Many people pay too much tax in retirement. This is generally due to a variety of things but they all come down to not having prepared a proper comprehensive financial plan! The big question most people in retirement have is “Will I run out of money?”
There is a great calculator on the home page of my website at www.frankwiginton.ca that will tell you whether you will run out of money, and if not, how much you will still have left as an estate. It will also tell you approximately what your lifetime tax bill will be. You will likely be surprised by the numbers – many are!
This is a four part series that talks about various ways to reduce your taxes throughout retirement.
Canada Revenue Agency allows you to split your income with a spouse or common law partner. You don't have to technically give them the money (which is probably a good thing in some cases), it is simply an election you make on one tax return and a declaration to accept the additional income on the others form.
Most tax software's like QuickTax and Ufile have tools that will automatically help you figure out the optimal amount of income to share and even fill out the proper forms for you.
Not all income can be split. This is where working with a financial planner to prepare comprehensive financial plan can help you understand what income can be split.
Pension income: if you receive income from a defined benefit pension plan at any time this income could be split with your spouse.
RRSP/RRIF income: any time you withdraw money from an RRSP. You cannot split it with your spouse. Only once you have converted your RRSP into an RRIF and you are 65 years of age or older can you then split the income with your spouse.
Investment income: in order to split investment income the account that you hold needs to be in joint ownership.
CPP: in technical terms, CPP cannot be split with a spouse. What you can do is apply to have your CPP credits assigned to each other. In order to do this you need to make an application to CPP and asked to have both yours and your spouses, CPP credits assigned. So simple example would be you would have 10 CPP credits and your spouse would have eight credits they would combine them into a total of 18 credits and then divide them by to giving each of you nine CPP credits.
Old Age Security/Guaranteed Income Supplement (OAS, GIS): neither of these social assistance payments can be split, but through income splitting you can help to ensure you don't have these incomes clawed back.
As you can see most of the income you could expect to receive in retirement can be split or shared with a spouse. Some of the income that cannot be shared with the spouse may be employment, income some forms of business income, and of course income that is only directly related to you and your investments.
So to look at an example a couple may need to have $60,000 a year after-tax money in order to have the lifestyle and pay the bills and do the things that they want in retirement. In preparing a proper financial plan for them this would mean we would aim to give each of them $35,000 of gross income. their average tax rate would be about 14%, and this would leave them each $30,000 of net cash in their pocket income. This assumes that all of the income they receive is fully taxable. (this is the subject matter for another segment).
As you can see income splitting can be a very powerful tool in ensuring there is sufficient income in retirement and recognizing that you don't need large sums of money to achieve the financial goals that you're looking for.
In the example above we only needed to draw $70,000 of assets in order to generate $60,000 of net income.
In the upcoming segments. We will talk about ways to generate tax efficient income. Reduce the taxation on your investment assets and look at a few strategies to reduce your lifetime tax bill.
How much income do you need to have in retirement?
What is your average tax rate in retirement?
How much money do you think you need in retirement to live comfortably?
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Tags: CPP, OAS, HubSpot Tips, retirement income, taxation, income splitting, income planning, financial plan, Canada revenue agency, RRSP/RIF, defined benefit pension, pension, ufile, quick tax, GIS, clawback
if you spoke to some of my friends were listened to me in a social environment you would hear me routinely bragging about my frugality. I love to talk about how I scored a great deal save 70% off this sort got something work when the company was going out of business for very cheap price. I always find it interesting how other people do the exact opposite. They like to show off their very expensive items or like to talk about how they just randomly go out and purchase things without spending some time looking into it.
It's also interesting to hear people ask me things like, how can you afford to go and take all those vacations that you take you take more vacations than anybody I know you do a lot of traveling. These are just some of the comments I hear all the time and when I think about it. I do is because of my frugality that I have the resources to be able to go out and do those things that I'm passionate about. Take a look at the passion section in my website under about me. There you can find some pictures from the many adventures that I've taken to exotic destinations such as Egypt, Hawaii, the Caribbean the Galapagos Machu Picchu the lesson everybody needs to learn is that money is finite. If you spend your money over here. You don't have it to spend over there. So the question you need to ask yourself is why am I spending my money on this or that?
