Significant gains in transfer payments combined with good market income growth translated into an increase in median income for Canadian households, to $57,000 in the period 2000 to 2016. There is a message in the numbers for pre-retirees, and in particular women: be proactive about tax-efficient investing now or risk poverty in retirement.
According to Statistics Canada’s Canadian Income Survey 2016, an increase of 8.7 percent in income from market sources—which includes employment, investment and retirement income—added more to retirement income than government transfers did. While Canadians are lucky to live in a country with many generous social safety nets, particularly the Canada Child Benefit, it’s critical to prioritize retirement planning early if you want to manage risk and at least beat inflation and taxes in your future.
Here are the numbers: median income after tax for all families was $57,000 in Canada in 2016. But that was also the year that top marginal tax rates increased significantly for some. Broken down in profile groups, you’ll see some critical trends:
|PROFILE||After Tax-Income in 2016|
|Couples with kids||$94,500|
|Couples no kids||$76,400|
|Unattached with kids||$44,600|
|Unattached no kids||$30,400|
|Seniors, highest earner is over 65||$57,800|
Noteworthy: we now know that unattached senior (often women) are the poorest of Canadians. These numbers don’t measure assets held, however, only income. That means there is an important opportunity for tax and financial advisors to work harder with families, and in particular with younger women, to set up sound financial plans to avoid poverty in retirement.
The first and most powerful step in doing so is with TFSA planning, which begins when a Canadian resident turns 18. A TFSA deposit of $5,500 a year for 40 years between the ages of 25 and 65, for example, will provide a very significant retirement nest egg. At an average rate of return of 5 percent, it can generate capital totalling $697,619. Parents and grandparents can help: there are no income splitting or attribution rules to be concerned about with this investment.
Assuming an average retirement of 20 years from age 65 to 85, a tax-free annual income of $34,880 is created, just from the TFSA investment in the example above. Add to this taxable public pensions like the universal Old Age Security (OAS) and the contributory Canada Pension Plan (both employer and employee must make contributions), employer-sponsored savings plans and the RRSP (Registered Retirement Savings Plan)—all can help significantly increase those median income numbers for seniors in the future.
However, the financial terms above, and the optimal order of investing (which comes first?) are a mystery to many Canadians. For professionals in financial services, there is much good work to do with clients to educate them and position them for financial success, both in retirement and before. It can be truly rewarding, but it’s important to get started now before taxes, inflation or interest rates rise to contribute to the significant changes Canadians face in the economy moving forward.
Next Time: Maximizing the Canada Child Benefit
Additional educational resources: Brush up on your skills to better help your clients prepare for retirement. Become a Master Financial Advisor by taking Knowledge Bureau’s comprehensive Retirement and Estate Services Specialist designation. Register before the June 15 session deadline for tuition savings. A free trial is available for Tax-Efficient Retirement Income Planning, a certificate course that earns you credits for the full designation. Completion of a free trial also gives you 2 CE/CPD credits! Also pick up your copy of Essential Tax Facts, by Evelyn Jacks, for tips on tax-efficient wealth management during all life stages. It’s written in easy-to-understand language and is perfect for sharing with your clients.
Evelyn Jacks is President of Knowledge Bureau, Canada’s leading national financial education institute and author of a new book in 2018: Essential Tax Facts – How to Make the Right Tax Moves and Be Audit-Proof, Too. Follow her on twitter @evelynjacks
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