Personally Owned Executive Compensation Plans, Can Fund Your Pension Shortfall…

As we know; CRA caps RRSP/Pension contributions to a maximum of 18% of our annual salary, therefore, if you currently earn $150,000 to $250,000* of T4 income (* we have plans if you earn $250,000 plus...); current annual RRSP or Pension maximums will not provide you with your desired retirement income.

At the end of this article, we will illustrate what a pension shortfall would look like, we will also project when your nest egg will run out and finally, we will touch on our ‘proprietary’ solution to correct your retirement funding shortage.

In order to fund your pension shortfall, you have to expand your investment instrument options, possibly take on excessive risk (which you may not be prepared for), invest in non-registered investments which are subject to annual taxation; actively or passively invest in real estate, exempt market investments or you can turn towards an Executive Compensation Structure, which was designed for CEO’s, COO’s, CTO’s, ?Key Employees and ?High Grossing Account Executives or any high ranking corporate officer earning in excess of $150,000. This structure will work even if you are self-employed in your own business and declaring at least $150,000 a year on line 15000 (formerly line 150).

When was the last time you requested a CPP or OAS statement, showing your projected CPP/OAS income? If it’s been more than 5 years; you need to request one. When was the last time you asked your financial advisor to create an in-depth retirement analysis which projects your retirement income? Again, if you don’t have one, we can facilitate your request.

Caution: If you are solely relying on CPP and OAS to fund your retirement, you will be in for a rude awakening, as the income from your CPP/OAS will not even come close to your desired retirement income.

Reminder: You need to run your projections factoring an inflation rate of 2% or 3%, as you need to keep pace with the reduced purchasing power of your money.

If, it’s been while, that’s step 1; you need to request these reports to see, exactly what your future numbers look like…if you cant see your end game; how will you get there?

What are possible pension funding shortfall funding options?

For starters, you will need a non-registered account; invested in a basket of investment funds; however, non-registered accounts are subject to annual taxation; which will reduce growth and future income. Thankfully, a TFSA will greatly assist your objectives as you’re not subject to annual taxation nor pay taxes when you liquidate...

Secondly, you may want to invest in real estate, either actively by purchasing a physical income property or via a REIT (Real Estate Investment Trust) if you’re a qualified investor. When you purchase an investment property, you become a landlord, attending to the needs of your property, at sometimes, inconvenient times. The advantage of an investment property is enjoying the real estate market’s growth of 4% - 5% annually, which will result in creating future equity, which can fund your pension shortfall.

At your retirement, you may want to sell or liquidate your investment properties; however, before you do, contact my office as we offer solutions, which will preserve your assets and allow you to continue generating desired cash-flow, without liquidation.

REIT: This investment option mirrors a mutual or segregated fund, as its subject to changing market conditions, plus, you must be an accredited investor; however, you may want to limit your portfolios exposure in a REIT, to a max of 5% - 10% (your advisor will create a risk-tolerance model) and illustrate what your risk profile suggests and or your willingness to expose 5% - 10%.

Exempt Market Investments: do you have $1 Million in investable assets excluding your family home? Do you have liquid funds to cut a cheque for at least $150,000? You see, as an accredited investor, you must follow these rules, to see, if you are even eligible to invest in Exempt Market investments. If you do, reach out to us, we will be happy to properly advise you and direct you to one of our partners.

Executive Compensation Structure: For starters, you don’t need to be an accredited or qualified investor, the only pre-requisite is what’s written on line 15000 of your income tax return, which is your taxable income. Line 15000 should state an income of at least $150,000 annually. Then, you must determine how much of your net income is required to pay your living expenses.

Secondly, based on a cash flow analysis; you need to identify your ‘unused’ income. Let me explain, at an annual salary of $150,000; you’re probably paying $50,000 in taxes; leaving you with $100,000 to live on; however, if you only need $60,000, you may be able to tax shelter the remaining $40,000 (why pay tax on an unused amount); if it makes financial sense.

By doing so, you will reduce your taxable income by the amount you transfer to your Executive Compensation account; allowing it to grow tax-deferred until you require those funds. We have access to advanced market strategies which permits further tax -deferral.

The Math: If you earn $150,000 annually, you pay close to $50,000 in taxes (your accountant will provide you with the exact number), which means 18% of $150,000 or $27,000 is the max you can contribute annually to your RRSP. If you invested $27,000 annually for the next 30 years at a 5% rate of return, your capital would grow to $2,023,809.85.

Therefore, at age 65, when you begin withdrawing $100,000 annually, your retirement nest-egg will ONLY last 12 years**.

Currently; male/female mortality is 82/84 years, which means you will still need income for at least 5 - 7 years. This is one of the myriads of strategies we execute to calculate and fund your shortfall. (** the net amount is subject to annual taxation and inflation; hence why it runs out early)

However, if you decided to reduce your annual retirement income, your nest-egg will obviously last longer; however, why take on financial stress during your retirement? We can discuss with you a solution, which will not increase your risk or exposure, and still allow you to reduce your taxable income.

If you are in the $150,000 - $250,000 tax-bracket, reach out to me, I’ll provide you with multiple options, including an IPP or RPP.

Article by Riyad K Mohammed – CEO - The Money Café - ?[email protected] and or visit us at www.themoneycafe.ca . Check out one of my strategies; Retire-Rite Lifestyle Solution (RRLS) business page; www.facebook.com/retireritelifestylesolutions

With over 32 years of Advanced Market Financial Solutions (AMFS) financial planning experience, I’m well suited to help you analyze your current cash-flow/net-worth status, create your retirement plan and help you create a structure to reduce your taxes, while investing in a tax-deferred account.