Financial Security in Retirement

Term Deposit and Savings Account rates have dropped to 50 year historic lows.  The Federal government is talking about adjustments to various pension programs.  How do you ensure that you have a financially secure retirement with all of this uncertainty?

Establish your financial foundation - Many people have an idea of when they would like to retire but have little idea how much money they have already saved up.  Between work pension plans, mutual funds, term deposits, RRSPs and TFSAs, people can have money spread out among many investment options.  Before you decide when to retire you should know how much you have available to you today as a starting point.

Determine how much you need in retirement - Some people plan to do a lot of travelling in retirement and others plan to stay close to home and family.  Some will still have debt going into retirement and others will have been out of debt for years.  Your retirement can sustain any of these choices if you have planned and prepared for it.   To begin planning start by figuring out how much you will really need to live on during retirement.  Take into account that your health costs may increase over the years. Once you know how much you will need to live on each month you can work those numbers back to determine how much you will need to have saved upon retiring.  A financial planner can help your numbers be realistic and they can help determine any potential OAS and CPP cash flow into your monthly budget.

Banking Changes Over 20 Years

The ways that people access and use their money has changed a lot over the past twenty years. 

Twenty years ago the standard way to do financial transactions involved: going into your local branch during banking hours, waiting in a line, doing your deposits, transfers, bill payments, withdrawing your cash, and leaving to do your other business.  Bills were often paid by mailing a cheque, which usually took a few weeks to come out of your account, and if you ever wanted to pay for something without a cheque you had to go back to your branch again to withdraw cash during banking hours.

Today consumers have a variety of ways to do their financial transactions whenever and wherever they want, faster and more accessible than 20 years ago.  Between debit cards, online banking, mobile banking (using cell phones), e-mailing money, and ATMs.

In addition to the convenience and speed of these electronic services, the decrease in cheque usage has resulted in retailers receiving far fewer NSF cheques which saves stores both time and money.  Instead of waiting for cheques to be deposited, and hopefully not bounced, debit machines allow an instant transfer of cash from the purchaser to the retailer.

Tax Free Savings Accounts (TFSA) Info

The Tax-Free Savings Account (TFSA) is a flexible, registered general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs. The TFSA could be best described as a Tax Free Investment Account because you can invest in stocks, term deposits, and mutual funds as well as applicable savings accounts.

The TFSA was started in 2009 allowing an investment of up to $5,000 per Canadian who is 18 years old or older.  The $5,000 amount is cumulative, meaning that if you haven't invested in a TFSA before, as of 2011 you could invest up to $15,000 ($5,000 for each investible year).  In January, 2012 you will be able to invest up to $20,000.

How the Tax-Free Savings Account Work:

Finances in Your 50s

On past blog posts I wrote about how your 20s and 30s are mostly about debt - gaining debt and trying to control debt.  In your 40s you are transitioning away from gaining debt to paying down debt and hopefully starting to build up assets that will support you in retirement.

In your 50s you should be completing the transition away from debt and focusing on preparing for retirement.   You should be making some extra payments on your mortgage, paying off credit cards completely whenever they are used, and have all vehicle loans at a minimum. 

As the debt decreases, the ability to add more to your retirement fund grows.  Throughout your 50s you will most likely be at the height of your earning potential, which will also allow you to add more of your income to your investment portfolio.  Usually, if you are in a relationship, both people are working, which provides a greater opportunity to increase your retirement fund holdings.

Good Financial Articles

There have been some great articles written in various newspapers, magazines and on blogs over the past few weeks.  The following are a few that I think our readers might be interested in, including an article we posted here last year:

Investments too good to be true - RCU Speak Blog

Joint bank accounts are increasingly being used to defraud seniors and effectively rewrite wills - Macleans.ca

Protect yourself from debit and credit card fraud - Financialpost.com

Make money from a lottery?  Don't be a fool - Globeandmail.com

What is the cheapest thing you've ever done? -  Million Dollar Journey Blog

Enjoy yourselves this weekend, and keep your money safe.  Jerry

 

Good Financial Information

Over the past 2 weeks various publications across Canada have shared some great articles about retirement planning with us.  I would like to share a few of these with you below:

Is Freedom 75 boomers' new goal? - Noreen Rasbach, Globe and Mail Blog

CDNs have admirable financial goals but lack proper tools - Stefania Moretti, Money Canoe.ca

Were RRSPs a major mistake? - John Newell, Financial Post

Forget what you've been taught about retirement saving - Gail Vaz-Oxlade, Globe and Mail

