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.

Safe Online Shopping

I posted the following advice over a year ago, but with so many more people shopping online this year I figured it would be worth re-posting.


Online purchases have grown dramatically over the past decade.  Whether you are looking for auto parts, books or even clothing, you can buy them online.  While many people want to see and touch the items they are buying, more and more feel safe about purchasing their goods over the internet.

 There are security risks, but if you follow the tips below you can have more confidence in your online shopping experience.

1. Make sure your information is being entered on a secure site. 
2. Look for the latest credit card password procedures
3. Know who you are buying from. Use stores you are familiar with or people you know have dealt with.
4. Beware of refurbished items, often a detail buried in small print.
5. Check the store’s return policies before you buy.
6. Use a separate credit card for online shopping, preferably one with a low limit in case the number gets stolen.
7. If the deal sounds too good to be true, it probably is.
8. Online deals can seem great, but what do you do if something goes wrong with the product?  Check out local retailers too as they can often provide faster service than the online merchants.

Christmas is coming, so if you are looking for a specialty item you just can't get nearby, feel free to do some online shopping, but keep safe.  Jerry

New Polymer $100 Note

Used with the permission of the Bank of Canada.

Ottawa, Ontario -

The Bank of Canada unveiled a new polymer bank note series today at its head office in Ottawa. Information on the polymer material and advanced new security features was released, along with the images and designs of the soon-to-be-issued $100 and $50 bank notes, and the themes for the remaining notes in the series.

Minister of Finance Jim Flaherty and RCMP Commissioner William J. S. Elliott joined Bank of Canada Governor Mark Carney for the unveiling ceremony.

Minister Flaherty spoke of the importance of cash as a means of payment in the daily lives of Canadians, adding this is why it is important Canadians see their story reflected in the designs. “These bank notes evoke the country’s spirit of innovation, and their designs celebrate Canada’s achievements at home, around the world and in space,” he said. “Bank notes are cultural touchstones that reflect and celebrate our Canadian experience.”

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:

Showing Aging Parents You Care

Is it too late to consider long-term care insurance for an aging parent? If your parent is in good health, the answer is no.

Many healthy aging parents have no coverage for a simple reason: it’s just not a concern. But if the need for long-term care moves from being a remote possibility to a reality, the financial burden could be significant. Making sure your parents have long-term care insurance can be one of the smarter financial moves you can make.

The costs of an extended-care facility or in-home care can quickly deplete finances. Adult children may then be required to help pay the expenses, negatively affecting their finances, and perhaps their own family’s standard of living.

Overpayment Scam Returns

Two years ago I posted an article on our blog about how crooks are using classified ads and other websites to perpetrate a scam that can be called "Overpayment."  The scam artist says he will buy your $2,000 stereo from you based on the ad he has seen in the newspaper or online.  He sends a cheque for $4,000.  You, being the honest person you are, e-mail him saying that he overpaid.  The scam artist replies that it was his secretary's fault and says it would be easier if you just deposit the cheque and than mail a money order for the difference back to him, even offering $100 as a reward for your honesty.

You deposit his cheque, take out the $1,900 as a money order and mail it off.  A day or two later you find out that his cheque was fake and that it has bounced, while the money you sent from your account as a money order is very real.  This overpayment scam has grown and is being used all over the country, including targeting people in the Rocky Region.  It is generally best to meet the buyer/seller in person so you can see the goods or the money you will be getting.

A new version of the scam

There is a slightly modified version of this scam going around this past year.  It preys on people who are looking for work.  It goes like this:

In Case Of A Car Accident

An opinion piece by Jerry

A few weeks ago my wife and I were involved in a collision that could have ended much worse than it did.  While traveling north on a primary highway a car coming south turned left across our lane.  I was able to stomp on the brakes and yank steering wheel to the left so that we just clipped the other car's right rear bumper at about 50 km/hr.

Fortunately no-one was injured. We each were able to drive off the road into the nearby gas station.  There we exchanged insurance information and business cards.  We pulled off the pieces of our right headlight and duct taped the wires down so we could continue driving.  Both vehicles were quite functionally usable.

This was the first time I had ever been in an accident when I needed to make a claim.  It was a learning experience for me.  Here is what I learned from this incident:

Saving Money Is A Choice?

