How Budget 2016 will impact your client’s retirement

The 2016 Budget made two changes that will impact Canadian retirement plans: the middle class tax cut and restoring Old Age Security (OAS) eligibility to age 65.

The Middle Class Tax Cut

On December 7th, 2015 the Liberal Government cut federal taxes on income between $45,282 and $90,563 from 22% to 20.5%. According to the Budget document, a single individual will see an average tax saving of $330 per year; couples will save an average of $540 each year.

At the maximum bracket income of $90,563, a single individual in Ontario will pay taxes of $21,107 at the new 20.5% federal tax rate, compared to $21,786 at the previous 22% federal tax rate. That’s a maximum tax savings of $679 per year.

Read: Life insurance loophole closed: example

Restoring OAS eligibility

The Liberal government also kept their promise to restore the eligibility age for OAS to 65. That means anyone born on or after February 1st, 1962 will receive a full two years’ worth of additional benefits. At today’s monthly benefit of $570.52 and ignoring future indexing, that’s a total of $13,692 more.

Impact on retirement

Vicky is a single 54-year-old professional living in Ontario. She was born on February 12, 1962, which means that prior to Budget 2016, she was not eligible for OAS until her 67th birthday.

In March 2015, Vicky met with her advisor to update her retirement plan. At that time, Vicky’s only investment was $923,697 in an RRSP, and she was contributing $2,000 per month. Assuming a 5% return and increasing future contributions at 2.5% (for inflation), her advisor calculated she would have $2,101,600 in her RRSP when she retires at age 65.

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Assuming the same 5% return and 2.5% inflation throughout retirement, this will provide Vicky with a maximum after-tax sustainable lifestyle of $91,280 ($67,872 in 2015 dollars) for 30 years.

Today, one year later, Vicky’s RRSP has grown to $994,425, and she is now contributing $2,050 per month as per last year’s retirement plan. With lower income taxes in the middle bracket and OAS starting at age 65, her advisor has projected that she is now on track for a maximum after-tax sustainable lifestyle of $92,093 — an increase of $813 per year.

Alternatively, if Vicky is happy with her original retirement lifestyle goal of $91,280, her advisor has calculated that she could reduce her current RRSP contributions by as much as $175 per month or $2,100 per year.

Read: What’s new with CPP, OAS and EI?

Impact to Vicky’s retirement plan

Bottom line

Every financial plan is subject to two budgets per year: one federal, one provincial. Each will impact the assumptions used in the previous year’s planning. Even when no new taxes or other changes are introduced, this year’s financial projections will be different than last year’s because future tax bracket thresholds are based on the advisor’s estimate for inflation, which often needs to be adjusted.

Advisors need to help clients understand the limitations associated with the projections at the heart of most plans. There are numerous assumptions that go into a financial plan; budgets are just one of the many things that are out of our control.

Dave Faulkner, CLU, CFP, is a financial planner in Alberta and co-creator of The Razor cloud-based financial planning software.