The key to a happy retirement - Patricia Lovett-Reid, MSN.ca Money

Taking baby steps into financial adulthood - Jodi Lai-Reichman, Financial Post

TFSA vs. RRSP – Best Retirement Vehicle? - Ed Rempel, Milliondollarjourney.com

The last article helps answer a questions that has been asked a lot over the past two and a half years that the TFSA has been around.  I hope these articles help you, and if you have seen an article that you think is useful, please post a link in the comments below.  Jerry

OAS & CPP Facts and Myths

I've heard from dozens of people planning for retirement that they don't want to earn money in retirement because the government will claw back their Old Age Security and Canada Pension Plan payments.  I have to say that this course of thinking is based on some myths that actually encourage people to make less money when they probably need it most.  Below are the numbers that hopefully help those who have questions about OAS and CPP get the maximum benefit during their retirement.

Old Age Security (OAS) Facts:
2011  Maximum Monthly Benefit                                     $524.23 ($6,506.23 annually)
2011 Average Monthly Benefit to be paid out                    $490.47 ($5,885.64 annually)  
Individual Annual Income before any clawbacks start    $67,668.00
Individual Annual Income when no OAS is received    $109,607.00

Good $ Information

There are many good financial advice articles floating around the web.  Here are articles from the past few weeks that I think may be worth your time:

Why women need to save more than men for retirement at Globeandmail.com - Longer life spans, health issues, less income and savings, and lower benefits are some of the hurdles.

Generation Spend at Macleans.ca - Today's youth are looking at outspending Baby Boomers

Is retirement chained to your home? at Financialpost.com - Canadians plan to take longer to pay off their mortgages, maybe even 35 years, but they don't expect it to affect their retirement plans.

Young, broke? You, too, can be a millionaire at Financialpost.com - Young people should start a tax-free savings account as soon as possible

Wealth Building Tips for New College/University Graduates at Milliondollarjourney.com

Enjoy.  If you know of some others, please let me know.  Jerry

Do Not Forget Investing

With so many articles and news programs focusing on Canadians' high personal debt load, it can be easy to forget that saving and investing are also vital parts of a budget and financial plan.  It is essential to reduce debt, especially bad debt that makes life difficult, but it is also important to reach retirement with money invested and hopefully growing.

How do you start investing when the paycheque is gone between bills and mortgage?
The best way to start is to put away a little at a time.  Use a High Interest Savings Account and put $10 or $25 into it every paycheque.  When you get a bonus, put $100 into it.  Most people don't even notice the money is gone from chequing if it's done as soon as they are paid.  Add more to the regular savings amount as the years go on. 

Games That Teach About Money

In my quest to help youth understand the importance of budgeting, avoiding unnecessary debt and saving money, I have looked at various board games as teaching tools.  Some games, like Life, has aspects of what I am looking for but is too unrealistic.  I have altered the rules to Monopoly, adding savings account and mutual fund options, and most recently making GO a salary based square where the salary goes up and down with education and may even be missed if you lose your job with a Chance card.  That version is actually coming very close to what I want, but I have some minor tweaks to do yet.

A game that my eldest son has been playing over the past couple of months is called Record Shop Tycoon.  You start out in a small store in a poor location (it's all you can afford) and then are responsible for stocking music CDs to sell to your customers.  The game takes into account neighbourhood buying patterns, supplies

5 Tips To Help In A Tight Economy

No matter how you look at it, the economy is going through some difficult times, and many Canadians are facing tighter budgets than they have seen in a long time.  The following are a few tips that can help people manage their finances through the ups and downs ahead.

Watch out for high interest rate debt
As of Oct 31, 2007, there were over 64.1 million credit cards in circulation in Canada.  Many of these cards charge standard interest rates of 18% or more.  The way most credit card payments work is that your monthly payment will cover the interest charged and 3% of the balance of the card.  If you have a balance of $2,000 on your card, and you make the minimum monthly payment, this means that after 5 years you would have paid over $830 dollars in interest, and still have $321 left to pay on the card.

Financial Life Stages Are Changing - Good or Bad?

Throughout most of the 1900’s most households’ financial life went through the following stages:

Accumulation – 20 to 35 years
  ·    Building up debt as many purchases require borrowing (Mortgage, credit cards, student loans)
  ·    Furniture is second hand, vehicles are used
  ·    Getting your education and starting career expertise
  ·    Budget is usually kept very controlled from necessity
Mid Accumulation – 35 to 50 years
  ·    Start saving for retirement,
  ·    Paying down big debt like mortgages and car loans
  ·    Some purchases are made for quality rather than price (vehicle, furniture)
  ·    Saving for children’s education
  ·    Get serious about financial planning with tax and estate planning

My Predictions For The Future

There are many economists and psychics who will tell you what is going to happen in the future.  I thought I might give it a try too, so here goes.