An opinion piece by Jerry

My wife and I finished buying our children's clothes and school supplies 2 weeks ago.  It was a lot of money to spend in one weekend, and there is more to come with school fees and the fall sports/activities registration coming up.  In fact we have found mid August to mid September to be more expensive than Christmas for our family.

We are fairly frugal, and my wife is amazing with a budget.  Before we did any clothes shopping she went through the kids current clothes to see what still fits and the shape of the clothes.  None of them had much of a growth spurt this last year, so many of the clothes can be worn again, those that didn't fit were given to friends that could use them or to goodwill.  There were a few new things they needed, so we made a list.  We went to Old Navy and stuck to the list.  Old Navy carries its own brand and doesn't carry popular brand name clothing, but the quality and prices are decent, although we did notice price increases over last year.

Life With Low Rates

An opinion piece by Jerry

With the Federal Reserve in the U.S. announcing that rates will be kept low until into 2013, Canada's own government bond rates have dropped and will most likely stay relatively low for the next year and half as well.

What does this mean?  With an almost guarantee of low rates for the next few years this will mean something very different to 2 groups - the savers/investors and the borrowers.

Savers & Investors - Low rates mean low returns on the safest investments.  This means bonds, GICs and term deposits.  With so many baby boomers looking at retirement over the next dozen years (or much sooner) they want a good return to build up their retirement fund.  The reality is that returns will be low, unless they go into riskier investments like mutual funds and stock markets.  However, principal and returns are not guaranteed with mutual funds and stocks, so investors need to be careful how much of their portfolio they put into the riskier investments while hoping for higher returns.

Extra Payments Pay Off

Taking a mortgage out over 25 years or more helps make the monthly payments more manageable, but by extending out the loan for so long you really increase the amount of interest you pay. 

To help reduce the total interest you pay on a mortgage (or any loan) I would encourage you to make extra payments.  If you get a tax return or a bonus, make sure at least some of it goes to repaying debt.  High interest debt, like credit cards, gets top billing as my first recommendation for extra payments, but reducing mortgages help long term as well.

For example, if you have a $10,000 credit card balance at 19%  annual interest (store cards range from 24% to 28%) and have to make the monthly interest payment and the monthly minimum principal payment of 2% (some are 3%) with a minimum payment of $20, you will pay the credit card off after 13.5 years and will have paid over $7,500 in interest.  If you can make an additional payment of $600 each year in the first 5 years you will knock off over 3 years of payments and save over $2,300 in interest.  It is well worth your time and money to try to pay off credit cards quickly, and not add to the credit card debt as you pay it off.

Risky Market News

Stock markets have dropped a lot in the past 2 weeks.  Term deposit and savings account interest rates are dropping as well.  What do you do when the world seems crazy?

Evaluate your risk tolerance - The markets go up and down, sometimes rather dramatically, but over the long term they tend to go up.  If the ups and downs of the current market keep you awake at night, your investment portfolio is probably too heavy in the markets.  Everyone wants a great return, but a great return also means a great risk.  Low risk means low returns, so you want a balance.  You need some risk if you want to earn better than inflation returns.  Before you invest anything a financial advisor should go over what kind of risk you are comfortable with for your investments.

Look at your time frame - If you are retiring in less than 5 years, than you should not be putting much of your portfolio at risk because you may not have enough time to recover if the markets have a bad few years.  A good financial advisor will warn you of this.  If you are planning to continue to invest or do business for at least 10 years then your portfolio can be in the riskier investments (with higher potential return) because it is more likely if the markets go down that your portfolio will have time to recover.  By looking for returns over the next 10 or 15 years you can afford to take a little more risk today.  Concentrating too much on the short term means you will be constantly anxious about what is happening.  Investing is best done over the long term, not in a short burst of a couple years before retirement.

6 Ways to Save $ at College

Going to college or university costs money.  Tuition and books prices have been increasing at about 2 to 3 times the annual inflation rate for the decade and a half.  In Canada tuition is kept relatively low because universities and colleges are heavily subsidized by the federal and provincial governments.  Usually the greatest costs for students are not directly related to school: rent, food, vehicle and entertainment.

Here are 6 ways that students can save money while going to school:
1.   Room mates.  A 2 bedroom apartment can cost over $700/month, plus some utilities, meaning just living quarters are about $450 per month.  If there are 2 people per bedroom, you cut the cost per person down below $250.  I once shared a house with 6 guys, and our rent was down to $150 a piece.  It worked well for us since most of us were at the library, lab or work most of the time anyway.

