Even if it’s decades away, there’s no better time than now to start planning for your retirement. Perhaps you already know it’s important to take control of your future in this way. But the problem is, you’re not sure where to begin. Well, you’re in the right place. We’re going to tell you everything you need to know about how to start retirement planning.
How to Start Retirement Planning: Important Topics
Here are some of the important retirement planning topics we will cover in this post:
- How to calculate how much money you need for retirement
- How to use cash from life insurance for retirement
- Why you should avoid a retirement savings plan
- How to plan your retirement without an RSP
How to Calculate How Much Money You Need for Retirement
Having a clear idea of how much money you need to retire is an important component of retirement planning. This helps give you a goal to work toward rather than putting money aside each month for retirement and hoping it will be enough.
Here are 3 tips for calculating how much money you need to retire:
1. Get clear on your retirement goals
It is not just about money. It is about what you are trying to accomplish in your personal life and your business. If you’re clear about your dreams and goals, then you’re going to get there. If you’re not clear about it, it’s unlikely you’re going to get there.
2. Get clear on your cash flow
You know you’re having success, but it feels like you should be further ahead; this is generally the case when your goals are not clear. Business owners tend to intermingle their corporate and personal cash flow. Oftentimes, cash is not allocated towards the important things in life and accomplishing the end goal of financial freedom.
3. Plan for retirement in after-tax dollars
Plan your financial freedom in after-tax dollars and avoid using RSPs as your retirement vehicle. If you’re a business owner invested in an RSP, you could find yourself giving up to 50% of your RSP to the CRA when you withdraw.
How to Use Cash From Your Life Insurance for Retirement
Many of our clients who are business owners are also interested in learning about how to start retirement planning with their life insurance. Here are three ways to access cash from your life insurance for your retirement income:
1. Through a direct withdrawal
You can take money out of your life insurance through a direct withdrawal. We do not recommend this because it is a very tax-inefficient way to access cash from your life insurance policy. Remember, money grows in a tax-free fashion but cannot be withdrawn tax-free. It means that you and your corporation may be taxed if you take out the money.
2. Through a policy loan
This is when you take out your policy and collateral against it with the life insurance company. One of the biggest benefits of doing this is you do not have to go through financial underwriting (an application process that requires a deep dive into a client’s finances for approval of a loan).
There may be some financial questions that they may ask you, but generally speaking, these types of loans are not difficult to obtain. The disadvantage is that it is at a higher interest rate than the third option.
3. Through a collateral loan from a private bank
This is the most effective way to lend money out of your life insurance. When you collateralize the cash value to a bank, you can negotiate for a lower interest rate. You do have to go through some financial underwriting, but you will win with a lower interest rate if you have the financial means to do so. Another benefit of doing this is it will work as a line of credit. This way, you only pull out what you need to spend rather than paying interest on the entire collateral loan.
Other options available from banks include the Immediate Financing Agreement (IFA) and the Insurer Retirement Plan (IRP). These options use the same concept: collateralizing your cash value to a bank to take back the advantage of the money inside your policy.
These are effective ways of accessing your cash because the interest rates are lower, and you pay a little bit of interest instead of paying income tax.
In “How To Use Life Insurance For Retirement,” we talk all about using life insurance as a retirement tool AND an investment tool.
Why You Should Avoid a Retirement Savings Plan
As we discuss how to start retirement planning, it’s also important to pay attention to what NOT to do.
Here’s why this using an RSP as the main retirement vehicle is not the right move for most business owners, as we explain in Stop Giving Half Of Your Retirement Savings to CRA:
“RSPs are designed for people to invest while they’re in a high-income bracket with the expectation they’ll be at a lower income bracket when they withdraw, often at retirement. They get to enjoy the tax-year savings by reducing their current taxable income, as well as tax-deferred savings when the investment is growing. Finally, in retirement, if you are in a lower tax bracket, you will be able to withdraw the money by paying fewer taxes.
However, for business owners who have planned for retirement using their corporation, RSPs just don’t work. Unless you can guarantee that you will have far less income at retirement than when you’re working, you’re never going to win.
The joy of being an entrepreneur is building your business to enjoy the life you want to live. Part of that involves building a passive income ready for when you retire. This could be anything from real estate, mutual funds, or investment in other businesses. The chances are you’ll continue to have a high income because of all these passive income sources.
If you’ve invested in an RSP, your income bracket won’t decrease at retirement. It will be bigger! You could find yourself giving up to 50% of your RSP to the CRA when you withdraw. ”
Other reasons why successful business owners should not use RSPs:
- The CRA controls how much tax you will pay (who knows where tax rates will go from here)
- If you pass away early, you could lose half of your RSP to the government
In this post, we cover even more problems with business owners using RSPs for retirement planning.
How to Plan Your Retirement Without an RSP
So, if an RSP isn’t right for most business owners, what’s the alternative?
We offer one up in this post: “Instead of an RSP, we recommend leaving your money in your corporation and utilizing your corporate structure to get the maximum benefit of tax-deferred growth.”
We also talk more about taking advantage of your corporation for retirement planning by keeping more money in your corporation in this post and accompanying video.
What if retirement isn’t the end goal?
“As most of our clients are business owners, retirement isn’t necessarily the end goal for most of them. But they do want the financial freedom to stop work when they choose to.
The starting question isn’t “when can I retire?” but rather, “when can I be free of financial stress and uncertainty?”. This means you need to be clear about your financial situation and what it needs to look like for you to have financial freedom.
We can structure your finances so you’re crystal clear on when you could walk away from your business… even if you choose never to stop showing up! For many business owners, simply knowing they can do this gives them the peace of mind they need.
Whether you’re a business owner who is eager to hand over the reins of your business or you plan to work for as long as you can, what matters most is being equipped with the knowledge and information you need to make the best decisions for yourself.”
We know that financial freedom means different things to everyone, and we talk more about that in this post.
Discover the Ocean 6 Difference
There’s a big gap between someone just managing your money and getting a full financial plan (Including how to start retirement planning) that’s personalized to your goals.
You need an advisor in your corner who considers every aspect of your finances to ensure you don’t miss out on opportunities to grow your wealth, pay less tax, and ultimately get further ahead.
We use the power of your corporation to save you thousands of dollars with the most advanced financial strategies. Savings you can use to reinvest in your business and achieve the financial freedom you’ve always dreamt about—whether that involves retirement or not.
Book a call with the team at Ocean 6 today to learn how we can help you reach your goals.
