Aspects of RRSP/RRIF

Keep in mind that when you put money into the Registered Retirement "Savings Plan", while you in effect decrease your earnings now to save tax and get a refund in your present days, you will have to pay the taxes in your retirement for a long time at ever increasing rates.

That is the deal. You save now and you pay later in the RRIF or Registered Retirement "Income Fund".

The key word is INCOME. What happens when you have INCOME? You pay TAXES.

The moment you convert your RRSP to a R.R.INCOME FUND, you must by law, take out as income a 'Minimum' of the savings money every year, whether you need it or not and pay tax on it. The minimum goes up every year once you start. Remember this

So in retirement you have the pension from work -if you were lucky enough to have one, and perhaps it pays you $400- $700 per month.

Then you have Old Age Security from the Fed at perhaps another $400-$600 per month and if you live in Quebec, you get the Quebec Pension Plan at another $500-700 per month.

So, $700 + $600 +$700= $20,000 per year not including any other savings you have inside an investment that is not REGISTERED. This will be taxed at a marginal tax rate of approx 35% or more.

Let us say you are age 71 and you now have converted the RRSP to RRIF.

You must take out from the RRIF a minimum of 7.38%.

Let's assume you have managed to save in this plan $200,000.

Then $200,000 x 7.38%= $14,760.

This amount must be taken out whether you like it or not and you must add it to the other income of $20,000 and pay tax on the increased amount.

There are other factors to be considered which I'll write about later. But the key question to you is,...

" Do you understand what is going to happen later if you use the RRSP as a savings device now?"

Good resource articles are in the Financial Post by Jonathan Chevreau (Wealthy Boomer).

He has two articles: Are You Saving Too Much? (Lower Targets) and the second is The RRIF Rebels. The articles are in the Financial Post Saturday Jan 29 2011 and can also be accessed at financialpost.com.

The minimums are :

age 65 = 4.17%

age 70 = 5 %

age 71 = 7.38%

age 72 =7.48%

age 73 = 7.59%

all the way up to age 99 = 20%

And just think, inside the RRIF, your invested money keeps growing even though you have only taken out the minimum.

Maybe we should consider how much should really go into the RRSP and how much should be saved outside it ...

say in a in the Tax Free Savings plan where you have $5000 you can save for year 2009, another $5000 for year 2010 and another $5000 for 2011 where even if you take any out, you pay NO TAX! That's right if you have not started for 2009 or 2010, it can all be added up in 2011 to $15,000, if you have that much to put in. You can put in less, but $15,000 is the maximum until next year if the Fed decides we can do it again.

Not only that, if you took any out, you can replace it at no extra cost.

Golden Rules on your WILL

Remember that every 5 years or so, you should sit with your investment advisor or legal advisor to review the will. Even if you and/or your spouse have not changed anything, the legal, tax and investment rules and laws are always in a state of flux which will have effect either positive or negative on your last wishes.

Also, whether you travel frequently of not, you should always have one of your children or parents or trusted friends 'in the loop' and know where you keep your will(s), so that if anything happens to you, at least (that) someone will know where to look.

Drowning in Paper

As a financial advisor, I ask my clients who are in 'couples-relationships' to share the tasks involved with bill payments, investment strategies, monitoring, organizing and collecting the paper related to those tasks (statements, reports and emails).

The reason is simple. Should one die, the one left with the assets is also left with bill payments and organizing of the paper. And inevitably they are caught short and have no clue where anything is or how things work.

This week I went out to lunch with a wonderful senior couple who are also my clients.

We chatted about several things, but one of the items that came up was how Mrs. H is becoming more involved with investment, cash flow, net worth and how to organize statements and paper as it comes in from the financial companies as she sees now, the need to take some responsibility for this element of the household in retirement.

I am now dealing with her as I would a 'new' (investment) client since I have dealt with Mr. H primarily for 'investment' in the past. She has been a client for just as long, but never has she had to concern herself with Taxation, Accountants, Investment Statements or household bill payment records since that was traditionally 'his territory'. Times and situations naturally do change.

The amount of paper coming in from mutual fund companies at year end is significant .