Save Money On Summer Vacation

Summer provides us with an opportunity to spend time with family, but it is also a time when we spend more on driving, camping, hotels and restaurants.  With so many people taking a hit in the wallet the past 2 years there are many who are looking for ways to have the family trips without blowing their budget.

Hotels:  Hotels have a wide variety of costs.  Sometimes paying for the most expensive hotel does not mean the nicest stay (although the service is usually better), but choosing the lowest priced hotel can often lead to a bad experience.  There are many websites that allow former customers to rate their hotel stay.  People will submit their opinions on location, service, cleanliness...  It's a great way to see if a hotel is worth staying at.

5 Tips To Better Mileage

Summer is a time when people drive.  They drive for family reunions, for vacations, and just to get out while the weather is nice.  It is also a time when gasoline prices rise and everyone grumbles about them.  There isn't really anything we can do about gas prices, but there are 5 things we can do to improve our mileage so we don't have to buy as much gas.

1.  Driving at the right speed.  Most vehicles built since 2001 get their best mileage between 90 km/hr and 105 km/hr, which speed is best depends on the vehicle.  Fuel mileage declines rapidly as you go over the 105 m/hr mark.  A heavy foot will cost you money for gas.  Slow down a bit and you will save.

2.  Avoid stomping on the gas and then stomping on the brakes.  A vehicle uses a lot of gas when it is trying to accelerate, even more if you are trying to accelerate quickly.  Learn to slow down a bit arriving and leaving intersections and stop lights.  This will reduce gas usage and save you money.

3. Don't idle a vehicle.  Idling not only uses up fuel, but it is also hard on an engine and not good for the environment.  The engine does not fully burn the fuel because it is not running at its hottest, meaning you are just wasting fuel.  Many people run a vehicle to run the air conditioning or the heater.  For air conditioning, it is far less expensive to roll down the windows and turn the vehicle off.  For warming up a vehicle in the cold winter, it is far better to let it run just for a minute or 2, and then drive (with the windows scraped off).  The engine warms up much more quickly driving than it does idling.

Debit & Credit Card Fraud

I wrote the following article in November of 2010, but thought it would be worth re-posting as everyone sets out to travel around the country this summer.  Please protect your cards.

Over 84% of Canadian adults have at least 1 debit card and at 74% have at least 1 credit card. Despite the convenience and popularity of these cards, there is a risk of fraud. It is important to protect your cards, just as you would cash or cheques. Some of the risks associated with debit/credit card fraud are the same as carrying around your account numbers, so protect your card information in your wallet, online and over the phone.

However, there is another threat to card users that is unique - it's called "skimming." Skimming occurs when thieves set up a device that captures the magnetic stripe and keypad information from ATM machines, gas pumps, restaurants, and retail stores. By doing the following, your information will be protected and you will reduce the risk of having your information stolen.

1. Cover the PIN machine when you are entering your code. This will help block a camera’s or other person’s view of your PIN number.
2. Never let the card out of your sight. Watch as the retail person swipes it to make sure they only use the store cash register.
3. Check your bank statements immediately upon receipt in the mail. Make sure all payments are yours.
4. Regularly check your account balance and transactions, by utilizing online banking and telephone banking.
5. Contact your financial institution immediately if your card is lost, stolen or subject to fraudulent use.
6. Keep a record of card numbers, PINs, expiration dates and 1-800 numbers so you can contact the issuing financial institution easily in case of theft.
7. Memorize your PIN number. Do not use your birth date, address, phone number or social security number. Never store your PIN with your card, and do not make it available to others.
8. Keep your receipts. You'll need them to check your statement. If they have your account number on them, tear up or shred receipts before throwing them away.
9. Mark through any blank spaces on debit slips, including the tip line at restaurants, so the total amount cannot be changed.
10. Know your limits. Many issuers limit daily purchases and withdrawals for your protection.
11. Do not use an ATM if it looks suspicious, it could be a skimming device.
12. Be wary of those trying to help you, especially when an ATM "eats" your card, they may be trying to steal your card number and PIN.
13. Do not give your PIN number to anyone over the phone, often thieves steal the cards and then call the victim for their PIN, sometimes claiming to be law enforcement or the issuing bank.

By protecting your cards, you will be protecting yourself. Keep your information safe as you use your cards more this Holiday Season. Jerry

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.

