In this video, we are discussing the reasons that cause people to retire earlier than planned and what you can do to prepare for such events.

Setting a retirement date is important for several reasons such as; understanding your retirement timeline, calculating the savings rate needed to acquire enough money to retire on time, and ensuring you don’t outlive your retirement account.

Shockingly, more than 50% of people who had a planned retirement date didn’t retire on or near that date. The largest reason was due to an illness or disability. Poor health resulted in having to leave the workforce early. Many people do not plan for this and it’s why using a financial advisor and having a written financial plan is vitally important.

Leverage the knowledge and experience a financial advisor has in helping people develop a contingency for unexpected job loss or permanent ability to work as in the case of poor health.

Strategies for investor and their portfolios through challenging markets.

In this video, we discuss investment principles that can affect your long-term investment success such as:

➤ How long you will live during retirement

➤ How inflation can affect your purchasing power

➤ The power of dividends and compounding

➤ Avoiding emotional investment and trading on fear

➤ Investing during times of volatility

➤ How to Diversify your portfolio and why

➤ Staying invested and avoid trying to time the market Successful long-term investing involves crafting a well-diversified portfolio with low correlation. 60/40 Equity/Fixed income portfolios (Balanced) have done well for many investors although you must keep in mind your own risk tolerance timelines and personal investment goals.

If you’re like many Canadians, deciding when to begin receiving CPP payments is confusing. In this video, I’ll show you the break-even point for CPP, areas of concern to consider when to taking your CPP benefit, and a live walk-through of the governments’ Retirement Income Planning tool.

The first and most important consideration is; do you need the money? There’s really no point in calculating the break-even on collecting CPP when no matter the result, the issue is you need the income as early as possible.

The next consideration is Longevity. If you have a family history of living to older ages, say well into your 90’s, then delaying your CPP until age 70 is in your favor. However, early family history of deaths suggests taking CPP early to receive at least some benefit. If you choose to take CPP at age 65 vs age 60 it would take 106.7 months to reach break-even.

If you choose to delay until age 65 then by the time you reach age 73.9 you’re now benefiting financially from the increased monthly payments.

Everyone’s situation is different, and having a discussion with your advisor about your income need is the best course of action.

This happens to be the number question for nearly everyone saving for retirement. Asking this question demonstrates your seriousness about achieving your retirement goals. The best way to start is to hire a financial advisor and well…that’s where I can help. Although if you want to try first here’s how to do it:

1️⃣ Begin with the end in mind – How much money will need annually or monthly? If you’re not sure, the average annual expenses spent by a couple in Canada was $57,000 (after-tax).

2️⃣ Government Benefits – Determine how much you expect to receive from Canada Pension Plan (CPP) Old Age Security (OAS). If you receive the average CPP payment, plus OAS, you will have $1,608.29 per month. That’s $19,299.48 per year, gross.

3️⃣ Employer Pension – Will you receive an employer pension?

4️⃣ Passive Income – Do you have any other income streams such as real estate rental income?

5️⃣ Add up all your projected income streams and subtract that from your retirement income need. The difference is the amount of annual income you will need to generate throughout your retirement.

6️⃣ Time value of money – Calculate how much money is needed to produce the annual income needed (the shortfall identified in step 5).

Most business owners think about how to save taxes on their personal income by taking Corporate Dividends however, you’re missing out on planning solutions that could save you hundreds of thousands of dollars in taxes and future value of your retirement income.

How often have I talked with a business owner and been informed they only take dividends from their corporation versus taking a salary. Do they also know taking dividends means they cannot make CPP contributions? The argument is that this strategy lowers taxes owing and you negate having to pay CPP premiums.

Let’s contemplate a retirement without CPP. To keep the math simple let’s assume inflation and discount rates are equal. Don’t think the Canada Pension Plan & Old Age Security are important to your retirement (especially with the recent CPP enhancement)? Consider this, the present value of the maximum CPP benefit for a 65-year-old over 20 years is $282,199, and for a couple, that’s $564,398!

If a business owner does decide to go the dividend route, they should consider how they are going to replace the CPP income. Obviously, that means saving more.

A compromise might be the best solution to try and get the best of both worlds. The business owner could pay themselves a salary equal to the Yearly Maximum Pensionable Earnings ($58,700 for 2020). This way they can contribute the maximum to CPP and create some RRSP room.

They could also save in the business corporation so that the CPP benefit can be replaced by dividends in the future.

What else are you losing out on by paying yourself a Corporate Dividend?

Registered Retirement Savings Plan (RRSP)

Taking a salary also creates RRSP contribution room, which is deductible from your personal income and allows you to save and invest in a tax-sheltered account. While I don’t automatically endorse the use of RRSP’s for business owners, they are a useful retirement planning tool given all other options are exhausted.

Individual Pension Plans

Arguably the most powerful retirement savings solutions for incorporated business owners provided they qualify. Individual Pension Plans provide the mechanism to move cash off the corporate balance sheet which otherwise could be subject to Passive Income Tax, and into your personal pension plan.

