RRSPs - Nov/Dec 2000 Commentary

Affiliated with Sentinel Life & Sentinel Financial Management Corp.

Merry Christmas
and a Happy New Year!!

It is with my warmest wishes for you and your loved ones that this message goes out. I sincerely hope that the first year of the New Millennium was a super year for you and those you care about.

November/December - 2000

Commentary - Hans H. Mathisen

November’s LIFE LETTER deals with your Registered Retirement Savings Plan. You only have a few more weeks to invest money in order to get the tax break you deserve for the 2000 taxation year. I hope this bulletin is helpful. Please call me with any questions you may have.

LIFE LETTER for December refers to Grandpa & Grandma Santa. For those of us who are Grandparents, this message strikes home: It’s almost mind-boggling to think years ahead and try to imagine the challenges our Grandchildren will have to face half a century or so after we, their Grandparents, had to deal with basically the same situations. We, as Grandparents, tend to get "that warm feeling inside" when we ponder how we can pass on part of our life experience and financial success to our Grandchildren. This issue of LIFE LETTER may give you the ideas you need in this respect. Please call if you feel this Grandpa can help.

THE STOCK MARKETS — As this is being written in early December, 2000, we know that the surge of the TSE 300 Index during the first 8 months of the year was artificial, and I still don’t recommend investments in Canadian Mutual Funds. The U.S. and International markets have declined somewhat since early November, mostly due to the uncertainty surrounding the American Presidency, But, as soon as George W. Bush is declared the new American President, most analysts expect the U.S. and World Markets to rally. A full report on this is forthcoming, early 2001.

ANNUAL REVIEW CHECK LIST - This list can be printed out. Please complete it and return it to me. Only when you tell me what's on your mind can I offer my assistance.

Life Letter
Get More From Your RRSP
The so-called RRSP Season is on its way. TV, newspapers and magazines will soon be full of advertising to get you to make your last-minute RRSP deposits. And then RRSPs and retirement planning are often forgotten until the next deadline. But a little advance planning will get you more from your RRSP.

Start early. It's human nature to put things off. As there is no immediate consequence to delaying financial planning, unlike not paying your electricity bill, it's easy to just let RRSP deposits slide. But to get the most from an RRSP, start it as soon as you can. A 25-year old depositing $5,000 per year at 8% compounded annually will have $1,199,706 at age 65. A 35-year old will have about half that, and a 45-year old investing the same amount at the same rate will have less than a fifth. So begin your RRSP as soon as you can.

Contribute today. You could have made your year 2000 RRSP deposit on January 1st of this year. It's easy enough to figure out how much you can contribute and Canada Customs and Revenue Agency (formerly Revenue Canada) lets us know each year what that amount is anyway. Using the 25-year old mentioned above, the total accumulations to age 65 would actually be $1,295,283 if the deposits were made at the beginning of each year instead of waiting until the deadline---a no-cost gain of almost $100,000!

Split future income. A spousal RRSP is a great way to split retirement income between spouses and reduce future taxes. If just one person has a $60,000 income, the total income taxes are about $15,000. But, split between two, so each has only $30,000, the total taxes for both are about $5,000 less. So, not only can you get a tax deduction today for your RRSP contribution, you can also pay less tax on your future income.

Enjoy tax-free growth. Perhaps a greater benefit than the tax-deductible contributions to an RRSP is its tax-free growth. The difference between tax-free growth and taxable growth is remarkable. $5,000 annually invested at 8% per year will accumulate to $566,416 in 30 years inside an RRSP. But at the 40% tax level, the same $5,000 annually grows to only $321,008 outside an RRSP. And if we consider that this nondeductible $5,000 annually is equivalent to a $3,000 after tax deposit, the accumulation is only $192,604. So put as much as you are allowed into your RRSP to maximize both your deductions and tax-free growth.

Look ahead. It's well and good to make regular deposits to an RRSP, but what does it mean in the long run? For example, have you projected how much your RRSPs and other assets will be worth when you retire? Will they pay you the income you want for as long as you want? Do you know if you'll be able to retire when you want to? Do you know how to make such projections? If so, are you happy with the results? And are your RRSP and non-RRSP investments arranged to minimize taxes, both today, and in the future?

Want help with your retirement savings and income projections? Call today:
Hans Mathisen - (306) 242-7042 or email hans@mathisen.ca

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Life Letter
Grandpa & Grandma Santa
Is it Christmas again already? Time passes too fast when you achieve grandparent status, and George and Grace are wondering once again what to give their grandchildren. Some years ago they realized they had no idea what toys were suitable, so started giving them cash at Yuletide. But it seemed to get frittered away on things that soon became boring or obsolete.

So now they wonder if there's some way to provide something that's meaningful and has lasting value. Something, perhaps, that will accumulate funds for future education or opportunities, and reduce the financial strain on their children. It might even help to make their kids' kids more aware of the advantages of long term saving. Might the miracle of Christmas be an introduction to the magic of compound interest?

Ideally the plan should be something where the money stays put, so Grace and George can add to it on future occasions, and the grandchildren can see how it grows. It should also accumulate interest or other earnings so they learn that money makes money. This eliminates ordinary bank savings accounts because the deposits are too accessible and the interest is infinitesimal. Here are some of the plans they are considering:

1. Registered Education Savings Plan (RESP). Provides tax sheltered growth and may qualify for the Canadian Education Savings Grant (CESG) of up to $400 per year. Must be used for education purposes or CESG is lost and growth would be taxable to the subscriber if plan collapsed. Control is ultimately in the child's (or beneficiary's) hands.

2. GICs or In-Trust Account. Provide greater flexibility in how money is used. Ongoing growth is taxed in the hands of the trustee of the plan. Usually in child's name in trust and again control will ultimately be the child's. Funds must be turned over to the child from the account at the relatively young age of 18 or 19, depending on province of residence.

3. Universal Life Insurance Policy. Provides tax-sheltered growth that can be transferred in the future at a time the grandparents choose. This transfer occurs without triggering a tax bill for the grandparents. The life insurance could be on each grandchild, his or her parents, or even on George and Grace. Control of the plan remains in the hands of the grandparents.

4. Other Plans. Space does not permit a description of other plans George and Grace are considering. They just know they want something that will benefit their grandchildren and serve as a meaningful memorial of Grandpa and Grandma. Of course any of these plans can also be set up by parents.

To explore various future benefit plans for children and grandchildren, call today:
Hans Mathisen - (306) 242-7042 or email hans@mathisen.ca

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Mathisen Financial, Inc.
335 Redberry Road
Saskatoon, Saskatchewan S7K 4W5
Bus. (306) 242-7042 Fax. (306) 242-4314
Email: hans@mathisen.ca