This week the federal government's Department of Finance released a draft proposal titled Framework for Pooled Registered Pension Plans. You can find a copy of the 9 page document at the link above.
I have been asked many times “Why should I get a financial plan? What questions can I get answers to?”
Many are not even aware of the array of questions they have when it comes to their personal finances. When I sit and chat with people about finances and mention some of the area’s to address they frequently respond with “I never thought of that before!”
To get a start here are just a few of the questions that can be answered by preparing a proper financial plan.
A financial plan will give you the answers and solutions to the following questions:
- When can I retire?
- Will I run out of money?
- What should I invest in?
- How much do I need to save?
- Should I participate in my company’s pension or RRSP plan?
- Should I pay down my mortgage or contribute to my RRSP?
- Should I contribute to my RRSP or the TFSA or both?
- Should I borrow to invest?
- Should I have a fixed or variable mortgage?
- What can I do to reduce my taxes?
- How much and what kind of insurance should I have?
- What is the most effective way to transfer my estate to my children?
- How should I set up and or structure my business?
- What is the most effective way to give to charity?
- Am I on the right track?
- Am I taking too much or too little risk with my investments
- and many more!
To start your financial plan or to learn how we may be able to help you please contact me.
Tags: In the news - Print
Tags: In the news - Print
As a New Year begins and we all think about resolutions and set new goals be sure to have “paying off credit cards” at the top of the list!
After all the Christmas decorations are taken down and the first set of batteries have died in the kids toys is about the time when your credit card bill arrives in the mail. Take a deep breath, open it, and resolve to tackle your debts once and for all.
The first step is to stop accumulating debt! You have all heard the saying “Don’t buy it if you don’t have the money!”
Build a budget! Start by looking at where you spend all your money. Collect up all your bank statements and credit card bills for the last three months and start identifying where it all goes.
Put yourself on a cash diet. Most people have no clue how much pocket-money they spend. Start with $40 in your pocket on Sunday night. That is all the money you have to spend for the week on discretionary items such as lunches, coffee’s, magazines, taxi’s, etc. So if by Wednesday lunch time you have run out of money you don’t have any more money to spend until the following Sunday night. This will definitely help you to think about spending before you do.
Money is Finite if you spend it over here – you don’t have it to spend over there. Decide if what you are going to purchase is more important to you than the other things you wish to purchase. Rather than buying that top you may wish to take a beach vacation or get a new car.
Is it a Want or a Need? Every time you pick something up when you are out shopping, stop and ask yourself “is this a want? or a need?” if it a want ask yourself “do I want this more than I want a the beach vacation, new car, or being debt free?”. If it is a need ask yourself “does it have value? or can I buy that same top over at Winners for 30% less?”
If you have debt, here are some cardinal rules to help you get debt free:
1) Pay out highest interest debt first! Maybe you have a couple of credit cards with balances on them at 19%, a store credit card 26%, a personla loan from the bank 9%, a line of credit 7.5%, and a mortgage 5%. Start by listing them ALL on a piece of paper with the interest rate from highest to lowest. See example below. Then be sure to pay the MINIMUM on all the debts and on time (more on these later). Then with any extra income left over be sure to apply it all to the one with the highest interest! For example – lets say you have $2000 a month for paying your debts and you go through and write them all down and it looks like this:
|Type||Interest Rate||Balance||Min Payment|
|Line of Credit||7.5%||$8,500||$170|
Once you have paid your Min Payment on all debts you will have $427 left over. Take that full amount and put it directly against the store card. This will have you pay out the highest intered card the fastest and save you thousands of dollars in interest!
2) Put your credit cards on ice! If you carry a balance from one month to the next on a credit card you will lose your grace period. If this happens call the credit card companies and ask them how much you have to pay to pay them off in full including all interest. Instruct them to make a note that you will be doing that, that day. Once you have paid them off put credit card in a block of ice in your freezer for two full months! You do this because if you use your credit card at any point in the next two months you will be charge interest starting from the moment you swipe that card. You lose your 20 day grace period until you have gone two complete billing cycles with payments in full.
