What If?…

If you are like most responsible people you are well on your way to meeting your retirement goals. I know, you’re not perfect, nobody is, but you’ve probably started to pay down some debts and set aside money in a retirement plan. That’s the good news but what if illness interrupts your plan?

I’m in the “what if?” business.

what if

I wrote a booklet called “6 Steps to Financial Freedom” (buy it here) in which I lay out the way I do business as a financial planner.  Contrary to popular opinion and what most other financial planners might teach step two of my plan is not to save for retirement. (Step one is get out of debt, everybody agrees at least in principle on that.) No, before saving for retirement step two is to take risk out of the equation by protecting yourself from unexpected losses like a critical illness.

Did you know a serious, life-altering illness strikes one in three Canadians in their lifetime?

If you had to withdraw funds unexpectedly from you RRSP it might be less than you expect after taxes and applicable fees. Remember RRSP money is meant to be left in long-term, you get a tax break when you put it in there but those taxes are simply deferred, not eliminated, you still have to pay the tax on that income when you take the money back out. The RRSP system is designed to give you a tax break now, when you are earning more, so that when you take the money out later you have been able to defer the tax to a time when you are presumably in a lower tax bracket. Thus saving you money both in the short and long term.  But, if you need to take the money out while you are still in the higher tax bracket you will end up paying taxes at your full taxable rate today. If you are in a 40% tax bracket and withdraw $50,000 from your RRSP you will lose $20,000 of it to tax.  Not to mention potential broker fees and deferred sales charges.

It could take years to recover from the financial loss if you have to take money out of your RRSP to live on in the event of a critical illness. That’s why Regulating Risk is Step Two in the 6 Steps to Financial Freedom. For a small reduction in your overall RRSP contribution you can purchase Critical Illness insurance that will pay out a lump sum, tax-free in the event of a critical diagnosis. If you don’t ever make a claim the program can also be set up to return all or a portion of your premium to you at a future date which can then roll back into your retirement savings as if you had been making the contribution all along. It’s a no-lose situation.

Even good plans get interrupted; why not make sure you can still continue contributing to them even if you have to take time off work to take care of yourself? For more information on Critical Illness Insurance and the 6 Steps to Financial Freedom write to themeekonomicsproject@gmail.com



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