Rates will go up, someday.  There are arguments about whether or not rates will rise this year or next.  I’m going to boldly say that 10 years from now, rates will have gone up from today!  I feel pretty safe saying this as these are pretty much the lowest bank rates that have existed since such tracking began.

Lessons From Pigs, Truckers And Overtime

Pigs:  One of the first lessons I learned was the importance of work.  My dad believed having animals and chores would be good for us kids, and those chores were what we did because we lived under his roof.  We were also given the opportunity to buy and raise animals.  I bought 4 pigs, took care of them (fed, cleaned the stalls, watered…) and sold them after about 12 months.  After totaling the costs and paying my dad back for the feed, I barely broke even. 

After some bitter complaining about all that work for nothing, my dad simply said “If you had fed the pigs every morning and night, cleaned their stalls out more often, and always made sure they had water, you probably could have sold them at 8 months for the same price.  By not doing those things properly, it took longer for them to gain weight and increased your costs.  Do it right next time and you will make money.”  Hard lesson for a 14 year old to learn.  I bought more pigs, did a better job at caring for them and made some money off them.

Sharing Banking Tips That Have Helped Me

About once a month someone asks me for a banking tip that will either make banking life easier or less expensive.  The following are a few of the things help me:

Online banking – This is a life saver.  I can pay my bills from home or the office at 7:00 in the morning or 11:00 at night.  It also lets me see all my transactions everyday, so I always know what is in my account.  The rare cheque that I write is scanned (front and back) so I can see online who it was to and for how much.  In addition to have this information readily available to me, it helps me be aware right away if any fraud is committed on my account.  By looking at my account a few times a week, I actually protect myself from fraud and would be able to spot something wrong right away.

Financial Articles For You

I have found a few Financial Articles that I think may be of some interest to you.  I'm linking to the specific article, as I don't always agree with everything on the website itself.
Enjoy.

An Interview With The Millionnaire Next Door - Get Rich Slowly Blog
Eight tips for feud-free estate plans - Financial Post
Keeping the farm all in the family - Financial Post
Feeding yourself on a dollar a day - Macleans

If you know of a good financial book or article that you have read, please post a comment about it below.
Jerry

Healthy Financial Life

In February I wrote an article about the habits of a “Sick Financial Life”.  It was very easy to write as the problems listed are common habits that we see harming our members on a regular basis.  Today I decided to look at the positive habits that we also see on a regular basis (but we do see people in bad situation more than those with good, after all, the doctor doesn’t tend to see the healthy people).

The people we see who are leading a healthy financial life either have or are doing the following:

1. 1.    Set realistic short term and long-term financial goals.  They then create and stick to a plan in order to achieve them.
2. 2.    They know their financial situation.  They keep track of debt monthly, and review their investments at least annually.
   

Sick Financial Life

Financial problems come from all sorts of sources and can create havoc in quite a few different ways.  I just want to let everyone know about some of the most common and harmful financial situations that we see on a regular basis.

• Too much consumer debt – It has been a very tough 18 months for many people, with lay offs and reduced wages for many households.  Unfortunately, during the boom times, many households were buying vehicles, expensive toys, and going on vacations and did not put much away for a rainy day. 
  

FP - Golden Years Postponed

Just a few articles from various sources this past week that I thought you might find of interesting.

Financial Post - Golden years postponed
Globe Investor Blog – How to avoid taking on too much mortgage debt
Financial Post, Wealthy Boomer – Canadians flunking test on TFSA
Financial Post – Crack that nest egg

I'm not trying to create a downer of a post, it's just that the articles came out that way this week.
Jerry

Good Financial Articles

There are a  lot of good articels to read around the internet, and this week seemed to have a lot worth reading.  The following are a few I thought were interesting and worth sharing.  I don't always agree with everything on these websites, but I think the linked articles would be of benefit for our readers.

FP Magazine Daily - Men and women see retirement differently
Globe Investor Blog - The cost of bad habits
FP Wealthy Boomer - 20% betting that CPP, lotteries or inheritance will make up for failure to save in RRSPs
Globe Investor Blog - Many couples don’t share same retirement dreams
Macleans Magazine -Awash in a sea of debt- Oblivious to the risks, Canadians are piling on record debt loads
FP Wealthy Boomer - "I need $1 million to retire " and 5 other popular retirement theories that need a rethink

Each one of these articles deals with an important area of financial education.  I hope you enjoy them, and feel free to comment on this blog about books and articles that have helped you in your progress towards your financial goals.  Jerry