Rhonda's Financial Blog

Are You Prepared to Live Single in Retirement?

Monday, May 7th, 2012

Many women picture their retirement years as a time when they will have more time to spend with their spouse or partner in ways which are meaningful to them. The reality is that a significant number of senior women are living single in retirement. Without a careful financial plan in place, the so-called “Golden Years” may end up looking like a lump of coal instead.

When you consider that the life expectancy for a Canadian male is 78.3 years for men and 83.0 year for women, it stands to reason that living on your own for at least a few years as a senior will be the rule, not the exception. Almost half of women over the age of 65 are widows and this number increases to three-quarters of women in the 75-and-older age group. The average age of widowhood is 56.

The divorce rate sits at approximately 40 percent for first marriages, and being part of a couple for a number of years is not a guarantee that the marriage will not break down at some point. The divorce rate for women between the ages of 55-64 is close to eight percent. Going through a marriage breakup and dividing assets and debts will likely leave the female partner in worse financial shape than before the split: a woman’s income decreases by an average of 45 percent.

Divorce is not the only threat to a senior woman’s standard of living in retirement. A 30-year-old Canadian is four times more likely to become disabled than to die before his or her 65th birthday, and one in six will be disabled for three months or more they blow out 50 candles on their birthday cake.

Financial Planning for Retirement

What does all of this mean for Canadian women? At some point, you can expect to be on your own in your retirement years. When you are looking at your financial picture, make plans based on the basic premise that you need to be independent and self-reliant. Circumstances in your life can change very quickly and while you can hope for the best, it’s also important to prepare for the worst.

Now is the time to take a good look at your assets and liabilities and consider what would happen if you had to live single in retirement. You may need to look at changing the mix of investments in your Registered Retirement Savings Plan (RRSP) and/or Tax-free Savings Account (TFSA). It’s a good idea to look at all potential sources of income available to you in retirement so that you can make decisions based on what your financial picture would look like if you had to go it alone.

Are you prepared to manage on your own in retirement if your life circumstances change? As an experienced financial planner, I can help you make decisions which can help you live well now and prepare for your future. Contact me for a personal consultation today.

Beyond Retirement Investing: 3 Success Factors to Consider while Planning your Best Future

Monday, April 16th, 2012

If you are within a few years of retirement, you’re most likely investing well and are benefiting from the sound advices of your knowledgeable financial advisor.  What is often overlooked on the road to this major life transition is the fact that there are nine other crucial factors to consider prior to exiting the workplace.  Here are three factors that you can address by asking yourself these important questions:

1. How will I manage my time and my energy?

A common assumption upon entering some form of retirement is that there will be unlimited time to finally do what we have longed to do for the past years.  However, in order to apportion your time and energy in a way that leads to happiness and fulfillment, you will need a clearly established vision with goals, a sense of purpose and intentions based on your values. Without this, new retirees may come to see a year or so later that time has passed them by; that they have been busy, yet have not accomplished their most important goals or realized their dreams. Be sure to focus your energy and apportion your time in accordance with your priorities and take specific steps towards your most heartfelt desires.

2. Who will I be beyond my working title, status or profession?

Over decades of working in a business position or a profession, you are likely to have equated your personal identity with your professional role. After the initial euphoria of the first stage of retirement, you may notice a discomfort when you introduce yourself to others as a “retired ….”.  Some retirees experience a sense of disorientation when the structure of the workplace is gone along with their hard-earned title. Some even feel they are going through a sort of identity crisis.  To prevent this, you need to think through how you will redefine yourself.  Your new sense of identity can take shape from your character strengths, talents, rediscovered interests, wisdom, experience, accomplishments and the community you belong to.  Knowing more about who you are personally also naturally leads to a congruent course of action and a more fulfilling quality of life.

3 .  What new purpose will I embrace?

Although leisure, travel and self-care appeals in the first stage of retirement, over time most people long for a sense of purpose to generate meaning in their life. For some, social utility may include more time helping family members while others may find joy in volunteering, locally or abroad, for a cause they care about.  Current research reveals that volunteering contributes to wellness, greater life satisfaction and longevity.  In the second half of life, happiness is created, more so than consumed as people prefer to simplify, focus on what really matters and avoid collecting more material possessions.  The three spheres of activity that make up happiness are leisure – things you do for fun; engagement – things that use your passions and skills; and meaning – involved in activities that connect you with a larger community, a cause or something greater than yourself.

