Canadian Finance BlogRetirement – Canadian Finance Blog

The History of OAS

Jim Yih — Tue, 07 Feb 2012 10:00:15 +0000

One of the big concerns in Canada is the number of baby boomers that are going to retire and put pressure on the retirement income system. The two key components of the retirement income system in Canada is the Canada Pension Plan (CPP) and the Old Age Security (OAS).

The CPP program was reviewed in 2009 and it was determined at that time, CPP was well funded and on solid financial ground. CPP will be there for Canadians.

Last week, OAS was the hot topic when Harper made some comments at the World Economic Forum in Davos, Switzerland about making some significant changes to those elements of the Canadian retirement system that are not properly funded. Now the big question is Do You Think Old Age Security needs change?

In doing some research on OAS, I found some interesting data that I thought would be worthwhile sharing:

Canada’s first public pension plan had been introduced in 1927 with the passing of the Old Age Pensions Act. That legislation established a means-tested pension for men and women 70 years of age and over who had little or no income.
The Old Age Security Act came into force in 1952, replacing legislation from 1927 requiring the federal government to share the cost of provincially-run, means-tested old age benefits.
Back in 1952, OAS paid a $40 per month universal, flat-rate pension for people 70 and over, with 20 years residence in Canada immediately prior to the approval of an application as sufficient qualification. 308,825 people were participating in the program
In 1965 the age of eligibility was moved from age 70 to age 65 over a 5 year period (to 1969).
In 1967, the program was expanded with the Guaranteed Income Supplement (GIS). The GIS program was and still is a tax-free, income-tested supplement to pensioners in receipt of the Old Age Security Pension, but with little or no other income.
Indexation of benefits was introduced in 1972
In the 1996 budget, a new Senior Benefit was introduced that would replace OAS, GIS and 2 tax credits for seniors. Although the government argued that 75% of seniors would have the same benefit or higher, the proposal never materialized.
In 2000, benefits and obligations were extended to same sex common law partners as well

How much does OAS pay?

Currently (2012) Old Age Security pays a maximum of $540 per month at age 65. You cannot collect OAS earlier than that. If you don’t apply, you don’t automatically get it. You must apply.

OAS is also income tested so Canadians need to be aware of the OAS clawback.

Before the government messes around with OAS and cuts the retirement income of Canadians, I think they need to look at their own lucrative MP Pensions which is costing taxpayers a lot of money. Canadians, you need to voice your thoughts before any changes are made to Old Age Security.

The History of OAS originally appeared on Canadian Finance Blog on February 7, 2012.

Four Interesting Stories From 2011

Jim Yih — Tue, 10 Jan 2012 10:00:44 +0000

One of my regular media gigs is sitting on the Alberta Primetime Monday Money Panel and for our year end show, we were asked to talk about some interesting stories from 2011 or share stories of interest and things we are watching in the new year. 30 seconds is not much time to respond properly to this question so I thought I would share four of my tops stories from 2011.

Pooled Registered Pension Plans (PRPP)

In January 2011, Finance Minister Jim Flaherty introduced the concept of a new PRPP as a means of trying to address the big retirement gap in Canada.

Later on November 17, 2011, the Harper government introduced the Pooled Registered Pension Plans Act(Proposed Act) legislation as the next step to the process of implement the federal portion of the PRPP. The government describes the PRPP as a change to Canada’s pension landscape that will make saving for retirement easier for millions of Canadians.

Being a strong advocate of workplace savings programs and financial education in the workplace, I have followed this story closely and written some articles:

The next steps for the PRPP is the Federal Government needs to pass this Proposed Act and adopt regulations. At the same time, work on provincial legislation and the multilateral agreements will need to be undertaken.

Task force on Financial Literacy in Canada releases their findings report

In the 2009 budget, the federal Minister of Finance announced his intention to establish a national task force dedicated to the issue of financial literacy. The Task Force would provide advice and recommendations to the Minister of Finance on a national strategy to strengthen the financial literacy of Canadians. Appointed in June 2009, the Task Force on Financial Literacy is comprised of 13 members, drawn from the business and education sectors, community organizations and academia.

On February 9, 2011, Canada’s Task Force on Financial Literacy today made public its report to the federal Minister of Finance, recommending urgent action on a national strategy to strengthen Canadians’ financial literacy. I am watching this story to see if this whole process makes an impact on the future financial literacy in Canada.

Vanguard comes to Canada

Back in June, US mutual fund giant Vanguard announced it’s intention to come to Canada with a series of Exchange Traded Funds (ETFs). In December they actually launched 6 ETFs with very low management fees. The management fee for all six Vanguard ETFs averages 0.24 per cent and the Canadian Equity Fund is reported to be 0.09 per cent.

I’m especially interested to see if the Vanguard Canada is able to create more awareness about the high fees being charged by the mutual fund industry. Canada has been reported as having some of the higher mutual fund fees around the world but despite that it remains the investment of choice for Canadians with $775 billion dollars of assets under management. ETFs have significantly less assets with less than $40 billion in assets under management.

Vanguard is targeting their ETFs to investment dealers and fee based advisors because the do-it-yourself market is too small (only 5% of all investors in Canada). Here’s a few articles I wrote on the topic:

Another year of Market Volatility

The last hot topic of 2011 was another tough year with more volatility. The TSX finished the year in negative territory (-8.89%) despite some hopes for a Santa Claus rally. The TSX hit a high of 14,329.50 and a low of 10,848.20 with 8 of 12 months with negative returns. September was the worst month of the year where the TSX lost 8.66% in a single month. October followed with the best month rebounding a 5.61% return.

In my line of work, I see a lot of investors who have accepted the volatility as normal and others who are just sick and tired of all the ups and downs and the market taking away any gains they make the previous weeks, months or years.

To help investors, here’s a few articles I wrote about dealing with market volatility:

Are there any interesting stories you are watching for 2012?

Best wishes to everyone in 2012.

Four Interesting Stories From 2011 originally appeared on Canadian Finance Blog on January 10, 2012.

How To Save Money When You Are Retired

Guest — Mon, 02 Jan 2012 10:00:00 +0000

I am just 35 going to be 36 soon, how do I know the needs of a 65+ year old and how can I advise him/her to save money on the things they need and cut back on things they don’t need? Before you wonder and cast serious doubt on my wisdom, let me tell you I very closely know a few persons who are over 65, my parents and in-laws are just four of them.

When you are earning income before retirement, it’s easier to set aside a portion of the income as saving. But, It ‘s extremely difficult during retirement to save. In fact, experts talk about withdrawing parts of the retirement saving each year. I feel as if, post retirement, the worth of each penny increases.

5 steps to save more money during retirement

As soon as you determine the right time to retire, start practising these steps.

Planning and budgeting

This is no brainer, budgeting is the single most effective way towards spending control and thus saving money. But, during retirement the budgeting gets different, where you budget for minimizing retirement saving withdrawal. No matter how much money you have, you don’t know how long you’ll need that money. You should save as much as possible.

Sure you should enjoy your days and do the things you didn’t do when you were working. The fear of running out of money in savings should not be forgotten. You may want to change your spending habit and food habit a bit. You should also increase provision for health care cost.

Review your budget and actuals at least every 6 months, if not quarterly. Check your investments and returns thereof. You might need to shuffle a few investments. Never miss any good opportunity to increase your investment return.

The impulses just after the retirement gets really big, my father wanted a winter home and a summer home. You might have set an eye on a beach house. Do your maths before you try pursuing those long kept wishes. Can you really afford? Can you sustain next 30 years with 4% annual withdrawal from retirement saving after that big purchase?

Claim senior citizen discounts

Don’t be embarrassed, if you don’t see senior citizen discount on a service, ask for one. Be it a local eatery or a boat ride on the sea. From train ride to flight tickets there are senior discounts everywhere, even if you don’t see it in the fine print.

It’s your right to get this discount, you paid taxes your entire life, you helped in building the nation, a full part of your share, now is the time to redeem it somewhat. If you are planning for a trip, research on places and restaurants where they offer senior discounts and plan your trip around them.

At many places there is no entree fee for seniors, use many such offers to save some money. You can also consider becoming an AARP member. The AARP membership fee is $16 a year. This organization has numerous discounts available for hotels, auto rentals, shopping, travel planning.

Open few passive income route

Imagine you have changed that ‘owning an RV’ dream of yours to owning a public transport vehicle. You now have a instrument to earn passive income rather than spending money on it life long. This is just an example. There are various other ways you can invest your money in income generating ways.

This point is not exactly saving rather, earning a few extra bucks to realize more dollars in saving.

Work part time

I will not recommend that to myself, retirement is a freedom from doing a money earning job. Still, if you are short on money in your saving, and you are physically able, why shouldn’t you take up job? By working post retirement and postponing on collecting social security ensures a greater pay out later.

I know many in my neighbourhood (Florida is retirees paradise) who are retired but still work. Some work as Realtors, some attend the sales counter at various local stores and some does consulting in their respective areas of strength.

And don’t forget to weigh other benefits of working. If you crave socializing with other people and want to keep your professional skills sharp, the little part time job should be for you.

Re-evaluate life and health insurance

You are no longer dependent on your salary, neither is your family. When your saving is enough to live on, do you need to supplement your income with life insurance? Think about it before keeping this insurance intact. The premium you are paying might be an unnecessary expense.

Crunch the numbers as to what your family needs when you are gone, will social security, pension and other retirement savings not be enough for their survival? Chances are high that you really have only one dependent in your spouse and your children have become independent.

Irrespective of your age the principles of saving money are the same. Still, when you are retired, you need to change your strategy a bit here and there to adjust for your maximum benefit.

I see my parents completely cut back on meats and fast food and eating out. It has to do more with their health rather than saving money. They take vacations and always buy tickets on senior citizen’s discount. Now I see my father growing a few vegetables, which I never saw him doing when he was working.

Betterment is non stop task, during retirement betterment is becoming more self sufficient and utilizing the time on hand for more fruitful and fulfilling work.

Author Bio: SB blogs at One Cent at a Time, where he teaches about getting ahead in life which includes personal finance and productivity related topics like how to be rich, how to increase salary and becoming better employee.

How To Save Money When You Are Retired originally appeared on Canadian Finance Blog on January 2, 2012.

Benefits of the Pooled Registered Pension Plan (PRPP)

Jim Yih — Tue, 29 Nov 2011 10:00:08 +0000

Being someone who works with Group Retirement Savings Plans, I am watching the development of the Pooled Registered Pension Plan very closely. I’ve also been quite vocal on how I think the PRPP should work.

Most recently, the government has released it’s framework for the Pooled Registered Pension Plan. Ted Menzies, Minister of Finance, said “the PRPP will be aimed at the self employed and workers at small-and mid-sized firms, companies that often lack the wherewithal to administer a private sector plan.”

It seems the new framework for the PRPP is being highly criticized by many people in the financial industry:

In my most recent appearance on Alberta Primetime’s Money Panel, we discussed the merits and shortfalls of the PRPPs.
York University Professor says the PRPP is not a Pension Plan
Labour Unions across Canada are not fans of the PRPP
Personal Finance blogger Mike Holman is skeptical about PRPPs
Media personality and blogger Preet Banerjee also has some reservations that they may not help the people who need it most
Even I have expressed some concerns that the PRPP missed the point of saving

At the end of the day, despite the criticism, there are some really strong points about the PRPP that should not be forgotten. It’s easy to criticize what others are doing but if the plan helps some people save for retirement then maybe it’s not such a bad thing. Here’s a few of the good points I see coming out of the new PRPP:

The PRPP is targeting the right people

Over 60% of Canadians do not have a workplace pension plan. This is not a good statistic because saving through work is one of the best ways to pay yourself first and develop the critical discipline of saving money for retirement. I’ve always believed if we can get more people saving through work we would close the retirement gap more effectively. People who retire with pensions tend to retire earlier and have better incomes in retirement than people who have no workplace savings programs. Although the PRPP is targeting the right people, will these plans be mandatory? I doesn’t look like it! Will employers step up and match employee contributions? I hope so but it looks like the only incentive is employer contributions will not attract payroll tax like CPP and EI deductions.

The PRPP will have low fees

There’s no question in my mind that low fees are better than high fees. That being said whether you like it or not, some investors have to pay higher fees if they want advice, help, service or plans from financial advisors.

PRPPs might bring awareness to fees on the group retirement plans but I’m not convinced. When I educate employees in my programs about fees, I think people get it but few people are really interested in becoming do-it yourself investors just to reduce fees.

People already have access and the ability to save in low cost fees for retirement through index products and exchange traded funds. These products have merit but they tend to appeal to the do-it-yourself investor who has the time, passion, knowledge and ability to self-manage and do research. Unfortunately most Canadians lack these qualities and will need help from the financial community. It will be interesting to see if there is any education around these new PRPP plans.

The PRPP offers portability between jobs

One of the biggest problems with the current pension system is it is complicated given that every province has it’s own set of rules. What we have is a mish mash of pension rules that has created a lot of confusion.

Since workers in small business tend to change jobs often, it’s important that their PRPP can follow them to their next job. It looks like it’s going to be easy to roll money from one PRPP to another.

I am still hoping that the PRPP legislation will have one set of rules instead of different rules for each province but if looks like there many be some differences provincially.

Benefits of the Pooled Registered Pension Plan (PRPP) originally appeared on Canadian Finance Blog on November 29, 2011.

Is Retirement Planning Just a Form of Lifestyle Planning?

Jim Yih — Tue, 13 Sep 2011 09:00:55 +0000

Lifestyle planning is about determining how you want to live as you age and ensuring that you acquire the resources and supports you will need to live in this manner. Lifestyle planning also addresses planning for contingencies, the “what ifs” in life that are or may be out of our control such as disability, chronic illness or even future transportation needs.

Lifestyle retirement planning

Traditionally, retirement was seen as a time to relax, slow down and do very little because of old age and poor health. Generally, retirement occurred at 65 and life expectancy was 70. Retirement planning was focused on the financial necessity of having enough money and assets to last into retirement.

Today, good retirement planning looks beyond money and assets, and focuses on meaningful living. Individuals and families need to thoughtfully consider what sort of lifestyle they wish to maintain. Lifestyle considerations include: relationships to family and friends; mental and physical health; community and volunteer involvement; leisure activities including travel; and other factors related to aging such as mobility, transportation and age-appropriate housing.

The term “lifestyle” is our “way” of living. Your lifestyle is developed over time and reflects a complex set of choices based on personal or shared values and experience (both successes and failures). Planning involves asking yourself the question, “Can I maintain my lifestyle in retirement both from an emotional and financial perspective?”

Lifestyle issues to consider

Lifestyle planning encompasses all areas of life. Some of the most recognized facets of lifestyle planning are:

Financial security. Money allows you to pay for basic needs like food, shelter, clothing and transportation as well as the activities and things that bring enjoyment to your life. Ensuring financial security means understanding the basic financial concepts of spending less than you earn, knowing your net worth, paying down debt and understanding tax implications.

Home and location. Your home and location refer not only to your house, but also your community. They refer to where you spend your time and might include other places like a recreational property. Part of lifestyle planning is to think about where you are living and whether that is the ideal place for you in the future. You have a number of available housing options. These choices are based on several factors, including: your personal situation; lifestyle preferences; cost and affordability; changing needs due to aging; and the housing options available. The key is for you to make decisions about living arrangements that are appropriate for your unique circumstances, including consideration of age-friendly and barrier-free design.

Health and wellness. We all want to remain as healthy as possible throughout our lives, including our senior years. When it comes to health, it’s not only physical health that matters. Healthy aging is a lifelong process of optimizing opportunities for improving and preserving health and physical, social and mental wellness, independence, quality of life and enhancing successful life course transitions.

Social relationships. Family and friends are an important part of life. Nothing in life is accomplished without some influence from others. Work can be a big part of your social structure so when you retire, it’s important to create new relationships to replace the relationships that were lost at retirement.

Estate planning. Estate planning is not only about legal, financial and tax implications; it includes family and relationships, and how to plan your affairs for a time then you are unable to look after them yourself.

Transportation and mobility. The ability to travel to the destinations you need or want to get to is important for maintaining well-being, quality of life and independence. Like all Albertans, seniors rely on transportation for day-to-day activities, such as attending appointments, accessing health care, buying groceries, getting to work, and attending social and recreational activities. The ability to drive, or access private and public transportation options are key to maintaining your desired lifestyle.

Hobbies and interests. Hobbies and interests are about fulfillment. Life is more meaningful when you are doing things that you enjoy and give you personal satisfaction. This might include travelling, fishing, gardening or hiking in the mountains. Part of life planning is thinking about what activities and hobbies make you happy.

Work and career. Many people say if you love what you do for a living then it does not feel like work. Are you happy with the work you are doing? Do you see the work you do as something you are going to keep doing? Are you planning to work in retirement? If so, is it similar to what you are doing today or completely different? Working in retirement is becoming more and more common so it should be part of the retirement planning process.

Contribution. Your life will change when your priority shifts from accumulation to contribution. Giving back to others is a big part of self-actualization and fulfillment. Volunteering, charitable giving, and helping friends and family are ways to give back and can provide tremendous satisfaction and reward.

Major purchases. Major purchases happen at all stages of life and can affect your savings and other retirement assets. As much as possible, major expenditures should be dealt with before you retire.

Perspective. Everyone has a different sense of who they are and why you are here. Your view of the world flows directly from the values that you hold and the primary purpose of your life. What is it that gets you up in the morning and makes you want to face the day? Where do you find meaning in your life?

This list is not exhaustive. No matter what stage you are at in life, lifestyle planning is an opportunity to re-evaluate life and make or adjust your plans proactively. One of the keys to lifestyle planning is finding BALANCE. It’s about having a more holistic approach looking at all aspects of life including leisure, finance, physical, emotional and spiritual wellness.

What other areas of life should we be thinking about for our retirement?

Is Retirement Planning Just a Form of Lifestyle Planning? originally appeared on Canadian Finance Blog on September 13, 2011.

Understanding Your Pension Options

Robb Engen — Tue, 23 Aug 2011 09:00:35 +0000

When you retire with a defined benefit plan you can choose from a selection of pension options including normal, guaranteed term, single life or joint life pension. All pensions are paid for your lifetime, and are based on the same actuarial value. The monthly payments vary because of the differences in the optional features.

Normal pension

A normal pension is the basic pension offered under your plan and is guaranteed for your lifetime. Typically, plans provide members with a five or ten-year guarantee for your pension. If you die before the guaranteed term is over, the pension will be paid to your beneficiary for the remainder of the term. If you do not have a beneficiary, your estate will receive a one-time payment equivalent to the value of the remaining term.

Guaranteed term pensions

You can choose a pension guaranteed for either five, ten or fifteen years. Guaranteed term pensions are paid for your lifetime. If you die before your guaranteed term of five, ten or fifteen years has expired, your pension is paid to your beneficiary for the remainder of the term.

For example, if you choose a ten-year guaranteed term pension and die four years later, the pension will be paid to your beneficiary for the remaining six years. Your beneficiary may apply to have the remainder paid out as a one-time payment. If you outlive the guaranteed term, the pension will continue to be paid until your death.

Joint life pension

A joint life pension is paid as long as either you or your spouse continues to live. If you choose a joint life not-reduced pension, on your death or your spouse’s death, the survivor will be paid the same amount you were paid for as long as the survivor lives. If you choose a joint life reduced-by-one-third pension, the pension paid to the survivor will be reduced by one-third after your death or the death of your nominee.

Joint life pensions can typically be guaranteed for a five or ten-year term. This means if both you and your nominee die before the guaranteed term is over, the pension will be paid to your beneficiary or estate for the remaining years. Your beneficiary may apply to have the remainder paid out as a one-time payment. The amount of monthly payment is tied to your age, and the age and gender of your nominee.

Single life pension

A single life pension is paid for your lifetime only and stops at the time of your death, regardless of the number of payments made. If you have a pension partner when your pension starts, you must choose a joint life pension, unless your pension partner signs a pension partner waiver form giving up their right to require you to select a joint life pension, meaning your pension partner gives up his or her entitlement.

Pension partner protection

If you have a pension partner when you begin your pension, you must choose a joint life pension with your pension partner as your nominee, which guarantees an income for that individual in the event of your death. You can choose either a joint life not-reduced or a joint life reduced-by-one-third pension, each typically has a five or ten-year guaranteed term.

It is also important to understand who qualifies as a pension partner, how he or she can waive his or her rights to this pension partner protection, and other factors that might affect your choice.

Weighing Your Pension Options

Before choosing one of these pension options, you should consider your needs as well as the needs of your pension partner and other concerns such as the state of your health, personal savings, family circumstances, life insurance, Canada Pension Plan and Old Age Security benefits.

Discuss your pension options with your Human Resources office or your pension administrator to help you make the best decision.

Understanding Your Pension Options originally appeared on Canadian Finance Blog on August 23, 2011.

Hate Winter? Here’s How To Avoid It Forever

Nelson Smith — Thu, 28 Jul 2011 09:00:09 +0000

Canadian summers are altogether too short. It seems like all I have time for is a couple rounds of golf and a few drinks on the patio before the weather starts turning crappy again. With a couple of snow days common in both April and October, that means summer really only lasts 5 months. I’m not sure what Mother Nature’s problem with Alberta is, but I’m not happy with her. Oh, wait. I bet it’s the oilsands.

Come around January, just about every Canadian is ready for a trip to Vegas or Hawaii. I’m starting to think that a full 72% of our debt problem is because people just want to warm up for a week or two, but lack the means to pay for it. I’m cold just thinking about winter, and it’s currently 28 degrees Celsius outside. Luckily for all of us, I have a strategy that will allow you to avoid winter forever, and will let you retire earlier than you could ever imagine. Sound too good to be true? It’s completely viable and achievable for even the average person. All you have to do is leave the country forever. Sounds easy, right?

Step 1- Get Passive Income

You should be striving for passive income no matter what, because it’s the main reason why wealthy people rise above the masses. This is especially important when you’re trying to relocate to a warmer country.

Passive income can take many forms, using the web is probably the easiest. Start up costs are low, all you really need to invest is a whole whack of time. It’ll take months (if not years) of hard work to even get to the point of making a decent sideline income online. Once you do though, it’s the perfect business to run from another place. All you really need is a laptop and a decent internet connection. No wonder so many people are trying to make extra cash online.

Or, you could go a more traditional route. By working more hours at your current job (or taking another) you can easily make an extra $10,000 per year. If you invest primarily for income, getting a return above 7% is quite possible with only taking on a bit of extra risk. If you commit to a goal of getting your expenses as low as possible, there’s no telling how much you can save. This strategy will probably take more years to implement than just making money online, but you could move and retire early.

Step 2- Pick A Country

I’m not talking about a vacation property in the United States here. If you want to live cheaply, you gotta go further south. You might have to mingle with some non-English speaking people. Oh the humanity!

Thanks to cheap living conditions in all sorts of different countries, living abroad is easier than you could have ever imagined. An income of $20,000 a year will allow you to live comfortably in countries such as Costa Rica, Mexico, Uruguay, Argentina, Brazil, South Africa or Malaysia. If any of those countries don’t fit your fancy, there’s a dozen more where living costs are cheap and the weather is warm all year round.

Obviously, research is key before you go and pack your bags for a faraway land. I know a guy who looked at retiring in Costa Rica, so let’s look at it specifically. I could find hundreds of different properties for sale in the country for less than $100k American. Hiring locals to serve as cooks, maids or gardeners will only set you back a few hundred bucks a month. Local groceries are cheap. The country has a state ran health care system, meaning you don’t have to worry about medical expenses down the road. The country has a stable, democratically elected government. It’s not perfect, but it has definite advantages to Canada.

If only it were as easy and packing up and moving.

Not So Fast Buck-o

The fine people of Costa Rica (or any country listed) aren’t about to let you in just because you asked them nicely. Like Canada or the U.S., they have immigration policies.

Retirees have it easy. Many countries create programs making it easy for retirees to relocate there, knowing your spending will help stimulate the local economy. A retiree will need a place to live, food to eat and medicine to extend their stay. Locals provide those services to them at a small fee, therefore strengthening the local economy. And since old people are usually lazy, they’ll hire locals to do their gardening and cleaning, further stimulating the local economy.

You’ll have to research each individual country’s immigration policies before even thinking about relocating. For Costa Rica specifically, you have to prove that you’re making more than $1000 (US) a month, and that income will continue in perpetuity. Also, you have to prove on an ongoing basis that you’re spending your earnings locally. And since this has become somewhat popular, the local immigration offices have a backlog of applications. Patience young grasshopper.

And why the rush anyway? You can head to whatever country strikes your fancy and preview it beforehand. Hang out on the beach and check out all the local sights, sounds and tastes. Maybe intentionally hurt yourself to see what kind of medical care you’d receive. Since they’re cheap countries to visit as well, a nice warm vacation might just be what Mother Nature ordered. Just make sure to go in January.

Hate Winter? Here’s How To Avoid It Forever originally appeared on Canadian Finance Blog on July 28, 2011.

Freedom 55 Is Just A Dream

Robb Engen — Mon, 11 Jul 2011 09:00:25 +0000

Most people my age have a distorted view of retirement. I’d bet if you surveyed people aged 25-34 that more than half of them truly believe they will be able to retire early. The reason why these views on retirement are often misguided is because it’s nearly impossible to determine what your life will be like 30 – 40 years into the future.

Why Freedom 55?

We’ve all seen the financial services commercials portraying the couples who have retired early and are living their dreams in exotic locations. Why wait until you reach the standard retirement age of 65 to stop working and enjoy life?

But is Freedom 55 even a reality for the majority of Canadians these days? Life expectancy is a lot higher than it used to be, so when people are planning on retiring when they’re 55 they still have another 30 years ahead of them. Investment returns are expected to be lower in the long term. No longer do we see projections of 12-15% returns. And the rising cost of housing is making home ownership a lot less affordable in terms of the down payment required and the monthly cost of living.

I don’t usually give much credence to retirement calculators since most of them are too rigid to handle the inevitable changes from year to year. But using some general assumptions let’s take a look at what it would take in order for a 30 year-old to comfortably retire at the age of 55:

Assumptions:

Rate of return to retirement – 6%

Number of years to retirement – 25 years

Savings Details:

Current value of investments – $50,000

Current investment contributions – $10,000 annually

Retirement Needs:

Income required – $40,000 annually

Number of years the funds need to last – 30 years

Retirement Outlook:

Annual income required – $40,000

Projected savings needed at retirement – $1,200,000

Value of investments at retirement – $796,157

Shortfall of savings plan – (403,843)

As you can see, this individual will end up considerably short of their retirement goal, and I was fairly generous with the starting point. I don’t know very many 30 year-old’s with $50,000 in savings who can also manage to set aside $10,000 a year for retirement.

Retirement Reality Check

Young people who are just getting started in their careers and learning how to invest can often convince themselves that they are on the right path towards early retirement. They pull out the retirement calculator, manipulate some numbers here and there, and just like magic they have achieved the early retirement dream!

The reality is that many of us have yet to really struggle with balancing our savings and investments while raising a family. That’s why retirement is so difficult to plan in your 20’s or 30’s. Who really knows where we will be at financially even 10 years from now?

Let’s look at real life examples of some of the difficult financial choices that we all may face down the road:

Save for a down payment on a house vs. Contribute to investment account
Take a job that you love for less pay vs. Take a job you hate for more money
Stay at home parent vs. two income household
Contribute to RESP vs. Make an extra mortgage payment
Take a family vacation vs. Take your family to the dentist
Replace the roof vs. Buy a 2^nd vehicle
Put your child in hockey vs. pay off credit card

If you try and save too much in order to reach Freedom 55, you might miss out on other great experiences with your friends and family. If you wait too long and don’t save enough, you might still be working in your 70’s.

The point is, trying to determine your retirement date 25 years in advance is next to impossible. Young people are better off trying to continually improve their financial situation each year so that their choices become less difficult over time.

Freedom 55 Is Just A Dream originally appeared on Canadian Finance Blog on July 11, 2011.

Lesser Known Thoughts About Retirement Planning

Jim Yih — Tue, 08 Mar 2011 10:00:13 +0000

When you think about retirement planning, what do you think of? For most people, the burning question people have about retirement planning is “How much is enough?” So much of retirement planning revolves around the money issues and saving for the future. As much as saving money is important, there is a lot more to retirement planning. Here are some lesser known thoughts about retirement planning.

1. Think lifestyle first

I’ve always said that retirement planning is about the harmonization of two critical issues: lifestyle issues and money issues. If you think of these two issues as circles, the more these circles intersect, the better the retirement plan. If the issues are not harmonized, you could have problems like too big of dreams and too little money. In fact, it’s tough to get to the money issues until you have a sense of what your lifestyle is going to look like. It’s so important to develop your retirement vision as part of the plan.

2. Know your spending

My good friend Rein Selles often says “the secret to retirement lies more in understanding your spending than saving. How can you save money without having some understanding your spending?”

It’s pretty simple: If you are having trouble saving money, then you need to take a look at your spending and make some changes to it. Knowing your spending helps you to save more money. Knowing your spending helps you to plan for retirement.

3. Retirement is a multiple paycheque world

For most of our lives, we go to work and earn a paycheque. What happens in retirement when we stop working? Where will our income come from? There are many possible retirement income paycheques a retiree could receive. Most retirees will get at least one of these paycheques and many will get more than one. The most financially secure retirees will get income from multiple sources.

4. Market risk means less control and predictability

One of the problems with retirement is too many people are heading into retirement with too much risk in their portfolios. Just look around and you probably know people that have delayed retirement because of the stock market and others that have retired but gone back to work because of downturns in the stock market. All you need to know is too much money in mutual funds and the stock market has created a new set of problems for people’s retirement plans. There is a big difference between investing for retirement and investing in retirement. It’s critical that retirees reevaluate their portfolios as they approach retirement.

5. Working in retirement is acceptable

As the baby boomers head towards retirement, one of the biggest changing trends in retirement is more people are planning to work in retirement. Because of early retirement and longevity, retirement is no longer about not working. Many studies suggest that 50% to 75% of boomers plan to and will do some form of work in retirement. Working in retirement is not only acceptable but it’s becoming the norm.

6. Don’t cancel all your insurance in retirement

When you think of life insurance, you probably think of something you need when you are younger — when you have dependants and more debts. Many experts have argued that you should only buy life insurance when you need it and as a result, they suggest that you should only buy term insurance while you are young because you will not need it later in life. Although there is some truth to this general rule of thumb, it’s a little too simplistic.

In many cases, the best way to determine if you need life insurance in retirement is to apply the golden rule “Only buy insurance if you need it.” If you don’t need it, then get rid of it. But use caution before you cancel an insurance policy especially universal life policies and whole life policies.

Retirement is supposed to be the best years of your life. To make that happen, you need to save money for the future but remember there’s more to retirement than just saving.

Lesser Known Thoughts About Retirement Planning originally appeared on Canadian Finance Blog on March 8, 2011.

Do we have a retirement crisis on our hands?

Jim Yih — Tue, 22 Feb 2011 10:00:50 +0000

I just watched Rob Carrick from the Globe and Mail interview Malcolm Hamilton, an actuary at Mercer talk about the retirement crisis in Canada.

Malcolm does not think there is a crisis despite the message that you hear constantly that no one is saving enough money for retirement. I really liked the message that Malcolm was sharing and I thought I would expand on some of the issues.

Lots of happy retirees

In the video Malcolm makes the point that despite the message, he has seen lots of happy retirees over his 30-year career. I’ve been in the business for 20 years and I welcome this statement with open arms because I see more people retire happy and successfully than not.

One of the misconceptions of retirement planning is that you need millions and millions of dollars to retire. For some that may be true but for many people, a happy and successful retirement can be achieved without millions. Although money is important, there is more to retirement planning than just focusing on the money. This holistic approach to retirement planning will help you to understand yourself and you may discover that you need less money for retirement than you might think.

Debt is a bigger problem than savings

Malcolm also makes the point that the bigger concern he has is the amount of debt that people, especially the younger generation is taking on. I could not agree more but I also think the older generation is also taking on more debt than before. Debt has become big business and it’s easier than ever to access debt and live beyond our means.

There’s no question that debt and savings are related. The more debt you have the harder it is to save money because debt requires payments.

One of the best ways to address saving for retirement is to simply manage and reduce debt. The best debt is no debt. Here’s a few articles on the importance of reducing debt:

Know where your retirement income is coming from

Before you buy into the theory that there is a retirement crisis in our country, you have to take the time to consider where your income will come from in retirement. When you retire, you will move to a multiple paycheque system. In other words, you are likely to get more than one source of paycheque in retirement. Despite some messages, you are likely to get Canada Pension Plan and Old Age Security. One third of Canadians will get a pension cheque. Others will get cheques from their savings including RRSPs, investments and maybe even the Tax Free Savings Accounts.

By understanding where retirement income comes from and how much you will get, you might find that you may need fewer saving than the messages you hear over and over again. Doing a little homework and planning may help you to reduce something I call retirement anxiety.

Do you have retirement anxiety?

Legitimately, there are more and more people who have a bad case of retirement anxiety because of fear of this retirement crisis. I recently wrote a guest post on Credit Cards Canada called “How to cure retirement anxiety?” In this article, I basically said the cure for retirement anxiety is to simple do some retirement planning. I was so impressed with the comments and the number of people who have started a retirement plan and agreed that knowing and planning for the future is the cure.

I understand that savings rates have dropped and debt has become a big hurdle to retirement success but at the same time, but retirement is about more than just money. Good planning, reducing debt, and saving money are all key components of a retirement plan and critical steps to avoiding a retirement crisis from happening in your life.

Do we have a retirement crisis on our hands? originally appeared on Canadian Finance Blog on February 22, 2011.