Because you were not employed in 2016 or you earned less than the basic personal deduction ($15,843 in Saskatchewan) you may not be worried about meeting the May 1st income tax deadline. But there are many good reasons to file a tax return even if you don’t have any income to report. For example:
Get a refund: If you worked for some period of time and your employer deducted income taxes you actually didn’t have to pay it is the only way to get a refund.
TFSA contribution room: It is the easiest way to establish contribution room for a Tax-Free Savings Account although contribution room is not affected by taxable income.
Earned income for RRSP purposes. Even if you do not wish to contribute to an RRSP currently, “earned income” amounts can be carried forward indefinitely. For RRSP purposes, earned income includes net employment income, net rental income from real property, CPP/QPP disability benefits and taxable alimony received.
Refundable tax credits: There are some federal and provincial refundable tax credits that may be payable to you even if you have no earnings and paid no tax. For example, see the federal Working Income Tax Benefit.
GST/HST credit: Generally, Canadian residents age 19 or older are eligible to receive the federal GST/HST credit, which is paid quarterly to eligible recipients. Those under 19 may be eligible, if they have (or previously had) a spouse or common-law partner, or if they are a parent and they reside with their child.
Non-capital loss: You have incurred a non-capital loss (see line 236) in 2016 that you want to be able to apply in other years.
Education credits: You want to carry forward or transfer the unused part of your tuition, education, and textbook amounts. See line 323.
GIS: You receive the guaranteed income supplement or allowance benefits under the old age security program. You can usually renew your benefit by filing your return by April 30. However, if you choose not to file a return, you will have to complete a renewal form. This form is available from Service Canada,
Also consider having your children file a tax return reporting income from various types of part-time work (paper route, baby-sitting, lawn mowing, etc.), even if they do not have to pay income tax, so they can create their own RRSP contribution room.
Making maximum annual available contributions to Saskatchewan Pension Plan plus your Registered Retirement Savings Plan and Tax-Free Savings Account will help to ensure that you have the retirement savings you need to support yourself once you leave the world of work.
However, there probably have been years when you have not been able to make the full available contributions. But fortunately, both RRSP and TFSA contribution room can be carried forward, so if your financial circumstances improve in future or you get a windfall like an inheritance or win a lottery, you can catch up.
Here is some information about 2016 and 2017 contribution limits plus how you can find out whether you have contribution room that has been carried forward.
SPP You can contribute up to $2,500 a year to SPP. In order to do so, you must have RRSP contribution room (see below). SPP contribution room cannot be carried forward if contributions are not maxed out each year. You can also transfer up to $10,000/year from your RRSP to SPP. Again, this transfer limit cannot be aggregated and carried forward to future years.
RRSP The RRSP deduction and contribution limit is 18% of your earned income to a maximum value each year. The maximum RRSP contribution limit for 2016 is $25,370 and for 2017 it will be $26,010. Unused contributions are carried forward each year, so if you didn’t maximize your RRSPs in previous years, you can add the unused amount to this year’s limit. RRSP contribution room is not restored in future years if you withdraw funds.
You can find out how much RRSP contribution room you have by going to:
The “Available contribution room for 2016” amount found on the RRSP/PRPP Deduction Limit Statement, on your latest notice of assessment or notice of reassessment
Form T1028, Your RRSP/PRPP Information for 2016. CRA may send you a Form T1028 if there are any changes to your RRSP/PRPP deduction limit since your last assessment.
TFSA Since the Tax Free Savings Account (TFSA) was introduced in 2009, Canadian residents over the age of 18 with a social insurance number have been permitted to contribute on annual basis. Here are the contribution limits by year:
If you are setting up a TFSA for the first time in 2016 you can contribute up to $46,500 (or $52,000 if you want to also make 2017 contributions). Withdrawals are permitted and the amount you take out can be re-contributed in the following year in addition to the $5,500 allotted for the next year plus any other carry forward of TFSA contribution room you may have.
Keeping track of available TFSA contribution room is important because if you over contribute, anything over the allowed tax free contribution room is subject to a 1% penalty charged on a monthly basis on the highest excess tax free savings amount.
According to a recent TD survey, more than two-thirds of Canadians between the ages of 35 and 54 say they’re not saving enough for retirement, and one in four say not being ready for retirement is keeping them up at night. As a result, the majority of Gen-X Canadians (60%) who aren’t saving enough do not expect to be able to retire on time and half as many (29%) expect to still be working in some capacity during retirement.
