How much is enough in retirement?

Well, it depends.

The rule of thumb that you only need 70% of your pre-retirement income is too simplistic.   For some people, it is sufficient.   But for many, it is not.

A good start in determining how much you’ll need in retirement is to break down your budget into two categories of spending –

  • necessities (basic food, shelter, clothing, medication, etc.), and
  • discretionary (travel, dining out, entertainment, money for a new car every years, etc.)

If your basic needs add up to 50% of your after-tax income, you will have up to another 50% for discretionary spending.  So if you choose to spend only 25% on discretionary items, then you will need a total of 75% of your current income in retirement.

And remember to take into account in your calculation that certain expenses will decline or even disappear in retirement.   For example, you will no longer have to make CPP or EI contributions, income tax will likely decrease, and the need to buy work clothes will be a thing of the past.

On the other hand, certain costs will likely increase in retirement.    Healthcare and hobby related expenses will likely go up.   So include these items in your retirement budget.

The last bit of planning is to make sure you will have enough income to take care of your retirement needs when you retire, before you retire.

Canadian Tax Myths and Tips

Canadian tax filings can be daunting.   Here are a few articles to help you through the process this season that I think is worth your read.  The first two from CBC News and the 3rd from a recent blog post from the Women’s Financial Learning Centre. –

  1. www.cbc.ca/news/business/taxes/10-tax-filing-myths-that-could-cost-you-money-1.1266240
  2. www.cbc.ca/news/business/taxes/tax-season-2015-10-ways-to-attract-a-cra-auditor-s-attention-1.2969196
  3. www.womensfinanciallearning.ca/2016/03/09/5-tax-filing-tips-to-save-you-time-and-money/#more-1802

 

 

It’s RRSP Time Again!

ReviewYrInvests (640x471)

Needless to say, it’s that time of the year again when some of us are scrounging for money and time to invest to our Registered Retirement Savings Plan (RRSP).

If you’re a procrastinator and haven’t got around to contributing yet, here are a few things to keep in mind.

• Deadline for this year is 11:59pm Monday, February 29, 2016.

• If you have high income in 2015 and projected low income for 2016, you may want to use RRSP contributions (2015)/withdrawals (2016) to equalize your income of both years to save on the overall income taxes for the combined two years.

• Contribute to a spousal RRSP if you’re the high income earner in the household. This will enable you the tax deductions and equalize both your retirement income down the road on retirement.

• If you have no or low income in 2015, you probably want to skip the contribution altogether for this year. This is especially applicable if you anticipate higher income years in the near future which can benefit more from your contributions then.

• Do not exceed your RRSP contribution limit. Check your Notice of Assessment for the maximum amount you’re allowed. There’s a maximum over-contribution limit of $2,000 and going over will end up attracting a steep penalty.

Other considerations

• Don’t rush into the wrong investments when you make your RRSP contributions. Temporarily park your contributions into a cash account within your plan. Take your time and make your investment decision later when you’ve done your due diligence.

• Consider appointing a beneficiary.

• Keep in mind any RRSP withdrawals are taxable in the year of withdrawal.

• Keep in mind any spousal RRSP withdrawals may be taxable by the higher income earner if the rules are not followed. Consult with your advisor before making this move.

• You can still make contributions to a spousal RRSP after you turned 71 if you have the room, providing your spouse is not yet 71.

• And remember your RRSP is, first and foremost, savings for your retirement. Do not use it as a short term savings vehicle.

2015 year-end tax saving tips

cutting taxes

 

 

 

Tax rules are getting more complex and cumbersome. That’s why it is important to spend time and make an effort to legally maximize your personal tax deductions and minimize your taxes.

Prior to year-end is a good time to do just that. It’s your opportunity to take advantage of available deductions before they expire or become unavailable for the current year.
For 2015, here are some common tax saving reminders …
1) Paying tax deductible expenses
these deductions are only available when they are paid. Tax deductible alimony payments, child care expenses, investment counsel fees and interest on borrowings for investing or business purpose are common deductible expenses.

2) Paying for items that qualify for tax credits
these payments may give rise to refundable/non-refundable tax credits but only if they are paid within the calendar year. Items include dental and medical expenses, charitable donations, political contributions, children’s fitness and arts program fees, tuition fees, student loan interest and monthly transit passes.

3) Review non registered investment portfolios to crystallize your losses
here’s an opportunity to rid your unwanted losing investments and lock in their losses to offset your other capital gains. These losses can be applied against 2015 as well as available for carry back to any or all of the previous 3 years. All trades must be settled by Dec 24, 2015 for Canadian exchanges and Dec 28, 2015 for the US exchanges. Check for potentially different trade dates for mutual fund dispositions. (Caution – watch out for superficial loss rule which will nullify your losses for tax purpose.)

4) RRSP contributions
you have until February 29, 2016 to contribute to your RRSP or spousal RRSP to qualify for 2015 deductions. If you are turning (or have turned) 71 this year, December 31, 2015 is your deadline for one final contribution to your RRSP.

