One thing I enjoy about my local Wal-Mart is the friendly greeter that I find at the entrance when I go shopping. Occasionally it’s a young girl, but usually it’s an older gentleman named Bill. Bill is great. I have two kids and Bill always helps me load them into the shopping cart. He chats up my four year old and supplies my son with his own flyer, which of-course makes him feel like a king. I am talkative by nature, so I suspect Bill is nice to me because he has gotten to know me as one of those people who always has a smile and pleasant conversation to share.
A few weeks ago, Bill and I were nattering away while I waited for my husband to bring the van to the main doors. Somehow, the banner of our conversation turned to retirement. Bill warned me profusely to inject money into a retirement plan, so I won’t be working at Wal-Mart in my golden years – like him. I was a little taken back by this comment and Bill explained his situation to me.
As it turns out, my friendly greeter is not working at Wal-Mart just to be out of the house and avoid idle time. Bill needs the money. He worked his whole life in construction, which is a good paying job and paid off his house, went on family vacations and sent three kids to college. Bill has been married for 42 years, and worked hard to look after his family. Unfortunately, Bill forgot to look after himself.
Many Canadians, just like Bill, enter retirement with little or no savings to live on. Sure, their house is paid for and the kids are grown, but that still leaves property taxes, insurance, utilities and other basic household expenses. Old Age Security and Canada Pension Plan offer a meager income that averages about $1200 per month at best. Map that to a forty-hour work week, and our seniors are scraping by at $7.50 per hour. My 15-year-old babysitter charges more than that.
If there is a single critical lesson we can learn from our elders, retirement planning is it.
Retirement planning doesn’t need to be complicated. I have a friend who is completely opposed to RRSP’s because “you get burned” when you take it out. Her ignorance frustrates me. This is just one of the misunderstandings about registered retirement savings. The fact is RRSP’s are good for everybody.
- What is an RRSP? RRSP stands for registered retirement savings plan. It means your savings are registered with the government, thereby “earmarked” for retirement. To encourage Canadians to save for retirement, the government allows you to defer paying income tax on money you register for retirement. Defer does not mean avoid. You will pay the income tax when you withdraw the money.
- How much can be put into RRSP’s? Contributions are based on the income your report on your return each year. The rule for rrsp’s is 18% of gross income. So, if you make $35 000 per year, that’s $6300 a year you can put into an RRSP. Since the income tax is deferred, that means your taxable income becomes $28 700.
- What’s an unused contribution? If you don’t use your whole 18% each year, the amount you didn’t use is carried forward. Using the above numbers, let’s assume you contributed $25 a week to an RRSP, totalling $1300 per year. The extra $5000 is carried forward to the next year and added to your contribution limit. So next year, you can contribute $6300, plus the extra $5000 which gives you a limit of $11 300. Anything you don’t use always carries forward.
- How much tax will I pay when I retire? Ah, therein rests the beauty of income deferral. You have complete control over how much you wish to take out. So, let’s say you are making $1200 per month from CPP and OAS, but you need to increase your income by $400 per month. That brings your total annual taxable income to $19 200, which is much less than your regular working wages, therefore, you will pay less tax.
Retirement planning is all about paying yourself first. If you’re just getting started, begin with a small amount and add a little more each year. You don’t have to invest in mutual funds or high-risk investments if that is not in your comfort zone. GIC’s, savings accounts and other risk free investments can be registered for retirement. The short-term benefits are a reduction in income tax. As for the long-term benefits, well, you can spend your golden years shopping at Wal-Mart, instead of working there.