The top barrier preventing Gen-Xers from retiring on time is everyday financial demands like living expenses, mortgage or rent, and childcare costs (61%), followed by existing debt (42%) and major unexpected life events such as divorce or death of a spouse (19%). Given these challenges, it’s not surprising that more than half (54%) of Gen-X Canadians surveyed say they need help meeting their financial goals, with a majority feeling guilty about not saving enough for retirement and wishing they had started earlier.
If you have fallen behind in saving for retirement, here are some ways you can get on track to achieving your savings goals and become retirement-ready.
Track your spending More than three in five (61%) Gen-Xers attribute everyday financial demands as the reason they don’t expect to retire on time. Keeping a record of your spending is a simple way to see where your money goes each month and look for ways to cut back on expenses to free up funds and help boost your savings.
Once you’ve identified some monthly savings, consider arranging for those funds to be transferred automatically into Saskatchewan Pension Plan, a Retirement Savings Plan (RSP) or Tax-Free Savings Account (TFSA). As you identify even more savings over time, you can increase the amount transferred automatically each month. Remember to also factor in any additional money you receive throughout the year such as annual raises or bonuses.
Tackle your debt while also saving Four in ten (42%) Gen-Xers attribute existing debt as a top reason that prevents them from retiring on time. While everyone’s financial picture is different, there are a few key steps you can take immediately to help pay down debt while building up savings:
As you start tracking your spending and becoming more in control of your finances, take a look at where your money is going and determine where you can free up cash flow to go towards paying down debt.
Seek out groups and communities – either online or in your neighbourhood – where you can sell stuff you no longer use or need, and use those funds to pay down your debt. One person’s junk is another person’s treasure.
Look for tips and tools online, like this Debt Repayment Calculator, to help you become organized by determining how much you owe and prioritizing what to tackle first. You can stay on top of your debt more easily when you have a repayment plan.
According to the survey, of Gen-Xers who are already saving for the future, the majority (64%) rely on RSPs to help fund their retirement. If you have RSP savings room, this video will show you how easy it is to join the Saskatchewan Pension Plan. SPP is an easy, flexible, cost-effective way that any Canadian over age 18 can save $2,500/year. You can also transfer an additional $10,000 a year into your SPP account from another RSP.
You have filed your income tax return and now all you are waiting for is to see your overpayment appear in your bank account. While paying too much taxes and getting it back at the end of the year really means you are giving the Canada Revenue Agency a no-interest loan, the fact is that particularly with interest rates so low, many of us look forward to a windfall every spring.
Because my husband retired in June 2015, we are getting a nice chunk of money back and we are planning to spend it on a cruise to Australia and New Zealand for our 40th anniversary this fall. But depending on your age and stage of life, there may be many better places to spend the money than taking an exotic vacation.
Here are some options for you to consider in no specific order:
Pay off high interest debt
If you have credit card or other high interest consumer debt and can only afford to make minimum payments, double digit interest rates mean the amount you owe is growing instead of shrinking. Consider consolidating your debts a lower rate of interest and paying them down with your income tax return.
Seed your emergency account
Everyone knows somebody who has lost their job or had to stop work earlier than planned due to family illness. Most financial experts suggest you have at least three months’ salary in your emergency fund. This calculator from RBC can help you figure out how much you need. Your income tax return can help you seed or top up an emergency fund.
Pay down your student loan Canada Student Loans are interest-free for six months after you graduate or leave school. You can choose between a fixed interest rate (where the rate doesn’t change for the duration of your loan) and a variable, or “floating,” interest rate (where it can fluctuate). For Canada Student Loans issued on or after August 1, 1995:
The fixed interest rate is prime + 5%
The floating interest rate is prime + 2.5%
The sooner you pay off your student loan, the sooner you can free up disposable income to save for other family priorities like a house or a car.
Pay down your mortgage
The longest running personal finance debate is whether you should use an income tax return or other windfall to pay down your mortgage or contribute to an RRSP or TFSA. Typically if you are paying a higher interest rate than you are earning in a savings vehicle, paying down your mortgage is more advantageous. Also, if at all possible, try to pay off your mortgage before you retire.
Contribute to a TFSA
In 2016 you can contribute $5,500 to a tax-free savings account. Contribution room from previous years can be carried forward. There is no tax deduction for contributions but your principle and any interest accumulates tax free and there is no tax on withdrawals. Also, if you take money out your TFSA contribution room is restored. Using your tax return to contribute to a TFSA allows you to accumulate money for retirement or other major purchases in the years prior to retirement. It is also a good place to park your emergency fund.
Contribute to an RRSP
Are you one of those people who scrambles to come up with a registered retirement savings plan contribution in February every year? By contributing your tax return to your RRSP you will get a head start on this year’s contribution and reach your retirement goals much sooner.
