One of the best things about a defined benefit pension plan is the fact a young person does not have to think about retirement until much later in their life. By the time they realize that those paycheque deductions actually mean something, they may have thought about what they want to do when they are finished their career. If the results of that thought process requires financing they may wish to figure out how to achieve it. Once you create a desire, there is motivation to formulate a plan on how to satisfy it.
Those with DB pension plans are fortunate in that they already have the foundation of their retirement plan done for them. Those with no pension plan or only a Defined Contribution plan however, need to start thinking about retirement a little earlier. As parents, we are constantly looking for ways to assist our children in helping themselves. In this case, it is imperative to drop a few scenarios in front of them and hope it starts the wheels turning.
There are too many variables to predict what amounts are needed in the future, but even a ballpark guess should provide an incentive to match their actions to their expectations. The closer they get to the actual number, the less their plans may have to adapt to a future reality.
Use the following links to determine the actual numbers and try putting the results together on a one page spreadsheet to show the timing and amounts of differing scenarios. If any of you are more handy than I, in setting up Excel spreadsheets, I would appreciate a copy of what you come up with.
Calculate how long until the mortgage is paid off - FCAC Mortgage Calculator
Calculate what their investments will generate using mortgage payment amount when mortgage is paid, and any other investments and/or regular contributions - IEF Compound Interest Calculator
Calculate how many years those investments will pay out at what monthly amount - Annuity Payout Calculator
Calculate CPP and OAS and GIS payable. This is not an easy task, but here is a link to help you, or you can just hire Doug Runchey to calculate it for you! Check out the different rates of CPP to retire earlier or later than 65. My Service Canada Account
Calculate how many years net return from house sale will last
Try a couple of different scenarios with different retirement ages and saving amounts...let them see the effects. If they are watching you enjoy the lifestyle that a Defined Benefit Pension can provide, they may assume the same lifestyle awaits them. Unfortunately, the reality can be greatly different, unless they plan for it now.
Personal Finance for Canadians
Thursday, 11 April 2013
Wednesday, 6 March 2013
Budgeting - A look ahead
One of the first steps in financial planning is preparing a
budget. Budgeting has a bad rap because
it carries the notion of sacrifice in order to achieve gains. Financial guru’s such as Kevin O’Leary
advocate giving up your daily latte in order to focus your resources on wealth
accumulation. While that type of effort
will certainly pay off, there are things you can do, that do not involve
denying yourself of life’s little pleasures.
If you have recognized that your financial planning consists of spreading
your paycheque around and hoping it lasts until next payday, you may benefit
from simply tracking your expenditures and knowing where your money is
going.
The first step is to track your money. Mint.com/canada is the easiest way to do this, although if you are reluctant to share your financial information with a third party, each financial institution does offer a download transaction feature whereby you can achieve the same goal. It is a little more work though, you have to match the download type to the software you have installed on your computer and be able to operate that software. I like Mint.com because it is all handled on the website. A Globe Investor review of some others can be found here
If you were lucky enough to have parents that recommended you to save 10% of your first paycheque, then hopefully you followed that advice and are still doing it. That is probably the best gift you can give your child...teach them to put 10% away automatically from the very first paycheque and they will never miss it. If not, you may want to read Rob Carrick's article in the Globe and Mail about saving and debt repayment to get a sense of where you should be in the benchmarking game.
This is where it gets tough, if you are spending more than you make, there is no easy way out....either get another job or cut back somewhere. In order to cut back you need a roadmap for the year to ensure you know where you are going. There are lots of budgeting tools available, including the one on Mint.com/canada, but I like a simple Excel spreadsheet to lay out the year. Although I use my own, there is a better one available online, which is intuitive and easy to modify, and displays all the information you would want. It is available and free, here
www.vertex42.com/Files/download/family-budget-planner.html
When you live paycheque to paycheque, it is important to take yourself beyond that time frame to gain some perspective.
The first step is to track your money. Mint.com/canada is the easiest way to do this, although if you are reluctant to share your financial information with a third party, each financial institution does offer a download transaction feature whereby you can achieve the same goal. It is a little more work though, you have to match the download type to the software you have installed on your computer and be able to operate that software. I like Mint.com because it is all handled on the website. A Globe Investor review of some others can be found here
If you were lucky enough to have parents that recommended you to save 10% of your first paycheque, then hopefully you followed that advice and are still doing it. That is probably the best gift you can give your child...teach them to put 10% away automatically from the very first paycheque and they will never miss it. If not, you may want to read Rob Carrick's article in the Globe and Mail about saving and debt repayment to get a sense of where you should be in the benchmarking game.
