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:

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.

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.

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.

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."

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:

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.

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

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. 

Do You Have A Plan?

No matter what stage of life you are in, a financial plan can help you direct your finances, identify where your costs are going and how to best take advantage of investing opportunities.

If you have student loans and credit card debt, a financial plan can help you figure out which loans should be paid off first, easing your cashflow problems and reducing the rates you pay. 

If you are buying a home or newer vehicle, a plan can help you know what you can realistically afford.  Too many people purchase homes or vehicles thinking of only what they want and not what they can actually afford.  A good plan will take into account bumps in rates as well, giving you some breathing room even with economic shocks.

If you are trying to figure out how and what to save for retirement, a plan can help you know what your goals should be and what you need to do to achieve them.  The longer you have to save, the more time your plan has to work to make financial security in retirement possible.

Even in retirement a financial plan can help you know what to do with your investments, how much you can withdraw every year to live on, and what you may have left of your wealth that can help your loved ones.

Every stage of life should have a financial plan.  With a plan, you know what you are building and what you need to build it.  Don't hesitate to contact a trusted Financial Planner while you are trying to build your plan for your future.  Jerry

Investments Too Good To Be True

I have a family member who was taken in by a con artist.  Actually, it was a group of con artists.  It was a very slick, smooth, and quick con that took advantage of my family member’s preconceived notions about the investment world.  They lied about their investment opportunities and ended up taking a lot of money from many different people.  Unfortunately, because these con artists were from another country and the people who were conned feel quite embarrassed about the situation, no-one has ever been prosecuted.  Some victims, in fact, still believe in the con artists and insist that the investment is growing and will pay off any day now.  Pretty sad, and I just hope they aren’t still giving the crooks money out of incredibly misplaced faith.

I shared the above because I want to emphasize one thing:  If it seems too good to be true, it probably is.  Now, I have to say that there are many investment opportunities out there, from investing in large corporations, to buying into a business, to helping fund private investment firms.  However, there are many crooks that are quite willing to take your money, and they are very good at it.  The following are a few of the things you will want to think about before trying to invest your hard earned money:

I'm saving money. Now what?

We have been telling members for years to put money away every month. Some of our younger members have started doing just that, but they aren’t sure what to do with the money they save to make it work for them.  I suggest the following:

Mutual Funds – mutual funds are a collection of investments that usually hold a variety of stocks, bonds and seg funds.  Some can be industry specific (focus on the energy or banking sector) and others are much more diversified.  There is risk with mutual funds that you could lose your investment, and you need to be aware that mutual funds charge fees for managing your fund.  In the long run mutual funds can be a good investment for those who want to invest but don’t feel comfortable doing it on your own.  The fee you pay is to have someone adjust your investments for you.  You should meet with your advisor at least annually to make sure they are doing what you want.

Debt or Investments First?

I often get asked: “Which is more important, investing or paying down debt?”  Usually my answer is "Both."

Let me qualify that, the most important priority is paying down high interest debt like credit cards.  Credit cards often have interest rates ranging from 18% to 28% which has a tremendous negative impact on where your money is going and can make it impossible to invest in yourself.

Once you have the high interest debt paid off, then you should split your disposable income between paying off debt and investing.  This balance can serve you well no matter what happens to the rates.  If the rates go up, your term deposit and savings account earnings increase.  If rates go down, you will be able to pay down debt more quickly.  Over the long term (more than 10 years) you will see the benefit of doing both activities.  Even if you are investing in mutual funds or stocks, over the long-term reinvesting dividends will help your investments grow, while your loan payments steadily pay down your debt.

The real point is that you want as much time as possible for compound interest to work on your investments while steadily paying down your debt.  Jerry

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

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

Best Investment Advice: Do It

A lot of people are quite willing to sell their investment advice books about the best stocks, bonds or GIC to invest in, but I offer some very basic investment advice:

Start putting something away now, and do it regularly for as long as you possibly can.

There are two benefits to putting money away over a long period of time:

Strategies That Beginning Investors Should Avoid

Mr. Cheap, who has a blog called Four Pillars, has written an article about investment strategies that beginning investors should avoid.  A lot of it comes down to 2 good pieces of advice:
1.  If it sounds too good to be true, then it probably is.
and
2.  Don't invest in an investment product or industry you don't know.

I would throw in a third piece of advice based on some experiences of people I know:
3.  If the investment is based on a secret or global conspiracy (New World Order), you are more likely to make someone else rich than yourself with your investment.  Enough said on that here.

Check out the more detailed article at Four Pillars.  http://www.four-pillars.ca/2009/09/17/beginning-investment-strategies-to-avoid/ 
Keep your investments safe
Jerry

Investment Planning 101

For some, retirement may seem like years away. For others, it may be right around the corner. Regardless of where you are, it’s still important to take control of your finances and start right now. If you invest even a small amount each month—say, $25 per week—you can accumulate a lot! If you wait, it could potentially cost you lots of money later.

If you start to invest in your 20s and invest $100 each month for just 10 years, then you will have a bigger nest egg than someone who invests $100 per month from age 35 to age 65!

No matter how old you are, if you're just starting to plan and invest for your retirement, you'll need to consider several things:

• Your time horizon
• Your risk tolerance
• Your goals and objectives
• Establish an Emergency Fund 

Your Time Horizon

If you're just getting started, you most likely have a while to go before you retire. The longer your time horizon, the greater your chances of reaching your retirement savings goal. Why? Because time gives compounding—earning interest on your interest—a chance to work. And, it gives long-term investors a chance to recover from market downturns.

Your time horizon also helps determine the amount of risk you can take on comfortably. The more time you have before you need your money, the greater the level of risk or volatility your portfolio can withstand (because you have years to recover). Volatility is inevitable, since markets tend to move in cycles. But the longer your time frame, the more volatility you can handle.

Risk Tolerance

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. A diversified portfolio may help seek a higher long-term return and keep your risk relatively low. The key: find a comfortable place on the risk/return spectrum. You can accomplish this through diversification and asset allocation.

Goals and Objectives

Maybe you want to save for a dream home or your child’s education. Perhaps you just want to have a nest egg for a rainy day. Once you specify your goals and when you’d like to reach them, it’ll be easier to develop a financial plan.

Establish an Emergency Fund

It's very important to have some money set aside in case of an emergency. Experts recommend three to six months’ worth of expenses in cash or a relatively liquid investment like a money market fund. This money can help get you through emergencies or other times when you might be tempted to dip into retirement savings to get by.

You can find a more detailed article on our website at  http://rockycreditunion.com/default.aspx?PageID=1084