We have all been educated how important it is to save for our retirement years. We save our whole life so we can have a nest egg when we stop working. These years of accumulation are very important because our future is largely dependent on it in many ways. More importantly, the method in which we save and the vehicles we use to save our money will also largely impact how much money we have access to. Although we are encouraged to build a big pile of money in the Accumulation Phase, no one seems to be talking about the Distribution Phase, to be able to extract the maximum amount of our savings, while minimizing losses.
Investments such as Registered Retirement Savings Plans (RRSPs) are tax deferred which allows compounding growth without having to pay taxes until you take them out. It’s a great way to grow and save your money however, the only problem is that when you eventually take the money out, your tax rate may be higher than it was when you deposited it.
Imagine you borrowed money at the bank and they didn’t tell the rate of interest and when it was due, would you take the loan? That is almost like the RRSP because in fact we don’t know our income tax rate in the future nor whether the government will change the rates. In today’s world where people are working longer and/or if your career is still providing successful income, that RRSP withdrawal will simply be tacked on to your income and taxed at that rate. To further that, the government requires RRSP income to be taken as Retirement Income at a set rate at the age of 71, so you could not even save it if you wanted to. Further, Old Age Security is reduced for persons with high income as defined yearly through a recovery provision of the Income Tax Act. In 2013 is was net income exceeds $70,954.
This is not to discourage RRSP investments, but simply to consider not putting all your eggs in one basket. Preferably there are other additional investments opportunities with life insurance products that can generate tax free retirement income and that will allow you to keep your wealth. It likely may not even affect any government income recovery or claw backs, if there is no other income. One of the greatest advantages of this type of investment is that is also provides so many other benefits, in particular, the use and control of your money, while still being invested and growing!
As an investment consideration, the chart below demonstrates the comparative opportunities with Life Insurance versus other traditional investments. A careful review of your individual plan will define the correct objective and direction one should take.
Additionally there are several other risks to consider as we plan for Retirement.
- Longevity – Is it possible that you will outlive your retirement savings?
People are living longer today and require more income to sustain them at their standard of living for a longer period of time. - Inflation – Is possible that you will have enough money to keep up with inflation?
Purchasing power in 20 yrs is eroded greatly with inflation. Maintaining the same standard of living in the future means generating more income to keep up with inflation. - Market Volatility – Is it possible your income will be affected by fluctuations in the market?
Many people saw a significant drop in their net worth in 2008 and if you were retiring that year, that could have meant a whole new standard of living or even risk of not having enough money.
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Consider your retirement planning carefully and consult with and Insurance and Financial Advisor that can provide you with alternative options to compliment your current plan.
Contact Us for more information about how this could work for you.
