How can you determine how much you need for your retirement? The answer depends. There’s no one size fits all with retirement planning because everyone’s vision for the future is different.
However, there is a right way to begin building a retirement plan.
Start Retirement Planning Off in the Right Direction
Here are a few points you want to consider to kick off retirement planning right:
1. Get clear on how you want your retirement to look
Ask yourself where you will live, what you will do, what you will eat, and who is coming with you.
Whether your goals involve having a house on the lake, traveling the world, taking the Grandkids to Disney, or flying private, we have a goal visualization tool to help you picture what this future looks like. The more time you spend envisioning the retirement of your dreams, the easier it will be to calculate how much money you’ll need to fund it.
2. Figure out how much money you have for retirement when you take taxes into consideration
It’s important to look at the after-tax value of your retirement assets because a million dollars isn’t always a million dollars.
Depending on if your money is held in your TFSA, RRSP, or corporation, the tax treatment will be different. If the million dollars is inside your TFSA, you will still have a million dollars since you get to withdraw the money tax-free. However, if it’s in your RRSP, you’ll likely give 20-50% to CRA. The million dollars becomes $500,000 – $800,000. Now, if the million dollars is in your corporation, the after-tax value of the million dollars will depend on how you invest it. Regardless, you end up with less than a million dollars because you must pay personal tax to withdraw the money out of your corporation.
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If you only start calculating your after-tax retirement assets at the time of retirement, you’re limited in how much tax you can save. By building your retirement plan years in advance and understanding how you’ll get taxed, you can set up a long-term plan to maximize your wealth.
How Your Retirement Plan as a Business Owner Differs From Others
Although the traditional route to building a retirement fund for most Canadians is by using an RRSP, there are often better ways business owners can save for retirement.
RRSPs are designed for you to invest in when you’re in a high-income bracket and withdraw when you’re in a lower income bracket, which is often at retirement. This allows you to pay fewer taxes when you withdraw, as long as you’re in a lower income bracket.
However, a part of being an entrepreneur involves building multiple sources of passive income for you to take advantage of when you retire. From real estate, mutual funds, and investments in other businesses, it’s likely you will continue to be in a high income bracket at retirement. So, if you invest in an RRSP, you risk giving up to 50% of your money to the CRA upon withdrawing.
An alternative is to maximize your corporate structure by leaving your money in your corporation and enjoying tax-deferred growth.
Start inventing your retirement by knowing where you want to be and what you want to be doing. From there, calculate what you’ll need to support that lifestyle in after-tax dollars. There are innovative strategies to lower the tax bill you pay if you start planning your retirement now.
If you want a seamless transition into your golden years, book a call today. It’s never too early to start.
