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The Reason for Planning
Occasionally I come across some folks who have done no planning at all for retirement. None! The argument that is given is that “the government taxes the money you take out, and I don’t want to give them any more of my money”!
While it is true that funds taken from an RRSP or RRIF (Registered Retirement Income Fund) are included as taxable income in the year of withdrawal, let’s look at the logistics and benefits of RRSP’s.
Assumptions: Current Salary (adjusted for inflation) $50,000
Approximate Tax Rate while Working: 40%
Taxes saved on a contribution of $2,000 $800
Approximate Tax Rate in Retirement 25%
Tax payable on the $2,000 withdrawal $500
Taxes saved: $300
Yes... you DO save tax dollars by contributing to an RRSP.
The next argument I hear, is that there wasn’t enough money to contribute to a retirement plan. This can be done for as little as $50 per month, through a preauthorized automatic contribution plan.
$50 per month, for 40 years, at 5% provides a balance of $76,300, and a monthly income of $446
$100 per month, for 40 years at 5% provides a balance of $152,600, and a monthly income of $892
$150 per month, for 40 years at 5% provides a balance of $228,900, and a monthly income of $1,338
$200 per month, for 40 years at 5% provides a balance of $305,200, and a monthly income of $1,784
An annual salary of $50,000 (adjusted each year for inflation) will provide a retiree with a CPP benefit of approximately $800, and an OAS benefit of approximately $500 per month. This is a total annual retirement amount of $15,600. This is only 31% of the pre-retirement income of $50,000. It is suggested that a range of 60% - 80% is required in retirement.
If we add the income from an investment of $200 per month, $1,784, the total annual income would be $37,008, being 74% of the pre-retirement income.
Going back to the tax issue... the total contribution of $96,000 would create a tax saving of $38,400!
While living today, making sure that bills are paid and food is on the table is very important, however a little planning will help to ensure that the bills are paid and that food is on the table in retirement, as well.
If you have any questions at all about these numbers, or wish to look at your situation in depth, please do not hesitate to give me a call.
Kerry Swann, CFP
Wealth Management Specialist
The information contained herein is based on certain assumptions and is for illustration purposes only. While care has been taken in the preparation of this document, no warranty is made as to the accuracy of applicability in any particular case.It is important to review you financial plan regularly with your financial advisor to ensure that it properly reflects your situation.
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