Written on May 13, 2013 at 12:02 pm, by Rhonda Sherwood
When you are thinking about and planning for your retirement, what do you focus on most? Is it a big number, or do you think about how much it will cost to maintain your lifestyle in retirement? To make the numbers work for you in retirement, you need to create tax-efficient income, and you won’t be able to do that if you are stuck being intimidated by the price tag for what has the potential to be a very enjoyable time of your life.
Retirement Math: When You Focus on the Money
You already know that one of your goals should be to put aside a portion of your income for retirement. Sit down with a financial advisor to talk about what retirement means to you and how you would like to spend your days during this stage in your life. The answers you provide will help your advisor calculate how much you should be saving for retirement.
If you ask, you will be given a lump sum figure that would make for a comfortable retirement. It will, no doubt have plenty of zeros after it. You can choose to focus on “the number” and you will probably be more than a little intimidated by the idea that you will have to save that amount for your retirement.
Keep in mind that you will have more than one income source in retirement, which will take some of the pressure off the idea that all of your retirement income has to come from your savings. Putting aside some money and letting it compound over several years will go a long way toward helping you reach your retirement goals. In the meantime, you shouldn’t be so focused on the future that you forget to live now.
How Much Will Your Annual Lifestyle Cost in Retirement
When you are trying to determine how much you will need to live on in retirement, don’t forget to include your government pension benefits in your calculations. The following figures were provided by Service Canada:
Canada Pension Plan
Maximum Benefit: $1,013.50
Average Benefit: $534.65
Old Age Security
Maximum Benefit: $546.07
Average Benefit: $515.48
Next, add in how much you can expect to receive from your defined benefit pension, income from your RRSP (Registered Retirement Pension Plan) or RRIF (Registered Retirement Income Fund). Do you have funds in a Tax-free Savings Account or non-registered investments? Your financial advisor can help you with your calculations.
Your goal in retirement should be to plan to plan your income around the marginal tax brackets. British Columbia residents pay income taxes once their earnings reach $11,038.00. The next income tax bracket is $37,013.00.00. There is only a two percent hit when the taxable income goes up to just under $43,561.00. At $75,138.00, the income tax rate increases to 29.7 percent, so you would want to make sure your income in retirement stays or below the $43,561.00 level if possible.
As long as your income stays under $70,954.00 per year, you will avoid having any of your Old Age Security payments clawed back by the government.
Couples can use income splitting as a way to reduce taxes. Their Canada Pension Plan and pension income can be split to bring the higher earning spouse or partner into a lower tax bracket.
Keeping careful track of the numbers can reap huge benefits at tax time in retirement. As an experienced financial advisor, I help clients understand how to make their retirement numbers work for them. Please contact me to schedule your confidential consultation.