Everyone worries about money. Daniel Kahneman, a behavioural economist and winner of the Nobel in economic science once said “Money does not buy you happiness, but lack of money certainly buys you misery”. Money worries are the greatest source of stress, more than work, personal health and relationships. Research shows: 48% of Canadians say they’ve lost sleep because of financial worries, according to the Financial Consumer Agency of Canada.
Being financially stress-free means something different to each of us: it could be your income will always be greater than your expenses, or that you will never have to worry about money. It all depends on your outlook on life. Knowing you are on track to retire with wealth provides flexibility to explore how you would like to spend your retirement.
Saving is the first step in becoming financially independent. Inflation however, will erode the purchasing power of your savings over time. Investing your savings is crucial in making progress to meet your future financial goals. Since income taxes will be one of the highest expense categories most of us face, tax planning will play a crucial role in financial wellbeing as well.
Investing in tax beneficial accounts such as an RRSP optimizes your returns, in the long term, as you benefit from preferential tax treatment. We encourage you to top up these accounts early each year, as they become eligible for additional contribution room.
In the short term, any amount contributed to your RRSP allows you to pay less tax. In the long term, taxes on RRSP contributions and growth are deferred to a time when your tax rate will likely be lower.
There is no minimum age to open an RRSP, as long as you have earned income. RRSP funds will also help in the future, if planning to buy a first home or pursuing education, as you can borrow from these funds instead of pursuing more expensive options.
For the 2022 taxation year, the RRSP contribution limit is 18% of your previous year’s earned income up to a maximum of $29,210, adjusted for your individual circumstances. If you are unable to contribute the full amount in any year, you will be able to carry forward your RRSP contribution room and even use it in a year with higher income.
Using your deduction at an optimal time adds flexibility in contributing to your RRSP. As an example, particularly for our self employed professional clients, when your income fluctuates yearly, you may consider making their RRSP contribution in one year and claiming the deduction in a subsequent year, when in a higher tax bracket. This is also beneficial as you accumulate tax-deferred growth immediately, when invested. This strategy can be used as well by anyone who misses the year’s RRSP deadline.
Contribution to a Spousal RRSP, where the spouse is the beneficiary, is another option, as it allows for income splitting in retirement and a longer contribution period when a spouse is younger. The contributor to the spousal RRSP has no legal rights to these funds – the funds belong to the spouse once contributed. The contributor’s RRSP room is reduced by the amount invested in a Spousal RRSP. Income attributions rules apply if funds are taken out too early.
Setting specific financial goals now will be instrumental in reaching your future goals. Try to save 10 % or more of your income to invest, and to build your emergency fund to cover 3-6 months of expenses. It is never too late to start. Give us a call and we will be happy to help.
These are just some of the steps you can take today to grow your future retirement assets. If you are unsure where to start, just call us and we will together create a roadmap that fits your financial strategy to create the flexibility you need in life and support your peace of mind.