My Finances

1. My Finances Presented By: Ben Reale, CFP

2. Why should we budget? Those ‘must-haves’ Those unforeseen events along the way! Education expenses Ahh.. Retirement! Paying bills Home of your dreams

3. ‘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!

4. Regular vs. Periodic expenses • Regular Expenditures • Rent, transportation & food • Schooling costs • Periodic Expenditures • Clothing & gifts • Entertainment & repairs

5. Non-discretionary expenses • Groceries • Mortgage & rent • Transportation • Taxes • Health care

6. 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

7. This is what your budget might look like:

8. 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?

9. 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.

10. 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%

11. 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

12. 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

13. 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%

14. 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

15. 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?

16. 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

17. Federal & Provincial tax rates

18. 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 The advantage is more than all of my deposits. Outside $136,565.52 • Do Canadians take advantage of this opportunity? *Assumes tax rate of 40% with refunds reinvested

19. 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

20. 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

21. Dare to compare…

22. 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

23. 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

24. Tax without splitting *Tax rate assumes pensioner has other income

25. Tax with splitting Family Tax Savings = $6,000 *Tax rate assumes pensioner has other income

26. Benefits of pension splitting • Pensioner OAS claw-back may be reduced • May reduce installment payments • Spouse may claim pension tax credit

27. Cautions of pension splitting • Spouse may have OAS clacked back • Spouse pension credit may be affected • Spouse may have to start making installment payments

28. 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

29. Income not eligible to split • Old Age Security • Canada Pension Plan • Registered Retirement Savings Plan withdrawals – non annuity income • Retirement Compensation Agreement withdrawals

30. 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

31. 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

32. 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

33. Thank you! Summary | Q & A Remember to enjoy your retirement! Presenter: Ben Reale, CFP