It’s Tax Time – A Good Time For Everyone to Think About Financing Their Retirement
It’s tax time – a time when we review our year’s income, how much we paid in income taxes, and our RRSP contributions. That makes it a very good time, to use this information as a starting point to look at our annual income and expenses and be ready for our future.
In order to live the life dreamt of for retirement, everyone needs to establish a financial plan to manage and support a certain standard of living. With an ever-growing elderly population and changing economic trends, in retirement, we cannot depend only on government social services, such as the Canada Pension Plan and Old Age Security. We all need to budget and plan for our future financial security .
So, where do you start?
- Make a list of the things you would like to accomplish or achieve during your retirement years.
- Use this list to estimate your lifestyle budget at retirement.
- Consider your current expenses, such as mortgage, debt repayment, children’s education, and household costs. Which of these expenses will continue and which will stop or decrease in retirement?
- Because everyone is different, be sure to find a plan that suits your needs. Knowing your income and costs, establish a budget, just as you would in your non-retirement years.
- Save money for retirement “little by little” and “month by month.”
- Contribute to an RRSP early on in life. The best strategy is to arrange for a direct deduction from your pay cheque. Note that an RRSP contributor makes an average of $400 more per month in total retirement income than someone who never contributed to an RRSP.
- Take advantage of income tax credits that result from your RRSP contributions. Use your income tax refund for paying off your mortgage or car loan, creating further savings.
- Ask a professional that you trust (a financial planner, bank representative, insurance agent, accountant or bookkeeper) to advise you regarding your retirement planning.
- Attend retirement workshops to help you prepare.
It’s never too early to start planning for retirement. The sooner you start, the more choices there are available to you. Here are some additional considerations that you can start investigating now:
Canada Pension Plan and Old Age Security
Service Canada now offers on-line CPP and OAS estimates. Visit their site to access your Canadian Retirement Income Calculator. Register online to get your personal access code mailed to you.
Child Rearing Provisions
The Canada Pension Plan takes into consideration that caring for young children can mean leaving the work force or working fewer hours. To ensure that these periods of low earnings do not affect your CPP benefits, you can apply for the Child Rearing Provision to not include in your CPP calculation the years when you were raising your children under the age of seven.
Pension Income Splitting
Canadian residents are able to allocate up to one-half of their pension income that qualifies to their resident spouse or common-law partner. This could mean lower combined taxes for both spouses. CPP also has a formula for pension sharing. Ask your financial advisory about how this plan would work for you in your circumstances or find out more by visiting the Canada Revenue Agency website.
Tax Free Savings Accounts
Canadians who are 18 and up can contribute $5,500 to a tax free savings account annually. These dollars accumulate interest and are not taxed when withdrawn. You can carry forward unused TFSA contribution room to future years. If you withdraw funds from a TFSA, you can re-deposit that money in a future year, but not in the same calendar year that you withdrew it. Find out more information about TFSAs from your bank.