Voice of the O/O: Retiring One Step Ahead of the Taxman
October 1, 2003
Once upon a time there was a hardworking truck driver who decided to spend his retirement doing exactly what he wanted. He had made a tidy sum during his many years on the road and now was the time to...
Once upon a time there was a hardworking truck driver who decided to spend his retirement doing exactly what he wanted. He had made a tidy sum during his many years on the road and now was the time to start spending some of that hard-earned loot. Unfortunately, when he turned 65 and looked in his financial cupboard, it was bare.
Does that sound like the start of a typical fairy tale? It shouldn’t, because it’s fairly close to the truth for at least 75 per cent of Canadians, and that means that almost 37,000 owner/operators are in need of a financial tune-up when it comes to retirement matters.
We admit there’s no subject guaranteed to get truckers snoring quite like a discussion of retirement. Their whole working life has been spent living in the moment and the thought of finally quitting is rarely a top priority. It’s difficult enough making ends meet now without trying to factor in a far distant future.
But the urgency of making plans now can’t be stressed strongly enough. Most drivers who are approaching retirement age are baby-boomers and the resulting drain on pension resources is going to do nothing but create problems throughout the entire system. Even if you are within 15 years of retiring and haven’t given any thought to a post-work life plan, here are a few absolutely necessary things that you should consider.
First, make the most of your annual RRSP contribution. The maximum allowable is 18 per cent of your taxable income, so don’t try to achieve the lowest possible taxable income merely to limit your income tax exposure. Tax exposure itself is limited if you can reroute income into an RRSP. Actually contributing the full 18 per cent is a heroic effort but is well worth it if you are looking at your business in the long term and want to achieve maximum tax-deferral.
Next, even if you have been attentive to making the most of your current year’s allowance, be sure to take advantage of any unused portions available from previous tax years.
Third, do whatever is possible to get out of debt unrelated to the business. Pay down high interest credit cards and then cut them up. Focus on your house mortgage by making extra payments against the principal. That way you don’t pay interest on money which you don’t owe. This may require a principal payment in the middle of the month but the annual gain is well worth it.
Although it may seem contradictory, taking out a loan for sufficient funds to make a maximum contribution on an RRSP actually makes sense. The immediate tax relief coupled with the long-term deferred tax obligation is more profitable than the one-year payback schedule with the lender. Besides you can use the immediate tax deduction as a healthy start to repay the loan.
Next, take a few minutes to familiarize yourself with the many options available to you through investment instruments like stocks, bonds and mutual funds. After the initial shock of all the terminology wears off, the details are really very straightforward. Together with a trained financial advisor (we can’t stress this strongly enough) you will be asked about your tolerance for financial risk. For people in our line of work, you’d think that risk tolerance is fairly high but actually most mature investors are extremely conservative in their strategy. Whatever your inclination, make sure to consult a professional.
Saving outside of your RRSP is also a proven strategy because it allows you more flexibility if your plans change (RRSP contributions are, by design, locked in, which is to say that they can’t be touched without disturbing their sheltered status and sacrificing the eventual gains). Particularly in trucking, having access to a ready sum of liquid cash can mean the difference between a mere inconvenience and some serious downtime. Saving outside your RRSP is also a hedge against inflation since RRSP contribution limits have fallen well behind the rising cost of living.
It requires more discipline to save outside of an RRSP because the assets are more readily available but it’s still the best bet for maximum flexibility.
The choices are fairly straightforward.
You can admit now that your lifestyle will need an adjustment to meet future obligations; in other words spend less on toys and more on investments. You can continue working well into your 60s and 70s (which many drivers often do because the nature of the trucking business allows older drivers to continue pounding out miles as long as they are able and willing).
Or you can continue on an unplanned course, hoping against hope that tomorrow will hold off for one more year.
For younger drivers, and particularly for young owner/operators, this is the perfect time to let the miracle of compound interest start working for you.
A regular, relatively painless contribution now will mean enormous gains in the future.
Next month, a discussion of allocating assets, since by then you’ll have some, right?
– A former O/O, Mike Smith is a member of OBAC’s board of directors. He can be reached at email@example.com.