The catch here is, you must be incorporated and corporate dividend income does not qualify as income used to calculate your eligible contributions. Only Salary income can be used in the calculation for pension contributions.

One of the key advantages of an IPP (besides increasing your retirement assets by as much as 65 % more than an RRSP) is creating large tax deductions for your corporation. Especially in the case of selling your business, the deductions could wipe out all or significantly reduce the amount of taxes owed to CRA.

Here are a few benefits:

• An excellent way to increase your retirement assets and have your company make large tax-deductible contributions
• Allows for significant additional tax-deductible contributions at inception and retirement
• Tax-deductible unused room (Past Service) contributions from your company, up to $900,000+
• All costs associated with the pension plan are tax-deductible to the company

Tax-Exempt Corporate Whole Life Insurance

Tax-Exempt Corporate whole life insurance could also fit the bill here, giving the corporation access to cash for business opportunities or challenges in the future. The key benefit of using corporately owned life insurance is creating a tax shelter. Moving cash off the balance sheet which could be subject to passive income tax, and into a Tax-exempt corporate life insurance policy. Growth within an exempt life insurance policy will not affect a CCPC’s passive investment income earnings under the new passive income rules.

Long-term planning is required for this strategy to be an effective tool in providing an income stream during retirement or to use as leverage against a loan.

Personal Credit

Finally, having salary income will help you with a mortgage application, if you intend to buy a house. The banks don’t consider dividend income as stable when looking at how much of a mortgage you can afford.

Bottom Line

Once you’ve set aside as much savings as possible inside your corporation, I recommend drawing salary to fund your lifestyle needs. This will maximize your CPP contributions and your RRSP contribution room, along with some of the other benefits mentioned. This recommendation may change in years to come since tax rates are constantly changing, but for now, salary is the clear winner.

Firstly, this is a biased article for me to write as I am a financial advisor. However, when I talk to teachers at various points in their career about their financial concerns, the one response I seem to hear is “I wish I had one of you earlier”.

Why do teachers need a financial advisor?

1. Mistakes cost money

I recently came across a situation where a teacher needed money for an unexpected expense for her child. She didn’t have anyone to discuss the situation with, so she took money out of her RRSP to pay for the situation. She thought her situation made her eligible for “hardship withdrawal”.

It didn’t.

Not only did this withdrawal incur a penalty but the total amount was added to her annual income and subject to income tax.

If she had someone to discuss the situation with, and lay out all of her options, she would have realized that there were a number of other options available.

2. Uninformed choices cost money

I tell (almost) every new teacher to avoid RRSPs when saving for retirement. As a teacher, you will receive a pension in retirement. Income for your RRSP will increase the amount of money you will pay in taxes to Canada Revenue (CRA).

For most new teachers, RRSPs may appear appropriate because it’s likely what your parents or non-teacher friends are using. As your teachers’ income grows your pension adjustment will also reach its maximum. Your Pension adjustment limits the amount of contribution room available towards your RRSP.

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3. No one wants to look back and think “What If?”

When my wife and I bought our house, we pondered if we should buy a move-in ready townhome and move out when our family grew, or if we should buy a bigger house and do some work. We didn’t really ask people’s opinion who had been there before us and we bought the townhome.

After we bought, the housing market took a downturn and our sizable down payment (now in the form of equity) disappeared, meaning we were stuck for a while. Sometimes we look back and wish we had bought a different house. What if we had spoken to a young family or realtor to get their opinion before buying?

Before you make any initial moves, or changes, to your financial endeavors – have you asked anyone’s opinion? Have you asked a teacher who’s been in your situation recently, or a financial advisor (not sales-person)?

I would suggest you do, so you don’t look back in a couple of years, and think “What if?”

4. I could fix my toilet, but I don’t have a weekend available to do it

Some teachers I come across are knowledgeable about financial topics. They understand pension eligibility and what accounts work well with a pension in retirement. They understand insurance, and the basic estate planning documents they need in place, and the list of other financial things that occur in their lives.

But first and foremost, they’re teachers. They are experts at educating children, providing differentiation of content to various students, and explaining complex situations with ease. While they could manage their financial lives adequately, should they be?

How much time would it take, and how accurate would it be?

I think the same thing when any type of outlet or pipe breaks in my house. I can do some things in the house, but when it comes to anything plumbing or electrical, I know enough to hurt myself and spend hours getting to that point. It makes sense to pay a professional who can do it in 25% of the time, fix the problem completely, and keep me from harm. I’m happy to pay them for their expertise.

That’s what a good financial advisor does.

They know lots of options when it comes to products, approaches to investing, insurance and income tax management; study these topics to remain up-to-date, can design a comprehensive plan that can change your future, and know the danger areas to look out for.

As I said at the start, this is a biased article for me to write as I earn my living as a financial advisor. I work with teachers and help them maximize their lives; make things easy to understand and provide you the flexibility to enjoy your free time as you wish.