3) Watch out for rocketing interest rates Many card companies will increase interest rates if you are late with your payments. Be sure to ALWAYS make at least your minimum payment ON TIME. Once you have been late or missed a few payments your lower interest rate cards that you thought were 9% could be as high as 36% or even higher!
4) Lower your limits. Many cards will increase you credit limits every time you use your cards to their limits. This may be useful when you are trying to purchase things but can cost you thousands of dollars in interest charges. Fortunately there are plans to restrict this practice. Pick up the phone call the card company and ask them to reduce your limit to a more manageable level.
5) Avoid taking cash advances. Either from payday loan companies (almost the worst) or from your credit cards. The interest charges start right away and are always very high. Take money from lines of credit, personal loans, or Mom!
6) Avoid promo gimmicks. If you have ever been to a hockey, baseball, or football game, or even just walking through an airport; you may have been tempted or enticed into signing up for a credit card to get a team hat, shirt, towel, or travel rewards. Be careful! Even though you might not use the card – every time you apply for a card it reduces your credit score which ultimately can increase interest charges on loans.
Even with all this advice you may want to get some additional help. Go to www.creditcanada.com They are a leading Canadian charity that provides money management and credit management counselling and education services that help individuals and families prevent and respond to financial difficulties.
Speak with spouse and family and work together as a team to tackle the debt. Ask your financial advisor and put a plan together to consolidate and payout the debt systematically.
As we head into the holiday season, many will get the biggest surprise of all – not from the gifts under the tree – but from the credit card bill in January!
It doesn’t have to be this way if you do a little planning and stick to your list. Below are some tips on ways to beat the January credit card blues
- Start by evaluating your gift list. Giving a gift is nice but not worth it if it is going to mean mounting debt, significant stress and anxiety. Start by speaking with your friends and family and seeing if they would be willing to do a Secret Santa exchange where you only have to buy one gift. You never know – they may be looking to save some money as well, and I am sure they would rather not have a gift if they understood the stress and anxiety it was causing.
- Set a budget on how much you can afford and determine how much you can spend on any one gift. This can be the hardest one to keep but can make all the difference.
- Planning ahead is a must. Attempt to purchase gifts throughout the year so you don’t have a huge amount of expenses all in December.
- Only buy things on sale. If you are shopping year-round the item you would like to buy will go on sale. Every store has to turn over their inventory and will do it 3-4 times a year. In order to do this they will put the items on sale to liquidate the inventory.
- Use your debit card. This way if you don’t have the money you can’t buy it!
- Set up a separate savings account. Set up to have $10 every week taken from your bank account and transferred to this savings account. Come the end of the year you will have $500 saved for the holidays! The best part – you won’t even notice that $10 missing every week but you will notice how great it will be to have that $500 to pay for Christmas.
- Use gift cards to stay on budget. If you set a budget of $50 a person, it is easy to spend over that limit due to taxes and extras. For example you find a great item that is $54.99, you think to yourself – that’s about $50. The problem is once you pay for it the total comes to $62.14! Now you are nearly 25% over budget. Another example is when you buy multiple gifts. You buy them a DVD – $19.99, a book $22.99, and a $10 Starbucks card. Add it up throw in the taxes and your total is… $58.57!
- Try buying gifts online. On eBay, Craigslist, Kijiji, you can find new and used items for a fraction of the cost. Books, CD’s, DVD’s, etc are especially abundant and inexpensive. Be sure to include any shipping costs and taxes in your calculation of cost to avoid spending more than your budget.
- Buy expensive items after Christmas. If you are buying an expensive item (electronics, furniture, appliances, etc), cut out a picture of it from a flyer or catalog and put it in a card to give to them Christmas day. Then go and buy it after christmas when the boxing week sales are on and save a bundle!
All this is can help to make your Christmas more affordable and reduce your debt and your stress. Let’s not forget what Christmas should really about, the festivities, the traditions, seeing old friends and family. Do you remember all the Christmas gifts you were given last year? Probably not, but you likely do remember the time you spent with family and friends. these are the gifts you will carry with you year-round.
Tags: credit card, debt consolidation, christmas gifts, eBay, Gift Cards, holiday budget, holiday cards, holiday shopping, budget holiday, Craigslist, debit card, Kijiji, personal credit, savings account, Secret Santa, Debt