Decoding the Inflation Puzzle

The government just announced a December inflation rate of 3.4%. Inflation, the relentless increase in prices, can erode your purchasing power. Beyond the basics, lesser-known ways inflation affects savings include the diminishing value of money. If returns lag behind inflation or savings idle in a bank account, keeping up with the cost of living becomes a challenge. 

Overcoming the Inflation Blues with RRSP and TFSA

Contributing to an RRSP is like donning a financial cape; it trims your current taxable income, possibly resulting in a tax refund. You can even reinvest that refund to boost your savings growth, putting inflation in its place.  For that, many rush to meet the February RRSP deadline without exploring TFSA, we like to call them the Joneses.

The special powers of RRSP and TFSA 

Both RRSP and TFSA grow tax-free, shielding returns from taxes and helping combat inflation. While TFSA contributions lack a tax-deductible cape, returns within the account remain tax-free upon withdrawal—serving as an extra shield.

And the kicker:  Unlike a term investment, you can withdraw funds from your TFSA at any time, acting as a secret weapon for building an emergency fund during inflationary times.

Unlocking Compound Interest: Your Savings Ally

Over the years, the dynamic duo of RRSP and TFSA generates returns on more than just your capital. It's called compound interest, and its "snowball effect" accelerates your saving, helping you stay ahead of inflation.

Strategies to Keep Your Pace, Forget the Joneses

Understanding the inflation puzzle underscores the need to maintain your savings strategy in inflationary times. If you're feeling a bit worn out, here are some ideas to keep your own pace, instead of following the others:

• Treat saving as a vital financial practice and set up automatic withdrawals to minimize nonessential expenses.
• Adjust your budget based on economic conditions. This allows you to reorganize your expenses and fine-tune your adjustments to protect your savings and purchasing power.
• Leverage the tax advantages offered by RRSP and TFSA, your trusty allies.
• Most importantly, don't hesitate to consult with an advisor like us; we will help you find the best strategies to save in periods of inflation, tailored to your unique needs and goals.

Have You Considered the FHSA?

In addition to those two capes, the First Home Savings Account (FHSA) is another excellent way to boost your savings in times of inflation.  Contributions are tax-deductible, and withdrawals for a first home purchase are tax-free.  You can roll it over to RRSP if you never used it for a home at the end.

You could also win $8,000 towards your FHSA, or $5,000 for either RRSP or TFSA before the promotions expires. The best things is you will get a gift card with a qualified application, no luck involved! Check them out by clicking each individual link, or our Current promotion section for more deals.

Here you have it! Fight back to keep up with inflation, leave the Joneses behind! But don't believe that you can only put it in savings accounts, although there are very attractive rates right now.   Contact us to learn about the options available for any of your registered accounts. 

*Information provided here is based on information provided by various insurance companies. Insurance Kit and those associated with the information on this website are not professional accountants, unless specified otherwise. Please always seek the advice of a professional accountant prior to making any tax or pension related decisions. 

If you're a baby boomer concerned about outlasting your income, you're not alone—82% of Canadians share this anxiety. With traditional guaranteed income sources like pensions becoming scarce and life expectancy rising (we are living twice as long versus in 1900), securing your financial future is crucial. 

But before you panic and start hoarding canned goods and gold coins, there are some steps you can take to secure your financial future and enjoy your golden years. One of them is investing in annuities, which are contracts that pay you a fixed amount of money every month for life or for a certain period of time. 

Annuities are contracts with an insurance company, involve a lump sum or series of payments in exchange for a regular income.  The amount of income you receive depends on various factors, such as the type of annuity, the amount you invest, your age, your gender, the interest rate, and the payout option you choose.

Annuities come in two main types:  deferred (accumulating money tax-deferred until retirement) and immediate (providing instant income). Annuities can also be fixed (guaranteed income) or variable (income varies based on chosen investments). 

Annuities have several advantages that can help you achieve your retirement goals. Here are some of them:

1. Provide a regular, guaranteed income for life or a specified period, covering essential expenses and combating inflation.
2. Shield against market fluctuations and inflation, offering fixed or variable income.
3. Offer tax benefits—deferred annuity growth is taxed upon withdrawal, and immediate annuity income is taxed only on the portion exceeding the original investment.
4. Customizable to suit individual needs, with various types, payout options, features, and beneficiaries.

