Rhonda's Financial Blog

Financial Planning: It’s That Time of the Year Again

Monday, December 19th, 2011

As the year comes to an end, it’s a good time to step back and seriously ask ourselves, “Have I achieved all that I wanted to?” It’s important to check in with yourself – in your relationships, career, health or overall well being. You can’t improve what you don’t measure!

It applies to your finances as well. If you were a business, you’d be preparing your year-end financial statements. You’d be cross checking your goals that you set at the beginning of the year and measure them against what you’d achieved. If you fell short, you’d look over your last year’s plan of action to see where things took a turn.

You need to do the same thing with your personal finances as well. Your family and your home are like a small business. You need to set meaningful and realistic financial goals for your personal life. Your family members need to be on the same page in terms of your financial goals. You also need a way to measure your success and celebrate your achievements – just like you would with a business.

This is something everyone at every stage in life should be doing and doing every year.

If you’re a young family, you may be overburdened with the costs of raising young kids and paying for the basics. Your objectives down the line will include staying on budget, reducing debt and possibly saving for a home. The start of a new family is an ideal time to develop a relationship with a financial planner. Your family needs to have financial goals that can be discussed, reviewed and amended (if need be) at the very least, on an annual basis. A financial planner can help with this. It’s a great way for a young family to start healthy financial discussions and set and achieve financial goals from the get-go.

A more mature family may be overextended with soccer, hockey or other extracurricular expenses. As your family grows, debt may be increasing so you might be cutting back and finding ways to bring in more income. Helping the kids with college is also in the near future and so more sacrifices need to take place. Did you put your plans to cut back and save more into action? If not, what went wrong?

How about if you’re one of the many “sandwich generation” families who not only bear the costs of their adult kids still living at home but also are taking care of mom and dad. What financial changes did you want to see happen and did they occur? Was it time to encourage the kids to leave the nest or are they still at home but finally paying rent and pitching in for food and other costs?  Were you able to create a realistic budget for the family including cutting back on some of the more frivolous expenses? How is that going? Are mom and dad able to financially pitch in a bit to at least cover the costs of their care?

An empty nester may need to be seriously planning for their ideal retirement. This could mean setting up an aggressive savings strategy, or focus on getting the last of the mortgage paid down. Planning late in life for retirement will always mean sacrifices, such as thinking about down-sizing in the coming years, working later than you hoped to or retiring on less than you ideally wanted to? It’s all a numbers game and your financial planner can help with this.

An early retiree might need to revisit the budget that they set when their income dropped 30% to 40% after they stopped working. If you’re in this position, are you eating your savings away too  quickly or increasing your debt load at an awfully fast pace? Or have you maybe lived frugally over the years so you could save as much as possible for retirement – but now find yourself hesitant to finally spend and enjoy your nest egg? Are you taking the trips you envisioned you would or learning a new hobby you wanted to learn? At this stage of the game, your financial advisor can help you determine the best way to invest your money and how to pull out an income so as not to deplete the monies too quickly.

If you’re in the ‘elderly’ stage of retirement you may want to seriously look into later in life care options. Do you want to move into a care facility sooner rather than later? Is there somewhere in particular you would like to go? Or is staying in your house as long as possible the priority? Can your budget afford to bear all of the in-home care you might require? When it comes to your will and estate planning – is everything as you wish it to be or have you made some mental changes that need to be put to paper?  Do you want to start gifting some of your estate now and can you afford to be doing this?  Do you feel your adult children are financially responsible enough to receive a large inheritance or should trusts be considered?  Your financial advisor can help guide on this or direct you to the right people to deal with.

No matter what age you are, you should be conducting an end of the year review:

• First and foremost, the three most important elements of your financial health- emergency savings, income protection and your will and estate plan. Do you have at least six months of your monthly costs put away in a savings stash somewhere? Do you have enough insurance in place to protect against the loss of income due to disability or death and do you have a valid Will and powers of attorney/Representation Agreements in place?

• Review your budget (hopefully you have some type of family budget). Where did you overspend and under-spend? Was your budget realistic or too hopeful? Maybe a new budget needs to be created to more accurately reflect your spending patterns or keep to the existing one and cutback?

• What is your networth today (what you own minus what you owe)? What was it 12 months previously? Are you richer or poorer than you were a year ago? Understand why your networth either increased or decreased. Did it go up because you stuck to your budget allowing you to increase your savings or is it just a paper increase (such as the value of your home or stocks going up)?

• Review your financial goals. What are you saving your money for? Do you have a plan in place to achieve your goals? And how are you doing?

As we move towards the end of 2011, I encourage you to take time to review your financial goals, make changes where need be and continue on or set new financial goals for the coming year. By doing this, you’ll be more likely to achieve your long-term financial objectives you will feel more in control of your money, and you’ll enjoy the peace that comes from knowing you have a plan.

