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Fall 2023 Financial Planning Report

Table of contents

How is your financial wellness?

Financial wellness is not a measure of a person’s wealth. It’s about the ways that financial aspects in our life either support or undermine our well-being. Stress over financial issues can affect Canadians of all income levels and age groups.

Measuring financial wellness

A person in a healthy state of financial wellness feels secure about meeting their current financial obligations and is confident they’re on track to meet their long-term financial goals. They’re able to enjoy life and not worry about discretionary spending: for example, they can take a vacation without losing sleep over its cost.

That’s the ideal. But just about everyone experiences financial anxiety at one time or another. Sometimes it’s caused by external factors, perhaps the markets or inflation. Other times the reason is personal, such as dealing with job loss or significant unexpected expenses.

Why it matters

The Financial Consumer Agency of Canada identifies three pillars of good health. The first two may be obvious – physical and mental health; the third is financial wellness. According to this government agency, stressors in our financial life can negatively impact our physical health, mental health, personal relationships and performance at work. Conditions potentially arising from financial stress include anxiety, depression, sleep disorders and high blood pressure, among many others.

How we can help

From the financial wellness standpoint, investors with an advisor have an advantage over those without one. You can contact us whenever you feel anxious about a financial issue. Our help may involve providing market information, discussing specifics of your wealth plan, negotiating a life change, ensuring you’re on track to meet your retirement savings goal or any other type of assistance. Whatever the issue, we’re here to help allay your worries and take care of your financial well-being.

Do you have questions for any of these topics? ​

Contact our team for additional financial recommendations.

Are you ghosting your RRSP?

When it comes to managing their Registered Retirement Savings Plan (RRSP), it’s very easy for many investors to fall into a routine. Make your contributions. Claim the tax deduction. Repeat. But there may be a problem if you only follow this routine, then ignore your RRSP. You could miss out on ways to make the most of your plan. Here are some helpful strategies to consider.

When a spousal RRSP saves you tax

Ever since retirees became able to split up to 50% of their eligible pension income with their spouse, the usefulness of a spousal RRSP came into question. A spousal RRSP can still offer tax advantages in three situations, provided one spouse is in a lower tax bracket.

You retire before age 65.

Splitting eligible pension income is only an option when you’re 65 or older. However, if you retire before 65, you can draw retirement income from your spousal RRSP and still have those funds taxed in the hands of the lower-income spouse.

You wish to split more than 50%.​

In some situations where the higher-income spouse has employment, rental or business income, the couple may wish to split more than 50% of their pension income. The couple can achieve this by making withdrawals from a spousal RRSP or spousal Registered Retirement Income Fund (RRIF).

You earn income past age 71. ​

You must close your RRSP at 71, but if you earn income and have a younger spouse, you can make contributions to a spousal RRSP until the end of the year your spouse turns 71.

Your RRSP refund can boost retirement income

In retirement, your RRSP or RRIF withdrawals will be taxed at your marginal tax rate. But in your working years, you can take your annual RRSP refund or tax savings and invest the funds with the specific purpose of helping to offset the eventual tax on RRSP or RRIF withdrawals. You can invest your tax refund or savings in your Tax-Free Savings Account (TFSA) or a non-registered account.

Claiming your tax deduction in a future year

Normally, you claim your RRSP tax deduction in the year you make the RRSP contribution, but you’re able to claim the deduction in any future year. It can pay to defer the deduction if you expect an increase in your income – a higher marginal tax bracket results in greater tax savings.

Making a tax-smart donation

Any funds remaining in an RRSP or RRIF when the plan holder passes away are taxed as income, payable by the estate. But there’s a way to offset this tax liability. You name a charity as the beneficiary of your RRSP or RRIF, and the resulting donation tax credit is used on the final tax return to offset the tax owing on the plan’s assets. Note that in Quebec the charity must be designated as an RRSP or RRIF legatee in a will.

When to convert your RRSP to a RRIF

The latest you can close your Registered Retirement Savings Plan (RRSP) and transfer the funds to a Registered Retirement Income Fund (RRIF) is December 31 of the year you turn 71. There is no minimum age requirement.

When it comes to the timing of converting an RRSP to a RRIF, the first basic guideline is to open a RRIF when you need the funds for retirement income – regardless of your age. The second guideline is to wait until you’re 71 if you have other income sources to support your retirement. Waiting gives your RRIF investments more time to grow tax-deferred and can save you tax while you draw retirement income from sources that are more tax-efficient than RRIF withdrawals.

