RRIFmetic Pro

RRIFmetic Personal

Recursion- the math behind RRIFmetic (pdf)

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Goal Based Financial Planning

The environment we live in is complex. Income tax is tricky enough, however when we factor in compound interest and inflation, RRIF/LIF/LRIF rules, loans, CPP/OAS, life insurance, RESPs, real estate... and especially the complex way TAX interacts over time with the various forms of investment capital (RRSP/nonreg/equity/TFSA), the problem of integrating everything into a single net income driven cash flow model is daunting. It requires serious computing, far beyond the ability of most financial planning software*.

(* Simply having the T1 calculation is not enough, the important issue is how the T1 is applied..... namely, in reverse. See more)

The problem is simple to explain. We are creatures of habit; and while we want a smooth predictable net income (lifestyle) from year to year, our gross income is very erratic. For instance, things such as salary or loan payments go up, down, sideways, and after a period of time they go away. Likewise for pension or entitlement income (CPP/OAS/GIS). Then we have future income from a capital gain such as selling a home or business, or an inheritance. These gains come in big chunks at various times.

What 'RRIFmetic© does is to take your estimates of these future elements (salary/pension/rental income, an inheritance or capital gain, CPP, loan payments or insurance premiums, etc) and automatically calculate an investment cash flow schedule which generates a smooth after tax income (ATI) or lifestyle. A lifestyle which you determine. The result is a schedule of payments in, out and between the two capital pools (registered and non-registered) which exactly forces out that specified smooth net income. (and does it in seconds!)

If you set your net income target (lifestyle) too high, your funding will run out too soon. If it is set low enough, you will have a comfortable retirement or a large estate to pass on. This is the balancing act that 'RRIFmetic© performs. The plan which RRIFmetic©creates in that 2 second calculation is impossible to create using any of the spreadsheet-based programs and would take a planner using a 'shortfall'-type financial planning program, many minutes to do manually, if at all.

Unlike its competitors, RRIFmetic doesn't approximate with "average tax rate" math, the problem is solved directly!

The tax (T1) treatment is 100% inclusive, there are no approximations. Registered, non-reg (tax accrued) and equity (tax deferred) funds are fully differentiated, tax-wise. The tax on non-reg funds is EXACT. The principal portion of non-registered income is tax-free, only the growth component (differentiated as to the distribution of dividends, capital gains and interest income) is taxed. This accuracy in the tax treatment is absolutely unique! (Hint... the tax is actually more current than your latest T1 program, since it is based on the UPCOMING year rather than last year!)

Google 'T4127E', this is the source for our tax calculation. Also, all tax brackets (federal and provincial) as well as clawback thresholds, are fully indexed going forward in time!

'RRIFmetic© works directly back from net income without having to approximate using 'shortfall', 'deficit' or 'surplus'. This reverse tax computation is unique, and is the essence of the 'goal-based' financial planning process.

The beauty of this application, apart from the accuracy, is that the data which drives the program comes from the subject's own knowledge base.... lifestyle need, current capital, loans, expected salary/pension, future inheritance/capital gain, etc... This doesn't require the consultant to make any subjective decisions since it is data which anyone can quantify. The process is as simple as:

"I earn $65,000 and plan to retire in 10 years. I have $50,000 in my RSP, $25,000 in non-registered capital and I plan to downsize my home in 15 years, realizing $200,000 (tax free) cash. Can I acheive a retirement lifestyle of $30,000 and have my capital just run out at age 90? How should I invest pre-retirement, (and what will my pre-retirement lifestyle look like), in order to get there? Or, instead of just dying broke, how do I ensure I pass on a prescribed (net to) estate?"

Of course, subjective decisions about future interest and inflation rates must be made, when to retire, pay off a loan, whether or not to accept a commuted pension, or 'should I attack my registered or nonregistered capital first?', 'should my spousal support payments last 10 or 15 years?'; after all, this is the nature of financial planning. One thing stands out however; the program is 100% consistent. This is why it is so popular with financial planners. If you took the above scenario to two different consultants, as long as the interest rate, province and inflation rate are the same, they will create exactly the same cash/tax projection.

This is the same as having two accountants prepare a tax return. As long as the financial data (T4, T5s, etc) supplied by the client is the same for both, the tax returns produced should be identical.

SPREADSHEET-BASED software just will not solve the above plan!

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