When people think about saving for retirement, they immediately think two things:
1. Put a bunch of money in my RRSP
2. Pay off my mortgage
And neither is a terrible idea (though maxing out your TFSA is usually the best place to start, and oftentimes it makes more sense to invest rather than pay off your mortgage faster).
But the real issue is that most people overlook a third pillar of saving for retirement that can help them:
1. Minimize the taxes they pay to the government
2. Maximize the inheritance they leave to the next generation
3. Avoid worrying about running out of money in retirement
That third pillar is Whole Life insurance, and there’s a few reasons why it’s such a powerful tool for retirement savings.
One is that unlike with an RRSP, your money isn’t locked up. By taking out loans against your policy, you can access the cash to pay your bills, buy things, and make additional investments while the money continues to grow year after year. This allows you to save at a high rate while also being able to finance purchases in the meantime.
The second reason is that because you’re always taking out loans against the cash value in your policy, the money you receive isn’t treated as income and won’t be taxed at the highest marginal tax rate like your RRSP withdrawals will be. It’s a very tax efficient tool.
The third reason Whole Life does so well is that the money you put into a policy is guaranteed to keep growing until the day you die. Unlike with a normal nest egg, you’re never actually touching the investment, so you don’t have to worry about running out of money in the same way.
The fourth reason is that the returns from your policy will be consistent, typically higher than GICs, and uncorrelated with your other investments in the market or real estate. It’s a way to diversify and lower your risk, without sacrificing your returns.
And the fifth reason, which is a huge bonus, is that using this strategy almost always maximizes how much money you’ll leave your family and does so in a way that means it won’t be taxed like the rest of your estate. In fact, the death benefit helps cover the tax bill from the rest of your estate, helps ensure your company or farm stays in the family, and helps prevent any disputes amongst family members.
And the best news is that some version of this strategy can be used at almost any stage of life. Whether you’re just getting started with retirement planning or have already worked your last day, it’s worth looking closer at how you could use Whole Life to minimize your tax bill, maximize your retirement income, and leave as much money as possible to your loved ones.