There are several types of payout options that determine how long the payments will continue and who will receive them after your death. Here are some common options:

• Life only: This option provides the highest monthly income, but stops when you die, and it does not leave anything to your beneficiaries, i.e. if you have no beneficiary, this could be the best option for you.
• Life with period certain: This option guarantees minimum payments for a certain period (such as 10, 15, or 20 years). Your beneficiary will receive the remaining payments until the period ends.
• Joint life: This option pays an income for as long as either you or your spouse lives. The income may be reduced when one spouse dies.
• Joint life with period certain: This option combines joint life and period certain options.  It ensures the beneficiary will receive the remaining payments until the period ends. 

The payout option you choose affects the amount of income you receive from your annuity. Generally, the longer the payments are guaranteed and the more beneficiaries are included, the lower the monthly income.

However, if your annuity is still in the accumulation phase when you die, it may offer a death benefit to your beneficiary. Typically, this lump-sum payment is the greater of the account balance or the total of all premiums paid.

Guaranteed Income Rates for Life as of Oct 10th, Guaranteed period 10 years:

                       Current Annuity Annual Payout Rate %  

Male Age 65                         7.19%

Male Age 70                         8.00%

Male Age 80                       10.07%

Female Age 65                     6.84%

Female Age 70                     7.53%

Female Age 80                     9.46%

Annuities can ensure a worry-free retirement, offering customization to match your goals. While not the sole solution, annuities complement other income sources like CPP/QPP, OAS, GIS, RRSPs, and TFSA, and /or private pensions.

Retirement is supposed to be a time of relaxation and enjoyment, not worry and stress. Planning for retirement, including annuity investment, is a proactive step to avoid running out of money, and journey towards securing your future. Don't delay—start planning and saving with us today for the retirement you deserve.

And remember to have fun along the way. As George Burns said, “You can’t help getting older, but you don’t have to get old.” So keep smiling and stay young at heart!  If you would like to look at your options, Contact us to learn more.

Related links:

Annuity Sales jumpo on high interest rates

A $1 Million Annuity will score you this much every month

Annuity break-even point falls by five years

*Insurance Kit and those associated with the information on this website are not professional accountants, unless specified otherwise. Please always seek the advice of a professional accountant prior to making any tax or pension related decisions. 

Life expectancies have never been higher. People are living longer than ever these days. In the 1920s, men and women could expect to live until 59 and 61, respectively. By 2020, those numbers had jumped to 80 and 84. 

That’s great news for seniors who want to enjoy their golden years, but not so great for their bank accounts. How can you make sure you don’t run out of money before you run out of time?

Here are some tips to help you stretch your retirement assets:

• Estimate how long you’ll live. This is not an exact science, but you can look at your health, family history, and lifestyle. If you’re fit as a fiddle and your grandparents lived past 100, you might want to plan for a long haul. If you’re a couch potato with a heart condition and a fondness for bacon, maybe not so much.
• Take inventory of your assets and debts. List everything you own and owe, from your home and pension to your credit card and car loan. Subtract your debts from your assets to get your net worth. This is how much money you have to work with.
• Review your pension plan. If you have a defined benefit plan that pays you a fixed amount for life, lucky you! You can skip this step. If you have a defined contribution plan that depends on how much you save and invest, pay attention. You need to make sure your savings will last as long as you do. You might want to consider buying an annuity that guarantees income for life.
• Delay starting your government benefits. If you can afford to wait until age 70 to collect your Canada Pension Plan and Old Age Security, do it. You’ll get 42% more money every month. That’s a lot of extra doughnuts.
• Draw down your assets wisely. Don’t withdraw more than 4% of your total assets per year, or better yet, 3%. And don’t forget about inflation and taxes. Some investments are taxed more favourably than others, and some benefits are clawed back if your income is too high. Talk to your financial advisor about the best strategy for you.
• Plan for health care costs. Health care is expensive, especially if you need special equipment, surgery, or long-term care. Make sure you have enough money set aside for these expenses, or buy insurance to cover them.
• Plan your estate. Don’t leave a mess for your loved ones when you die. Make a will that spells out how you want your assets distributed. Use charitable donations or trusts to reduce taxes on death. Buy life insurance to cover any remaining taxes or debts.

We know someone learned these tips the hard way when her father passed away. He had no will, no insurance, and no savings. He left behind a mountain of bills and debt. It was a nightmare that she thought she would never wake up from.

Don’t be like this father. Plan ahead and enjoy your retirement!