Money Lessons My Kids Taught Me

My family reserves one night a week for just us.  We try not to book anything else so that we can do an activity together, like swimming, playing board games, and sometimes holding a family council.

This past week I was taught an important lesson concerning how to teach my kids. It came in 2 parts.

Part 1:  For our family night my wife and I decided to help teach our children about budgeting and saving money.  We went through a brief discussion about separating their allowance (based on chores done properly) into spending, savings, and long-term savings.  We used lots of examples of things they could save for that would take a few months to do (iPod Touch, horse riding lessons...).  We tried to emphasize that by saving some of the spending money they would achieve their goals more quickly. We then decorated 3 boxes for each child, giving them a place to store their money as they saved it for the 3 different purposes.  I though it went pretty well, until we were starting to clean up and the 3 oldest immediately asked if they could go to 7-11 to buy a slush.  It was a "slap my forehead in frustration" moment.

BoC concerned about debt

The Governor of the Bank of Canada, Marc Carney, made a few comments this week about his concern for Canadians' debt, savings levels and how rising rates will impact Canadian households.   About our debt and savings levels he said:

"Financial vulnerabilities have increased as a result. Canadians are now as indebted (relative to their income) as the Americans and the British. The Bank estimates that the proportion of Canadian households that would be highly vulnerable to an adverse economic shock has risen to its highest level in nine years, despite improving economic conditions and the ongoing low level of interest rates. This partly reflects the fact that the increase in aggregate household debt over the past decade has been driven by households with the highest debt levels.

There are some offsets. Debt is largely fixed rate and household net worth is at an all-time high. However, borrowers should remember that a fixed-rate mortgage will reprice a number of times over the life of the mortgage and, while asset prices can rise and fall, debt endures.

The fact that the “official” personal savings rate in Canada has remained consistently positive is of limited comfort. The personal savings rate has fallen to historically low levels, despite the fact that the baby-boom generation is entering its highest saving years. Adjusting for housing expenditures, Canadian households have now collectively run a net financial deficit for 40 consecutive quarters, in effect, demanding funds from the rest of the economy, rather than providing them, as had been the case through the 1960s, 1970s, 1980s and 1990s."

Kids Learn about $ from Parents

I've written articles about teaching youth about finances before.  I wrote about using games like Monopoly or the Game of Life to teach youth about budgets and incomes.

Rocky Credit Union goes into schools (those that let us in) to teach a class about needs vs. wants, online banking, debit cards, credit cards, and student loans.  In these classes I often ask the students "How do you learn about controlling your money?"   The usual response is from parents, friends or their job.  A few students have responded that they don't ask their parents because they are always in debt and can't teach them anything about handling money, and a few others have said they really haven't learned anything about money from anyone.  This is scary considering most of these students are grade 10 or 11 and half of them already have part time jobs.

There are 2 key things parents do to teach kids about money:  1. Teach by example, and 2. Talk to kids about money.

Rent Vs Mortgage

Over the past 20 years Canadians have decided that owning a home is a great financial investment.  While owning a home has many advantages, there are also many reasons you may not want to own a home.  The following is a short list of some of the main reasons for and against owning a home:

Pros -

• Sense of ownership
• Build equity in an asset rather than paying it all to someone else
• A house usually grows in value at, or above, the inflation rate
• Privacy
• Freedom to do what you want with the house for decorating and renovations
• Financial security for retirement

72 Hour Emergency Kits Are Important

This is a repost of an article I wrote back in Nov of 2009.  I thought that with the recent evacuations around Alberta and the Rocky area that it was worth posting again.

Are you prepared for an emergency?  There are some areas of the world where they have become accustomed to evacuating their homes at a moments notice.  Hurricanes, tornadoes, and forest fires are just some of the natural disasters that affect people’s lives annually.  As a result, people who live in areas plagued by these events have 72 hour kits that allow them to leave home quickly, and be prepared to live away from home for at least 3 days.  Many have suitcases packed to help them live for up to a week without access to their home.

The basics around a 72 hour emergency kit are:
1. Know the risks
2. Make a plan
3. Get a Kit

Costs of a Home

A couple of weeks ago I spoke with a 23 year old, single young man who has been living with his parents for the past 18 months.  He was talking about saving up money for a down payment on a home.  He already has a pretty good idea about what mortgage payment he can afford.  He is buying a small house, with the hope of moving into a larger one in several years.

