1. Maximize your contribution

The more you put away the more you will have. It is important to know the maximum allowable limit for your financial situation. Currently for 2011, you can contribute 18% of your prior year’s earned income up to a maximum of $22,450 less your pension adjustment (PA) and your past service pension adjustment (PSPA). Remember also that carry forwards of unused contributions from 1991 onward can also be contributed.

2. Contribute Today

The sooner you contribute, the sooner your savings start growing for your retirement. The compounding of interest returns can make a big difference on your RRSP balance over time.

3. Spousal RRSPs

Contributions can be made to a spousal RRSP that will allow income splitting at retirement which in turn will reduce the amount of tax that you will pay. Contributions are limited to your personal limit.

4. No More Foreign Content Limit

• 30% foreign content limit in RRSPs and registered pension plans is now a thing of the past.
• Canadian investors now have the option to invest up to 100% of their retirement plans into foreign securities, without penalty.
• Opportunities for money managers to seek out the best investment opportunities wherever they exist is wonderful news for Canadians – provides the opportunity for greater diversity and more attractive risk-adjusted returns.

5. Consolidation

Consolidating your assets leads to more efficient asset management as well as reduced costs. You should discuss with your advisor why consolidation would be right for you

With the deadline fast approaching, it’s important to remember that the maximum contribution limit for 2011 is $22,450.

RRSP Contribution Room:

RRSP contribution room is based on prior year’s earned income. It is the lesser of 18% of earned income or the maximum contribution limit. If you are a member of a Registered Pension Plan or Deferred Profit Sharing plan, your contribution room will be reduced by a pension adjustment.

Not sure on how much you can contribute?

The limit can be found on your Notice of Assessment that Canada Revenue Agency (CRA) sends after processing a tax return. It also includes any unused room.
The Tax Information Phone Systems (TIPS) also gives current contribution limit – Toll Free Number 1-800-267-6999. SIN and previous year’s tax return must be handy.
In addition, the new “My Account” online service on the CRA website can be used to check your RRSP deduction limit for 2010. My Account lets you get personalized information about your RRSP contributions and deduction limits as well as information about payments, installments, outstanding balances, statements of accounts and much more.

For more information, please contact me at 604-661-1532 or rhonda_sherwood (at) scotiamcleod.com.

It is time to get serious about ensuring you have some type of income stream coming in should you decided to slow down or stop working all together- whether by choice or by circumstance. Boomers may be working into their late 60s and early 70s, but only if health permits. It’s important to start planning for changes in your health that may prevent you from earning an income. If you have not done any real planning up until now, it’s time to stop procrastinating and start facing the reality of the situation.

To begin, gather all of your financial papers. This includes insurance policies, company pension statements and group life and disability insurance information, bank and investment statements, Will and Powers of Attorneys and finally, your government pension statements (CPP and OAS). The first step in taking hold of your financial house is to ensure you actually have taken care of all of the above and that know where such important papers are kept.

Next, get a realistic picture of what your expenses are today and how these will change in the coming years? I would first look at costs that you must pay such as your mortgage, utilities, taxes, insurance, medical/dental and food. All the basics that you would have to remain in some type of employment to cover if you have insufficient pension or investment income coming in when you ideally would like to stop working.  Now what is your net or after-tax income today? Ideally at this stage in life there should be a good spread between what’s coming in and what must go out. Making savings not overly challenging, and a priority. If not, you will need to find a way to either be bringing in more income today to go towards savings or you might have to take a hard look at your life and see where you can start cutting back or scaling down. However, if you do have excess money after paying the monthly bills ensure that you’re challenging yourself to save the absolute maximum you’re capable of.  Especially, if your behind with your retirement planning and savings.

Basically, just write down all your ‘must pay’ or fixed expenses.  Cross off all the costs that should be gone by retirement. Add on any new expenses you might have such as medical and dental costs that may no longer be covered by your company. Now take that amount and add approximately 3% to account for the cost of living. Continue to add 3% to the figure for every year that is in between now and your ideal retirement date. The end figure is the amount you will need to be coming in in your first year of retirement.  Keep in mind that this will continue to increase to keep with inflation.

Now, look at what income you know will be coming in. If you don’t have your Canadian Pension statement, you can go on-line to see what amounts will be paid to you at 65 – http://www.servicecanada.gc.ca/eng/isp/common/proceed/socinfo.shtml

Do you have a company pension? If so, do you know when you can start taking it and how much you will receive? All this information can be obtained through your pension department. Also double check if it has a cost of living increase tied to it. This is common for Government pension, but isn’t always a given with company pensions.

Image credit: epSos

Six months in, you are well rested. You have slept in daily, ignored the news and have kept a distance from all things relating to the past working world. You have had neither pressures nor deadlines. Life is easy breezy, however, you are now finding yourself bored. How much rest and relaxation does a person really need? You have taken a well-deserved hiatus from life but now it is time to venture back into the real world. You have done six months of chapter two of your life.

What will you do for the next decade or so?

Have you taken the time to think what the second half of your life might look like? Yes ‘retirement’ may be the buzz word for the early to mid- boomers but beyond that what planning have you actually done to fill the next 20 plus years of your life?

A good starting point is to take a reality check of your finances. Do you have a regular cash flow from your pension income or your investments to cover your day to day expenses? If not, you either need to continue working where you are, find a part time job to make up the shortfall or look at ways you can either reduce expenses or free up some money (i.e. downsize your life).

