Should I Borrow to Invest in My RRSP? -- The November issue of LIFE LETTER answers this question. And I can send you a pamphlet that will show you how all present and future clients of Mathisen Financial, Inc. could receive RRSP loans at Prime MINUS 1%. That means you can borrow money at 3.5%!
Please, do not hesitate to call me if you have any questions about Equitable Life's RRSP Loan Program. I use this program every year myself, for the reasons outlined in LIFE LETTER.

Twelve-Step Financial Program --Don't you wish you had the discipline to follow this Program? If you're like most of us, you do some of these common-sense checks on a regular basis, but probably not all. LIFE LETTER for December may just help you do one more item of planning during the New Year.

THE STOCK MARKETS - Finally, the world markets seem to have turned around. And my advice still remains the same: Stay invested where you are. The markets will work in your favor in the long run.

HAPPY INVESTING!
Sincerely,
Hans Mathisen

 

LIFE LETTER

Should I Borrow to Invest in My RRSP?

Martin, age 35, has $3,000 to deposit to an RRSP and plans to make the same deposit each year. He earns about $60,000 per year. Depending on which province he lives in, he will be taxed at a combined federal and provincial rate of between 31.15% (BC and Ontario) and 38.37% (Quebec). At an average rate of around 35%, his refund will be about $1,050.

The most common strategy for most Canadians, unfortunately, is to spend their tax refunds. Good for retail sales, but not so good for retirement plans. If Martin invests just his $3,000 each year and earns 7% compounded annually, he will have about $283,382 in his
RRSP at age 65. This will provide him with a lifetime income of about $2,012 per month. That's less than half of his current income.

Instead of spending his refund, Martin could deposit it to his RRSP. By re-investing his refund, he can grow his RRSP to about $382,566 at age 65, assuming the same 7% annual compound return. His income would then be about $2,716 monthly, a little over half of what he earns now.

Martin can bump-up his annual RRSP deposits by using an RRSP loan. If he borrows $1,615 and adds it to his own $3,000 deposit for a total contribution of $4,615, he will get a refund of about $1,615.25. This refund is enough to pay off the RRSP loan. Some lenders offer a 90-day deferred first payment plan, so all Martin would have to pay is the
principal and a little bit of interest. This strategy, however, will increase his funds at age 65, again assuming a 7% compound annual return, to about $435,937, which will generate a monthly income of $3,095. A nice increase over spending the refund and just a little bit of loan interest above the $3,000 annually that Martin has committed to his future.

By using a double-up RRSP loan, Martin can enhance his retirement income even more. He has $3,000 committed to his RRSP plans. By borrowing another $3,000, he doubles-up his RRSP deposit to $6,000. When he gets his $2,100 refund, he applies it right away to his
RRSP loan principal. If Martin takes advantage of a 90-day deferred payment plan, he only has about $900 to pay back over nine months. He can handle the $ 100 or so monthly payment.

The double-up RRSP loan strategy only doubles up Martin's RRSP deposit and, ultimately, retirement income. Because he has income taxes deducted by his employer, a tax refund reduces his actual out-of-pocket extra cash outlay to just a fraction of what he borrowed to double-up his RRSP. At the same 7% annual compound rate, he will have about $566,765 that produces a monthly income of $4,024. Isn't $900 extra per year worth double the income at age 65?

Martin, like many Canadians, has been taught that debt is bad and should be avoided at all costs. This is certainly true of consumer and credit card debt. It is non-deductible, at very high rates (as high as 28% or more) and usually used to buy something that goes down in value. However, by using what actually amounts to a small amount of debt, Martin can significantly enhance his retirement income and even make it more feasible to retire sooner.

Copyright © 1999 Bowen Financial Inc. and Donald F. Pooley, Inc.
All rights reserved

Want to significantly enhance our retirement income?
Call Hans Mathisen today at (306)242-7042.
or email - hans@mathisen.ca

 

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LIFE LETTER

A Twelve-Step Financial Program
Brad and Lisa looked back on the year that was and were disappointed they had not dealt with as many financial issues as they intended to.

Realizing they can't get everything done at once, they decided to focus on one item per month. They will use the following twelve-step list as a guide:

January - Everyone should have a rainy day fund. It is recommended that we have three to six months income set aside in case an emergency comes up. It could be a short period of unemployment, major home repairs, or perhaps a legal problem. Money market funds and Canada Savings Bonds are ideal plans as they are easily accessible and you can make monthly deposits to them.

February - You have until March 1, 2003 to make RRSP deposits that are deductible from 2002 income. If you don't have the cash to make a contribution, you can carry forward your contribution room for use in a future tax year before age 69. Why not consider an RRSP loan or monthly automatic deposits?

March - Review your life insurance needs. In light of recent investment returns, you probably have to reconsider the rates assumed to arrive at the capital needed to provide for your family's income needs.

April - The deadline for filing your 2002 income tax return is April 30, 2003 to avoid penalties and interest charges. Misplaced any of your tax documents? Contact CCRA for a personal income tax information summary.

May - Less than half of Canadians have a current will. Do you really want the government to decide what happens to your estate when you die? Have a lawyer prepare your will to make sure it is done properly.

June - Will you be traveling outside of Canada anytime this year? Be aware that provincial health plans cover only a small portion of out-of-country medical expenses. You could be on the hook for huge medical bills without travel insurance.

July - Make sure your vehicle is in top working order before you head out on vacation. Nothing can spoil a holiday faster than a big repair bill on the road.

August - Turning 69 in 2003? Your RRSPs must be converted to an income before the end of the year or you will be fully taxed on the whole amount.

September - Some 38 of women and 41 of men will develop cancer in their lifetime (Source - Canadian Cancer Society). Critical illness insurance pays you a tax-free lump sum thirty days after you are diagnosed with this or any other illness listed in your policy. The amount is not limited by income and you decide how to use it.

October - Want to upgrade your skills by going back to school? Consider taking advantage of the Lifelong Learning Plan. This plan allows you to withdraw up to $10,000 per year from your RRSPs to a maximum of $20,000 over four years as a tax-free loan. Funds must be paid back over ten years or they become taxable.

November - Where will the money come from for your day-to-day expenses if you become disabled and can't work for a few months or even longer? Maybe it's time to review your disability insurance plans.

December - Christmas giving can mean more than just another item to go into next year's garage sale. Why not contribute what you would have spent on a gift item to an RRSP for children and adult grandchildren instead?

Copyright © 1999 Bowen Financial Inc. and Donald F. Pooley, Inc.
All rights reserved

Want help reaching your financial goals? Call today:
Mathisen Financial, Inc. (306)242-7042 or email Hans at hans@mathisen.ca.