Household Debt as % Disposable Income Excluding Mortgages Canada 113% 42% British Columbia (highest)

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1 The Ecnmy RRSP Editin February 2003 The Canadian ecnmy cntinued its strng perfrmance in 2002: preliminary numbers shw a 3.4% year-n-year increase in GDP, the best amng the G-7 cuntries. Emplyment grwth was the highest since 1987: the slid upward trend at the start f 2002 cntinued int December, with an increase f 58,000, mstly full-time jbs. Fr the year, emplyment rse 3.7%, representing 560,000 jbs i. In Nrth America, stck markets fell fr the third cnsecutive year! The market utlk fr 2003 is fr a bumpy ride. Hwever, the Canadian ecnmy shuld utpace the G- 7 cuntries again! Meanwhile, in Canada, husehld debt including mrtgages, as a percent f dispsable incme cntinued t rise in The table belw shws a snapsht at the end f 2001: Husehld Debt as % Dispsable Incme Including Mrtgages Husehld Debt as % Dispsable Incme Excluding Mrtgages Canada 113% 42% British Clumbia (highest) 165% 53% Manitba (lwest) 78% 35% I think we shuld ask urselves tw questins: Have lw interest rates induced us t buy hmes we cannt affrd? Hw will we cpe when interest rates start t rise? What des all this mean fr Registered Retirement Savings Plans (RRSPs)? The ptential t get deeper int debt because f attractive RRSP lans is real! Accrding t Statistics Canada, fllwing recrd RRSP cntributins in tax year 2000, tax year 2001 saw a decline f 3% in cntributins and 1% by the number f peple cntributing ii. Because f current stck market cnditins and cntinuing uncertainty with Iraq, frecasters predict a further decline fr tax year Thus, expect aggressive marketing by banks and financial institutins t entice yu t buy RRSP prducts at lw interest rates! Befre yu buy an RRSP, ensure yu understand all alternatives; try t understand hw yu will repay any lans ffered t yu! In this letter, I will suggest critical matters yu may wish t cnsider as yu decide. Hwever, I encurage yu t get independent advice frm smene yu can trust, befre cmmitting t a decisin. In this review I will cver the fllwing areas: What is an RRSP What are the benefits Suggested apprach t making the RRSP decisin Managing Gd's Mney Ministry, RRSP Newsletter, February Cpyright February 2003, Michel A. Bell, Miltn, Ontari. May be reprduced in its entirety by individuals, churches and nn-prfit grups fr private use. Otherwise, it may be reprduced by permissin frm michelbell@managinggdsmney.cm. 1

2 What Is An RRSP? It is a savings plan registered with Canada Custms and Revenue Agency t prduce retirement incme. It is essential that we nt frget this purpse! Yu must clse it in the year yu turn 69; several clsure chices are available. Yu shuld knw yur maximum allwable deductin fr 2002 frm the Ntice f Assessment r Ntice f Reassessment the tax authrities sent yu after they accepted yur 2001 tax return. The general limit is 18% f earned incme in 2001 t a maximum f $13,500, subject t varius adjustments. The deadline fr cntributing is midnight, March 3, Yu may get mre infrmatin frm Canada Custms and Revenue Agency s web site at and their publicatin RRSPs and Other Registered Plans fr Retirement 2002 ; call them at What Are The Benefits? Yur allwable depsits are deductible frm yur earned incme fr tax purpses. Incme earned in yur RRSP accunt increases tax-free n yur grss depsit until withdrawn. Think f yur RRSP as cntaining tw streams, bth earning incme: yur net cst and the tax refund! Yu may cntribute int yur RRSP until yu turn 69. Yu may cntribute t a spusal RRSP prvided yu have cntributin rm. The benefit arises if yur incme is higher than yur spuse s, and yu expect it t remain higher. The RRSP becmes yur spuse s. She r he will withdraw funds in the future at a lwer tax rate than yu. If yu chse t use this benefit, get t knw the rules. If yu cntribute less than yur maximum in ne year, yu may carry the shrtfall int later years withut limit. I d nt cnsider The Hme Buyers Plan and the Lifelng Learning Plan as benefits. Yur RRSP is fr retirement and yu shuld develp alternatives, such as the Capital Fund iii, t save fr educatin and fr a dwn payment n a hme. Here is a brief example t shw the benefits, frm page 167 f Managing Gd s Mney- The Basics iv : 1) Earned incme $50,000 2) Cntributin t cmpany pensin plan $2,500 3) Marginal (tp) tax rate 45% 4) Maximum RRSP cntributin $6,500 18% f $50,000 minus $2,500 5) Tax refund due $2,925 45% f $6,500 6) Net cst t yu $3,575 $6500-$2925 Managing Gd's Mney Ministry, RRSP Newsletter, February Cpyright February 2003, Michel A. Bell, Miltn, Ontari. May be reprduced in its entirety by individuals, churches and nn-prfit grups fr private use. Otherwise, it may be reprduced by permissin frm michelbell@managinggdsmney.cm. 2