Once you are comfortable that you have the basics safely covered you can then start planning the fun stuff. What hobbies, activities or places have interested you that you have yet to explore? Write them down in order of preference. Now let’s start pricing them out.

So you want to be able to take a few courses at the community centre, perfect a skill or learn a craft. There is a few hundred dollars spent.

How about going to more events, concerts or dinners? This is also going to change your budget significantly.

Think about travel. You may want to fly back east to visit one of your kids every six months and take a big trip every year. Or even go on a cruise! Those are more expenses to think about.

Let’s say you plan your lifestyle costs to continue until age 75. If the fun stuff costs you an extra $15,000 to $20,000 a year for the next 15 years – can you really afford this?

Don’t forget to factor in inflation. If you’re lucky, your pension income covers most if not all of your basic and lifestyle costs. However, most people have to combine pension income with income from their investments. Again, if you find yourself coming up short, you will need to downsize your life, reduce your budget or keep on working. It really is that simple.

Financial planning aside, you’ll also need to consider life planning for the second half of your life. We don’t often appreciate the good things that we get from our working environment such as the friendships, structure, learning and growing that takes place. When we work, we also feel valuable.

When we enter into retirement it is extremely important to fill those needs in other capacities. In other words, we still need to contribute or give back and to keep our mind active and growing. So how do we find meaningful work or activities?

This is where Walmart greeters come in. As much teasing as they get, greeters are filling their need for meaningful engagement. They have responsibilities and structure and of course some income but most importantly, social interaction. So whether you decide to get this through volunteerism, through employment, by joining groups or through your family and friendship – it doesn’t matter. You just need to ensure the needs you have to feel fulfilled as a human being are met.

Chapter two in your life can be an exciting and rewarding!

The days could be filled with the activities you are passionate about. You’ll finally have the time to give back. You may use the time to strengthen your relationships and build new ones.

It’s a time of endless possibilities but it takes the financial means and serious planning. Don’t jump in or pull the plug on your career or current employment until you have done what needs to be done to ensure your days are meaningful and enriched.

Photo credit : MikeCogh

This seems to be working perfectly fine and you assume it will continue on even into retirement. You have your pension from your 30 years of service that will cover your entire half of the basic costs. In addition, you aggressively saved over the years. When the mortgage was paid your portion of the payments was redirected right into your RRSP. You did everything right with the help of your road map created many moons ago by your financial advisor. Retirement planning has never been a worry for you.

Then the day comes when you decide it is time to take it easy and either slow down at work or stop working permanently. Your dream was to start traveling with your spouse, taking up hobbies and entertaining more. This ‘retirement’ phase looks to be quite eventful and worry free due to your years of planning and saving.

However, it dawns on you one day that you and hubby have never actually discussed retirement and what possibilities lay ahead for you both. So one day you approach them and are shocked to learn that their version of ‘retirement’ is quite different from yours. What do you do then?

Retirement Planning With Separate Accounts

Your goal was to stay in the family house as long as possible. Maybe even do Reno’s to accommodate future health issues – anything to avoid the care home life. You also assumed costs in retirement will increase as you are no longer working 50 to 70 hours a week and then going home and zoning out in front of the TV. You now have a lot of time on your hands to fill and you plan on spending whatever it takes to make your days interesting.

Unfortunately your spouse has never planned for retirement. This is marriage number two for them. They lost half their assets and half their pension 10 years ago as an aftermath of the divorce. Trying to pay child support and half their current living costs has left very little extra for savings. If anything, they have racked up their line of credit and now have a lot of debt and very little RRSP’s. Retirement has never been on the radar even though they are entering their late fifties now. They just assumed they would continue to work until health issues kicked in and then sell the home, down size and hopefully have a bit of money from the sale for some lifestyle costs.

However, you want to retire at age 57 when your full unreduced pension kicks in. You now find out that your spouse is planning on working until they drop dead. So what do you do?

Open the Retirement Planning Conversation

Well this is where a lot of frank conversation needs to take place and a lot of compromises and sacrifices. A ‘no blame’ open discussion on what your dreams and expectations are is important.

Start by writing down all your fixed retirement costs. Now tally up each of your ‘guaranteed’ pension income. Can you each pay half your costs with your pension income? If you can- GREAT! Technically you can retire. The basics are covered. If one of you can’t pay your share then compromise needs to take place.

• Are you willing to downsize the home freeing up some cash for your partner?
• Are you willing to pay more than half your share of the basic costs if it keeps you in the home?
• What if your partner works part-time? Would that cover his shortfall?

If retiring sooner than later is important to you and making that transition with your partner is equally important then you will need to make some real sacrifices if his pension income and savings doesn’t cover his share of the costs.

Next you both need to tackle your individual bucket lists. What do you want to do in your retirement? What dreams and aspirations do you have? Or how do you want to fill your days. If as a couple you have figured out how to pay the basic costs you then need to discuss the “extras”.

Lifestyle costs can get expensive. They can add anywhere from $5,000 to $50,000 to your budget. If your spouse is challenged just to make their half of the basic or fixed costs then the “extras” might really be unachievable. What then? Do you have the pension income and savings to fund both your activities? Are you willing to pay more than your fair share and again its all about compromise and sacrifices?