Contribute to an RESP Tuition fees alone for Canadian undergraduate programs are currently about $6,000/year and they will be much higher before your young children graduate from high school. College tuition is lower but by the time you add books, living expenses and transportation costs these programs also cost thousands of dollars a year. If you use your income tax return to contribute to a Registered Educational Savings Plan, the money will accumulate tax free and taxes will be paid by the student who will likely have to pay little or no taxes. Also, an annual contribution of up to $2,500 will attract a government grant of up to $500/year to a lifetime maximum of $7,200.
Give to charity
If you donate all or part of your tax refund to an approved charity, you will not only benefit others, but you will get a non-refundable tax credit. If it is the first time you have made a charitable donation you may be eligible for the first-time donor’s super credit which supplements the value of the charitable donations tax credit by 25%. The FDSC applies to a gift of money made after March 20, 2013, up to a maximum of $1,000, in respect of only one taxation year from 2013 to 2017.
Upgrade your education
You want to upgrade your skills to put you in line for a promotion. You are bored with your current job and want to train part-time for another one. You’ve always wanted to fix your own car or learn a new language. You can use your income tax return to upgrade your education and you may also be entitled to tax credits for the tuition paid.
Invest in your health
Your dental plan does not cover the braces your child needs. You need a new pair of glasses that cost way more than the $150 every two years paid by your medical plan. You want buy training sessions at your gym to reach your fitness goals faster. Your income tax return can be used to invest in you or your family’s health and wellness.
Canadians have spoken. Canada has a new Prime Minister and a new first family. While the moving trucks have not been booked yet, Justin, Sophie, Ella-Grace, Xavier and Hadrien will be the second generation of Trudeaus to live at 24 Sussex Drive.
Since the election, the financial press has gone into overdrive analyzing what the new government will mean for your bottom line and urging the new government to either act quickly or step back from key election promises.
Here are some of the post-election stories I found interesting:
The MoneySense staff posted What a Liberal majority means for you on election day shortly after a Liberal majority was announced. One of Trudeau’s well-publicized campaign promises was to cut the annual Tax Free Savings Account (TFSA) contribution limit from $10,000 back to $5,500. A recent MoneySense analysis found high-income individuals stand to lose an estimated $53,000 over 30 years, assuming 5% equity returns and a combined federal and provincial tax rate of 50% under the Liberal plan.
In the Globe and Mail, Rob Carrick considered some potential TFSA avenues the Liberals could take. He quoted Mark Goodfield, a partner at BDO Canada LLP, who believes the Liberals may announce before year’s end that the cumulative TFSA limit starting next year will be $42,000. That would factor in the $5,000 limit from 2009 through 2012, the $5,500 limit for 2013 and 2014 and $5,500 limits for 2015 and 2016. According to Carrick, Goodfield believes the government will make the current $10,000 limit for this year a moot point, by limiting people who contributed $10,000 this year to just $1,000 in 2016, which would effectively be $5,500 a year for 2015 and 2016.
How the election affects your savings by Adam Mayers at the Toronto Star reports on both the Liberal commitment to expand the Canada Pension Plan and the proposed TFSA rollback. He says, “We can be hopeful about CPP expansion, but don’t expect it for a while. In the meantime, the Ontario plan will go ahead, with the best outcome being that it’s folded into an improved CPP at a later date.” Mayers also believes TFSA rules are unlikely to change before the new year, so if you have the money to use the $10,000 limit, he says do it now.
The non-profit Working Canadians group headed by Catherine Swift (formerly chair of the Canadian Federation for Independent Business) says cutting the TFSA limit is unfair when our tax dollars pay for gold-plated public pensions, Jonathan Chevreau reports in the Financial Post. Chevreau points out affluent baby boomers and seniors have hundreds of thousands of dollars ready to convert to TFSAs and he agrees with Swift that leaving the TFSA limit where it currently stands at $10,000 is the least the feds can do to enable 80% of Canadians to put away some funds for their own proper retirement.
The Universal Child Care Benefit will be replaced by the Canada Child Benefit. The biggest difference? The new benefit is tied to income and is tax-free.
The Liberals have quietly announced they would eliminate textbook tax credits for students ($520/year). But it’s not all bad news for students. Students won’t have to start paying back their loans until they begin earning $25,000 per year (or more).
One of the bigger changes announced is that it will be easier to access the Home Buyers Plan which allows a first time home buyer to borrow up to $25,000 (tax free) from his/her RRSP. Borrowers have 15 years to pay it back and it can be used more than once in a lifetime. Under the new rules, those going through life changes (such as divorce) will be able to access the home buyers plan to buy a second home.
Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.
By now you may be aware that there are changes to the Registered Retirement Income Fund (RRIF) withdrawal rules in the 2015 federal budget. But you may be wondering what difference it will make to you.
The basic purpose of the tax deferral provided on savings in registered pension plans (RPPs) and registered retirement savings plans (RRSPs) is to encourage and assist you to accumulate savings over your working career in order to meet your retirement income needs.
Consistent with this purpose, savings in Saskatchewan Pension Plan and RRSPs must be converted into a retirement income vehicle by age 71. In particular, unless you purchase an annuity, an RRSP must be converted to a RRIF by the end of the year in which you reach 71 years of age and a minimum amount must be withdrawn from the RRIF annually beginning the year after it is established (alternatively, the RRSP savings may be used to purchase an annuity). This treatment ensures that the tax-deferred RRSP/RRIF savings serve their intended retirement income purpose.
A formula is used to determine the required minimum amount a person must withdraw each year from a RRIF. The formula is based on a percentage factor multiplied by the value of the assets in the RRIF. The percentage factors (the RRIF factors) are based on a particular rate of return and indexing assumption.
Until this year, a senior was required to withdraw 7.38% of their RRIF in the year they are age 71 at the start of the year. The RRIF factor increased each year until age 94 when the percentage that seniors were required to withdraw annually was capped at 20%.
The existing RRIF factors were in place since 1992. The 2015 Federal Budget adjusts the RRIF minimum withdrawal factors that apply in respect of ages 71 to 94 to better reflect more recent long-term historical real rates of return and expected inflation. As a result, the new RRIF factors will be substantially lower than the existing factors.
The new RRIF factors will range from 5.28% at age 71 to 18.79% at age 94. The percentage that you will be required to withdraw from your RRIF will remain capped at 20% at age 95 and above. Table 1 below shows the existing and proposed new RRIF factors.
By permitting more capital preservation, the new factors will help reduce the risk that you will outlive your savings, while ensuring that the tax deferral provided on RRSP/RRIF savings continues to serve a retirement income purpose.
As illustrated in Table 2 below, the new RRIF factors will permit close to 50% more capital to be preserved to age 90, compared to the existing factors (Table 1 above).
TABLE 2: CAPITAL PRESERVED UNDER THE RRIF FACTORS
Age at January 1
Under existing RRIF factors
Under new RRIF factors
Difference (% more remaining)
1 For an individual 71 years of age at the start of 2015 with $100,000 in RRIF capital making the required minimum RRIF withdrawal each year.
2 Age 71 capital preserved at older ages is expressed in terms of the real (or constant) dollar value of the capital (i.e., the value of the capital adjusted for inflation after age 71). The calculations assume a 5% nominal rate of return on RRIF assets and 2% inflation.
By reducing your RRIF withdrawals, you can retain more assets in your RRIF—assets that will continue to accumulate on a tax-deferred basis to support your future retirement income needs should you live to an advanced age. In addition, if you do not need your minimum RRIF withdrawal for income purposes, you can save the after-tax amount for future needs — for example, in a Tax-Free Savings Account (TFSA), if you have available TFSA contribution room.
Of course, if you need more money sooner, you can withdraw it from your RRIF and pay the tax owing. Any money that you withdraw from a RRIF will increase your income for the purposes of calculating the Old Age Security clawback and eligibility for the Guaranteed Income Supplement.
I retired early and elected to start receiving my Canada Pension in 2010 at age 60. As I result my pension was reduced by 30% (.5% for every month prior to age 65) and I currently receive $675.20/month. At the time, the general consensus among many financial advisors was based on the old adage, “one in the hand.” In other words, it was worth taking the reduction to receive the reduced benefit for five extra years.
With changes made to the program beginning in 2012, if you choose to take CPP early, the reduction is greater. For example, if you retire in January 2015 at age 60, your pension will be reduced .58% for every month prior to your 65th birthday (to a maximum of 34.8%) and a January 2016 retirement will lead to a reduction of .60% per month until age 65 (a total reduction of 36%).
For a recent Toronto Star article, Some math on taking CPP early or late, Adam Mayers asked two actuaries and a financial planner for a few rules of thumb readers could use. Although there isn’t a simple one-size fits all answer, here is what they told him:
If you need the money to live on, take it as soon as possible.
If you have health problems or have a family history of short life spans in retirement, take it as early as possible.
If you think you can invest the money and come out ahead take it early. But be warned you will need a pretty hefty rate of return because you will pay tax on the pension and tax on the profit unless you can put it into an RRSP or a Tax-free savings account (TFSA).