3 Observatins Althugh yur net cst in item six is $3,575, investment in yur RRSP remains at $6,500 and incme accrues n this amunt. Yu will nt pay taxes n incme earned within yur RRSP accunt n the $6,500 depsit. Further, this incme will cmpund. v Taxes saved prduce an instant return! Hwever, pr investment perfrmance within the RRSP accunt wuld erde these savings. When yu withdraw funds frm yur RRSP accunt, yu will pay tax as if that incme was rdinary incme, even if yur RRSP investments prduced capital gains. If yu depsited $6,500 utside the RRSP accunt, yu wuld nt receive the tax benefit and the earnings wuld be taxable. Suggested Decisin Prcedure Because f the majr benefits, yu might think everyne shuld maximize his r her cntributin every year! Hwever, as we saw earlier, an RRSP is merely ne part f retirement planning. Yur RRSP must fit yur verall gals and plans fr retirement. I suggest we adpt this prcedure t decide if we will cntribute t an RRSP: Review yur retirement gals and plan, specifically fr prpsed timing f retirement, estimated value f ther pensin plans, prjected net wrth vi, and size f retirement budget gap vii, if any. Identifying this gap is essential because this is what yu will try t fill with yur RRSP. If yu d nt have gals and plans I suggest yu set sme nw yu are never t yung! Yur age and timing f retirement will als affect where yu invest these funds; the clser t retirement, the mre secure the investment medium. Depending n yur earlier answers, yu will knw the amunt yu ught t save nw. Hwever, this may nt necessarily be in the frm f an RRSP. If yu are in debt, yu need t understand the pretax cst f each debt cmpared t the ptential incme frm investment a similar amunt viii. Remving debt is a guaranteed saving f interest. Repaying a $10,000 debt with a pretax cst f 30% wuld save $ 3,000 in ne year. Nte that interest cst after-tax, f yur department stre credit card is arund 30%! Indeed, even at a lwer interest cst, yu shuld cnsider debt repayment ver investing, because f the certain interest savings, cmpared t an RRSP investment. Remember als the emtinal and family cst f carrying debt! D nt brrw t cntribute: If yu need t brrw, yu prbably will nt have funds t repay the lan amunt. Yur tax refund will be less than yur RRSP cntributin. In ur example, a depsit f $6,500 will cst yu $3,575! D nt make yur RRSP decisin based slely n the tax benefit. Managing Gd's Mney Ministry, RRSP Newsletter, February Cpyright February 2003, Michel A. Bell, Miltn, Ontari. May be reprduced in its entirety by individuals, churches and nn-prfit grups fr private use. Otherwise, it may be reprduced by permissin frm michelbell@managinggdsmney.cm. 3