Factors and strategies

Some retirees can simply follow one of these two general rules, but there are exceptions to the rules – so the timing decision should be made with the guidance of your advisor.

Triggering a tax credit.​

The pension income tax credit applies to $2,000 of eligible pension income, which includes RRIF withdrawals. You can open a RRIF at age 65 and transfer just enough funds from your RRSP to make a $2,000 annual RRIF withdrawal from age 65 to 71.

Delaying government benefits.​

Do you plan on delaying Canada Pension Plan (CPP)/ Quebec Pension Plan (QPP) and Old Age Security (OAS) benefits to age 70? You could open a RRIF – or make RRSP withdrawals – to help provide retirement income in your 60s.

Splitting pension income.

You may want to open a RRIF at age 65 to save tax through pension income splitting. Up to 50% of RRIF withdrawals can be allocated to your spouse.

Controlling your minimum RRIF withdrawals.

For some retirees, their minimum RRIF withdrawal at age 71 or 72 would push their income to a higher tax bracket. One solution is to transfer some funds from their RRSP to a RRIF from age 65 to 71, making annual withdrawals. The result is a smaller RRIF at 71 and a lower minimum withdrawal.

Is the latte factor valid?

The idea behind the latte factor is that you eliminate or cut down on any unnecessary item you regularly purchase, whether it’s a specialty coffee or something else. You then invest those savings, and over time you have a significant sum. Whether this concept is valid or not has been much debated.

Latte factor supporters point to the math. For example, say that someone invests just $5 a day. After 30 years, based on a 5% annual rate of return, they would accumulate about $125,000.

Critics of this practice question why you would sacrifice one of your life’s pleasures when there are other ways to save, such as the pay-yourself-first method where you dedicate a set amount of each paycheque to savings.

What it all comes down to is that how you save is personal. Any saving method or variety of methods is valid, as long as you meet your saving and investment goals.

Introduce your teen to investing

When your child reaches the age of majority, they’re able to open a Tax-Free Savings Account (TFSA) and First Home Savings Account (FHSA). So it’s a good idea if you can introduce them to some investment basics.

A helpful guide

To help determine which basics to cover, it’s helpful to know which topics your child should eventually understand as an investor. But this is only a guide – it’s not expected that a teen will know about all of these topics.

Compound interest. Understanding compound interest will encourage your child to save when they’re able to. Their money makes money, and the original and new money makes even more. You could show them an online compound interest calculator.

Stocks and bonds. It’s helpful to know why stocks are typically used to meet longer-term goals, why bonds are used to meet shorter-term goals and how they work together in a portfolio.

Asset allocation. When they start investing, your child should know that their proportion of equities and fixed income is based on their financial goal, their risk tolerance and when they’ll need the money.

Diversification. You can let your child know that different types of stocks and bonds perform differently at any given time, so it’s wise to have a variety of investments.

Discussion ideas

A great lesson is to talk about the investments in the child’s Registered Education Savings Plan (RESP). You can explain why the focus shifted from equities to fixed income over the years.

You could also tell your child that at age 18 or 19 (depending on your province) they can open a TFSA, then explain the account’s benefits.

You may want to ask your teen if they’ve learned about compound interest in school. If they haven’t, you could explain the concept.

These are only a few ideas. You can come up with your own approaches that suit you and your teen. All you need to do is provide an introduction, so they won’t feel intimidated or overwhelmed when they start to invest.

Beware of following the herd

Whether in politics, the social sphere or the financial world, joining the crowd can make us feel reassured and bring us comfort. But when making investment decisions, following the herd can lead to financial loss.

Chasing outperformers. A common herd behaviour is investing in an outperforming stock or fund that has attracted a multitude of investors. The trouble is that you’re buying when the investment has become expensive. Also, the price could escalate beyond the investment’s true value, risking a collapse.

Taking a flight to safety. Another behaviour to be wary of is following the crowd who sells their investments when markets plummet. In March 2020, when COVID hit and markets fell, mutual funds in Canada recorded over $18 billion in redemptions.1 Over the following months, many investors missed one of the fastest market recoveries in history.

An advantage of working with an advisor is that we base your investments on your goals, time horizon and risk tolerance – not on what’s trending. If you ever do experience fear over a falling market or missing out on a popular investment, let us know.

1 The Investment Funds Institute of Canada, IFIC Monthly Investment Fund Statistics – March 2020, April 22, 2020

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