If you’ve ever explored the nuances of Registered Retirement Savings Plans (RRSPs), you may already be aware you can’t own them forever. It is mandatory that all RRSPs be converted into Registered Retirement Income Funds (RRIFs) by December 31st of the year you turn 71. This begs the question: “should everyone wait until they’re 71 to start a RRIF? Or is there a better time?”
Let’s start by understanding RRIFs a little better and how they differ from RRSPs. RRIFs really only have two key rules that make them unique. The first rule is that you’re no longer able to make new contributions (unless you’re rolling in another, pre-existing RRIF or RRSP account). The second is that you must take at least a minimum withdrawal from the RRIF each year. The dollar amount is determined by a formula, using your age and the account’s value at the start of the year. The older you are, and the more money in your RRIF, the higher your minimum withdrawal will be!
I like to think of RRIFs as turning on leaky faucet. Once you’ve committed to a RRIF, some money will come out every year whether you want it or not. You can turn the flow down to a “drip,” but you can never turn the tap all the way off! Controlling when you turn that tap on for the first time is crucial to proper tax and retirement planning.
Who should defer starting their RRIF before age 71? Namely people who have high or fluctuating incomes from other sources. If you’re still working in your 50s and 60s, adding on a layer of taxable RRIF income may do your plans more harm than good. Remember, RRIF income is going to unavoidably keep flowing year after year. Triggering the inflows in high tax years is a missed opportunity for tax deferral and (potential) tax reduction!
Who should consider starting their RRIFs early? Primarily they fall into one of three camps:
- People who don’t have other sources of pension income. Unlike an RRSP withdrawal, a RRIF payment qualifies as “pension income” on your tax return. This could enable you to qualify for the pension tax credit if you’re over the age of 55, or for pension income splitting if you’re over the age of 65. Getting an extra 6-16 years of tax breaks may be a big boost to your retirement plans!
- People who are deferring CPP and OAS. Holding off on your government pensions has a substantial, guaranteed rate of return. From age 60 to 65, your CPP benefits are enhanced by 7.2% per year for deferring. From age 65 to 70, it’s 8.4% per year. OAS benefits follow a similar enhancement of 7.2% per year by deferring from 65 to 70. A reasonable retirement strategy to explore is to draw down your RRIF early and delay the guaranteed government benefits for later!
- People who need the money to fund their retirement! Deferring your RRIF income for later has some significant pros. However, the last thing I believe any retiree should do though is sacrifice the enjoyment of their retirement to achieve optimal financial planning. If a successful, meaningful retirement is contingent on you accessing your RRSPs before the age of 71, do it!
If you have the choice about when to start your RRIF payments, consult with your Financial Planner and Accountant. Waiting until you’re forced to make the switch can be advantageous for some and a lost opportunity for others. Like most major financial decisions, the timing of when to start your RRIF income stream is unique to your circumstances!
by Thomas Johnson
It’s common knowledge that many Manitobans work for employers with a defined benefit pension. Teachers, nurses, government employees and MB Hydro workers make up a significant portion of our workforce! While having an employer-funded pension is a great start to your retirement plans, you likely shouldn’t stop there.
Defined benefit pensions can provide a consistent income in retirement, similar to the paycheque you’re receiving today. When combined with other income streams, like CPP and OAS, you can likely replicate a significant percentage of today’s income while living in retirement. Sounds great, right?
The biggest problem most pensioners face in their retirement years relates to the timing of cash flows. Especially when large purchases or emergencies come in to play.
Do your retirement plans include warm vacations? A new car perhaps? Replacing a furnace, roof, or windows in your home?
For most people, it’s not a matter of if a lump sum of money is needed in retirement, but when. So if your retirement assets are exclusively monthly incomes (like pension payments), you may find yourself in scrimping and saving mode or cycling through debt to cover the shortfalls. Cutting back on living your dream retirement, to afford the payments on an engine repair, sounds more like a nightmare to me.
To avoid this dilemma, consider building a stockpile of retirement savings, over-and-above your pension. Set money aside specifically for the lump sum expenses of the future. For this type of goal, Tax Free Savings Accounts make an excellent investment vehicle since they alleviate tax headaches when making withdrawals.
Counting on your pension for 100% of your retirement needs could wind up a costly and stressful mistake. If the idea of saving money for future expenses seems daunting now, it will likely only be harder when you’re living on those fixed incomes in retirement. Starting soon, even just starting small, can make all the difference in leaving money stress behind for good!
by Thomas Johnson
“Why should I do tax planning? I already have an accountant doing my tax returns.” I hear these kinds of phrases all the time when working with clients. By-and-large, there is a great deal of misconceptions in the financial services space around tax planning vs. filing taxes.
Your accountant will prepare, record and submit the history of your income for the previous year. They are there to ensure your filings accurately represent actions taken in the past. That is the value of “filing taxes.” A good financial planner will take a forward-looking approach to your financial situation to help optimize your tax position in the future. That is the value of “tax planning.”
