When planning to reach a financial goal, one very important aspect is the timeline. How much time do you have until you want to meet your goal? Is it 1-year, 3-years, 5-years, 10-years or maybe it’s a long-term goal like 25+ years.
Your timeline is a very important factor to consider. Your timeline is going to help inform decisions about how much risk you should be taking and the best way to invest.
One common mistake people make is that they make investment decisions without thinking about their timeline. They’re mostly focused on getting the highest return, making the most of their money, and not leaving anything on the table. But they don’t fully appreciate the short-term risk associated with a decision to “maximize returns”.
Over the long-term, taking on more risk can be a smart decision, but over the short-term that extra risk can cause some wild swings.
If you need access to money within a few years then you need to choose a good way to invest short-term.
Maybe it’s for a down payment, or maybe it’s to pay for post-secondary education, maybe it’s to pay for an expensive once-in-a-lifetime trip in retirement, or perhaps it’s a wedding gift for your daughter and soon to be son-in-law. Whatever the reason, if you need access to a large amount of cash within the next 3-5 years then you need a good short-term investment.
Both the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP) are tax-sheltered accounts offered to Canadians by the government as a way to help save and invest without the drag of income tax on annual returns.
Although both are great ways to help grow your money, it can be difficult to decide which one is best for you.
Often one type of account (either TFSA or RRSP) is better for an individual than the other. In most cases we would prefer to maximize one of these accounts before moving on to the next.
Which account we choose, TFSA or RRSP, will depend on a number of factors. These factors may change over time. It’s reasonable to assume that a new grad entering the work force would be better suited to maximizing their TFSA first but as their income grows they may prefer to start focusing on their RRSP instead.
This decision between TFSA or RRSP often involves looking at your marginal effective tax rate today and your marginal effective tax rate in the future. You marginal effective tax rate is your income tax rate PLUS the claw back rate you experience from government benefits.
Making the right decision between TFSA or RRSP can help save $100,000’s over time.
It can mean paying thousands LESS in income tax and it can mean qualifying for thousands MORE in government benefits (like the Canada Child Benefit (CCB) or the Guaranteed Income Supplement (GIS) or one of dozens of other government benefits that are available).
Defined benefit pensions are often an enormous advantage when it comes to retirement planning but there are also some very complex decisions that need to be made. One of those decisions could be whether or not you should take the commuted value of a pension.
The commuted value represents the lump-sum value of a defined benefit pension… it is the amount that the actuary feels your pension is worth in today’s dollars… and it can be very very large.
A reasonable defined benefit pension could have a commuted value worth $250,000+, or $500,000+, or even $1,000,000+
Seeing all those zeros can be very enticing. This can cause many people to consider taking the commuted value rather than the lifetime retirement benefit offered by a defined benefit pension.
But should you take the commuted value of a pension? There are often many things to consider when deciding to take the commuted value of a pension and the size of the commuted value itself is one just one piece of the puzzle.
Let’s take a look at a few of the factors that you may want to consider, but first, what is a commuted value exactly?
How much money do you need to retire? Well that depends, the more appropriate question might be how much do you want to spend? In this post we’re going to look at three real life retirement examples, one high spending around $200,000 per year, one moderate spending around $70,000 per year, and one low spending at $30,000 per year.
Retirement planning is always driven by spending assumptions in retirement. Spending levels have an enormous impact on how we can plan draw down, how we can manage taxes, and most importantly… how successful the plan is during periods of low investment returns. This is why it’s so important to accurately estimate spending when doing a retirement plan.
Spending doesn’t just include your regular day to day spending, it should also include things like one-time expenses for children’s weddings or once-in-a-lifetime trips. And it should always include an estimate for infrequent expenses like home repairs, vehicle repairs, and vehicle upgrades.
Determining how much money you want to spend in retirement will go a long way to helping to determine how much money you need to retire.
That being said, spending is important, but it isn’t everything…
Other income sources like government pensions, private pensions, and government benefits are also an important factor to consider. Income from government pensions can easily represent 25% to 50% of a retirees spending goal in retirement. Government benefits like GIS and GAINS in Ontario can easily add up to $10,000+ per year for low-income retirees.
The other factor to consider is how much income tax you’ll be paying in retirement. Not all income sources are created equal. Income from a defined benefit pension can be split between partners before age 65, a huge tax planning advantage. Income from CPP, OAS, RRSPs etc are all fully taxable whereas income from TFSAs or non-registered accounts are not. In some provinces non-registered eligible dividends from a Canadian company can actually have a negative tax rate, a big advantage when determining how to best draw down assets in retirement.
To determine how much money you need in retirement often requires a very custom financial plan. This retirement plan looks specifically at your income sources, your financial assets, and your spending goals to determine how much you actually need to retire (and often it’s less than you think!).
In this post we’re going to look at three real life retirement planning examples. These examples are from case studies that we’ve done in the past with the Financial Post or other personal finance websites. We’ve chosen three in particular. One high income retirement planning example. One moderate income retirement planning example. And one low income retirement planning example.
The TFSA is an amazing account and it just got a little bit better. The contribution limit for 2020 is an additional $6,000. This means that as of January 1st 2020, anyone over the age of 18 in 2009 will have $69,500 of TFSA contribution room if they’ve never contributed before!
What makes the TFSA so amazing is the tax free compounding and when this compounding starts to take hold the results are incredible (just take a look at some of the projections below).
It’s reasonable to expect that many of us with TFSAs will see them reach $1,000,000+ at some point in the future. It’s just a matter of time. We’ll share some projections below but its pretty reasonable to expect that TFSAs could reach $5M, $7M or even $10M+ (in future dollars).
In fact, having TFSAs that reach $1,000,000+ is pretty common in many retirement projections that we do at PlanEasy.
Often, from an income tax and estate planning perspective, we want to draw down TFSAs last in retirement (or sometimes they’re also draw down strategically to avoid higher marginal tax brackets). We’re also strategically shifting assets from RRSPs/RRIFs into TFSAs over time. This leads to some very large TFSA balances and very little tax on the estate (depending on future investment returns of course).
Should anything change when investing after retirement? Are there specific investment options for after retirement? Should you change your asset allocation after you’ve retired?
For the average retiree their investment portfolio will make up a significant portion of their retirement income. Most of us will receive some government pension from CPP and OAS. Some of us may also receive retirement income from a defined benefit pension as well. But even in those situations we’re probably still creating some retirement income from an investment portfolio each year and this income is critical to help us reach our spending goals.
Given investment income is such an important part of most retirement plans, should anything change when investing after retirement?
For some people the answer might be yes. But for most of us the answer is probably no.
There are a few important factors to consider when investing after retirement and the three big ones are asset allocation, investment fees, and complexity.
These three factors are important to consider when investing after retirement. Depending on how your investment portfolio currently stands against these three factors it may warrant making some changes before entering retirement.