 

Some 2015 changes in tax rules:
– Indexing of adoption tax credit of $15,000.
– Child care deduction increases to $8,000 for children under 7, $5,000 for children 7 to 16, and $11,000 for children eligible for the disability tax credit
– Child fitness tax credit will be a refundable tax credit starting in 2015.
– A non-refundable Home Accessibility Tax Credit of up to $10,000 will be available in 2016 for expenditures made in 2015. This is available to seniors and persons eligible for the disability tax credit.
– Enhancement of the Universal Childcare Benefit program. The amount has been increased by $60 a month and is taxable to the lower income spouse. At the same time, the children’s credit of $2,255 a year, has been eliminated.

Automate your financial life

automate to organize

Life’s not always a beach.   There’s work to be done and things to plan for before you play.   So let’s start the new year off on the right foot, and make a simple plan for your 2014 saving plan.

Don’t want to have to scramble (again) to deal with last minute financial tasks, like RRSP contribution and tax filing organization?   Well, you can make life easier on yourself by sparing a few moments now to plan ahead.    Here is a financial 5’er list on what to automate now to simplify your life for the rest of the year.

  1. Automate your files for your tax filing papers:   Set up a few folders to handle all the tax papers that should be arriving soon for this year’s tax filing – tax slips, investment activities summaries; donations, medical and other receipts, etc.  Keep these paperwork organized by keeping receipts categorized using envelops and folders.   Make sure you mark them clearly to indicate their paper contents.   A good starting point is to see what receipts were used from your previous year’s filing.
  2. Automate your RRSP contributions (*) for this year:  For many tax filers, this is still a good way to save money and defer/reduce tax at the same time.   Setting up an automatic savings plan for as little as $50 a week will yield you at least $2,600 a year in contributions!;
  3. Automate to maximize your TFSA contributions (*) for this year:  Although your contributions are not tax deductible, the income generated is tax free.   You can save your annual contribution limit of $5,500 by setting up an automatic savings plan of only $106 a week.;
  4. Automate to maximize your RESP contributions (*) for this year:   There’s free money from the government (grants) to help with your child or grandchild’s post secondary education.  Up to 20% of your contributions to a maximum of $500 a year is available per child.   By setting up an automatic contribution of $50 a week will add up to $2,500 a year, and the plan will also be entitled to the maximum $500 grant.;
  5. Automate your donations for this year:  Registered charities prefer receiving regular donations from their supporters than one time donations.   It helps them to budget their operations better and for you, it is a no-brainer way to donate.   You can set up as little as $20 a month automatic donation to yield you a $240 donation receipt at the end of the year.   Check here for information on the super credit available for first time donors.

 

It’s a good idea to set up these automatic savings and out-transfers at the same time as when your paycheques are deposited into your chequing account.   That way, you’ll be more likely to reduce your spending because the money is not in the account anymore.

Now pat yourself on the back for a job well done.   You’re set for a more organized and well planned out 2014!

 

*    You are strongly advised to meet with your financial advisor/accountant/tax preparer to determine your optimal contributions level for your specific circumstance.

Rethink New Year Resolutions

Many of us think to make resolutions for the new year and that’s a good thing.   But instead of the popular “I want to lose weight” or “I’m going to quit smoking (drinking, etc. …)”, go one step further by adding 2 measurable perimeters to your resolution.

The first is to give it an amount that is a number.    For example, instead of “I want to lose weight”, your resolution need to include “20 lbs (weight)”.

The second perimeter is to give the resolution a deadline.       So if your resolution is to “Quit smoking”, state “I want to completely stop my one-pack-a-day cigarette smoking habit by June 30, 2014”.

These two perimeters help you define further your goals and how to achieve them.   They are measurable and you can monitor them as your progress.

Of course, don’t be too hard on yourself with resolutions.   Don’t beat yourself up if you didn’t lose the 20 lbs by June 30th (bikini season), instead celebrate your achievement of losing 10.   Revisit your resolution and reset your goal.   Was it a bit too ambitious?   Was it realistic?

The bottom line is to make new year resolutions that are right for you, and are achievable and measurable.  Than put in some hard work and keep your eye on the prize (resolution goal).    And don’t forget to celebrate the milestones along the way.

So what is your New Year resolution for 2014?

Best kept secret in retirement contribution investing … the SPP!

Did you know that you can contribute to a Saskatchewan Pension Plan (SPP) even if you don’t live in Saskatchewan?   Yes folks, this is absolutely true.

It is a plan that’s available to all Canadians who has RRSP contribution room.  You can contribute up to $2,500 a year.   In addition, you can also transfer in up to $10,000 a year from an existing RRSP plan.

Why SPP?

I like this plan because:
1)  it is easy to join;
2)  it is easy to contribute – you can opt for monthly contributions using your credit card;
3)  their management fees are attractively low;
4)  their balanced fund return is decent.   Check out the history here.   (Of course, you need to keep in mind that these rates are not guaranteed going forward.   They just show the plan’s past performance in investment returns.)

So give the SPP some serious consideration, and happy retirement planning!