Yih’s table reveals that if you take CPP at age 60 in 2015, (assuming you qualify for the maximum CPP at age 65) your benefit will be $643.31/month (reduced from $986.67).
Alternatively, if you wait until age 65 to collect a higher amount, you are foregoing the $38,598.53 to get more in the future. It will take until age 74 (the breakeven age) to make up the $38,598.53 you left on the table.
If you think you will live past age 74, the math suggests you should wait until age 65 or later to start receiving CPP. Unfortunately no one knows how long they will live. However, the Canadian Business Life Expectancy Calculator is one way to get a rough idea if you will live to a ripe old age. For example, I am currently age 64 and the calculator says I will live to 87.01 years.
You can apply for CPP at age 60, but if you continue to earn income beyond that age, you will still have to make CPP contributions until at least 65. A self-employed person will have to make both the employer and employee contributions. After age 65, CPP contributions are optional to age 70.
Based on your age, financial situation, projected life expectancy and whether you intend to keep working for some period of time after you retire, your financial planner can help you decide what the best time is for you to apply for CPP.
A recent policy paper from the C.D. Howe Institute[I] documents how the current mandatory minimum withdrawals from registered retirement income funds (RRIFs) and similar accounts have not kept pace with the increased life expectancies of Canadians – a problem for retired Canadians trying to balance their need for current income against the risk of outliving their savings.
Since 1992, the Income Tax Act has obliged holders of RRIFs and similar accounts to withdraw annual amounts, dictated by an age-related formula, that rise until holders must withdraw 20% each year. But in 1992, the federal government was in a deficit position and needed cash. Now it is close to surplus and the timing of the receipt of those taxes is less critical for the government.
To the RRIF holder, however, the minimums pose a threat. They oblige the holder to run tax-deferred assets down rapidly. Today, people can expect to live much longer after retirement, and real returns on investments that provide secure incomes are much lower. RRIF holders now face serious erosion in the purchasing power of tax-deferred savings in their later years.
Back in 1992, a 71-year-old man who withdrew the annual mandatory minimum from his RRIF could expect to deplete 25 per cent of his initial balance’s real value upon reaching his life expectancy, and had virtually no chance of seeing its real value drop more than 90%. Now, he can expect to live to see his initial balance drop about 70%, and faces a 1-in-7 chance of seeing its real value drop more than 90%.
In the same year, a 71-year-old woman making minimum RRIF withdrawals could expect to deplete about 40% of her initial balance’s real value upon reaching her life expectancy. Now, she can expect to deplete about 80% of it. And she faces a 1-in-4 chance of seeing its real value drop more than 90%.
The study authors William B.P. Robson and Alexandre Laurin admit these are stylized examples that will not apply to everyone. Some seniors, especially those who do not anticipate living long, will want to withdraw tax-deferred savings faster than the RRIF minimums. In the coming decades, more seniors, enjoying better health and working at less physically demanding jobs than their predecessors, will work longer and replenish their savings notwithstanding the disadvantage of losing tax deferrals after age 71.
Couples can delay the impact of the drawdown rules by gearing their withdrawals to the younger spouse’s age. High-income seniors whose incremental withdrawals do not trigger OAS and GIS clawbacks will find the burden of paying ordinary income taxes on them tolerable. As room to save in TFSAs grows, more seniors will be able to reinvest unspent withdrawals in them, avoiding repeated taxation.
For other seniors, however – even if they do have room to reinvest in TFSAs – these forced drawdowns make no sense. These seniors include those whose withdrawals – reinvested in TFSAs or not – trigger clawbacks and other income and asset tests; who find tax planning and investing outside RRIFs daunting; who cannot easily continue working; or, who anticipate sizeable late-in-life expenses such as long-term care.
Moreover, foreseeable demands on individual and public resources suggest we should be encouraging saving, rather than discouraging or at best complicating it. Roughly 203,300 Canadians are now age 90 and older; in about 25 years that number will roughly triple. To the extent future seniors have ample assets to finance their needs – especially those such as health and long-term care that rise with age – all Canadians will benefit.
Therefore, the authors of the paper argue minimum drawdowns from RRIFs and similar vehicles should start later and be smaller, or even disappear entirely.
They say that since tax is payable on RRIFs upon the death of the last to die of the account holder and his/her spouse, in a present-value sense, elimination of mandatory minimum withdrawals would have no significant fiscal impact for the government. Elimination would also have the additional benefit of removing the need for future updates as longevity, yields and possibly other circumstances change again.
