Posted on August 17, 2017
Are credits and benefits on your FIRE radar?
If you are Canadian and have small children, you probably receive one or more benefits from the government. If you are a family who makes under $220000 a year chances are you are getting some form of the Canada Child Benefit.
The fun thing about the CCB is that unlike the GST, it’s based on net – not gross income. So you can theoretically get your net income down enough even if you make a substantial amount of money. For example, if you have accumulated contribution room in your RRSPs, or if you have deductions from a small business.
When I first started thinking about Financial Independence (seriously thinking about it, not reading Your Money or Your Life at 20 and then forgetting about it) I based our numbers on our spending. So – as most people know – the 4% rule would mean that a family who needs $40000 a year to live on will need $1,000,000 saved to be able to live off of. Or, more simply $40000 x 25. I am not going to get into all the assumptions here about the 4% rule but I encourage you to read more at Investopedia.
However, this is an incredibly simplistic model. So while I don’t want to go deep into the various situations (because wow, there are so many) I found myself playing around with the CRA’s Child and Family Benefits Calculator for fun and I thought I would share some numbers with you.
A fun thought exercise for families
Let’s pretend that you think you need $40000 a year of income to support your family and achieve financial independence/early retirement. Do you really need ONE MILLION dollars? Maybe not.
If we plug the numbers into the calculator & assume that each parent withdraws $15000 a year, the numbers look like this*:
Income: $30000 ($15k each adult)
So that extra $5000 can cover the tax you would owe on anything above the $11474 Basic Personal Amount (untaxed amount). Someone smarter than me will also point out that with kids as dependents, this will probably be a wash. So take a vacation if you’d like!
So what would you need to save to bring in that $30000 a year? $750000. That is $250000 less than the one million you thought you needed.
Income: $24000 ($12000 each)
Given the parameters of the basic personal amount above, hitting $40000 on the nose with a combination of investments and benefits is possible on a lower amount. What would you need to save in this instance? $600000.
But what if you don’t have children?
Assuming the same two scenarios above, you’d be eligible for all the other credits except for the ones aimed at families with children. Here we will do the math for people who are childfree, and those whose kids will leave sometime after they’ve FIREd (uh, new verb!) Let’s see:
Income: $30000 ($15k each adult)
Assuming that you think your children cost about $8000 a year to raise, this amount may be good enough for you when they fly the coop at 18.
Yikes! At least in our case, $25885.88 would not cut it. I don’t think we could get our expenses that low. Maybe other people can? I can’t say. But I am 100% sure that my kids don’t cost me $14k a year in expenses.
Of course, a myriad of things can happen between now and when your kids are 18: the primary one being a change in government. The Liberals brought in the tax-free CCB to replace the taxable UCCB when they took power so who knows what the future holds? Governments change and the tax code and other policies change along with them. Currently you aren’t taxed on dividend income $35000 and under but given the shake up that Finance Canada is discussing in relation to businesses, that could change at any minute.
One of the interesting things to keep in mind is that when you reduce your spending by $10000, you have to save $250000 less to reach financial independence (in this scenario, it scales down as you scale down the amount). So maybe spending less is easier than saving more.
Obviously, relying on that money would be a gambit for sure. However, if you lost a salary and you only have $600000 saved, knowing you can rely on those benefits rolling in can mean the difference between scrambling to find work, or knowing you will be ok. Obviously, the challenge is that these benefits are calculated in July based on the previous year’s income. But you have an emergency fund, right?
In the end, this is a fun thought exercise to look at your financial situation from another angle. For myself, I had never included these benefits in any of my calculations, nor have I done the math for when the kids leave home, or for things I know we will inherit. Part of that is because I firmly believe on relying solely on my own, personal savings and investment strategy. On the flip side however, it means I am ignoring some situations that are really likely. This is why it is important to play around with math and see what the possibilities are.
*In all cases I assumed $4500 in property taxes, and nil to all other questions except my children’s real ages: 7 & 9.