I threw him for a loop, though, when I asked him about property taxes and maintenance costs.  He had not thought about those costs.  He figured property taxes would be about $400, but when I told him to expect property taxes to be around $2,000 or more his jaw almost hit the floor.  He had no idea the taxes would be that high. 

There are always added costs to owning a home.  Here are a few I could think of:
Property Taxes - these always seem to be more than you thought, and they tend to increase pretty much every year, sometimes by several percent.  It often means having to put away $150 to $300 away each month to pay for them, a cost that can really add up.

Rates Are Going To Rise

Rates have been at historic lows for about 2 years in Canada, and about 3 years in the United States.  As the international and national economies improve, interest rates really have nowhere to go but up, and that is going to impact you.

There are 2 groups of consumers who will be most concerned with increasing rates: Investors/Savers and borrowers.  The first wants rates to increase, the latter does not.

Why Rates Go Up Or Down

There has been a lot of talk in the media about the effects of rising interest rates and what they will do the economy.  Some say it is a sign of growth, others say it will harm growth and kill the middle income Canadian family.  Let's start off with some basic facts about interest rates:

Interest is the cost of borrowing or the return for lending money, depending on if you are the borrower or the lender.  The rates at which lenders are willing to lend at are determined by risk, lending competition, and the desired rate of return.  The general rates at which borrowers borrow money at are determined by almost the same things; risk, lending competition, and the forecast rate of return.

Risk -  If risk is considered high, than rates increase.  There is a lot that goes into high level risk assessment some of them working against or with each other: the state of the economy (federal and international), inflation, Central Bank intervention, and the supply and demand for money.

Credit Card Can Be Like Fire

Using a credit card is very similar to using fire:  using and controlling it can be incredibly beneficial to you, but let it get out of hand and you face a disaster.

We are seeing many people trying to clear up their most expensive debt, the vast majority of which comes from credit cards.  People get into a lot of trouble by not understanding what credit cards do and how they work. The following are 5 simple facts about credit cards.

1.  High Interest Rates - They charge higher interest than bank loans because they are easy to acquire, and the credit card companies don't have your house or vehicle as collateral.  In order to make up for this increased risk of no collateral, they charge higher interest rates.  The standard card today charges around 18.9%, with some store cards charging as much as 28%.  There are lower rate cards around, but the low rate is usually an introductory offer and increases to regular rates after 6 months or a year.  A good credit bureau score can get you a better rate.

The Story of 4 Little Pigs

Once upon a time there were four little pigs, brothers all, who decided to head out into the world and build their own homes.

The first little pig didn't want to spend much time or money on his house as there were many more enjoyable activities he could be doing.  He hastily built a frame, found some straw and hay in a nearby field, and put it all together one morning before heading out for a round of golf with his buddies and then an all-nighter playing Pinkeneye 007 on his porkstation 3.  He laughed as he walked by his brothers' yards and saw how hard they were working on their homes. 

The second little pig didn't want to spend any money on his house as he wanted to save as much he could for retirement.  He was afraid that he might have to live in a pig pen if he didn't have enough money saved for his senior years, so he never spent anything extra.  He didn't have any experience building a house, but he found some free plans at the local library, gathered the sticks from discard bins at local wood yards, and found some used twine at a local post office.  He spent several days putting the house together, an activity made more difficult because so many of the sticks were crooked and the twine often broke.  When he was done he went to Cost Club to eat the free samples as a reward for how little his house cost him.  He shook his sadly as he walked by his brothers still building their homes, knowing that they had spent more money than he had, but he felt sorry for them wasting all that money on their houses with retirement only a few decades away.

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

 

RRSP Withholding Tax

A very important thing to remember is that contributions to Registered Retirement Savings Plans (RRSPs) are tax deductible.  That means that you in the year you contributed to your RRSP, you were able to claim less income, thus reducing the taxes you paid.  This is a major incentive by the government to help people save money by helping them reduce personal income taxes at the same time.

The general plan is that you will keep that money growing in your RRSP, tax deferred, until you start making withdrawals in retirement.  Notice that RRSP investments and growth are tax deferred, not tax free, meaning you will have to pay taxes on the money as you withdraw it from your RRSP.