Table 1 below illustrates how the RRIF minimum drawdown schedule could be modified to reflect both the increased longevity of Canadians in 2014 and revised interest rate assumptions.
[I] This blog contains excerpts from the C.D. Howe Institute report Outliving Our Savings: RRIF Rules Need a Big Update:
Current RRIF Prescribed Minimum Withdrawal
RRIF Minimum Withdrawals to Replicate 1992 Account Depletion Probabilities
Source: Outliving Our Savings: RRIF rules need a Big Update: C.D. Howe Institute
 This blog contains excerpts from the C.D. Howe Institute report Outliving Our Savings: RRIF Rules Need a Big Update:
Hi, as part of the SavewithSPP.com continuing series of podcast interviews with personal finance bloggers, today, I’m talking to Tom Drake, author of the personal finance blogs Canadian Finance and Balance Junkie. He also partners on three other sites and writes guest posts on several others.
Tom lives with his wife and two boys in Edmonton. He’s a financial analyst for all of the Sobeys stores west of Ontario. He’s always looking for ways to reduce any expenses, while continuing to save money, in part because his wife is a full-time homemaker.
Hi Sheryl, thanks for having me here.
Q. When did you start blogging Tom?
A. I started in early 2009. I hadn’t really thought about my personal finances too much prior to that. I was never totally terrible with money, but in about a six month span, we got married, and soon after that, we were expecting our first child, and we were also looking to buy a house when the market dipped in early 2009. So those three things kind of put personal finance right at the forefront in my mind.
Q. What were your goals for the blog when you started blogging, and have they changed over time?
A. Well, they have a little. When I first started, it was certainly more about the three major events that I’ve already mentioned. Nowadays, I try to cover as many personal finance topics as possible because through Google searches and even people emailing me directly I discover a lot of topics that I can kind of help them with their own personal finances, even if it’s not something that I’ve had to deal with myself.
Q. How frequently do you blog?
A. Lately it’s been about two or three times a week on the “Canadian Finance” blog. I have multiple blogs, so I’m probably doing something every day. I also post one to two times a month on “Balance Junkie,” and soon I’ll be writing on “Retire Happy” as well.
Q. What other blogs do you have?
A. Well, within Canada, it’s the Canadian Finance blog and Balance Junkie and I’m also a partner with Jim Yih on Retire Happy.
Q. To what extent is there an overlap between the topics that you would feature or write about on your own blog and that, for example, you or Jim or his other bloggers would post on his blog?
A. Well, Jim Yih is very dedicated to the retirement niche, which I honestly haven’t thought about it much. I save money in my RRSP and have savings in my TFSA as well, but I don’t have a huge retirement planning goal right now. So I don’t cover those topics as much. So I’d say my blog is about more general personal finance issues and his is very targeted on retirement issues.
Q. So what will you be writing about on Retire Happy?
A. On Canadian Finance, I cover a lot of tips on how to save money, reduce your utility bills and such. Most of the people who read Retire Happy are beyond that, and they’re looking for ways to use their money better. So I’ll probably be covering things like making sure that your credit card has a decent rewards plan and products like TurboTax. Just about anything that can help people use products that are out there and add something a little more than just retirement to that blog.
Q. Now, you say that retirement hasn’t been your focus as yet. May I ask how old you are?
A. Just about to turn 37 this week.
Q. I see, well, you know what, you’re getting closer to that break point. I think 40 is when the light goes on.
A. Yeah, exactly. I do save a decent amount. I just don’t have a full retirement plan. I don’t know if I’m going to retire at 50 or 70 at this point.
Q. Unlike Tim Stobbs who says he’s retiring at 45.
A. Oh, that would be nice, but I’ll say 50 at the earliest.
Q. There’s probably over a dozen well-known personal finance bloggers or more in Canada. What’s different about your blog? Why do you think it’s a must read?
A. Well, I think with any personal finance blog, readers are going to gravitate to someone that kind of fits their situation. So as a family man in my mid-30s, I get a lot of readers that sort of fit that same mold. Also, archived articles from other staff writers I have had from time to time add a different dimension.
Q. How many hits do you typically get for each blog?
A. I don’t really look at it per post. So much of it is search traffic. I get a few thousand in a day. But as a total network of all the sites that I own, or am in partner with, we get over 500,000 page views in a month.
Q. Wow. You said all the sites that you own or partner with. You’ve told me about two and about working with Jim. Are there others?
A. Yes, Jim Yih gets all the credit for this model, which is basically taking a 50/50 partnership where we focus on our strengths. I like writing personal finance posts, but I’m not as efficient at it as a lot of these other writers. So the people I partner with are really good writers.