This is where it gets tough, if you are spending more than you make, there is no easy way out....either get another job or cut back somewhere. In order to cut back you need a roadmap for the year to ensure you know where you are going. There are lots of budgeting tools available, including the one on Mint.com/canada, but I like a simple Excel spreadsheet to lay out the year. Although I use my own, there is a better one available online, which is intuitive and easy to modify, and displays all the information you would want. It is available and free, here
www.vertex42.com/Files/download/family-budget-planner.html
When you live paycheque to paycheque, it is important to take yourself beyond that time frame to gain some perspective.
Thursday, 28 February 2013
Making the Best of a Bad Situation
The Bank of Canada signalled last month that growth expectations for 2013 are reduced and therefore interest rates are not likely to move up as a result. This means the fixed income portion of your properly allocated assets will continue to provide low returns in exchange for their security.
This will mean increased vigilance for individuals to squeeze the maximum rate out of those investments and possibly some effort to ensure full potential is achieved. For those of us who practice the couch potato style of investing with its rewards of time off to do more enjoyable things, the thought of more work can be terrifying and can kick in our protective procrastination tendencies.
The failure to grab even an extra per cent on our GIC's over a 35 year investment career can mean significantly less funds at the end though, when we need them the most....when we want to spend them. Fortunately, the internet has come to our rescue and the ability to search out the best rate available is only a click or two away.
www.ratesupermarket.ca has a great feature (Compare GIC Rates) where you can select your province, amount to invest, RRSP eligibility and term length and it will produce a list of institutions that meet those criteria. I selected Ontario, $5,000, Yes to RRSP eligibility and 5 year term and it identified ICICI Bank as the top rate at 3.15%. From there it was 2 clicks to get to the ICICI website and start the enrollment process.
There were a couple of institutions missing from the list, (ING Direct and PC Financial), but I assume that was because those banks had not partnered with ratesupermarket.ca to publish their rates. The identification of ICICI as the highest rate matched that found at Cannex by Ellen Roseman in her column published in the Toronto Star Personal Finance Section a couple of days ago, so I am not worried by their absence.
The www.ratesupermarket.ca website has a lot of other good comparison information also and I invite you to look around on it. One word of warning though, you may have to get up off the couch to do it. I gotta get my computer hooked up to my TV!!
This will mean increased vigilance for individuals to squeeze the maximum rate out of those investments and possibly some effort to ensure full potential is achieved. For those of us who practice the couch potato style of investing with its rewards of time off to do more enjoyable things, the thought of more work can be terrifying and can kick in our protective procrastination tendencies.
The failure to grab even an extra per cent on our GIC's over a 35 year investment career can mean significantly less funds at the end though, when we need them the most....when we want to spend them. Fortunately, the internet has come to our rescue and the ability to search out the best rate available is only a click or two away.
www.ratesupermarket.ca has a great feature (Compare GIC Rates) where you can select your province, amount to invest, RRSP eligibility and term length and it will produce a list of institutions that meet those criteria. I selected Ontario, $5,000, Yes to RRSP eligibility and 5 year term and it identified ICICI Bank as the top rate at 3.15%. From there it was 2 clicks to get to the ICICI website and start the enrollment process.
There were a couple of institutions missing from the list, (ING Direct and PC Financial), but I assume that was because those banks had not partnered with ratesupermarket.ca to publish their rates. The identification of ICICI as the highest rate matched that found at Cannex by Ellen Roseman in her column published in the Toronto Star Personal Finance Section a couple of days ago, so I am not worried by their absence.
The www.ratesupermarket.ca website has a lot of other good comparison information also and I invite you to look around on it. One word of warning though, you may have to get up off the couch to do it. I gotta get my computer hooked up to my TV!!
Tuesday, 22 January 2013
RRSP's
Soon the marketing engines will start to wind into high gear as the annual RRSP sales season takes off. The industry will market the financial benefits of saving money by highlighting the tax treatment Ottawa gives to the situation.
The goal of saving for retirement is an important goal, but it tends to get overshadowed by the tax refund emphasized in the short term. A longer term look at the options available to people is necessary before you can be assured of making the right decision.