Image Credit: k.steudel

Did Procrastination Kill Your Retirement Planning?

Monday, December 12th, 2011

You’re in your mid to late 50s, and are longing for the day when you can make some permanent life changes. You’re in the peak of your career and earnings potential but you can’t seem to save. You are hoping ‘retirement’ is around the corner but you know deep down inside that you have not been preparing as seriously as you should.  Procrastination seems to have gotten in the way of any type of retirement planning.

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

So What Does Your Next Chapter Look Like?

Monday, December 5th, 2011

After many years of pushing yourself through deadlines, demands and lots of politics you are ready for an infinite amount of rest and relaxation. You mark the day on the calendar when you are finally free to enter the mysterious world of retirement.

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

What Happens When You Have Different Retirement Planning Goals?

Monday, November 14th, 2011

It’s your second marriage or you married late in life. Keeping your finances separate seemed the sensible thing to do. The basic costs such as the mortgage, utilities, taxes and insurances were split 50/50. You took care of your own personal needs and lifestyle costs. You have your own savings and retirement accounts.

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.

The Importance of Estate Planning

Monday, November 7th, 2011

Having a will is important regardless of your age or financial situation. You need to let others know what you want to happen to your personal and financial belongings after you pass. Often the misconception is that one needs to have sizable estate to consider estate planning. This is a mistaken belief. If you have something of value that you want to pass on or something or someone you want to protect after you should die then estate planning is necessary.

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

A Single Person’s Guide to Smart Retirement Planning

Monday, October 31st, 2011

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

5 Common Pitfalls of Early Retirement

Monday, October 24th, 2011

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

Planning for the two phases of your retirement

Monday, October 17th, 2011

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

Is 65 the New 40?

Monday, October 10th, 2011

It used to be that we stopped working at age 65 and lived out our few remaining years in leisure (if we were one of the lucky ones who lived past 65). If you are 65 or older today, living to age 80 is not unrealistic. Have you given much thought to how you plan on spending the next 15 to 20 years of your life?

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.

7 Keys to Taking Control of Your Family’s Finances for the First Time

Monday, October 3rd, 2011

Are you a passenger when it comes to the family finances? With busy lives, household chores are often dived up to help families muddle through the chaos of daily life.  That is why it is not uncommon for one partner in a relationship to manage the day to day household spending, savings and other financial affairs.

If we knew for certain that no hardships lay ahead (divorce, death, physical/mental disabilities) then leaving our financial well-being in the hands of our trusted spouse might be ok. Unfortunately, life is rarely that ‘crisis free.’ None of us know what lies ahead or when we may have to take the reins of the family affairs. It is best to be reasonably knowledgeable and up to date on the family finances.

 So do you know the state of your family’s financial health? If your spouse were no longer in the picture would your financial situation deteriorate? If a sudden change in your health made working implausible would you have enough disability insurance and savings to get by? What if you die, would your family be able to financially continue on intact?

Understanding the family’s financial affairs doesn’t mean you need to be an economic expert or a stock market guru. It just means you need to have a good understanding of the big picture of your financial house. These seven keys will help.

• Wills & powers of attorney- You need to understand what they are and ensure they are always up to date and relevant.
• Insurance - It is vital that you have regular insurance ‘check-ups’ to ensure that at all times you are more than adequately covered for any of life’s misfortunes.
• Emergency funds- Do you have any and if you do, do you have access to them? If you don’t have enough savings to cover at least 6 months of your monthly overhead costs then, at the very least, make sure you have access to a line of credit.
• What’s coming in and what’s going out- You need to have a general understanding of what income the household is bringing in and how much is going out each month. If you are constantly in the red then it’s time for a family meeting to discuss necessary cutbacks or ways to make more money.
• What is the family’s networth? What do you own minus what you owe? - Your house, savings, RRSPs minus your mortgage, line of credit and credit card debt = your networth. If in the negative big time then a good financial goal could be to reverse this position so one day you own far more than you owe.
• What are your family’s financial goals and do you have any savings strategies in place to achieve these goals? -As time consuming or uninteresting the annual visits to your financial advisor may be it’s really important to show up and participate. You don’t want to find yourself all of a sudden divorced at 55 or widowed at 60 and in a state of panic because retirement at any age is no longer plausible. Plan as a couple while ensuring your financial health will remain intact should something happen to the union (death/divorce).
• Finally, know where all the above documents are kept-Will, Powers of Attorney, Insurance papers & documents of all your assets and of your debt. You never know when you will need to access them and quickly. It is best to have a safety deposit box for such papers. If you are really organized, scan the documents and store on a USB in a safe location outside the home. Again, a safety deposit box is the best place.

Image Credit: Images_of_Money