Category - Taxation

6 ways to keep your retirement nest egg safe

Here are six expert tips: By Louis Sapi

1. How much investment risk can you afford?

People in their 20s and 30s have time on their side. They can take on more risk with investments, with the possibility of higher returns. Plus, they’ve got years to rebuild during market corrections.

2. Write down you investment plan and set goals.

“Many people don’t know what their target rate of return is. They have not sat down and figured it out. They have no plan,” says Warren MacKenzie, a certified financial planner, chartered accountant and CEO of Weigh House Investor Services, a company that provides fee-based independent reviews of investment portfolios.

3. Know what percentage annual return your portfolio will need to make to achieve your investment plan.

Your first benchmark is called your absolute return. That’s the average rate of return you’ll need to make your financial goals.

You’ll need to figure out what you’re likely to be spending per year when you retire. And if you have a pension, you’ll be significantly better off than if you’ll be relying on just RRSPs.

Say, for example, after you do the math, you learn that you need an annual return of 7 per cent until you stop working, to live comfortably in retirement.

You then build your nest egg using investment vehicles — stocks, bonds, mutual funds and more — to give you that 7 per cent return.

4. Know how much fees are really costing you.

The second benchmark is one comparing returns you might get elsewhere. How well you are actually doing, compared to how well you could be doing if you bought something else?

If you buy exchange-traded funds or ETFs, are you paying lower fees than the management expense ratios or MERs you pay on mutual funds, or the commissions you’d pay on stocks.

In other words, how much money are you leaving on the table?

5. Learn about investment products.

Read the business sections of newspapers, visit personal-finance and investment websites, watch business TV channels and programs, and pick up some business magazines.

Also, all the big banks have robust websites that offer lots of great information, for free.

6. Get some professional advice.

There are various ways of paying for advice, many linked to the purchase of investments, but sometimes in the form of fees.

Other full-service stock brokers and capital management firms offer a wide range of advice on products, including stocks, bonds, mutual funds and ETFs, and they are paid by fees and commissions that vary by product.

“The whole adult family should be aware of investment plans for retirement,” says Louis Sapi, a chartered accountant and managing partner of H&S Partners, an independent accounting firm in Mississauga. “It’s typical of many men of the older generation to control investments themselves, and they are reluctant to involve the rest of the family. It’s important that the spouse, along with the adult children, be aware of the investment plan.”

The 1 Percenters and the Warped Definition of Progressive Taxation

As a Chartered Accountant, I constantly feel certain sympathy for the taxes our higher income clients pay. Yes……let me repeat, I feel sympathy for them for they pay a disproportionate share of our nations taxes and yet are constantly accused of not paying enough. Jamie Golombek, one of my favorite columnists, published an article on March 13 of this year asking “Are you a 1%er”. It was his usual well written and informative expose that surprised many readers. In it he states:

If you reported income of over $201,400 in 2010, you were part of the top 1% of Canadian income earners. This cohort earned 10.6% of Canada’s total reported income that year and paid 21.2% of all personal taxes. The top 10%, whose income was at least $81,200 that year, accounted for 55% of the total personal tax collected in 2010.

Based on the facts above, it appears the top 1% pays 2 times their proportionate share of taxes. Is this progressive or abusive? The CBC also posted general tax statistics in February of this year. Some of the more salient points were:

$8,200: median (meaning half of the people pay more and half pay less than this) income tax paid by families of two or more people. Unchanged from 2009

245,700: number of individuals who made up the wealthiest 1% of tax filers.

10.6%: how much of Canada’s total income the wealthiest 1% of tax filers: (i.e. those who paid the most tax in) accounted for. Down from its 2006 peak of 12.1%

21.1%: proportion of total income taxes collected paid by the richest 1%. Down from a 2007 peak of 23.3%.

$283,400: the median income of the richest 1%.

$28,000: the median income of the remaining 99%

$90, 100: the median income tax paid by the richest 1%

$1,800: the median income tax paid by the remaining 99%

So what do we disseminate from the data above? Clearly when one takes a step back from the details and assesses the “big picture” we have to ask ourselves the following:

1. Are the current “progressive” tax rates fair?
2. Are current tax revenues resulting from progressive taxation an economically pragmatic or sustainable revenue strategy?

In our socially conscious and democratic country, almost everyone feels a degree of progressive taxation is fair and practical. However, when the numbers start to skew to the levels illustrated above then we have big problem. The 46.41% marginal tax rate the high net income earners are asked to pay on every dollar earned over $135,054 is too high and boarders on abusive – especially considering how little tax lower income Canadians pay as a % of their income. Many of these 1%ers are hardworking entrepreneurs that deal with a myriad of financial risks to their families that are far greater than any faced by your typical employee or executive. Depending on what statistics you read, it is generally understood that about 80% of employment in this country is created by small business. Why should these stalwarts of our society, these risk taking wonder men and women with significant more pressures and risks be penalized by paying disproportionate share of taxes when they can finally profit from their efforts? Although it is not right to do and must be stopped, it should be no surprise that there are many that hide money off shore or in the underground economy. I refer to Newton’s third Law……..for every action there is an equal and opposite reaction. When unfairness is perceived, action is taken.

On the second question, I ask you: How can relying on the top 1% to fund 21.2% of total income tax revenues be an economically sustainable strategy? The fact that the top 10% accounted for 55% of total income tax revenues is even more concerning. Frankly, I see this as a huge future problem for Canada’s economic fabric. As our population ages, we have lower ratio of tax payers funding retirement plans. As our debt continues to climb we require a greater proportion of total revenues required to fund interest payments. Think about this: do we really want to rely on only 254,700 Canadians defined as the top 1%ers to pay over 21% of our total income tax revenues? In today’s very mobile world, this must be seen for what it is – a very risky business tactic. No company would be happy if 1% of their clients represented that % of their revenues.

We need to develop an economy where more of the 99% earn a decent living and pay their fair share of tax. The solution cannot always be to “hit the rich”. Unfortunately the term “progressive taxation” needs to take on a new meaning to make it fairer at all levels of income. Our country needs this.