November is Financial Literacy Month in Canada. Happy Hallelujah!
It came just in time given that July 18 is National Caviar Day and October is National Pickled Peppers Month.
In all seriousness, financial literacy needs all the help it can get. This is especially true when it comes to planning for retirement. In this article, you will find several free tools that will help with your financial literacy and retirement planning.
Before finding the answers, it is important to understand the questions. Here are four fundamental questions that most Canadians do not know how to answer:
1. How much do I need to save by the time I am 60 in order to live a particular lifestyle?
2. What will I receive from government pensions when I am retired?
3. How big will my tax bill be if I pass away with a large RIF (Retirement Income Fund)?
4. What are the fees I am being charged on my investments?
The result of this lack of awareness is that some don’t save enough while others save too much. In many cases the government receives more taxes than it should, and sometimes those who could most use your financial help (such as a charity or family member) won’t receive it – because you didn’t know you could afford it.
While these questions are too difficult to answer in a short article, here are some tools to help discover the answers:
To find out how much you need to save, here are two calculators that can help:
This one is from Fiscal Agents, a Canadian Deposit Broker
The next one is a retirement calculator that my firm TriDelta Financial put together.
To determine what kind of government pension you will receive, this tool from Service Canada is ideal.
Your RRIF and taxes
To understand the final tax bill on a RRIF, the key thing to understand is that your entire RRIF will be taxed as if it is income in the year that you pass away (or in the year that your spouse passes away, whichever is the second death).
What this means is that if you had $50,000 of taxable income in the year you passed away, and your RRIF was worth $400,000, it would be as if you had $450,000 of income. In Ontario, your tax bill would be roughly $189,000. A great site to help with taxes is the Ernst and Young tax calculator.
Fees on investments should be fairly straightforward, but are often ‘obscured.’ Don’t be afraid to ask the question of your adviser, and to expect a direct answer. If you own mutual funds in particular, be sure you understand the fee that you pay every year. A good place to find out your mutual fund fees would be from GlobeInvestor by looking up a particular fund and looking for the MER (management expense ratio). This is the annual percentage fee charged to the fund.
As a final tool, you may want to download the Canadian Retirement Income Guide that TriDelta put together. This will give you some insight into the nine sources of potential retirement income.
While all of these tools are helpful, financial literacy is a journey, just like any other area of knowledge. Just when you think you know all there is to know, the rules of the game change.
If you are interested, the key is to dive in and learn all you can. If you aren’t interested, you should at least try to understand the basics.
Whether you go it alone or work with a financial professional, be sure that you are getting those key questions answered, then you will be the best prepared to handle whatever your financial future may bring.
Ted Rechtshaffen is president and CEO of TriDelta Financial Partners, a firm that provides independent financial planning advice. He has an MBA from the Schulich School of Business and is a certified financial planner. He was vice-president of business strategy at a major Canadian brokerage firm.
Follow Ted on his blog at The Canadian Financial Planner.