Jim’s been writing for over a decade in newspapers and on his own site, even before we turned it into Retire Happy. I’ve also partnered up with Miranda Marquit down in the States. She can be found pretty much in any personal finance blog that you look at. She’s a big freelancer.
These people don’t want to deal with creating a site, working on things like search engine optimization, how to monetize the site, so they actually make some money from it. Those are more of my strengths actually than the actual writing. So it’s been a good partnership with both of them.
And the third person I’m partnering with is Kevin at Out of Your Rut which is another American blog. Again, he’s more of a freelancer. But he has a site and we work to make sure that site makes money as well and gets the traffic.
Q. One of the more popular blogs you’ve posted related to the Smith Maneuver, which allows you to deduct mortgage interest as an investment expense. Can you tell me how that works?
A. Basically what you need is a re-advanceable mortgage. And what that means is as you pay down your principle, you have a home equity line of credit that will increase. So if you pay $500 down on your principle, your L.O.C. increases by that amount. You can use that line of credit to invest in dividend bank stocks.
The goal is that the stocks you pick have a higher dividend percentage than the interest rate you’re paying on your mortgage. Then you can use those dividends to accelerate your mortgage pay down. So ultimately your debt level stays the same.
A lot of people don’t like that, because you’re not really reducing your debt, and you’re leveraging it for investing. But I’m comfortable with it. The dividends I have are certainly making a higher percentage than what I’m paying on a mortgage currently. Obviously, the risks are the way that the mortgage rates go in the future. But dividends have some preferential tax treatment as well, which also helps.
Q. So when did you implement a Smith Maneuver personally?
A. Probably about 2010. Buying my house in 2009, I got the Scotia STEP mortgage which includes a line of credit. But since I had exactly a 20% down payment, I couldn’t actually borrow anything yet because I hadn’t paid down any additional principle. So after about a year of that mortgage, I started out with the Smith Maneuver, and using that extra equity on the house to invest in stock.
Q. So you’ve got a day job. You’ve got two kids. You’ve got your work with your own blog and others. What advice would you give to busy people to fit it all in?
A. I don’t get a lot of sleep. So if you can do a 19-hour day, you can fit a lot. But otherwise, certainly prioritize family first. Obviously, I’ve got my day job. But as soon as I come home, I spend time with my family. Once the boys are in bed, then I go into business mode and write a blog post or deal with various technical issues and such, up until 1:00am or later.
Q. That’s amazing. I’m one of those people who needs my sleep. So you’ve mentioned a number of people you’ve worked with, but who are your favourite personal finance bloggers?
A. Well, some of the ones that originally got me into personal finances haven’t been blogging as much, like Mike at Money Smarts or Preet at Where does all my money go?
Million Dollar Journey is certainly the reason I started blogging. It’s what got me into the Smith Maneuver too actually, and so I still read that one quite a bit. And I read Jim Yih’s stuff a lot. But Robb at “Boomer & Echo” is certainly a great writer.
Q. So if you had to look at all the time you’re spending on this, are you doing it for love or are you doing it for money?
A. I do make a full-time income with my online business, but my wife is staying at home with our kids. So it’s her full time income basically. It’s worth it to juggle sort of both jobs right now, to allow her that time with the kids.
Q. If you had only one piece of advice to people who want to save money and optimize their savings, what would it be?
A. I think the biggest advice for me is basically to have a positive cash flow. I’m not a big fan of budgeting myself. It’s something I don’t think people always stick to. But the cash flow is just simple calculation to make sure that you’re bringing in more than you’re spending. So you want to make sure you’re saving and covering all your bills. And you certainly want to make sure that you’re not going into a negative cash flow. It’s the simplest way to improve your finances.
Thanks very much Tom. It was a pleasure to talk to you.
Thank you. It was great conversation.
This is an edited transcript of the podcast you can listen to by clicking on the graphic under the picture above. If you don’t already follow Tom’s blogs “Canadian Finance and Balance Junkie” you can find them here and here. Subscribe to receive blog posts by email as soon as they’re available.
Every family has multiple financial priorities. If you have small children and a big mortgage it is often daunting to think about saving for anything more than a family night out at a local fast food restaurant.
But one way to manage your money is to pay yourself first by allocating specific amounts to savings and having these amounts moved into different jars (or accounts) as soon as your paycheque is deposited into your account.
In Part 2 of the series “how to save for retirement” we will focus on several of the tax-assisted or tax–deferred savings plans available to you and some tips for using them effectively.
