This column continues retirement planning examples from the Nov. 29 issue of Beach Metro News. In this issue, we will look at the individual who has no pension; one is an employee and the other is an individual who has run his own business for the last 32 years. As in the previous article, both individuals are age 60 today and retiring at age 65.
Jane has worked as supervisor for a small marketing firm for the past 30 years. Today, she earns $65,000 per year. Her employer provides basic group health and dental benefits but no pension plan. Jane has not really concerned herself with how much she saves for retirement because her husband has a pension. However, in 1992 she started to contribute $5,000 each year to an RRSP (Registered Retirement Savings Plan) to reduce her taxes. Over the years she has invested very conservatively. Today, after 20 years of contributions her RRSPs are worth $194,960.
Recently, her Advisor suggested she save an additional $5,000 per year in a Tax Free Savings Account (TFSA). Jane didn’t feel she could put that much aside per year however, whenever possible she contributes to her TFSA. Over 2 years, Jane has saved $3,600 in her TFSA. She expects over the next 5 years to add another $18,000. Her hope is to use the TFSA to help her buy a new car when she starts retirement at age 65. (See more about TFSAs below.)
By continuing to contribute to her RRSP, Jane expects the balance of her RRSP will be approximately $265,000 at age 65. If Jane is earning a 4 per cent investment return on her RRSP at age 65, she can expect to receive a RRIF (Registered Retirement Income Fund) income of $13,500 indexed at 2 per cent for inflation per year until she is age 89.
In addition, she will receive $537 per month from Old Age Security and the maximum amount from CPP of $960 per month. Jane’s income from all sources in her first year of retirement will be approximately $25,800. This is a significant drop in income.
Jack is self-employed and nets approximately $65,000 per year after business expenses. Since he started in business, Jack has saved money for a rainy day. In 1985, he began to contribute to RRSPs. His contributions have varied over the years because of changes in the economy and the profitability of his business. However, he managed to contribute approximately $11,700 to his RRSPs every year by drawing on his savings in the difficult years to meet the contributions. At age 65, he expects to have an income from his RRIF of $53,000, indexed at 2 per cent per year. By adding the income from the government benefits, Jack will have a total income of ~$65,300. By maintaining a frugal lifestyle, Jack has saved enough to have sufficient income during his retirement.
It is important to note that if Jack had been an owner/manager of a private corporation, his approach to retirement savings may have been through the use of holding company. For more information, please consult your professional Advisor.
What is a TFSA?
In 2009 Tax Free Savings Accounts (TFSA) were established to allow Canadians and Canadian residents to invest up to $5,000 annually in a tax free account for their lifetime. Unlike an RRSP, contributions to a TFSA are not deductible for income tax purposes, however, like an RRSP, the income earned in the account (for example, investment income and capital gains) is tax-free, even when it is withdrawn. You can withdraw amounts from the plan without tax penalty or tax inclusion.
In 2009 the maximum contribution was $5,000 for the year. The contribution amount will increased with inflation, to the nearest $500, for each subsequent year.
Your TFSA contribution room will appear on your Notice of Assessment from CRA (Canada Revenue Agency) each year. To calculate you TFSA room:
•Start with your annual TFSA dollar limit ($5,000 per year plus indexation)
•Add any unused TFSA contribution room from the previous year – the amount is found on your Notice of Assessment
•Add any withdrawals made from the TFSA in the previous year
Note: You must be least 18 years old, a resident of Canada, and have a valid social insurance number (SIN) to be a holder of a TFSA.