Tax Efficiency Boosts Self Sufficiency For Retirees

Tomorrow’s retirees may be well advised to seek help in planning for tax-efficiency in retirement, because their taxes on both income and capital could soon rise and this needs to be taken into account in wealth management.

Two recent studies provide insight:  one by the OECD in May 2014,  (  found that there has been a spectacular rise in top income earners in the US and Canada, some of that resulting from favorable taxation policies.

The study noted that lower personal tax rates over the period of the financial crisis have had two positive effects on those who earn high incomes:  first, incentives to evade taxes are diminished when people have more disposable income.   Second, more investments are made when people have more spare change, after taxes.

However, this low tax environment could change.  The OECD has studied ways to increase taxation on top earners, including reducing tax deductions and credits, taxing all income from employment including fringe benefits as ordinary income and reviewing taxes on inheritances.  In Canada today, surtaxes on high incomes and increased taxation on dividends and capital gains are already appearing in provincial budgets.

When it comes to income, the richest of the rich in Canada receive 20% of income from capital, a lower percentage than in other countries.  Here more highly educated professionals are in the top earning group. However, this too may change as those earners plan for retirement.  Retirees rely increasingly less on their human capital and more on their assets to produce income, a positive outcome of a lifetime of diligent saving and investing.

This is supported statistically today.  The segment of Canadian society that has the most wealth today, according to the Survey of Financial Security (2012), happens to be those over 55.   Older means richer for a variety of reasons:  debt is paid down and personal residences are downsized as children fly out of the nest, producing capital from a tax exempt asset that requires investing.  Capital has also been accumulating for longer periods of time, often in deferred taxation accounts.

Tomorrow’s asset-rich retirees and their heirs may well be targeted in future tax increases.  The key to wealth sustainability, therefore, must involve new thinking about retirement income planning. It will include more precision about which investment vehicles to save in, and how to achieve the greatest tax efficiency from them upon withdrawal.

Fortunately, since 2009, it’s been possible to accumulate tax-free income inside a TFSA:  a powerful tool for future retirees.  In addition, recent law has introduced pension income splitting with spouses.  For singles, a keen eye on the averaging of taxable income sources throughout retirement is important.

It’s Your Money.  Your Life.    This may well be one of the lowest taxed decades this century.  Taxpayers have the right to arrange their affairs within the framework of the law to pay the least taxes possible.  It’s a good time to do that, but getting the after-tax results needed from income and capital in retirement increasingly requires specialized help.

That makes this a great time for specialists in tax efficient retirement income planning to hone up their skills to serve one of the biggest pre-retirement demographics in our history.

We hope you’ll join us to explore the possibilities that tax efficient retirement income projections can bring at the Distinguished Advisor Workshops starting mid September, or take the certificate course from Knowledge Bureau, online.

Evelyn Jacks: Back to Retirement Planning School

The fall “back to school” time provides a great opportunity enhance knowledge-based careers.

It’s a time to start again, take on a new challenge, get out of your comfort zone, meet new people, reconnect with your best friends. Back to school time is about challenging your potential to add to your “knowledge kit” by setting new goals for achievement.

In today’s financial world that’s important because “old” knowledge and skills may not cut it anymore. That could be scary for many high achievers, especially if you are in transition – to a new career, to start a new family, or to begin retirement.

Let’s take retirement planning, as an example. Everyone knows that saving regularly and starting early will bring better results, but for most people, those two goals are very difficult. Even if you have a good start on the nest egg you think you’ll need, the one unsettling question still arises: “Will I have enough?”

This angst is well-founded in the unknowns – how long will I live, will I be healthy, how predictable are the rates of return I will earn, how high will the taxes be on withdrawal?

Going back to school on tax efficient retirement income projections is important, according to a study by Gopi Shah Goda, a Senior Research Scholar at Stanford Institute for Economic Policy Research. Her team found that doing retirement income projections along with general retirement planning induces people to increase their savings for retirement. Individuals who are more perfectly informed about the link between saving today and income in retirement can achieve their goals more effectively and, in fact, avoid over-estimating the income they will need in retirement. They can also overcome bias in their perceived asset values at retirement.

Retirement income projections are the subject of Knowledge Bureau’s September classroom sessions, being held in Winnipeg on September 17, Calgary on September 18, Vancouver on September 19, and Toronto on September 22.

It’s Your Money. Your Life. New research tells us that when people can better assess their financial security, they will feel better informed and  more satisfied about their retirement savings adequacy. It’s time to go back to school on retirement income planning. Please join us.

Evelyn Jacks is president of Knowledge Bureau and author of 51 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of the 2014 three day think tank in Horseshoe Bay, Texas Nov 9-12 will be “Think BIG: Find the Sweet Spots in Wealth Management”  Follow Evelyn on Twitter at @EvelynJacks.

Average Refund Up to $1655

The interest-free loans Canadians give to their governments keeps rising – it’s up from $1646 in the 2012 tax filing year to $1655 in 2013 – that’s $138 a month that could be going into TFSAs or RRSPs instead.

Consider saving $1655 in a TFSA for 40 years at a 3% return: you’ll have close to $128,900 in your savings according to a nifty TFSA calculator from CIBC.

Invest that refund into an RRSP first and tax savings of close to $500 would result if marginal tax rates were 30%. Adding those savings to a TFSA would increase the eventual pot to over $165,000.

Canadians must pay the correct amount of tax, but no more. Consider seeing a tax professional for help in reducing our withholding taxes throughout the year so you can turbo-charge your savings. Tax form T1213 is required to do so.

It’s Your Money. Your Life. To reach your financial goals sooner, pay yourself first, by managing your tax withholdings. With the tax preferred investments available in Canada, it can pay off in a very big way.

Evelyn Jacks is president of Knowledge Bureau and author of 51 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of the 2014 three day think tank in Horseshoe Bay, Texas Nov 9-12 will be “Think BIG: Find the Sweet Spots in Wealth Management”  Follow Evelyn on Twitter at @EvelynJacks.