Thursday, March 5, 2015

Bicycle or Tricycle


The deadline for RRSP contributions for the 2014 tax year was March 2nd.  The practice of making RRSP contributions has a more far-reaching result than just deferring taxes.  It can determine whether RRSP investments will become an important source of retirement income for you.
The authors of The Pension Puzzle pose an interesting question: “Are you on a tricycle or bicycle?”  We are given a peek here into the chapter which explains these modes of transportation.   When I read this, I understood how this makes logical sense.  The diagram below identifies the wheels which drive retirement. These are your sources of retirement income.

Here’s Bruce Cohen and Brian Fitzgerald’s explanation:

Think of the retirement income system as a tricycle with one wheel for government programs (such as old Age Security), another for employer-sponsored retirement plans and a third wheel for your own savings (such as an RRSP).  Instead of a tricycle, many will head into retirement on a bicycle with just two wheels, because they don’t have employer plans.  It’s extremely unlikely that you’ll be on a unicycle with just one source of income unless you’re very poor or maybe a recent immigrant.

Since the publication of the third edition of The Pension Puzzle in 2007, new government legislation has been introduced:  Pension Splitting, Tax Free Savings Accounts and a revamped Canada Pension Plan.  Although it’s difficult for books of this caliber to stay current with constantly-changing legislation, other information in this particular book remains useful.  Such tools like the Worksheet, Where Will You Get Your Retirement Money, will never become outdated.  The authors want Canadians to think what sources of income will replace the pay cheque they receive today.
Worksheet 3 (Chapter Two/Page16)
Check off the sources of income you’re going to include in your retirement plan. 
The Maybe column is for income that you might receive but don’t count on.
Government programs:
   Old Age Security (OAS)
   Canada or Quebec Pension Plan (C/QPP)
   Guaranteed Income Supplement (GIS)
   Provincial low-income supplement
Employer-related programs:
   Registered Pension Plans (RPP)
   Supplementary Employee Retirement Plan (SERPs)
   Group RRSP
   Deferred Profit Sharing Plan (DPSP)
Personal Plans:
  Taxable savings & investments
  Sale of home and/or vacation property
  Employment or business income

When your time is limited, finding the right book to address your specific needs can be extremely difficult.  Financial planners provide information so you have a better understanding why contributions to an RRSP (Registered Retirement Savings Plan) or TFSA (Tax Free Savings Account) are important.  When I read books I am hunting, not only for information, but also for a better way to explain this necessary information.  Authors like, Bruce Cohen and Brian Fitzgerald, turn complicated into common sense.  I would venture to guess you never thought about driving a bicycle or tricycle in retirement.  The challenge now is to examine which one you will be driving. Dare to share if you want.                                                             


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