As you plan for your best future, you may choose to live your life as a purposeful learning journey, rather than a series of busy days.  This helps you avoid painful regrets and it will augment the richness of meaning you can draw from your one very precious life.

Isabelle St-Jean, RSW, ACC is a Certified Retirement Coach, facilitator and author of Living Forward, Giving Back: A Practical Guide to Fulfillment in Midlife and Beyond.  To learn more about her services, visit her website at www.inspiredmomentum.com.

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

Retirement Planning: Top 10 Lessons We Learned

Monday, November 28th, 2011

Dave and Colleen both retired early simultaneously from very high-stress careers and moved to the Gulf Islands. Through years of hard work, they have a good government pension and decent RRSP savings.

(image credit: Dr. Hemmert)

Top Ten Lessons Dave and Colleen Have Learned from Retirement

1- You can retire at the same time.

Many people recommend not retiring at the same time. Dave and Colleen found that being able to support each other and work on their new life together was very valuable.

2- Stress does not go away

Work stress of course goes away, but stress from other areas of life seems to fill in a fair bit of what was removed. The significant thing is that these items are actually important: health, family, and the like. These stressors are not meaningless work-related items but the important parts of life.

3- You should have your hobbies and projects setup and ready

Retirement planning isn’t only about the finances. You should have developed, or be developing, your interests outside of work, so you can start on these as soon as you retire. You do not need to have spent a lot of time on these (who has the time when working), but have identified what you want to spend your time doing. Dave took a woodworking course at night and now spends part of each day working on furniture projects. Colleen enjoyed jewelry design, now sells at the local farmer’s market.

4- Physical space from each other is important

You used to spend 8-10 hours away from each other 5 days a week, now you are together all the time. Develop a plan for some physical space away from each other. Heading to the gym at different times or a workshop is a great idea. Arrange so you have some time apart most days.

5- People at your old job really do not care you are gone.

The day you leave, life goes on at your old job, and it really is as if you were never there. Do not visit too much, they are busy, have made changes, and may not really want to hear how wonderful retirement is.

6- Take time to participate in volunteer work.

If you are already involved in some volunteer work, you can of course spend more time at that. For any new volunteer work, take some time and carefully review what you want to do. There are hundreds of opportunities out there, try a few to pick what you want to do.

7- Have a small nest egg for the first year outside of your budget.

If at all possible, try and have a few thousand saved away so you can start on your projects, go on a trip, or buy some things you have wanted. If this does not effect your first years budgeting, it will be easier.

8- A truly fixed income after years of increasing income takes getting use to

Most professional’s salaries increase over the years, so the idea that your income is now truly fixed can be daunting. Work with your financial advisor on a needs and wants budget. Make sure you can cover the needs and adjust the wants as time and conditions change, but do not be afraid to spend the “wants” if conditions are right. You are retired and you should enjoy it!

9- Take realistic life expectancy into account when planning.

One of them has usually long-lived relatives on all branches of their family tree. The other has some fairly short branches on their tree. While a bus can hit anyone tomorrow, they have planned their cash flow, pension choices and life insurance with these life expectancy issues in mind.

10- Retire as soon as you possibly can.

Retirement is wonderful! The chance to do what you want, when you want is invaluable to your own physical and mental health, as well as the health of your relationship.

Dave and Colleen retired the first day they could draw a pension, and would recommend that people work with their financial advisor to put together a realistic retirement plan, and making do with less is absolutely worth it to be retired.

And a bonus #11

11- Have a great financial advisor like Rhonda, and LISTEN TO WHAT THEY TELL YOU!

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.

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

What happens to my retirement when my spouse dies?

Monday, September 19th, 2011

When you’re building the financial means to fund your retirement years, one of the areas that people often skip over is how this picture might change if either you or your spouse should die. This is an especially an important consideration if you’re a women, as women on average still outlive our men.

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

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.