Further, she is coming to terms with the inflow of statements on bill payments as well. Yes I know about on-line banking, however, the statements from the household cost factors still come in. Mr.H. had always dealt with these in files and filing cabinets. This is not wrong, but there is a tendency for receipts and statements to get lost in files over time.

I recommended something that seems to work for many of my clients who are in business.

For your investment statements, written investment communications, investment e-mails etc, have a 3inch binder and 3-holed punch. Anytime you get a statement or any investment paper, get it out of the envelope as quickly as possible -the same day as you receive it, 3-hole punch it and then put on top of the last paper in the binder the binder. In this way, you have an ongoing story and can quickly look back to see what values you had before compared to now and can keep all the investment related stuff together.

If you deal with an investment advisor who is with a dealer or single 'captive' dealer company, then use the quarterly reports (for mutual funds) or monthly reports (for stock) as your check list to understand the 'geography' of your investments, since your advisor may use many different fund companies for various specialized investment types.

As for household receipts, have a 2 inch binder that has 12 plastic folders for each month and collect the monthly bank machine slips, or any other tax related receipts and put them into this month's plastic 3 ring transparent envelope. At year end - pass it to the accountant and let him or her deal with it.

A book keeper or accountant is a great tool to have. But getting him or her the right paper data will be a big help. At least you don't have to blame yourself for the tax messes and it is time well saved for going for nice long walks, yoga, Tai Chi and staying in shape. In short, more quality time can be spent with your 'significant-other' while eliminating topics of conflict.

Investment: Do You Know How Much You Pay?

One of the most significant investment methods made in the Canadian Investment Market is via Mutual Funds.

Mutual Funds are manufactured by a person or group around a method of investment and risk comfort level. The fund has a fund manager or team which place the trades in accordance with the risk level of those who would be the investors - you.

These people charge the fund a fee. The more money in the fund, the higher the fee since the fee is a percentage along with in some cases benchmarks for bonus fees. Witinin the fee is a Managemnt Equity Ratio which usually pays the income or commission of a fund advisor.

A fund Advisor guides clients usually with financial advice. The advice is based upon goals of clients to a given time horizon for eventual use of the money.

What many people do not know is that there are varying ways of charging you for the fund you have selected through an advisor. Also, there are various advisors and not all of them charge the same way.

The wealthy usually do not wish to pay high fees and neither should you. And yet, it would appear that the less money you invest the higher you pay when using an advisor. Put another way, once you pass certain levels of invested money, the more power you have to reduce what is charged to you. Yet there are some advisors who will give you a break right away, depending upon how they run their business.

So the goal you should start with, is 'to know how your advisor is paid'.

Your options, while defined in the 'simplefied prospectus'- (a kind of menu of cost and Risk or rule book provided to you by your advisor for each fund you own) may not at first be clear to you. But this booklet tells you how much you pay the advisor and the mutual fund company out of your fund which therefore reduces your overall investment return.

While it would be quite nice if the advisor were like a maitre'd in a restaurant, highlighting risks, costs and generally explaining the more subtle aspect of an investment while you consider your investment choice, many advisors simply guide your attention to Series A or what I call the 'retail' part of the menu rather than the wholesale menu that is also there for you to be aware of.
In the 'wholesale' section, after the retail area or series A, you should be able to locate Series F.

Most mutual funds have various series which have different costs to you.

Series F cuts your Fund costs in half and also cuts the income of the advisor by relieveing the Fund Company of the duty of taking from your fund and remitting to the advisor a commission.

With Series F the advisor is required to deal with you directly and ask permission of you to accept a certain level of cost. In other words-negotiate with you. Series F gives you the control of the relationship. Series F is the cheapest way of dealing with an advisor due to this aspect of negitiability. In series A there is minimized negotiability.

If you use a financial advisor, you should make it your first order of business and continued order of business every year to examine what you pay the advisor, since it comes right out of the 'return' of your mutual fund (s) and your return on investment.

Let me ask you a question. When was the last time you negotiated your cost of investing?

DO YOU KNOW HOW MUCH YOU ARE PAYING?