4 Despite pressure frm media and salespeple, d nt lk at yur RRSP decisin by itself! Start nw t plan yur retirement, including a plan t becme debt free, befre yu start yur RRSP cntributin! Yu may ask: shuld I repay my mrtgage befre starting an RRSP? Yes, I suggest yu shuld repay all interest bearing debt first. Repaying yur lans will prduce a definite saving f interest expenses! If yu have a mrtgage f $ 100,000 at 6% repayable ver 25 years, yu will pay arund $500 mnthly in interest in the early years. Of curse, yu wuld be better-ff repaying this amunt biweekly. Hwever, fr ur example, let us assume mnthly repayment. The table belw shws the assured investment return by putting annual lump sums tward yur mrtgage: Mrtgage $ 100,000 N-Prepayments Prepay $1000 yearly Prepay $3000 yearly Interest paid $92,000 $69,600 $48,000 Interest saved 0 $22,400 $44,000 Repayment perid 25 years 19.7 years 14 years Think f debt repayment as an investment with a guaranteed return! D nt frget that interest rates are at histric lws and will increase. Therefre, yur debt repayment cst will rise! I culd prve mathematically, that if all went well, yu wuld be better-ff brrwing t cntribute t an RRSP! Equally, I culd shw the lsses if investments did nt perfrm! Hwever, I will nt g there! I prefer the debt eliminatin rute that prduces a certain return! If yu decide t invest in an RRSP, yu shuld cnsider several issues, including these: Cst: Ensure yu understand the charges levied, which are nt always clear. Self-directed: Yu need t be reasnably cmfrtable with investing t select this alternative. Get advice t understand hw much f yur prtfli shuld be inside an RRSP versus utside. Remember, Gvernment taxes all withdrawals frm RRSP s as rdinary incme. Interest n an RRSP lan is nt tax deductible. Start nw t cntribute t yur 2003 RRSP if yu have the rm and n debt! Sme RRSP Facts The median ix cntributin declined in 2000 frm $ 2,700 t $2,600 in Fr tax year 2001, 83% f tax filers had unused RRSP cntributin rm. All tax filers used nly 9% f available rm! Managing Gd's Mney Ministry, RRSP Newsletter, February Cpyright February 2003, Michel A. Bell, Miltn, Ontari. May be reprduced in its entirety by individuals, churches and nn-prfit grups fr private use. Otherwise, it may be reprduced by permissin frm michelbell@managinggdsmney.cm. 4

5 Upcming Events Seminars 18 February: Imprving Persnal Effectiveness seminar at Snwdn Baptist Church, 5275 avenue, Earnscliffe, Mntréal, frm 7:00 PM t 10:00 PM. T register call the church at February: Fcus n the Family spnsred, Managing Gd s Mney seminar at the Internatinal Plaza Htel, 655 Dixn Rad, Trnt. T register, call , r visit 15 March: Fcus n the Family spnsred, Managing Gd s Mney seminar, Winnipeg. Details will be available shrtly at and TV Appearances 20 February: Nite Lite Live n CTS TV. 27 February: 100 Huntley Street n CTS TV. Fr mre infrmatin n Managing Gd s Mney, visit i Statistics Canada ii 6.24 millin tax filers cntributed just ver $ 28.4 billin in 2001 cmpared t 6.29 tax filers wh cntributed $ 29.3 billin in iii Michel A. Bell, Managing Gd s Mney-The Basics (Belleville, Ontari: Essence Publishing) p. 82 iv Ibid, p.167. v If yu depsit $100 at 10 percent, at the end f ne year it will grw t $ 110. At the end f the secnd year, bth yur riginal $100 and the $10 earned will attract interest: the value at the end f the secnd year will be $121, f which, $10 earned frm yur riginal depsit and $ 1 frm incme earned in year 1. vi Ttal assets, which are things f value that yu wn, minus the ttal f all yur lans. vii A retirement budget gap reflects the difference between ur estimated retirement incme and estimated retirement budget. One key aspect f retirement planning is t decide hw t fill this gap! Additinal RRSP cntributin is ne, but nt the nly way t fill the gap. viii Refer ur March 2002 Newsletter at ix The middle amunt if yu ranked all cntributins frm the lwest dllar amunt t the highest. Managing Gd's Mney Ministry, RRSP Newsletter, February Cpyright February 2003, Michel A. Bell, Miltn, Ontari. May be reprduced in its entirety by individuals, churches and nn-prfit grups fr private use. Otherwise, it may be reprduced by permissin frm michelbell@managinggdsmney.cm. 5