Contact us to learn more.

Related links:

Canadians are living longer and it's changing the financial equation for retirement | Financial Post 

 Canadians projected to live longer, but can they afford it? | CBC News 

*Information provided here is based on material provided by Industrial Alliance.  Insurance Kit and those associated with the information on this website are not professional accountants, unless specified otherwise. Please always seek the advice of a professional accountant prior to making any tax or pension related decisions. 

A First Home Savings Account (FHSA) is a savings account from the Federal Government that is set to be available for Canadians on April 1s, 2023. It allows individuals to save money for their first home purchase, providing tax benefits and other incentives to help them afford a home.

The Tax-Free First Home Savings Account is a new type of account that works much like an RRSP or TFSA because it combines the features of both. For example, when you contribute to your FHSA, your taxable income will decrease by the same amount for that year.  Additionally, when you withdraw from your FHSA to purchase a qualified property, that money will be tax-free.

• Must be Canadian residents, at least 18 years old.  
• You cannot own a home in the calendar year that the account is opened nor in the 4 years preceding that.  That means you are considered a new home buyer if you and your spouse have not owned a home for up to 5 years.  
• The FHSA account is meant for primary residences and not investment or leisure properties.  
• You can have more than one FHSA, but you cannot exceed your yearly or total contribution limit.
  

The FHSA works very similarly to an RRSP or TFSA, with a few key differences. You will need to open an account with any Canadian financial institution or bank that offers these accounts. Once you open an FHSA, some of the contribution rules will include:  

• A contribution limit of $8,000 per year with a maximum lifetime contribution limit of $40,000.  
• The unused contribution room in this account cannot be carried forward.  
• Any contributions you make to these accounts can also lower your taxable income by an equal amount. 
• If you open an account this year, even if you don't have money to put in yet, in 2024, you’ll have $16,000 of contribution room available.
  

Some of the withdrawal requirements and applicable tax consequences include: 

• No tax consequences if the withdrawal is for the purchase of a first home. The FHSA must also be closed within 1 calendar year of the first withdrawal, and the holder of the account will no longer be eligible to open another FHSA.  
• Withdrawals that are not related to a first-time home purchase will be considered taxable income.  
• Different than RRSP, FHSA withdrawals do NOT need to be paid back.  
• You CANNOT use both the Home Buyer's Plan from an RRSP and FHSA for the same home purchase.
  

When you contribute to your FHSA, you can invest your money in allowable investment assets like stocks, bonds Segregated funds mutual funds, ETFs, and GICs.   

• If the funds in your FHSA are not used within 15 years of opening the account, you will need to close the account or the funds within can be transferred to a Registered Retirement Savings Plan (RRSP)
• As the account holder, you can transfer the funds from within to an RRSP or a RRIF.  When you withdraw the amount from these other accounts, the taxes will be paid as normal.  
• If you transfer funds from your FHSA to an RRSP or RRIF, you will not be limited by the RRSP contribution room.
  

If you're looking for some additional home-buying support, there are a few other programs and plans available to you.  

• The Home Buyers' Plan (HBP) -  a program that allows home buyers to borrow up to $35,000 from their RRSPs towards the purchase of your first home under certain conditions. 
• The First Time Home Buyer Incentive (FTHBI) provides eligible buyers with 5% or 10% off the price of the home they're buying. To qualify for this program, you must have purchased or plan on purchasing a resale or new build home that is less than $500,000.  
• The Home Buyer's Tax Credit (HBTC) is a non-refundable tax credit that provides buyers with $10,000 for the purchase of an existing home, which would provide up to $1,500 in tax relief to eligible home buyers. 

If you're thinking about purchasing your first home or are in the process of doing so, a First Home Savings Account can be an excellent way to help you achieve this goal while enjoying all the benefits it offers.  Some of the advantages of the FHSA include tax-deductible contributions, tax-free earnings, and the ability to use funds from your account at any time for anything related to your home purchase. 

There’s almost no downside to opening the FHSA and contributing earlier. Whether you're ready now or in the future, consider opening a First Home Savings Account to help you on your journey to homeownership. Book a coffee chat with us to learn more.

Related links:

Design of the Tax-Free First Home Savings Account

*Information provided here is based on material provided by Canada Life.  Insurance Kit and those associated with the information on this website are not professional accountants, unless specified otherwise. Please always seek the advice of a professional accountant prior to making any tax related decisions.