Planning for the cold weather to come

Dear Money Lady readers,

As we approach the winter months, many of you may have gas fireplaces that you’re starting to enjoy and some of you may even be lucky enough to have a “real wood” fireplace. Isn’t it wonderful to cozy up to a fireplace as we head towards Christmas?

Fireplaces, the real-wood-kind, are very much like how we run our lives. It takes planning and preparation to have a good dry wood supply to enjoy fires in the depth of a Canadian winter. That same sort of planning and preparation must be done if you want to have a comfortable and cozy retirement, too. There’s no switch you can turn on, the day after you quit work, to provide you with that monetary security we all need. Planning is at the core of everything we do in life and should not be something you ever stop.

OK, I’m not telling you something that you don’t already know, right? We all know we should save for a rainy day and for retirement. Having said that, I still don’t want you to get too carried away. You don’t need an RRSP fund that is so huge you won’t want to draw it down in retirement due to taxation, ending up with so much of a balance left in your registered accounts that your executor will send half of it to the Canada Revenue Agency when you die. Sure, I’m a big fan of registered accounts, especially tax-free savings accounts but not so much of the ever-popular registered retirement savings plans.

Don’t ever think that the Canadian government hasn’t got a plan behind their generous ideas to help you save for retirement. Remember, tax is progressive and, while you enjoyed the tax rebate when you were working by investing in RRSPs, you were only delaying the taxation into retirement. So many seniors think there should be a way to get out of paying the taxation on their registered retirement incomed fund withdrawals; but they are conveniently forgetting they got the tax rebate many years ago, when they were working. Added to this conundrum is the fact that your adviser would prefer you to only make minimum withdrawals from your RRIFs, to ensure a larger-for-longer balance on his books.

I recently spoke to a single retiree – let’s call her Jane – who just turned 82 and has a $2.9 million balance in her RRIF. Now, I know some of you reading this will say “I would love that,” but would you really? Because she was widowed at 69, and both Jane and her husband had large RRSP accounts, the automatic spousal rollover to avoid taxation left her with an excessively large amount in registered accounts that continued to grow. The only one happy about this situation is her adviser. In my opinion, we now have a fire that is out of control and can only be extinguished by the CRA.

Jane asked me for a solution, as she now only makes minimum withdrawals from her RRIF (as guided by her investment adviser) to curtail the exorbitant taxation.

My answer to her was simple – you will pay the taxes in your lifetime, or you will pay the taxes when you die. Either way, the government will get what is due. Because she has no children to whom she can leave money, I suggested she hire a cleaning lady, a gardener, fly business class and start spending. It’s not a bad situation to be in, I’m sure, but there is a lesson here, too.

When you’re planning your savings while still working, please don’t make your “RRSP-fire” too big. A nice cozy fire, with a manageable number of RRSPs, together with insurance products, annuities, non-registered accounts and a maxed-up TFSA will do much better.

To those of you who don’t have large RRSP/RRIF accounts – bravo! Stay warm!