Government benefits: Every working Canadian must pay into the Canada Pension Plan or the Quebec Pension Plan until age 65. In addition, Old Age Security is payable to Canadians or legal residents living in Canada who lived in the country at least 10 years before age 65 and Canadians or legal residents living outside Canada who lived in the country at least 20 years before age 65. Lower income OAS recipients may also be eligible for the Guaranteed income Supplement (GIS). But changes to government benefit programs mean you can take benefits later or in some cases earlier (with a penalty). When developing a retirement savings plan you should understand how these programs work and the benefits you can expect to receive. You also need to decide when it makes the most financial sense for you to start collecting CPP and OAS.
Saskatchewan Pension Plan: The Saskatchewan Pension Plan is a defined contribution pension plan open to all Canadians with registered retirement savings plan (RRSP) room. You can contribute up to $2,500/year or transfer in up to $10,000/year from another unlocked RRSP. Low fees (one percent/year on average) and consistent returns (average of 8.13% over 28 years since inception) make SPP an excellent investment. The program is very flexible because how much you contribute and when is up to you. Funds are locked in until your selected retirement date, between ages 55 and 71.
Registered Retirement Savings Plan: In 2014 you can contribute 18% of your previous year’s income to a maximum of $24,270 to your RRSP minus specified amounts contributed to other registered savings accounts. Unused contribution room can be carried forward. You can find your RRSP limit on line (A) of the RRSP Deduction Limit Statement, on your latest notice of assessment or notice of reassessment from the Canada Revenue Agency.
RRSP withdrawals: One weakness of an RRSP as a retirement savings vehicle is that you can withdraw money at any time. If you do withdraw RRSP funds you will pay tax on withdrawals at your normal tax rate, the contribution room is lost and you lose the benefit of future tax-free compounding. However, the Home Buyers’ Plan and the Lifelong Learning Plan permit you to withdraw amounts from your RRSP in specific circumstances without triggering a tax bill and require you to repay the money, usually over 15 years.
Tax deductible: Contributions to SPP, RRSPs and other registered pension plans are tax deductible. If you participate in one or more of these plans and have not already arranged to have less tax taken off at source, you may get a hefty income tax return. There are lots of ways to spend this windfall including taking a vacation or paying down debt. However, in his book The Smart Debt Coach, author Talbot Stevens says reinvesting your tax returns into an RRSP is the best way to get the full benefit of compounding in the plan.
Deferring tax deduction: There is no minimum age for an RRSP. In order to make contributions to an RRSP account, a minor needs to have earned income the previous year and have filed an income tax return. If a thrifty young person or anyone with a low income makes RRSP contributions, deferring taking the tax deduction until they are in a higher tax bracket means they will get a bigger bank for their savings bucks. The last RRSP contribution a taxpayer can make is in the year they turn 71.
Tax Free Savings Account: A Tax Free Savings Account (TFSA) allows you to currently save $5,500 a year. Contributions are not tax deductible, but investment earnings accrue tax free in the account. If you withdraw money, you can re-contribute the amount to the account in the next or subsequent years without any penalty. You can only begin making contributions at age 18 but there is no upper age when you have to stop contributing. How do you decide if a TFSA or an RRSP is best for you? Gordon Pape says TFSAs are better for short-term savings goals and if you don’t want to undermine possible eligibility for government benefits like the GIS. But if your income will be lower in retirement he suggests saving in an RRSP.
Automatic withdrawal: Whether you participate in a company pension plan, SPP, RRSP, TFSA or a combination of all or some of the above, set up automatic withdrawal so a specified percentage of your income is moved into these accounts every payday. David Chilton made “pay yourself first” a popular mantra in The Wealthy Barber, first published in 1989. If savings are skimmed off the top, you will learn to live on less while you get on with the business of day-to- day living. And when you do retire, you will have a significant part of the nest egg you need to live on.
Automatic escalation: To find out how much you need to save for retirement, you need a financial plan. But in a recent column in the Globe and Mail, personal finance expert Preet Banerjee suggests that in the absence of a plan, the rule of thumb should be at least 10% or as much as you can save. In other words, you are not going to have enough if you keep saving a flat dollar amount each year. But if you select a percentage of income and ensure you increase your contributions every time you get a raise, it is more likely that you will reach your retirement savings goal.
Consider insurance: Nobody expects to become disabled or die young, but it happens more often than you think. Regardless of how much you are saving for retirement, an unexpected loss of income can derail all of your short and long term goals. You may have some life insurance, disability insurance and maybe even critical illness insurance at work. Review your coverage with a financial advisor to determine if you need more individual coverage or if you can afford to self-fund the risk.
In Part 3 of this series we will focus on some basic investment principles that will help you grow your retirement savings.