Does investing seem difficult and challenging to you? If your goal is to save enough money to sell your business and retire comfortably without ever running out of money, you likely have spent some time focused on how to get the best rate of return on your investments. You may meet with a number of advisors at various financial institutions, attend seminars, and read articles in magazines and on the Internet. You may even obsessively research a “hot tip” a friend shared with you after a few cocktails at a dinner party.
The result may be an unstructured approach, duplication of effort, overwhelming complexity, high stress, and uncertainty about being able to exit your business and meet your basic financial needs in retirement. This lack of confidence may hold you back from pursuing some of the things you really want in life!
But building an investment plan based exclusively on high rates of return is only one piece of the puzzle. There are three other pieces, including:
· The amount of time money is invested
· The effects of compound interest
· The rate of taxes paid on various investments
A simple example with a toonie
Let’s say you decided to invest just a toonie (a CA$2 coin, for those of you south of the border). Let’s also suggest you could find a fantastic investment that would enable you to double this $2 every year for 20 years. So, after one year you’d have $4; after two years, $8; after three years, $16. This growth on top of growth is the compound interest.
Now, let’s also include a rate of tax. In Canada the top tax rate is about 46%, so that’s what we will use for our example. Can you guess how much this investment would be worth after 20 years? The answer is $10,673. Not bad for 2 bucks, eh?
How going tax-free makes a big difference
Here is a super-interesting spin on this example. Let’s say we find an investment vehicle that enables the money to grow on a tax-free basis. In Canada, we have an awesome opportunity called the Tax Free Savings Account (TFSA), created by the Canadian government in 2009. You can invest money, allow it to grow tax-free, and eventually withdraw it tax-free! Similar opportunities also exist within RRSPs, as well as cash-value life insurance. And if your business is incorporated, cash-value life insurance can really maximize returns if paid for corporately.
Adding the tax-free spin to our example, $2, doubling every year for 20 years without any tax, would be worth a whopping $2,097,152. The difference is truly amazing!
I will be the first to admit this is a magnified example. There are very few opportunities to invest long term and double your money every year. But this example truly does highlight the impact that taxes can have on investing.
When planning for a comfortable retirement, it is imperative to evaluate investment options beyond just the sticker. The sticker in this case is the rate of return. The impact of this investment on your overall financial plan is really what counts. It goes much deeper than which product to buy. Rather, you need to layer all the right pieces of your plan to ensure a lifetime of financial security.
And remember: The value of developing a proper retirement income plan with ongoing input from an experienced financial planner will go a long way to reduce stress about your retirement. When was the last time you reviewed the funding of your retirement plan? If you are like most, it’s been a while! Take a step today to reduce stress and simplify your finances. You’ll be very happy that you did!
In the event you need additional assistance in simplifying your life, we have developed a free report that identifies implementable tips that you can act on immediately to begin simplifying your life. Visit www.simpleplanreport.com to download today!
Have a fantastic day and always remember to keep things simple!
Mark Landers is the creator of The Simple Plan Program and has been helping entrepreneurs simplify their lives for over 10 years. He can be reached at Mark R. Landers, CFP CHS, The Northridge Financial Group Ltd. at 416.705.6640 or mark@nrfg.ca.
No comments:
Post a Comment