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.

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.

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.

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."

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

 

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. 

Canadians Loving Debt?

If you have been reading any newspapers or news magazines over the past couple of months, you probably have read a few articles about how Canadians' household/personal debt is worrisome.  Since the economic troubles started 3 years ago, Americans have been working hard to both lower their personal debt and to increase their personal savings.  This is great because their personal debt had risen to around an average personal debt load of 150% of annual income and savings was around 0% for a few years leading up to 2007.  This significant economic event has shaken up the Americans and has caused consumers to change their spending and saving behaviour.

However, the economic event has not shaken up Canadians enough to change behaviour in the same way.  In fact, our reputation as savers is going out the window.  Over the past several years our savings rate dropped not only to 0%, but there were quarters where it was negative, meaning people were dipping into their savings to spend money on homes/vehicles or other items.  And our personal debt to annual income ratio has risen to just below that of the Americans with ours now at over 147%.  Much of this is because with today's low mortgage rates, people have been buying the largest house they could afford, not taking into account that rates won't always stay this low.

What does this mean for us?

• As rates increase, and they will, servicing the debt at these high levels will become very difficult for most Canadian households, which will force Canadians to change their behaviour.  Many will have missed the opportunity to pay down debt during the lowest ever rate environment and will have to concentrate on being able to make the rising payments.
• The activities that many Canadians have enjoyed over the past several years, annual trips, eating out a few times a week... will probably decrease as people try to decrease expenses.
• The rising rates will encourage more saving as current low returns make people feel like they might as well spend the money as they don't make much saving it.

Hopefully, you have enough years left before retirement to pay down debt and improve your savings/investment nest egg.

Jonathon Chevreau, Wealthy Boomer columnist for the Financial Post, recently wrote an article trying to emphasize Freedom, not Stuff.  It's worth a read and may encourage some to review their own habits and what the future may hold for them.

Registered Education Savings Plan (RESP)

The second article that I ever wrote for RCU Speak was about RESPs.  You can find it here.  RESPS are probably the best investment option to save for a child’s education, and I would hope every parent/grandparent would look into them to save for their children’s future.

The basics of a Registered Education Savings Plan are:

• Contributed money grows tax deferred, so it is not taxed until it is withdrawn, usually when the student is in a low tax bracket.
• With each contribution, up to defined limits, the RESP will receive a bonus from the government of 20% to 40%, depending on the family’s income.  This bonus also earns interest.
• An RESP can be opened for a person at any age, but can only remain open for a maximum of 26 years.  The CESG is only available if the beneficiary is 17 years old or less.
• The Canada Education Savings Grant provides anyone who invests in RESPs with an amount equal to 20% of yearly contributions, up to an annual maximum of $500 per child (and to $1,000 from $800 if there is unused grant room from previous years) to a maximum of $7,200.
• There is a maximum lifetime contribution limit of $50,000.  If you contribute more than $2,500 per year ($5,000 if there is unused room), you only receive the above mentioned amount from CESG per year, but the whole contribution grows tax sheltered.
• The child/children who is the beneficiary(ies) of the RESP must have a Social Insurance Number from the government to have an RESP.

Some additional things to be aware of:

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.

What's your goal for 2010?

Do you have a financial goal and plan for this year? Do you have any goals for your finances in 2010?

It’s important to have a goal and a plan on how to achieve it. If you don’t have a goal, it’s like a ship not having a destination. And if you do have a goal, but no plan on how to achieve it, that is like a ship that doesn’t have a crew. Either way, you end up going wherever the current and wind take you, and you have very little control over where you end up.

Guerrilla Frugality - Saving You Money

Have you ever cleaned up after Christmas and asked yourself “Why do we need all of this stuff?”  And then as the credit card bills arrive in January you think “Is all of this stuff worth it?”  Well, it’s from those questions that a movement has started to grow around the world: Guerrilla Frugality.

Guerrilla Frugality is (to many) a way of life that involves cutting costs wherever possible.  As in any activity, some people take it to extremes, but most people who live a life of guerrilla frugality are simply trying to pay off debt, save for retirement, and live within their means.  The emphasis is on doing whatever you can to achieve those goals.  Some people embrace guerrilla frugality because of their debt load, and others because they have seen their parents retire without enough savings to support themselves and don’t want to have the same thing happen to them.  Whatever the reason, it often becomes a way of life instead of just a temporary thing.

Tax Free Savings Account

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 complements existing registered savings plans like the Registered Retirement Savings Plans (RRSP) and the Registered Education Savings Plans (RESP).

How the Tax-Free Savings Account Works

• A limit of one TFSA per person. Similar to RRSPs, this account is reported to the Canada Revenue Agency.
• Contributions to a TFSA will not be deductible for income tax purposes but investment income, including capital gains, earned in a TFSA will not be taxed, even when withdrawn.
• Unused TFSA contribution room can be carried forward to future years.
• You can withdraw funds from the TFSA at any time for any purpose.
• The amount withdrawn can be put back in the TFSA at a later date (not within the same calendar year) without reducing your contribution room.
• Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits and credits.
• Contributions to a spouse’s TFSA will be allowed and TFSA assets can be transferred to a spouse upon death.

The Cost Of A Wedding

The average wedding in Canada costs $26,000.

I know that as a rather frugal guy that many may disagree with me, but I believe that $26,000 may be a little too much to spend on one day.  I have been happily married for over 12 years now, and we had a fairly simple wedding, but we had a lot of friends and family celebrate it with us in a pretty simple setting.  Our total cost was under $4,000.  I have trouble picturing starting off married with the added debt of a super expensive wedding, or saddling any parents with those costs.  We had enough debt with student loans that we sure didn't need to add more to it.

But for those who are planning for the big weddings, the following 2 links can help you control and even reduce your costs.  Always remember that as important as that one day is, all the days after it are even more important.

Get Rich Slowly site
Canada.com article

Jerry

15% of parents are saving for kids education over retirement

Good article by Jonathon Chevreau of the Financial Post about saving for retirement and children's education at the same time.  Some scary stats about how many are saving for neither one of those.

http://network.nationalpost.com/np/blogs/wealthyboomer/archive/2009/09/23/15-of-parents-put-kids-university-savings-ahead-of-their-own-retirement-plans.aspx

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