Wednesday, May 5, 2010

Budgeting for Pension Cuts 1- Income sources

Spending some time thinking about your current and future sources of income is a worthwhile exercise that will really help when trying to determine what needs to be cut from expenditures.

Income may vary from month to month if you are using investment returns and it will help to understand what is fixed and what is variable.

Likely sources of income are:

Current pension from Nortel.
Pension from other companies.
Federal pension like CPP or social security or other countries.
State pensions.
Old age pension in Canada.
Annuity payments.
Payments from IRA, or 401K's or other US tax deferred vehicles.
Payments from RIF's in Canada.
Interest from CDs or GICs.
Interest from bank accounts.
Dividends from investments.
Withdrawals from savings.

Each of the items that specifically apply to you should be examined to separate those that are going to last a lifetime, and those that will only last for a set number of years at the rate you are withdrawing from them.

You may have to adjust your withdrawal rate in order to make up for the pension cuts and that means you will have to be sure the rate of withdrawal does not deplete your resources too quickly.

You may also have some income that will start at some time in the future. For example your spouse may become eligible for social security or CPP at some time in the future, so you should take that into account as you start to create this information.

You will need to look forward a number of years and forecast what your income will be from each of these sources so that you can determine what to expect as time moves along. I suggest a minimum of five years but use what you are comfortable with.

In all cases you should use your gross income to start because taxes will vary depending on how your gross income alters.

Once you have your annual gross income determined as it is now. Next you should reduce the amount from Nortel by 40% to reflect the impact on your total from October 2010 onwards.

In the next post I will discuss the impact on taxes that the reduction will create so that you can find out what the change in your net disposable income is.

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