RRSP & Retirement Planning









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  • Will your savings put you where you want to be in 5, 10, 20, 25 years?
  • Will you wait until it is too late to find whether you made the right, or the wrong choice?
  • Do you know that 78% of Canadians do not have enough funds to retire on?
  • Do you know how much you will need to retire on?

Tax Sheltering Explained
RRSPs are one of the few ways that ordinary Canadians can get a meaningful tax break. Earning money is hard and if you don't plan carefully, the government will take much of your hard earned money and do some serious damage to how much you will be able to accumulate over the long term.

However, you can greatly reduce the tax you pay — both on your income and on your investments — and accumulate a lot more over a lifetime with an RRSP. Here is a look at how the tax–deferral available with an RRSP can help you build your wealth.

Tax–Deferred Contributions
When you contribute money into an RRSP, that contribution amount is deducted from your taxable income when you calculate how much you owe Revenue Canada at the end of the year. Say your taxable income is $60,000. Put $10,000 into your plan, and Revenue Canada will assume that you only made $50,000. If you are in the highest tax bracket — approximately 50 per cent — your tax bill would drop from around $30,000 to $25,000. You end up with $5,000 more in your pocket.

But look at it another way. Let’s follow the example above — you make $60,000 a year and pay approximately 50 per cent tax, leaving you with about $30,000 and if you don’t qualify for any other tax savings, your living costs take up $25,000 of your after–tax dollars. If you neglected to make an RRSP contribution, you’d have just $5,000 left over to add to your savings.

Now look at what happens if you put $10,000 into your RRSP. That cuts your taxable income down to $50,000, meaning a tax bill of around $25,000. And that leaves you with $35,000 after–tax. Subtract your living expenses of $25,000, and you’re left with $10,000.  

So without using your RRSP you would have $5,000 left over; with an RRSP, $10,000. That is a big difference. (In fact, your savings are equal to what you contribute times your marginal tax rate). If you were in the lowest tax bracket of around 27 per cent, a $2,000 contribution would save you about $540 in taxes. In essence, the government is subsidizing your contribution.

So the first benefit of an RRSP is that you can put more away, simply because you’re working with tax–free dollars. The real boost comes when you start to add up how much more you can put away each year, and project that out over several decades.

Tax–Deferred Compounding
This is the second boost an RRSP will give your savings. Whether your investments earn you interest, dividends, or capital gains, you don’t have to pay tax each year on the money you make inside your plan. Rather than having to share your good fortune with the government, you can take every penny you earned and reinvest it. (Technically, this is known as tax–free compounding.) This will have a snowball effect on your savings.

How fast will your savings grow? A handy rule–of–thumb is that an investment earning 10 per cent will double approximately every 7 years. So if you had $10,000 earning 10 per cent, and you could reinvest all your profits after 7 years, you would have around $20,000. After 20 years, $40,000. And after three decades? An impressive $80,000, all thanks to your $10,000 initial investment, and the power of tax–free compounding.

Using your RRSP to Buy a Home
In 1992, in the depths of recession, the federal government decided to help people buy their first home by allowing them to borrow up to $20,000 tax– and interest–free from their RRSPs. This is another excellent reason why young individuals should maximize their RRSP contribution so that they can withdraw up to $20,00 each ($40,000 per couple) towards a home purchase without having to pay any immediate penalty.

How tax-free earnings can grow
Compare a $5,000 annual investment over 30 years - one inside an RRSP, the other outside.
Assume a 10% annual return and a marginal tax rate of 50%.
Thus, with a total contribution of $150,000, you would earn about $313,000 outside an RRSP, and $815,000 inside an RRSP - a whopping $502,000 difference!

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How long will your reitrement savings last?
Let's say you are planning to start your retirement in January of 1999 and will be withdrawing $3,000 out of RRSP each month (assuming a steady 10% return on your investments).
If you start your retirement with $250,000 in your RRSP, you will have $51,844 left after 10 years (including the 10% return you would have earned in that time).
However, if you manange to save $500,00 in your RRSP, it is a different story. Even with   monthly withdrawals, by the year 2009 your savings will have actually increased to over $700,279 and will continue to grow!

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Small savings,big payoff
Investing regularly in a tax-shelter investment like an RRSP can pay
huge dividends over the long term. Look how much $100 a month
(earning 10% annually) can grow to become.


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The Sooner, the better
Let us say Jane starts investing $2,500 a year starting at age 20, but John waits until he is 35 to start investing the same amount. If they both earn a 10% return on their investments, Jane could potentially earn 3 times the amount of John's   retirement fund, even if she stops contributing at age 35.

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How $1,000 would have grown
$1,000 invested in the Toranto Stock Exchange 300 Composite Stock Index (growth securities) in 1956 would have grown by June 30, 1998 to $56,203. In the same time frame, $1000 invested in the Scotia McLeod Long Term Book Index (fixed income securities) would have grown to about $33,130. A $1,000 purchase of 3-month Treasury bills (cash and cash equivalents), would have grown to only $18,593.

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Fees
You will not have to pay any fees to MoneyWI$E Financial Inc. for us to provide the above mentioned advice if you purchase mutual funds, stocks, bonds or GICs through us.
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