The Question - So how much tax do you pay on RRSP withdrawals?
There are 2 parts to the answer for this question.   The first part is the withholding tax, or the amount that the Federal Government requires financial institutions to withhold when you take your money out.  In all provinces, except Quebec, the schedule is as follows:

$ Amount                    Withholding tax                Example
The first $5,000                10% is withheld     $5,000 - 10% ($500) = $4,500 cash
$5,001 to $15,000             20%                     $10,000 - 20% ($2,000) = $8,000 cash
$15,001 and up                 30%                     $20,000 - 30% ($6,000) = $14,000 cash

The second part of the answer is your personal income tax rate.  Because you reduced your taxable income by the amount of your RRSP contribution in the year you made the contribution, your RRSP withdrawal will be counted as be taxable income in the year you withdraw the money.  If you make a withdrawal before retirement, it is likely that your income tax level will be higher than if you withdraw during retirement, thus you will pay more tax.

For example, in Alberta, if you are making $50,000/year, any additional regular personal income will be marginally taxed (federally and provincially) at about 32%.  This means that a RRSP withdrawal will be taxed at 32%.  So if your withdrawal is $5,000, you will pay about (32% of $5,000) $1,600 in taxes.  You already had a 10% withholding tax applied, so at year end you will pay the following: $1,600 (taxes) less $500 (withholding tax already paid) = $1,100 still owing.

My recommendation is to be very careful about withdrawing RRSPs without a long term plan.  Even in retirement the taxes on withdrawals from registered plans can be quite onerous, but I will speak to that another day.  Jerry

Lotto Wins for Retirement?

Macleans has an article out this week that speaks about how lotteries are now the retirement plan of choice for 32% of Canadians between 45 and 64 years old.  This not only a surprisingly high percentage, but it almost matches the 34% who said they actually have retirement plans and investments to go with the plans.

The chances of winning Lotto Max are about 1 in 85 million, or about 0.0000012%.  Not great odds.  Yet, the closer people get to retirement, the more concerned they are that they haven't saved enough and are turning to lotteries as a hopeful "quick, cheap fix" to get the retirement savings they will need.

I'm not trying to condemn lotteries, but I want to emphasize that planning on winning the lottery to fund your retirement is not a plan at all.  It's a gamble with your retirement's financial security, and the odds are not in your favour.

What is the best way to retire financially secure?  Start early, create and periodically update a plan, invest regularly, diversify your investments to reduce risk, and live on less than you make.

When people don't feel financially secure, they start to do things that don't always make sense, reacting out of fear rather than following a logically laid out plan.  These over-reactions often fall into 2 categories:

GIS and Allowance Facts

Wow, since posting the article on Old Age Security (OAS) and Canadian Pension Plan 9CPP) Myths and Facts a few weeks ago, we have gotten a few phone calls questioning the accuracy of the article.  In each case where someone thought the government had clawed back their OAS, it turns out they had actually clawed back the Guaranteed Income Supplement (GIS) or Allowance.  The information in the article stands true, but I am writing this one about GIS and Allowance to add information about the GIS and Allowance program.

Guaranteed Income Supplement Facts

• The Guaranteed Income Supplement(GIS) is provided to OAS pensioners with little or no other income.
• You must be 65 years old or older to receive OAS & GIS.
• GIS must be applied for.
• GIS is not taxable income.
• Once income is over the maximum amount to receive the maximum benefit, GIS is clawed back at the rate of $0.50 for every $1 over the threshold until the maximum is met, as indicated below.

Life Stage for Baby Boomers

Baby Boomers in Canada make up about 8.5 million people or roughly 25% of the Canadian population.  They are usually described as the group of people born between 1946 and 1965, often to parents who got married right after World War 2. 

Some Boomers have already gone into a retired lifestyle, with either a change to something part-time or outright retirement.  For most, they will be considering how they want to retire in the next dozen years.  This group, hopefully, is already looking at their lifestyle and adjusting it so they will be ready for the day when their retirement and income change their lives substantially.

What Boomers should be doing before retirement?

Retiring debt - Boomers should be paying down debt.  In their 50's they should be at the peak of their earning potential, and as children move away, the Boomers should have more money to pay off the mortgage, vehicle loans and all credit card debt.  Also important, Boomers should not be accumulating debt during the years leading into retirement.  Any purchase that will increase debt into the retirement years should be seriously reviewed, as cashflow will be lower in retirement and debt payments will be more difficult than they were during the working years.

Investing 101

This is an updated article from 2009.