If you really resent paying the bulk of your retirement expenses you will have to either except that retirement will be a ‘solo’ journey for you. And you also may have to accept some changes you didn’t want to make such as selling the home, relocating to a more affordable city and having less of the extras.

There is no right or wrong way to live in retirement or decisions how to fund it between spouses. It is whatever agreement each couple has decided works best for them. Often in second marriages people keep their finances separate due to their negative and costly past experiences and because they want to ensure hefty portions of their savings passes on to their children (ensure the Will is properly set up for this). Sometimes couples keep their finances separate because they married late in life and have a hard time compromising or sharing their hard earned monies. Again neither is a right or wrong but you need to discuss your expectations and dreams so when retirement comes you are not completely floored to learn you will be taking the journey on your own.

Working with a financial advisor is a great place to start when you consider your estate plan. A qualified financial advisor can help put the overall picture of ‘your estate’ into place. Their services will include preparing a networth statement that will outline everything you own, minus what you owe.

You then need to decide what you would like to do with each asset after you die. Do you want to equally split your estate between your children? Do you want to donate to a charity you care about? What about giving money to the grandchildren or a close friend or sibling? Having your financial worth on paper can help in the decision making process.

You also have to contemplate what to do with personal belongings not included on the networth statement. This can include jewellery, furniture, cars, art and other items of worth. Spending time on this process beforehand potentially saves costs when you visit a lawyer or notary to finalize your Will.

The networth statement is also a good way to determine if you are satisfied with your after-tax and after-debt repayment estate. If it is important to leave as much as possible to your beneficiaries and you’re not happy with the final estate you might look into insurance options.

Having insurance on your debt in case of disability or death is a great way to preserve your estate. If you die and still hold a mortgage but have it insured it will be repaid in full. Leaving the full value of your home intact and if need be, keeping your family in it. Often financial institutions offer insurance when providing you with a mortgage, line of credit, regular term loan or credit cards. You can either accept their insurance offer or you can ask your financial advisor to review your overall insurance needs and provide the best insurance solution.

Looking at the big picture of your estate can also help you to see opportunities to protect your assets and your beneficiaries by using trusts. If you have young children, financially irresponsible adult children, a disabled child or young grandkids and you want to continue to care for them after you are gone, a testamentary trust is a good way to go. You can set up a formal trust with a trust company or lawyer or discuss an informal trust with your financial advisor. The complexity and size of the trust will really determine the route you should go.

The cash flow statement from your financial advisor can summarize your income flow and expenses. This is another valuable tool for estate planning as it provides a visual of what your beneficiaries will receive if you die. If you are the bread winner or have the majority of pension income that decreases or stops after your death deeply impacting the financial well-beings of your loved ones then insurance is definitely a must. You may have some insurance already through work. What happens if you leave your place of employment? Often the group policies obtained through work don’t fully cover debt repayment and income needs. It might be better to look into a personal insurance policy versus a group policy or you might keep your group policy but add some personal life insurance to it to supplement the shortfall.

Insurance can also play a part in funding some or all the taxes owed on your estate after you die. If you have an RRSP or RRIF and it is not rolling over to a spouse, the full value will be considered as income in the final tax return and taxed accordingly. Having enough insurance in place to cover such liabilities means your beneficiaries can get the benefit of the before tax asset. Other taxable assets such as a family cottage may benefit from having insurance in place. Often families hold property that they want to pass down and to be enjoyed by all the children and generations to come. However, tax has to be paid on the gains in the property after you should die. If there is not enough cash in the estate to pay the taxes, the beneficiaries may have to sell the cottage to cover the liabilities. Having enough insurance in place can greatly help your family preserve meaningful assets.

Make an appointment with your financial advisor if you do not have an estate plan in place. They will provide you with an overall picture of your current financial house. Where there are cracks, they can provide recommendations and help to implement. You can then take some time to reflect on the big picture, have a good idea of what you want to happen when you pass and then make an appointment with a lawyer or notary to put to paper your wishes.

Image credit – StevenM_61

Lifestyle planning in retirement may be a bit easier when there is only one of you. It’s very simple to create a bucket list for exactly what you’d like to do during retirement. There are no arguments if you decide that travel just isn’t for you – or if travel means a month in Italy or six months in a Winnebago.

Although decision making for single retirees is a lot simpler, financing without a partner may be a bit more of a challenge. It’s a different retirement planning strategy.

Whether single or coupled, we all have pretty much the same fixed or basic expenses in our working years and in retirement-mortgage/rent, utilities, insurance, taxes, food, personal hygiene and other debt repayment.

When you have that constant pay cheque coming in presumably we have learned to keep these essential costs within our means. As you creep closer to your retirement years, we should be aiming to reduce or eliminate some of these fixed costs (such as our mortgage and other debt repayments).

By the time you hit whatever ever age you decide to call “retirement” you should have reduced your overhead sufficiently enough to be fully covered by our incoming pension income (assuming you have some of course!). Whatever shortfall there is, your savings will have to cover. This is all a heck of a lot easier to finance if there are two of you versus one!

When there are two of you, there may well have been many years of dual income which also might mean there are dual streams of future pension income. If this is the case, you may be able to continue to sufficiently cover your basic fixed expenses in retirement without too much costs cutting or downsizing.

Even if there is only one source of incoming company pension income there still may be dual government pension income (twice the CPP & OAS). Some reduction in overhead will be a must but you might still be ok.

However, if there is only one of you then having a company pension is extremely important. If you qualified for the highest level of pension income from the Government plans, this may only bring you in around $1,400 a month before taxes.

Unless your basic costs are under about $1,100 a month you might be in financial trouble if you have no savings or other sources of income. You may qualify for a Government supplement for being a low income earner but that still doesn’t add too much to the overall picture.

Building a nest egg is much easier if there is dual income coming in. Particularly, in your mid to late empty nesting, mortgage free 50’s. Even if you have not done any retirement planning or savings before this you can aggressively start now.

One salary can hopefully cover the majority of expenses and the other can be used for savings. Funds once meant to cover the mortgage can now be directed towards your RRSP’s without missing it too much. However, when it’s just you, saving becomes a bit more of a challenge even in the high income, mortgage free days. However, it’s a must and especially important if you have no company pension.

Saving earlier in life versus later is even more paramount if you’re single. A health issue or job loss at any point can greatly impact your ability to invest in your later years. So starting small and early on is advisable versus assuming you will be employable and working in your 60s and can easily be contributing to your retirement. Look for employment that not only offers good health benefits but also a liveable pension plan. Disability insurance and insurance on your debt is also a must for singles.

Retirement planning is essential for everyone. Whether you want to buy a house, fund a child’s education or plan for your retirement. You need a plan. If you’re single, planning is even more crucial for a successful and worry-free retirement. Even if you are in your 30’s or 40’s and still envision marriage in the future, financially plan for a one person retirement. If there happens to beanother income source in the meantime then all the better! If there isn’t you will not be any worse off.

Image Credit – TinFoil Raccoon

So you made the bold decision to retire sooner than you had originally planned. Congratulations! You are counting down the minutes until you pack up the office and head for the door. But before you turn out the lights for the last time you might want to touch base with your financial advisor to ensure there are not any miscalculations in your new retirement plan.

Yes, retiring early may be ideal but only if you can financially make it work! Here are a few common blunders people tend to make with retirement planning when deciding to take an early exit.

• You originally planned for your savings to cover 20 years of retirement living but you have recently decided to retire five years earlier.

Are you confident you have enough monies put aside to cover those five extra non-income earning years? Let’s say you need an extra $20,000 annually from your savings to make up the shortfall in your retirement needs that your pension income doesn’t fully cover. If you add say 3% to keep with the cost of living you will need an extra $107,000 in savings to be able to achieve your early retirement goal. That’s no small change. 

• Can you take your pension early and without penalties?

If your new retirement calculations still reflect your old pension income, you need to get to your financial advisor before the sun sets and recalculate what your annual income will look like reflecting any penalties or years of no pension income. Take a look at your pension documents for the earliest age of retirement allowed and what penalties, if any, apply. If you plan on retiring at 57 but you only qualify for an unreduced pension at age 60 or later, then you need to ensure that you can still make it on the reduce amount.

If you have a defined contribution plan you might want to look into transferring it to your financial advisor instead of taking a fixed pension. This allows more freedom to take higher amounts of income in your active retirement years. LRIF (locked in retirement accounts) allow for a range of payment based on a minimum & maximum payment calculation. Your financial advisor can help with this. In addition, new legislation allows for some pension plans to unlock half the funds – which basically makes them more of an RRSP than a LRSP (locked in RSP). Again, this will provide you with more flexibility in how much and when to take income.

• Are you aware of the penalties for taking CPP early?

Under the current rules, your CPP is reduced by 0.5% a month up to 30% when you take it before age 65. The new rules, which will be phased in over the next five years starting in 2012, will reduce your pension by 0.6% a month up to 36% when you take it before 65. That is a HUGE reduction if you decide to take your pension at age 60. Let’s say at age 65, you’re qualified for $800 month pension. If you instead decide to take it at age 60, under the new rules your pension income will now be $512. That is $3,600 less a year. Can you afford that?

• Moving most or all your retirement savings into bonds and cash.

There is a misconception out there that when you enter into retirement all your monies should be completely liquid and risk free. This is a good strategy if you need the money today or tomorrow or even if you need it in a year or two from now but it’s not so wise if it’s to provide income for the next 20 years time. You need to ensure your investing strategy provides safety and liquidity for your short term needs, but also is invested to protect you against rising costs in years to come. Good quality dividend paying stocks are essential for most portfolios. The percentage you hold depends on your unique needs. Your advisor can help you determine the asset mix right for you

• Failing to plan or asking for help.

It’s important to crunch out the number regardless of what age you plan on retiring. Don’t just assume your company pension and CPP/OAS will cover all your retirement needs. You need to know the numbers. How much income do you need to come in to cover the basics, how much to cover the extra’s or lifestyle costs and the unplanned expenses? What do you actually have coming in? Does it have an inflation hedge? If the costs are higher than the income coming in, then what is your plan B? This is serious stuff and can’t be left to chance. You need a real tangible and meaningful financial plan in place. You should search out a financial advisor who not only will help develop your financial plan but can invest your money to reflect your goals.  

Image credit – S. Yume

When you take the big leap into retirement, you will hopefully enjoy many years of active living. Although it would be wonderful if this continued throughout our entire retirement, nature has other plans for us! More likely we will have 10 to 15 years of active living and then we gradually start to slow down and health concerns might start kicking in. This type of retirement living is entirely different from active retirement living.

When we are retirement planning for these years, we need to take this into consideration and consider how much in retirement savings we really need. The concept of a comfortable retirement will change year to year depending on what phase we are in.

In other words, needing the same fixed amount of income per year, every year, throughout your retirement is not a reality. Your retirement planning needs to include two different phases.

Although there is not a set age from when active living turns into “slower living,” you will hopefully have at least a good 10 years of phase one, unless of course you have serious health issues when entering retirement. If that’s the case, then static costs might be a reality.

So let’s assume you have 10 years to take up hobbies, travel and be physically active: What will this cost you?

The first step in retirement planning is to assess all your “essential costs” or costs to keep the household afloat. This will include your mortgage or debt payment, taxes, insurance, utilities, maintenance, food and personal essentials.

The second step is to start calculating the costs of the activities/hobbies/travel/entertaining you want to pursue. Add the two together and you will have a good idea of what you will need after tax for the first year of your retirement. You then need to consider the cost of living or inflation rate for each year in phase one of retirement. An inflation calculator or your financial advisor can help to determine what you will need for each year of the 10 plus years of active retirement.
For example, if you need $50,000 in year one, at a 3% inflation and you assume these costs will stay relatively stable for the next 10 years what will you need in year two, year three, year four and so on?

• Year 1 $50,000
• Year 2 $51,500
• Year 3 $53,045
• Year 4 $54,636
• Year 5 $56,275
• Year 6 $57,963
• Year 7 $59,702
• Year 8 $61493
• Year 9 $63,338
• Year 10 $65,238

Total income needs over a 10 year period amounts to $573,190.

How much of your Government pensions, company pensions and annuity income will cover this? The difference will have to be met by your savings. Again your financial advisor can provide full calculations on this.

The second phase of retirement should be less costly as you’re most likely not as active. You will still have the fixed or ‘essential costs’ to cover and hopefully your pension income will be enough to meet these needs. Again, if it doesn’t they will need to be met by your savings. So if your fixed costs were $20,000 in year one of retirement you will need to figure in inflation as well (3% is what is common today).

So assuming you enter phase two in 10 years and need $20,000 in today’s value to cover the basics you will need approximately $26, 879 in year one of the ‘elderly phase of retirement’.

• Year 1 $26,879
• Year 2 $27,686
• Year 3 $28,517
• Year 4 $29,372
• Year 5 $30,253
• Year 6 $31,160
• Year 7 $32,094
• Year 8 $33,056
• Year 9 $34,047
• Year 10 $35,068

Total income needs over a 10 year period amounts to $308,812

If you live for 20 years in active and elderly phases of retirement (10 years in each), and need $50,000 for each active year (in today’s value) and $20,000 for the elderly phases of retirement, you’ll need approximately $882,002 in savings to fully cover both phases of your retirement. Assuming that you have no pension coming in, you need to figure out how much of your Government pensions, company pensions and annuity income will cover this? The difference will have to be met by your savings.
It really is best to speak with your BC financial advisor to get an accurate picture of your personal retirement needs.

One last note: the additional costs in the second phase in retirement could go up considerably when additional care or help is needed. For example, you may want to stay in your home as long as possible and so you need someone to cut the grass or care for the garden for you. Maybe you need help with cleaning and cooking. Or someone to come in and provide care with health issues you are having. This can get quite costly. Alternatively, you might consider moving into a retirement community or may need to go into a care home. You may be able to receive some Government subsidies on the latter.

Depending if you choose private or public care facilities this can get quite expensive. Maybe selling the family home will cover these costs. The best advice I can give is to make an appointment with your financial advisor to get a realistic idea of what your retirement planning will look like in financial terms. Once you have your plan in place, be sure to review it annually especially if significant changes to your health or lifestyle have occurred.

Image credit - SCA Svenska

We are healthier than ever before and this translates into many more years of active productive living. This also means ensuring there is enough income coming in to cover whatever lifestyle we have chosen.

The focus of this ‘new retirement reality’ seems to be on ‘choices.’ For example, you may decide to phase out of your existing career and use your knowledge and skills and go into business for yourself. You may plan on bringing in enough income to keep you afloat while meeting all the other needs that working provides – purpose, structure, belonging, fulfillment, socialization. Or perhaps you may find an easy, stress-free part time job more enjoyable – Wal-Mart is always looking for greeters! If the financial situation is looking good, volunteering or babysitting the grandkids may be more fulfilling. Travel and other active hobbies may be what you are looking for while you are healthy and able to enjoy them.

No matter what your version of the perfect retirement is, you need to do some planning. If you were expecting to stop any type of income producing work at your desired retirement age you need to ensure you have enough pension income and savings to support the next 20 non-earning years. You need to do this while keeping the rising costs of living in mind, especially in the area of services relating to the aging population. Taking a realistic look ahead and planning carefully with a BC financial advisor will help ensure that this next phase of your life will meet your expectations.

I would suggest that you sit down and consider what you see for the next twenty foreseeable years. If you have a spouse, you’ll want to sit down with them as well and share what you both see for the ages 65 and beyond. Consider your current health, your individual interests, your shared passions, and each of your less tangible needs. After all, there are things that employment provides beyond just a pay cheque.

After you consider the options, take a realistic look at what income you have coming in to support your ideal retirement. Look at your CPP, OAS and your company pension. You’ll need to meet any shortfall by your savings or the equity in your home. If not, you’ll need to turn your experience into some type of income generating work. Alternatively, you may consider finding some type of work involving a hobby or a passion you have. This will make working in this phase of life more meaningful and probably more enjoyable.

As you can see, the planning process is essential to feeling fulfilled and being comfortable through retirement. A BC financial advisor can greatly help in with this process. They can do all the number crunching for you and help devise a plan to achieve your ideal retirement.

Rather than retirement planning with blinders on, it’s important to face some facts. You have to plan for the possibility that your spouse will not be there for your entire retirement.

How to plan for the inevitable:

Step 1: How much are your ‘basic’ retirement costs?

What are the basic costs you estimate to have in retirement? For example, assume you are in retirement today. What are your fixed monthly/yearly costs (i.e., your mortgage, utilities, food, taxes, insurance, hygiene/personal)? Which of these costs do you expect to continue to have in retirement? For example, your basic costs today are around $4,500 a month. At retirement you expected these costs to drop to around $2,300 (today’s value). Assuming your mortgage is paid, you have only one car and the kids have finally moved out.

Step 2: How much would these basic costs change if there is only one of you?

If you are going through retirement on your own, most likely the food bill will drop a quarter to a half, the utilities may go down a bit, personal/hygiene is reduced, etc. However, the major costs like the tax and insurance owed on the home and car will not be reduced by much. So again, let’s assume these costs drop to $2,000 a month. Will you still have enough after tax income after the loss of a spouse to cover the expenses?

Step 3: What income will be coming in between you and your spouse in retirement?

For each spouse calculate how much is coming in in CPP, OAS and company pension plan (before income splitting) on your desire retirement date. Let’s assume both people in the couple are 65.

For example,

Spouse A -Rick Spouse B – Barb

CPP 800 300

OAS 500 500

Company pension $2,700 400

Total $ 4,000 $1,200

The combined total in today’s dollars comes to $5,200. That would be more than enough to cover your estimated after tax costs of $2,300.00 (again, in today’s dollars). Now you can start planning how you will fund your lifestyle costs or the ‘fun’ things you want to be doing- golfing, travel, hobbies.

Step 4: What retirement income will be coming in if say Spouse A dies when he is 67?

Rick, Spouse A is in his second marriage. In the first marriage’s divorce settle, the wife got the RRSPs and he kept his full pension. However, he changed his pension option from 60% payout to his spouse when he passes to zero payout so as to take the maximum pension available. Barb, Spouse B, started work late in life to raise kids from her first marriage. Her $400 pension was half of her ex- husband’s pension plan. She never qualified for a pension through any of her own employment means. She was out of the work force for some time and has not upgraded her knowledge or skills. She has only been able to work at lower pay jobs and has a smaller CPP payout and no company pensions of her own.

Barb may be entitled to some survivor benefits. However, the most amount payable of the CPP Survivor benefit and the CPP retirement pension is the maximum retirement pension of $940 a month ($943).

Since spouse B is over the age of 65 and is receiving her own OAS payment she doesn’t qualify for the Allowance for Survivors (which requires that she must be low income between the ages of 60-64).

If Rick passes on Barb will have:

CPP $940 (maximum payable)

OAS $500

Company pension $400

Total $1,840 before tax

Barb`s gross income (before tax) is now $1,840 and her net (after tax) basic expenses are $2,000 a month, in today’s dollars. She will not be able to fully cover her basic no frills retirement lifestyle. Let alone hobbies, travel, entertaining or any kind of fun that costs money. The one time maximum $2,500 Canadian Plan death benefit payable to the estate helps with the funeral costs but not so much the day to day living costs.

Hopefully, Barb has the savings to cover her monthly shortfall plus fund any other retirement activities and dreams. If not, she will have to downsize her lifestyle. That may mean selling the home and moving into a condo. There by reducing her overhead costs plus creating an investment portfolio to draw some income from. Barb may not want to leave the family home. She could look into a reverse mortgage but they can be costly. What other options would have been available to her had she planned?

Step 5: Plan in advance to ensure you don’t find yourself short of money in retirement

Best case scenario, Barb has been seeing her financial advisor annually to review her goals and action plan, especially after her first divorce. She would have had a pretty good idea then that retirement was not looking too good. And a savings plan of action should have started then. The longer you have to save, the more compound interest works for you – even if it is only $25 a month. That is better than nothing.

In addition, she could have looked for employment that offered a good pension plan or any plan. Or even consider upgrading her skills and education to increase her income, pension possibilities and a larger CPP payout. The more time you have, the more options are available!

One option couples often consider is an insurance policy to fund the shortfall in income that would occur when the person with the larger pension income dies first. Your financial advisor can calculate what amount of a policy you require to make up for the monthly shortfall for the estimated life expectancy of the surviving spouse.

As a benefit- no major life changes have to immediately take place. When the spouse dies, the life insurance company cuts a cheque payable to the beneficiary (hopefully the surviving spouse), tax free and avoids probate. The surviving spouse can then ‘conservatively’ invest the proceeds to produce income that should supplement any shortfall in the overall expenses. For the time being, the surviving spouse can remain in the family home (if left to them in the Will) and maintain the existing lifestyle.

Photo Credit : Hudson

While most beneficiaries assume that large sums of money may be coming their way, in reality it’s often not as big as they think. Here’s some plain as day retirement advice: Until that money is actually in your bank account you cannot be guaranteed how much, if any, will be left to you.

Are You Sure You Are Inheriting That Much?

There are a variety of factors that can affect your inheritance that will impact your financial status and retirement plans.

Some scenarios to consider

• Mom passes on and dad remarries leaving the bulk of his estate to the new wife.  Any remaining is to be split equally amongst her 3 kids and his two.
• Dad gifts out to his favorite son 80% of his estate before he passes. Leaving the remaining 20% to be split equally upon his passing to the beneficiaries (including the favorite son).
• Mom & Dad know their son is not good with money or is a spendthrift and so they leave the bulk of the estate to the grandkids ‘in trust’. Alternatively, they put the son’s portion ‘in trust’ to pay out a small monthly annuity for the rest of his life.
• Dad makes a bad investment decision with the bulk of the money and so very little is left to the estate when he passes.
• Some beneficiaries rely on that “$1 mil Vancouver home” that their parents own. The only problem is that Mom and Dad took out a line of credit against the equity in their home to fund their desired retirement lifestyle, leaving a small estate for their children.
• Mom and dad decide to move into an expensive, non-subsidized retirement home……….for the next 20 years. There goes that inheritance!

The Realities of Modern Retirement

There was a time we retired at 65 and lived to 67. Funding those golden years was not too challenging. However, today we are living longer and healthier in retirement. We are filling these days with enjoyable and sometimes costly activities or adventures. If we need ‘later in life’ care services or facilities, it may cost a considerable sum of money.  Beneficiaries can’t always be guaranteed that there will be enough money left over to fund a year in retirement, let alone the next 20.  This makes it even more important to plan your own retirement based on your own financial means.

If you have not seriously considered funding your retirement through your own means and need retirement advice then start today! Here are some essential areas to consider.

• Do you have a company pension plan? If so, are you contributing to it along with your employer? If you’re unsure, speak with your HR department.  If it is a defined contribution plan, ensure that the investments selected are appropriate for where you are in life and what your end means are.
• Are you betting that Government pensions will still be around? Thinking about retirement is very different if you’re 55 versus 35. I wouldn’t include Government pensions in my retirement calculations if I were any further than 15 years out from my retirement date. However, the good news is the farther you are from retirement the longer you have to save and the more you will benefit from compound interest.
• Lastly, how are your savings looking? If you’re unsure if what you’re contributing, and how your investing is going to get you through, possibly 20, years of retirement you definitely should meet with a Financial Advisor. Driving to Alaska from Florida without a map or GPS may seem easy (keep going North and West); however, having a well thought out, detailed plan will make the likelihood of reaching your destination more certain.

If you do inherit a large sum of money, you may feel the urge to do something rash like quit your job and start spending lavishly. Hold off these urges until you sit with your financial advisor. It may shock you how much money you will actually need to put aside to fund 20 plus years of retirement. Especially if you have no savings or pension plans. Once the monies are gone, they are gone forever.

Bottom line retirement advice; don’t live your life now on the basis that an inheritance will happen.  Save through your own means to guarantee the retirement you want.

Photo Credit – Images_of_Money

A lot of consumers wonder “What will retirement cost me?” In order to figure out, you need to sit down and crunch some numbers.

First, start with the basics. How much does it currently cost you to run your household? The bare essentials – mortgage/rent, utilities, insurance, taxes, car/house maintenance, food & essential clothes/personal hygiene items?

Write these down, but understand that these costs will probably be reduced in retirement. For example, your mortgage may be paid and your kids have left the nest. You may able to go from two cars to one so your insurance, maintenance and gas costs will decrease. Estimate your current expenses and take out the costs you expect will be reduced or eliminated. This is the approximate amount in today’s dollars you must have coming in retirement income. You might have to add medical and dental expenditures that are no longer covered by your employer though.

Let’s look at an example:

Sue and Jim, ages 49 and 51

Necessities budget pre retirement

• Mortgage $2,000 month
• Utilities $ 200
• Insurance (2 cars and home insurance)  $ 500
• Maintenance (cars/home) $300
• Food $800
• Personal clothes & hygiene (2 kids and 2 adults) $500

Total $4,300 a month

They plan to retire in 14 years when Jim is 65 and Sue is 63

Necessities budget retirement

• Mortgage $0
• Utilities $ 200
• Insurance (1 cars and home insurance)  $ 300
• Maintenance (cars/home) $150
• Food $400
• Personal clothes & hygiene (2 adults) $200
• Medical/dental $200

Total $1,450 a month in today’s dollars

So in today’s dollars, Sue and Jim may need approx $1,450 a month to pay the basic overhead costs in retirement. This would be just short of $2,200 in 14 years time assuming your basic costs go up 3% a year. Compare that to what you know you will have coming in from pension income. Any shortfalls between these two numbers will need to be covered by your savings.

Now add on non essential everyday costs such as gifts, donations, subscriptions etc.  Let’s assume that is another $400 a month. So to cover the necessities and incidentals, Jim & Sue need about $1,850 a month in incoming income in today’s dollars, or $2,716 in 14 years time when they retire.

Once you have the basics covered then you need to spend some time contemplating what you would like to do with your time. We are living longer and retirement now extends upwards of 20 to 30 years. How will you fill your days?

Consider what’s important to you. The options are wide open.

You could:

Leaving the high stress career as soon as it’s financially viable.

Change your pace of life.

