You are no doubt being inundated with all the virtues of the Registered Retirement Savings Plan (RRSP) and the tax saving benefits that come along with this program. The problem is that many Canadians only do their tax planning at this time of the year, when there is a contribution deadline and there are tax benefits to be realized in a few short weeks.
How often have you said to yourself, “I must buy my RRSP before the deadline to get the tax break”, or something similar? Is this really a good financial and tax planning strategy?
After all, unless you have an employer-sponsored pension plan, your RRSP may be your main source of income at retirement. It’s your personal pension plan. And if you do have an employer plan, your RRSP will be an excellent retirement income supplement.
Tax and retirement planning is not something to be rushed into at the end of every February. It takes time to review your situation, determine your goals, analyse your options and make proper decisions that are suitable to meet your long-term objectives.
So what are the appropriate steps you should be taking to prepare a well-drafted retirement and tax planning strategy? The first things you need to establish are your retirement date or age you would like to retire, how much income you would like to receive and for how long you will receive this retirement income. Given today’s healthy lifestyle and modern medicine, you may be planning for thirty to thirty-five years depending on your retirement age. And finally, you may wish to consider leaving an inheritance to your loved ones. Oh yes, and don’t forget to factor in inflation. To buy the same $100 of groceries today in twenty-five years it will cost you $164 with inflation at 2%, $266 with inflation at 4% and $429 with inflation at 6%.
Now that you know your lump sum retirement objective, you can work backwards to estimate how much you will need to save on a regular basis to achieve your goal. You can set up your savings program on an annual, monthly or weekly basis. The factors that will determine your regular savings objective will include your disposable income, your time horizon and rate of return. Given today’s low interest rates associated with guaranteed investments you may have to look at an equity-based investment plan to achieve a higher rate of return. This then involves an element of risk. You will want to ensure that you have the fortitude to be able to withstand market volatility and not panic at inappropriate times.
Once you have gone through all these steps and implemented your plan, it doesn’t end there. You will want to monitor your progress on a regular basis, at least annually. You want to ensure that you are on track to achieving your goals. If you fall behind, you will want to consider how to adjust. Will you extend your retirement date, save more, or seek higher returns?
As you can see there is a lot more to tax and retirement planning than just plunking down a few bucks at the end of February. You won’t hear much in the media about this subject other than at this time of the year. It’s up to you to ensure that you plan accordingly to meet your retirement goals and use the government programs to save tax at the same time.
The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail email@example.com. Mutual Funds provided through FundEX Investments Inc.