Rhonda's Financial Blog

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

Retirement? No Worries – I have my inheritance

Monday, September 12th, 2011

If you’re betting on your inheritance for the retirement of your dreams, you might want to think again.

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

What will retirement cost me?

Monday, September 5th, 2011

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

11 tips to make the most of your RRSP

Monday, August 29th, 2011

Your registered retirement savings plan is a key to making sure you have enough money when you retire. Although this is an essential retirement planning step, many consumers don’t know how to maximize this type of investment. With these tips, you can make sure to make the most of your RRSP and get the benefits that you’re looking for.

Retirement Planning Tips for your RRSP

1. Start early – As soon as you earn an income you can start contributing to an RRSP, all the way up to the age of 71. It pays to start early and benefit from the compound interest you accrue over time. Even if you only contribute a small amount each month, it will add up. Start with a $25 savings per month at the beginning of your career vs. trying to catch up at age 40. The sooner you start with retirement planning, the better.

2. Contribute the maximum if possible – You can contribute up to 18% of your earned income up to the maximum (in 2011, the maximum is $22,450). Try to get as close to that maximum as possible. Look at your “Notice Assessment” from the Canada Revenue Agency (CRA) to see how much you can contribute. Make monthly contributions to the RRSP, make a lump sum contribution or consider taking out an RRSP loan to contribute. These loans often are available at prime or prime plus one. Once you take out the loan, you can pay it off with your tax rebate.

3. Catch up on the maximum if you haven’t contributed it – If you haven’t contributed the maximum to your RRSP in past years, it carries over into the future. You can use an RRSP loan to catch up with retirement planning.

4. Invest wisely – It is essential to get investment advice from a professional financial advisor. Depending on where you are in life, your financial advisor can help you find the right combination of stocks, bonds and cash. The right asset allocation is the key to achieving your required rate of return.

5. Use a spousal RRSP – With a spousal RRSP, you can take advantage of late in life income splitting. You can split 50% of your ‘eligible pension income’ between yourself and your spouse, which will lower the income tax you’d otherwise owe.

6. Use your RRSP for other life events – Although an RRSP is meant for supplementing your retirement income, you can also use it for other life events like lifelong learning or a home buyer’s plan.

7. Don’t use it for debt or lifestyle changes – There’s a difference between funding your learning and going on an all expenses paid cruise! Don’t use your RRSP funds to pay down debt or to pay for lifestyle costs. Only take out in emergencies or during years where you have lower income.

8. Know the tax facts – Your RRSP income is not taxed unless you make a withdrawal, so hold your highest taxed investments in your RRSP and your tax preferred investments outside your RRSP.

9. Withdraw from your RRSP conservatively – Be very cautious about what you draw from your RRSP as it gets added to your overall income for the year. If your new marginal tax rate exceeds the tax you have paid you will owe Revenue Canada more.

10. Claim your deductions – RRSPs come with a deduction each. Be sure you’re taking advantage of this tax benefit! You can always defer your deduction to a year when your income is higher in order to garner better tax savings.

11. Name a beneficiary –and update it if the circumstances warrant it (such as a death or divorce).

With this retirement planning advice, you can be sure to make the most out of your RRSP and be able to rely on it after you retire.