What is your Risk Level?
"What is the chance that I'll lose money?" Every investor asks himself this question when making an investment. And understandably so–nobody likes to lose any of his or her hard-earned money. The key to understanding risk—and getting it to work for you—is to understand the trade-off between risk and reward.

Simply put, to seek greater rewards—such as a higher investment return—you must be willing to accept greater risk. If you wish to reduce risk, you must be willing to accept lower returns.

Historically, foreign stocks have entailed the most annualized risk, followed by U.S. stock and lastly Treasury bills. The more risk you are willing to take, the higher your return potential may be. But, it is possible to seek a high long-term return and keep your risk relatively low with a diversified portfolio.

Avoiding The Debt Trap

I presented a seminar called "Avoiding the Debt Trap" at the Rocky Public Library on Thursday, Feb 3.  I have included some of the highlights and a link to the slide show that I used (500 kb).

Avoiding The Debt Trap

Debt is an obligation to pay for money/services given out, often at an additional cost of interest

When do debt problems start?

• Usually when spending more on wants than needs
• Spending more than is taken home
• Put extras on credit cards and don’t pay them off

Controlling Your Wants

• Write down what you need and their costs - Mortgage, rent, insurance, food, medicine
• Write down what you want and their costs - Cable, phone, movies, meals, vacations
• Look at take home income, figure what fits - Needs come first, wants can be postponed and may even change with time

Common Bad Debt

• Vehicle (truck or car)
• Quad & snowmobile
• RV, motor home
• Vacation
• Sports
• Entertainment (movies, bar, TV)
• All things that while enjoyable, but add no money to savings, no value. They cost money, but there are no monetary returns.

Choices - Avoiding debt or getting out of debt is about choices

• Choosing needs over wants
• Choosing long-term over short-term
• Choosing to control your lifestyle and its costs vs. your lifestyle

For full details from the presentation, please go to the slide show pdf (500 kb).  Any comments or questions, please post them and I'll get back to you as soon as I can.  Jerry

2011 Personal Tax Levels

As we have recently started 2011, it is always good to plan how to protect your money from taxes.  The following is some tax information that you may want to review for tax planning purposes throughout the year.

The Federal Income Tax rates for 2011 are as follows:
•15% on the first $41,544 of taxable income
•22% on taxable income between $41,544 and $83,088
•26% on taxable income between $83,088 and $128,800
•29% of taxable income over $128,800
The Federal Basic Personal Amount in 2011 is $10,527

The Alberta Income Tax rate is 10% of taxable income.  The Alberta Basic Personal Amount is $16,977.

CPP Info
Maximum Pensionable Earnings:            $48,300
Basic Exemption                                     $3,500
Rate                                                             4.95%
Employee & Employer Maximum            $2,217.60
Self Employed Maximum                       $4,435.20

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

What Happens With Low Rates

The Bank of Canada Governor, Mark Carney, has been warning Canadians for a while now that we will be in a low interest rate environment for a few years.  He has clarified that by "low" he means lower than average, not necessarily as low as interest rates have been over the past 2 years.

This past week a deputy governor at the Bank of Canada also spoke about low rates and their impact, warning that while usually good for the economy, people's behaviour can create risk during low rate times.

The following is a short list of impacts that low rates have on the economy:
Low Inflation - The Bank of Canada is trying to keep inflation between 1% & 3% annually.  They can influence this by increasing or decreasing the Bank of Canada overnight rate, which is the rate the BoC charges Banks for borrowing money from them to cover some daily incidentals.  Because inflation has been very low for the past 2 years, the BoC rate has been very low.  This means it costs the banks less to borrow money, and the lower cost is passed on to consumers and businesses through lower loan costs.

Lessons Learned from 2010

After a very enjoyable Christmas holiday, it's time to get back to work and the regular busy routines of life.

I must admit that while my family stayed very close to budget with Christmas gifts this past year, we went way over on the food budget during the holidays.  We only had some family over one evening, but we had other friends over a few times and we ended up buying a lot of snack foods.  While the snacks tasted good in the moment, I found that later on I wanted something more filling or substantial that wouldn't leave me feeling so groggy.  After seeing the bill for all the snack food, I really wished we'd just spent the money on a meal of ham, scalloped potatoes and corn rather than potato chips and fried spring rolls; in the end it would have tasted better and been far less expensive. A lesson learned for next time.

I'm starting out 2011 by looking at the things I've learned in 2010.  Here are a few of them: