My Finances
Presented By: Ben Reale, CFP
Why should we budget?
Those ‘must-haves’
Those unforeseen
events along the way!
Education expenses
Home of your dreams
Paying bills
Ahh.. Retirement!
‘Reasons’ not to budget
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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
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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 your
budget 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?
• Save More:
STEW!
– 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
Saving $10,000 for 10 years at 10%
growth
$238,986.48
Inside
$136,565.52
The advantage is more
than all of my deposits.
Outsid
e
• Do Canadians take advantage of this opportunity?
*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
Pension Income
Tax Rate
Tax Due on
Pension
Pensioner
Spouse
$50,000
$0
46%
0%
$23,000
$0
*Tax rate assumes pensioner has other income
Tax with splitting
Pension Income
Tax Rate
Tax Due on
Pension
Pensioner
Spouse
$25,000
$25,000
46%
22%
$11,500
$5,500
Family Tax Savings = $6,000
*Tax rate assumes pensioner has other income
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
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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
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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!
Presenter: Ben Reale, CFP