November/December - 2010
LIFE LETTER MATURE
THE ANNUAL REVIEW CHECK LIST: Please don't forget to let me know what has changed in your life during the past year. This is your Annual Reminder. You can complete the Annual Review Check List on our web site, print the page off, complete it and forward it back to me.
If you're not on the internet, please call me and I'll personally get the Annual Review Check List to you.
Please, allow me to say it once more: MERRY
CHRISTMAS AND A HAPPY
NEW YEAR TO YOU AND YOUR LOVED ONES.
Registered Retirement Savings Plan (RRSP) Basics
Registered Retirement Savings Plans (RRSPs) were created by federal legislation in 1957 as an incentive for Canadians to save for their retirement income needs. Although changes have been made over the years, the basic mechanics of RRSPs are quite simple. You can benefit from RRSPs by:
Postponing taxes - Canada Revenue Agency (CRA) enforces the rules as to how much we can contribute to our RRSP. For the 2010 tax year, it's 18% of 2009 income to a maximum of $22,000, minus any Pension Adjustment, plus any unused contribution room from previous years. Deposits made to an RRSP within the above limits are deductible from income. Deductions can actually be delayed to a future year when income is greater, thereby making the tax savings larger.
When income is taken from an RRSP, it will be fully taxable. In most cases, however, total annual income is lower in retirement than when the deductions were taken, so the tax impact may be less.
Income taxes on the RRSP growth are also postponed. For example, John commits to saving $10,000 of his income each year. Because an RRSP deposit is tax deductible, the full amount is invested. If John were to deposit instead to a non-RRSP account, he would only be able to invest $6,500 (assumes a 35% marginal tax bracket) which is what he would have left over after paying taxes. As taxes on growth are also postponed inside an RRSP, his $10,000 per year would grow to about $1,383,369 in 35 years at 7%. His non-RRSP account would only grow to about $535,164 over the same period because John's growth will be taxed along the way.
Starting young - It's so easy to put things off. The 18 year old says, "I can't save now because I'm burdened with my education costs." The 25 year old says, "We're just getting started and our income is low right now. Besides, we want to have a little fun while we're young." The 35 year old says, "Our family is growing and we have a big mortgage. We should be able to do more when the kids are older." The 45 year old says, "The kids are in college and we just can't spare a cent until they're done." And the excuses go on and on.
Assuming a 7% annual compounded rate of return and a desire to accumulate $1 million in an RRSP at age 65, Sarah, starting at age 18, would need to deposit only $3,038 per year. Roy, at age 25, would need to make deposits of $5,010 annually. $10,587 is the RRSP deposit amount Grace would have to make from age 35 on. And Bill, age 45, would need to deposit a staggering $24,393 to his RRSP each year.
Leaving them alone - The temptation can be great to cash out a portion of an RRSP account to pay off some debt. Brad and Carol have about $10,000 of credit card debt that they are carrying from month to month. To get that amount out of their RRSP, they would have to cash out about $15,400 to net the amount needed, assuming a 35% income tax rate. At age 35, this withdrawal would reduce their retirement savings at age 65 by about $114,184 assuming a 7% annual compound interest rate.
Copyright © 2009 Life Letter. All rights reserved
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Beware of this insurance trick
Alicia was about to sign the papers on her new vehicle when she noticed an additional charge of a little over $3,400 for insurance on the Bill of Sale. When she asked the finance manager what it was for, he said, "Well, that's for the life and disability insurance for your car loan." She was left with the impression that the insurance was mandatory. Alicia didn't sign the papers and said she would finish them up the next day. She asked for a copy of the coverage wording to help with her decision.
She learned that the insurance would only make her monthly payments if Alicia died or couldn't work during the loan repayment period. The premium would be a one-time charge added to the financing contract, so she would also have to pay interest on the premium for the term of the loan. There would not be a refund if she pays the loan off early.
If she becomes disabled and qualifies for disability benefits, they would only make her $740 monthly payments for the balance of the loan period or until she goes back to work, whichever comes first. The insurance definitions said she’s disabled only if she is unable to work at any job "for which [she] is qualified by education, training or experience." Would her student experience as a waitress force her to work at a fast food counter? What if she is only partially disabled?
Alicia called her insurance and financial advisor for more information. She found out that, as a 35- year old non-smoker, she could get $100,000 of tenyear renewable and convertible term life insurance for about $120 per year. Plus, she can get $750 per month of disability insurance with a full five-year benefit period for about $600 per year. Unlike the dealership group insurance, this personal coverage does not diminish over time.
The personal disability plan pays a benefit if Alicia can't work at her own job, not just any job, even if she is only partially disabled. Her personal life insurance can be renewed without new medical evidence. This is important because it is not the last vehicle she’ll ever buy and finance. Alicia will be older when she gets her next vehicle and may not qualify for the dealer’s coverage because her health might change.
If she took the car dealer’s insurance, Alicia would pay dearly for inferior coverage. It made a lot of sense to her to have coverage that is a better value, has better definitions regarding disability, does not reduce or limit the payment period, is completely portable and renewable, and benefits Alicia and her family instead of just the finance company.
Alicia also learned that the insurance coverage is not mandatory for her car loan.
Alicia liked the idea of covering her other debts the same way and believes that her financing obligations shouldn't last longer than she does. When she met with the car salesman the next day, she just took the vehicle. As she wouldn't go to her insurance agent for an oil change, she won't be going to a car salesman for insurance.
Copyright © 2009 Life Letter. All rights reserved
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