My Finances

Presented By: Ben Reale, CFP

Why should we budget?

Those ‘must-haves’

Home of your dreams

Education expenses

Ahh.. Retirement!

Those unforeseenevents along the way!

Paying bills

‘Reasons’ not to budget

• I spend everything I earn• Budgeting is boring, tedious and never works• Only rich people budget, I don’t make enough• Are you kidding?

– Living expenses, clothing, entertainment & gifts

– Kids, tuition & books, transportation– There’s nothing left to budget!

Regular vs. Periodic expenses

• Regular Expenditures– Rent, transportation & food– Schooling costs

• Periodic Expenditures– Clothing & gifts– Entertainment & repairs

Non-discretionary expenses

• Groceries• Mortgage & rent• Transportation• Taxes• Health care

Discretionary expenses

• Type of transportation you have– Car vs. public transit

• Type of food you eat– Red Lobster vs. Tim Hortons

• Dining out vs. brown bag• Hobbies• Entertainment

– Rent a movie vs. $75 movie night

This is what yourbudget might look like:

Negative cash flow

• Can I reduce spending?– Eat out less? Go out less?

• Can I increase cash flow?– Part-time job? Sell items no longer used?

• Do I need to change my lifestyle?– Move into a cheaper home? Sell my car?

Managing debt

• Clear balance on high interest debts such as credit cards monthly

• After minimum payments, apply additional payments to move expensive debt first

• Can you consolidate to reduce interest?• Use unexpected cash to pay down debt

– Gifts, bonuses, rebates, refunds, overtime, etc.

Debt Service Ratios

• Ratios are used by lenders to assess your ability to repay the money they loan you.

• Gross Debt Service Ratio (GDSR)– Mortgage, heating, taxes, 50% of condo

fees– Not to exceed 32%

• Total Debt Service Ratio (TDSR)– Gross debt + minimum payments on other

debt– Not to exceed 40%

Budgeting tips

• Have one! But set realistic goals• Estimate future cash crunches and know how

you will make up the short-fall• Understand that frugal living today means

more enjoyment tomorrow• If you have a partner, involve them in the

planning process

Will you have enough?

Two key questions Life Expectancy

– How long does your money need to last

Income Replacement Ratio – What percentage of your pre-

retirement income do you require

Income replacement ratio Source: Statistics Canada

Pre-Retirement Income

• $20,000 - $29,999• $30,000 - $39,999• $40,000 - $49,999• $50,000 - $69,999• $70,000 plus

Replacement Ratio

• 62%• 60%• 59%• 56%• 45%

Retirement income example

Non registered income

• Value of a fund grows from $10,000 to $20,000

• You redeem $1,000• 50% of the gain is

taxed (50% of $500 or $250)

• Tax is approximately $125 (assuming 50% tax bracket)

• After tax is $875

Pension income• $1,000 of

pension income• Fully taxable • Tax is

approximately $500 (assuming 50% tax bracket)

• After tax is approximately $500

Can’t meet your retirement income needs?

STEW!• Save More:

– Trade off some of today for more tomorrow

• Take Less– Realistic estimate of retirement needs

• Earn More– Higher returns on investments?– Efficient tax planning yields more

after tax income• Work Longer

– Maybe one day per week in retirement?

Understand the basics

• Canadian tax is progressive• Though there are exceptions, tax is generally logical• The government provides incentives and impediments to

encourage and discourage various patterns• Taking advantage of incentives is not illegal • Taxes can be reduced through proper planning• Income can be split to reduce total taxes payable• Taxes can be deferred to create advantages• Know your rights as a taxpayer, and exercise them

Federal & Provincial tax rates

RRSPs – What’s the big deal?• Allows you to reduce your taxable income• Allows tax free growth• Excellent tool for saving for retirement

• Do Canadians take advantage of this opportunity?

Saving $10,000 for 10 years at 10% growth

Outside

Inside

$136,565.52

$238,986.48

The advantage is more than all of my deposits.