Spend more time with the family, kids, grand kids and your spouse.

Take up a hobby or learn a new craft.

Improve your health.

Sell the home, down size and maybe even start traveling.

Work part-time or volunteer.

If you were to retire today what would you most like to be doing? Make a list, a ‘retirement bucket list’ and start pricing each activity in today’s dollars.

For example, if my health is good I would like to travel once a year for a month to some location outside of North America. So what on average would it cost you to do this in today’s dollars? Maybe start pricing out air fare, hotels and other related costs.  If on average it would cost you $10,000 a year and your estimate you would travel for the first 5 years of your retirement then you need approx $50,000 in todays dollars to fund this. Use a ‘future values’ calculator to determine what amount you will need when you retire http://www.calculatorsoup.com/calculators/financial/future-value.php

Jim & Sue’s retirement bucket list

• Jim golf twice a week $400 month
• Sue babysit grandkids 3 times a week – zero cost
• Jim & Sue volunteer at the local animal shelter once a week – zero cost
• Sue to get more involved in jewelry making  $300 month
• Go away one weekend a month to some near by town $500
• Jim & Sue go to gym 3 times a week- $100 membership
• Dine out once a week at a nice restaurant $150 month
• Misc spending $500

Monthly they need an extra $1,950 in today’s dollars or just shy of $2,900 when they enter into retirement.

So to cover the necessities, incidentals and their ‘retirement bucket list’, Jim & Sue need after tax about $3,800 in today’s dollars or $5,600 in 14 years time to fully fund their retirement. Any shortfalls will have to come from savings or other means (i.e.: selling the home and buying a condo to invest the difference to fund shortfall or aggressively saving for the next 14 years).

Speak with your financial advisor to determine how much you need in retirement and how much you must start saving today.

Photo Credit – Wanderlinse

Having said that, each situation is unique and so to give or not to give really depends upon the relationship between the parent and the adult child.  If you are contemplating such a request, consider the following factors before making a decision; your child’s financial history, the other siblings in the family, whether your gifting or lending the money and most importantly, if you can afford it.

Your adult child’s financial history

Before you hand out any money, you might want to ensure that you’re actually helping your adult child and not enabling them. Otherwise you’re just throwing good money, after bad. So ask what the money is for and what sacrifices or life changes they have already made themselves prior to asking for financial help? Get a clear picture of their current financial situation to see if they are living beyond their means. Is borrowing a chronic condition and your adult child needs help once again because they are not managing their money responsibly? Or is this a one-time situation in which they need temporary financial assistance?

Other siblings in the family

Giving money to one child and not another will often lead to resentment. So if you cannot afford to dish out equal amounts to all your children then either ensure to provide the financing by way of a loan so it is paid back, or make provisions in your Will to account for the money given.  If it is a large sum of money, you might start off as a loan and then evolve it into a gift as part of the child’s inheritance. Again, ensure to put this in writing to prevent family squabbles when you are long gone.

Gifting or lending

Be very clear, is it a gift or a loan? If it is a loan, set clear expectations. Specify whether there will there be interest charged, the terms of repayment, and put it in writing. Setting terms in writing allows everyone to know from the get-go where they stand and what their future responsibilities are.

Can you afford it?

Before dishing out the money, ask yourself earnestly ‘can I afford to’? Any money you give or lend should be beyond what you need to cover your day-to-day expenses without touching your emergency savings, credit cards/line of credit and your retirement savings. If giving your child money puts a financial strain on you today or in retirement the answer without question should be no.

Responsible money management is part of being an adult as is the consequences for poor management. You are better off helping your adult child improve their financial skills then by bailing them out. Saying no is never easy but it’s better to endure a little discomfort now then a major fallout later. Whatever you decide, just be sure that you think through the ramifications beforehand and seek out the advice of a financial advisor. Maybe the best way to help your adult child is with a little guidance, direction and some time with a financial planner.

 The following quiz can help provide some insight into you and your spouse’s financial compatibility

1.       Do you have some sort of realistic budget or a spending plan in place that you are both accountable to?

2.       Are you comfortable with your spouse’s spending habits?

3.       Do you argue over monthly bills?

4.       Do you and your spouse discuss major financial decisions before they are made?

5.       Do you and your spouse have a plan of attack in case one of you should lose your job? (I.E. Currently live off of only one income and bank the other)

6.       Do you and your spouse share in the responsibility of managing your financial affairs?

7.       Do you and your spouse regularly discuss your finances including your short and long term financial goals?

8.       Do you and your spouse share the same views towards debt and savings?

9.       Are you and your spouse both actively saving for retirement?

10.   Do you and your spouse send the same message about money to your children?

Ideally, the answers to all the above questions should be yes. 

To achieve complete financial unity may not be a realistic goal for many couples but to achieve greater financial compatibility is. However, this does require a lot of work.  Here are a few tips to help improve your financial compatibility:

·         Devote more time to financial discussions and to goal planning.

·         Define what each of your financial responsibilities is.

·         Start making joint decisions about how your money is to be spent.

If you are finding it a challenge to have these important money discussions you may want to seek the advice of an experienced financial planner. A financial planner can help you identify differences you may have and how you can work towards finding a happy medium, which is valuable and meaningful to you both. When there is mutual understanding about financial goals, couples most often will work together to achieve them resulting in fewer money confrontations. You can then redirect such valuable energy towards building a more positive and prosperous future together.