Posted by Dave on March 11, 2014
The basis of my entire Early Retirement plan is that I will be able to achieve enough in the way of investment returns over 10 and a half years to live off for 55 years (which will bring me to age 100). Both my wife and I realize that this goal is aggressive, and may not be doable – depending on both our investment returns, as well as our spending patterns over the next decade. If either differs significantly, our plans could change.
Although our day-to-day life is relatively stress free, due to my inherent nature as a financial worry-wart I do get concerned at times about our ability to maintain the lifestyle we want to have after retirement. I get troubled about the possibility of health problems, of market crashes, and many other things that could possibly go wrong – sometimes in excess.
The thing with most of these negative thoughts is they would be an issue whether I was retired or not. I don’t get insomnia from these kind of dark thoughts, they just exist at the back of my mind sometimes – a part of my “personal finance” brain that won’t shut off. I have (to a certain extent) included contingency plans into my financial “base”.
I haven’t included either my work pension or any government money into my financial plans. My defined-benefit work pension is not inflation-adjusted, which will obviously leave me much less buying power at retirement. I would prefer not to depend on CPP coming through, as I don’t have a lot of faith in my government to pay up 30 years from now (whether right or wrong – as noted I’m a bit of a pessimist).
Either of these sources of income will provide a boost to my available dollars from age 65 – 70 onwards. This is the period of time that I am most concerned about – an age where it would be much more difficult to find a job anywhere, at any pay, and also an age range where the probability is high that health problems will become an issue and an additional boost to retirement funds will be welcome for peace of mind.
Both of these pension plans act as a savings plan that I really had no choice but to become involved with. I would have preferred to have control over either of them to do as I liked, but as a part of my overall plan, it seems like this buffer will add some insurance to my overall aggressive plan – beyond the obvious working for additional years.
Do you have a contingency in your personal finance plan?
Posted by Tim Stobbs on March 6, 2014
Oh dear, it’s that time of year again…tax season is upon us, and as our various tax related slips keep coming in the mail I’m getting ready to plug everything into some software and find out what we owe (hopefully) otherwise I just gave the government a interest free loan for the last year.
Yet during the last week I’ve had numerous tax related questions asked of me at work. I’m not an expert by any stretch of the imagination, but I have developed a few rough rules to help people keep things straight in their head.
- Marginal Tax Rate Isn’t Average – People in Canada often like to complain about their marginal tax rate, or how much tax they pay on your last dollar of income. Yet they can often confuse that with their average tax rate, which is the amount you pay overall on your income in percentage terms. So people like to whine they pay a 39% tax on their income, when in fact the average might be closer to 20%.
- Not all Income is Taxed the Same – Keep in mind the basic classes of income when you do things. Interest income or profit from an unincorporated business is considered other income and gets taxed at your marginal tax rate (ie: the highest rate for you). Meanwhile capital gains which you earn when you sell a stock in a taxable account for a profit is taxed at only half your marginal rate (like a permanent 50% off sale and keep in mind you only get taxed at profit part, your original investment is tax free). Then finally you have dividend income which you get a big fat tax credit on, so even at higher incomes you often are taxed even lower than capital gains and for those at incomes less than $40,000 it can be close to tax free (at least from Canadian companies, US will be a be higher).
- Know Your Tax Shelters – RRSP are not an investment, they are a vessel for your investments that let’s it grow tax free. So when you put money in your tax a refund of the taxes you paid on that income. Yet you have to pay tax when you pull the money out, so your delaying the tax, not entirely avoiding it. A TFSA is again a vessel, not a savings account. Here you get no tax refund, but the growth again isn’t taxed, but the real bonus of this one is when you take money out you don’t pay a dime in tax. Here you are avoiding tax. So if you don’t know which to use, default to the TFSA first and for the love of god don’t just use it as a savings account for your next vacation, it’s a waste of a good tax shelter which could give you a tax free stream of income in retirement.
- Don’t Let Tax Savings Rule Your Investments – Obviously consider tax implications when investing, but a bigger issue is often the fees from your investments. You pay fees every year on mutual funds, but if the money in in an RRSP you only pay the tax once when you take it out. So a 1% difference in fees for 30 years are a bigger issue than which tax bracket you are in. If the only reason you are going to buy an investment is tax reasons, it is usually a bad idea.
- Ask for Help – If you don’t know, go find some help. I personally like the website TaxTips.ca as it is packed with useful information and I’ve yet to come across an error on the site.
So what tax questions do you hear about from others? Any other common misunderstandings you hear about?
Posted by Dave on March 4, 2014
About a month ago, my workplace laid off around 15% of the employees in my 400 person company, with no warning to the staff of the company (as is usual in these type of circumstances). I was not affected by this move, but it created quite a lot of anxiety internally with my company, as there were very few departments which weren’t impacted by the corporate “shuffle”.
Due to our fairly low monthly spending amounts, compared to the amount of money we bring in, my wife and I are able to cover all “fixed” expenses through either one of our salaries. We set up our budget like this purposefully, as in the past, my wife has had a couple of terrible jobs. I would rather she (or I) have the flexibility and freedom to leave this kind of situation, instead of feeling stuck due to our lifestyle requirements.
Stressing over money (or anything really) isn’t healthy. I recently read a book called “The Cholesterol Myth” – in it, the author described two kinds of stress. The first kind of stress is the kind you’d get being chased by a lion – once you lose the predator, the stress is removed from your life and you go back to “normal”. The second kind of stress is the dull, persistent stress experienced through work and personal relationships – the kind of thing that doesn’t have an easy fix and stubbornly nags at the back of your mind. It’s the second kind of stress that leads to health problems and is one of the main drivers of heart disease today (besides terrible diets being consumed by most people).
My wife and I would rather not have to worry about money. We think it’s healthier for our relationship and allows us to enjoy our daily lives much more. There are some things we do that would seem ridiculous to others – like having a bunch of money sitting in a high interest savings account rather than being invested, but these are done to reduce the impact of major life occurrences to our normal spending “curve”.
We are also responsible only for ourselves – we don’t have children, or even any pets that are dependent on our ability to create wealth in order to eat every day. This type of arrangement also offers some additional flexibility in our financial decisions – we can act more selfish in our spending and saving.
I am by nature a bit of a worry-wart when it comes to money, perhaps borderline paranoid when it comes to the possibility of extended unemployment. The benefit of our goal of Early Retirement, is that even if we only get part way to the goal by the time we reach age 45 (our hopeful date of financial independence) – we will hopefully continue to live a financially stress-free life.
Do you stress about money? Have you in the past?