*Assumes tax rate of 40% with refunds reinvested

How the TFSA works

• $5,000 per year for each person over 18• No maximum age limits (i.e. RRSP age 71)• No deduction or credit on contributions

(i.e. RRSPs)• No tax on growth• No tax on withdrawals• No tax benefits on any losses• Contribution room is carried forward

indefinitely• Contribution room is not reduced by

withdrawals• Withdrawals do not affect income tested

programs– GIS, OAS, Child Benefits

Pay down mortgage, RRSP or TFSA

• It depends on your personal situation• Mortgage rate vs. RRSP vs. TFSA returns• RRSP: Build retirement assets, tax deductions, Home

Buyer Plan, tax deferred growth, income splitting• TFSA: Tax free accumulation and withdrawals, income

splitting, cash when you need it (emergency fund)• Mortgage: Reduce liabilities, improve debt ratios, reduce

total cost of borrowing, lower housing costs in retirement• Combination: Invest in your RRSPs and apply the

refund towards your mortgage and/or TFSA• RRSP contributions are typically made post tax which

means people often get a tax refund at year end

Dare to compare…

What is income splitting

• We learned Canadian tax is progressive – the more you earn, the higher your marginal rate

• To reduce the total tax paid by a family, we equalize income between partners in the future

• Transferring income from a higher tax paying partner to the lower tax paying partner

• Another strategy is combining tax credits, such as receipts for charitable gifts, to maximize tax benefits

Pension splitting

• Established in 2007 • Pensioner may ‘elect’ to split, shift or

allocate up to 50% of pension income from higher bracket taxpayer to lower bracket spouse.

• Annual election on form T1032

Tax without splitting

*Tax rate assumes pensioner has other

income

Pensioner Spouse

Pension Income $50,000 $0

Tax Rate 46% 0%

Tax Due on Pension

$23,000 $0

Tax with splitting

Pensioner Spouse

Pension Income $25,000 $25,000

Tax Rate 46% 22%

Tax Due on Pension

$11,500 $5,500

*Tax rate assumes pensioner has other

income

Family Tax Savings =

$6,000

Benefits of pension splitting

• Pensioner OAS claw-back may be reduced• May reduce installment payments• Spouse may claim pension tax credit

Cautions of pension splitting

• Spouse may have OAS clacked back• Spouse pension credit may be affected• Spouse may have to start making

installment payments

How to do it

• There is a line on the tax return of pensioners

• Enter the amount to be transferred• Enter the same amount on spouse’s tax

return• Tax withheld on pension is split

proportionately• Both spouses must agree and approve

T1032 form

Income not eligible to split

• Old Age Security• Canada Pension Plan• Registered Retirement Savings Plan

withdrawals – non annuity income• Retirement Compensation Agreement

withdrawals

Eligible income

• If aged 65 and over:– Annuity payments from a Registered

Pension Plan– Annuity payments from a Dividend

Reinvestment Plan– Registered Retirement Income Fund and

Life Income Fund payments• If aged under 65:

– Annuity payments from Registered Pension Plans

– Other amounts eligible (listed above) if as a result of death of a spouse

Tax-free life insurance

• Insurance has tax advantages and considerations• Tax free death benefits• Investment growth is tax free• Virtually no limits on deposits• Cost of insurance and MERs must be considered• Usually best option after RRSPs, TFSA and home• Tax efficient for survivor income, paying estate taxes,

augmenting retirement income, numerous business applications

Summary

• Understand that how much you keep is just as important as how much you make– Know where your money goes– Explore tax reduction strategies

• Understand how income is taxed and things like RRSPs and TFSAs

• Deal with debt today rather than tomorrow

• Estimate how much retirement income you’ll need

• Don’t forget STEW

Remember to enjoy your retirement!Thank you!

Summary | Q &

A

Presenter: Ben Reale, CFP