When it comes to retirement your income tax situation is incredibly important, making tax planning increasingly valuable. Timing out incomes and deductions can be an incredibly powerful tool in your retirement toolkit. If you don’t plan ahead, you could be faced with:
OAS Clawback: for higher-earning seniors in Canada, you could be missing out on a significant income source. Canadians over the age of 65 are eligible to begin receiving their Old Age Security (OAS) payments each month. If your taxable income exceeds $79,845 in 2021, you’ll start forfeiting some of that benefit, at a rate of $0.15 for each dollar above the threshold. By planning for taxable incomes ahead of time, you may be able to reduce or eliminate the impact of OAS clawback!
Higher Cost of Living: in Manitoba, many programs link your taxable income to the price you pay for that service. Two great examples are assisted living facilities and Pharmacare. Personal care services for Manitobans charge a daily rate, based entirely off your net taxable income as reported on your tax return. Pharmacare, which covers prescription medications, increases the deductible as your net taxable income increases. For retirees who require medical assistance, your taxable income is a very significant factor in your cost of living. Those that are able to access cash, without triggering taxable income, could wind up paying far less for the same level of service!
Tax Bracket Changes: in 2021, the largest jumps in marginal tax rates in Manitoba exist at the $49,020 income mark (from 27.75% to 33.25%) and again at the $98,040 mark (from 37.90% to 43.40%). For individuals with the ability to adjust their taxable income, keeping close to, or under, these thresholds can mean huge tax savings!
These are just a handful of the expensive mistakes that can occur when tax planning is done improperly (or not at all). Taking the time to plan ahead for income tax is crucial.
Tax is one of those areas that, once done, can’t be easily undone. So set yourself up for success in the future by adding some tax planning to your retirement plans.
by Thomas Johnson
Last week, we went over the basics of planning for the eventual exit from a business. If you haven’t read that post, I highly recommend starting there! A successful transition out of a business is a big win for retirement planning.
This week is all about the other, smaller-but-still-valuable things you can do as a business owner to give yourself a leg up in your retirement plans. These strategies aren’t for everyone and you should definitely consult with your financial planning, accounting and legal teams before implementing any one of them.
- Corporate Investing. Individuals have limited options for “where” they can invest their dollars. RRSPs, TFSAs, and Non-Registered accounts are the status quo for individuals. Incorporated business owners have the additional flexibility of owning Non-Registered accounts inside a corporation. Why own investments inside of your corporation? One-word answer: taxes.
If your business earns $1 of revenue, you can pay yourself $1 of salary and the business deducts the expense. If you, in turn, buy $1 of RRSPs, you deduct the contribution and pay no taxes on that dollar until you withdraw it. Instead, should you choose to invest in a TFSA or personal Non-Registered account, there’s no deduction to claim. This line of investing makes your $1 of salary fully taxable. With a top personal tax rate of 50.40% in Manitoba, that could leave you as little as $0.49 to invest.
If you invest that $1 of revenue inside an account owned by the business, only corporate income tax is paid. In Manitoba, for businesses with less than $500,000 of net income, the tax rate is only 9%. That would enable you to invest $0.91 inside the business compared to $0.49 personally! This difference in tax rates often makes corporate investing the second most tax-effective strategy for business owners, behind only the RRSP.
- Individual Pension Plans. Salaried employees are at the whim of their employer for whether or not they participate in a pension program. Business owners on the other hand, can create their own! Individual Pension Plans (or IPPs) enable business owners to fund a defined benefit pension for their retirement. IPPs require some actuarial assistance, but often enable higher, tax-deductible deposits than RRSPs. IPPs are structured as Defined Benefit Pension Plans, guaranteeing the inevitable retirement income stream!
- Corporately Owned Life Insurance. Just as with corporate investing, business owners can have their companies be the owner and payor on their life insurance policies. This can have a multitude of benefits, such as using “cheaper” after-tax corporate dollars to pay premiums than after-tax personal dollars. For an individual to pay $1,000 in life insurance premiums at a 50.40% marginal tax rate, they need $2,016 of salary. For a corporation to pay $1,000 in life insurance premiums at a 9% tax rate, they only need $1,098 of revenue.
Some life insurance policies enable the accumulation of cash values inside the policy. This accumulation grows on a tax-deferred basis, even when the policy is corporately owned! This can enable corporately owned life insurance policies to double as a tax advantaged savings vehicle for the owner.
Aside from alternate investment structures, business owners can take advantage of their corporate structures for other personal benefits. Strategies such as income splitting with a spouse, timing of income or taking dividends over salary, just to name a few.
The moral of the story is quite simple. The journey to an earlier, more secure retirement for business owners doesn’t start at retirement. By planning ahead, maximizing your resource and planning for an effective transition, you can magnify the financial impact of your business success!
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