There is no template for planning for your retirement income. So many conditions affect your personal situation – how much you save, what assets you accumulate, what inheritances you receive, how much of a pension you have in place, whether you own a house. It’s prudent to speak to a certified financial advisor who can look at your personal situation and create a plan to reach your retirement goals. Here is an introduction to two investment options commonly used in retirement planning.
RRSP – Save now, pay your taxes later
The very basic goal of the government in creating the registered retirement savings plan (RRSP) was to encourage saving for retirement. They offered an incentive (that is, a tax deduction in the year of your investment) for you to save money and ensure you had funds to live on after you retire. This, in turn, relieved some of the welfare weight from the federal budget.
Ideally, the benefit to you, the investor, is that you get a tax deduction while you’re working and, theoretically, paying your highest taxes. When you eventually have to withdraw funds from the RRSP (usually, after you retire), you are required to pay taxes on the income that you deferred plus any earnings from your RRSP investments.
So why bother? Generally, people earn less when they retire. So, you might find yourself in a lower tax bracket, which means you would pay lower taxes on the principle and the earnings of the investments than you would have the year you invested in the RRSP.
If you earn a high income and your spouse has little or no income, you might consider a spousal RRSP. In this form of investment, you get the tax deferral but, at retirement, the money is withdrawn in the name of the spouse, presumably at a significantly lower tax rate.
TFSA – Save now, pay your taxes now
When you contribute to a Tax Free Savings Account (TFSA) you use after-tax dollars and there is no reduction in your income for tax purposes. So you don’t get a benefit on your tax return, but your earnings on that money are exempt from taxes (unlike an RRSP where your investments’ earnings are taxed when you withdraw them).
Sometimes, income in retirement is sufficient to keep you in the same, or even higher, tax bracket. So your primary reason for having invested in an RRSP (the tax deferral) may no longer be valid. This is one instance where a TFSA is something you might want to consider as a savings vehicle.
Other investment options exist that may be suited for your current and future needs. There is a lot to know, and every situation is unique. It’s a good idea to speak with a financial advisor to plan a path to your retirement. If your company’s benefits plan includes an employee assistance program, this service might include financial advice.
And when is the best time to start planning? Yesterday. It’s never too early to start and it’s never too
late to look at your financial plan.