One needs to be aware of the fact that RRSP's are a tax deferral option and it is necessary to consider your tax situation both at the time of contribution and the time of withdrawal. With the time of withdrawal so far into the future, many people fail to consider it, or to plan for the tax payment in advance.
Investigate more than one option and choose the one that best suits your circumstances
People should consider an RRSP option as one aspect of their financial plan, not just dump money into a mutual fund or GIC in order to grab the tax refund, then assume they have fulfilled their need to plan for retirement.
Ellen Roseman lets us know about the Saskatchewan Pension Plan and how it is an alternative available to anyone in Canada. An option to consider, given the reality of the performance of many of the mutual funds promoted in the coming marketing blitz. http://www.ellenroseman.com/?p=1259
One of the situations where an RRSP makes sense can be found here. http://tinyurl.com/ak6p26e I would like to point out though, the scenario only works if the individual is able to curtail future credit card spending and does not run up another balance on the card. It is also noteworthy to point out that a $5000 loan will do the same thing and at 4% can be paid off in one year with $425 per month payments. This would leave $6000 to invest the next year with no taxes pending in the future, if a TFSA was used.
The best plan depends on your ability to manage your spending habits.
Spousal contributions were a great way to split income in retirement for situations where one spouse had a pension plan and the other did not. The recent change in pension plan splitting has changed the game a little, but as outlined in this link, it still has value.
http://www.advisor.ca/tax/tax-news/the-case-for-sposual-rrsps-51703
Here are some situations where a RRSP does not make sense, more on TFSA's later. http://tinyurl.com/am34nsp
If you are able to generate a lump sum, I offer the following suggestions for utilizing it.
The goal of saving for retirement is an important goal, but it tends to get overshadowed by the tax refund emphasized in the short term. A longer term look at the options available to people is necessary before you can be assured of making the right decision.
One needs to be aware of the fact that RRSP's are a tax deferral option and it is necessary to consider your tax situation both at the time of contribution and the time of withdrawal. With the time of withdrawal so far into the future, many people fail to consider it, or to plan for the tax payment in advance.
Investigate more than one option and choose the one that best suits your circumstances
People should consider an RRSP option as one aspect of their financial plan, not just dump money into a mutual fund or GIC in order to grab the tax refund, then assume they have fulfilled their need to plan for retirement.
Ellen Roseman lets us know about the Saskatchewan Pension Plan and how it is an alternative available to anyone in Canada. An option to consider, given the reality of the performance of many of the mutual funds promoted in the coming marketing blitz. http://www.ellenroseman.com/?p=1259
One of the situations where an RRSP makes sense can be found here. http://tinyurl.com/ak6p26e I would like to point out though, the scenario only works if the individual is able to curtail future credit card spending and does not run up another balance on the card. It is also noteworthy to point out that a $5000 loan will do the same thing and at 4% can be paid off in one year with $425 per month payments. This would leave $6000 to invest the next year with no taxes pending in the future, if a TFSA was used.
The best plan depends on your ability to manage your spending habits.
Spousal contributions were a great way to split income in retirement for situations where one spouse had a pension plan and the other did not. The recent change in pension plan splitting has changed the game a little, but as outlined in this link, it still has value.
http://www.advisor.ca/tax/tax-news/the-case-for-sposual-rrsps-51703
Here are some situations where a RRSP does not make sense, more on TFSA's later. http://tinyurl.com/am34nsp
If you are able to generate a lump sum, I offer the following suggestions for utilizing it.
- Pay off credit card balance with commitment to spend less than you make
- Pre-pay mortgage principle with commitment to invest half of payment amount when mortgage is paid off. (There will be other things needed by the time the mortgage is gone)
- Maximize TFSA contribution with highest rate of return your risk profile permits
- Maximize RRSP contributions with plan to withdraw funds in a way to pay less tax
Sunday, 20 January 2013
Mortgages
Image lifted from KellyCaldwell.ca)
Mortgages
This blog does not have topics listed in any particular order of importance or area of impact, but is just a collection of thoughts I have about these particular financial issues. If you think they raise valid points or refer to good sources of information, please feel free to share them with those who you think may benefit from the knowledge
I remember my feeling of total confusion when it came time to get my first mortgage in 1981. I had no idea of where to go or who to talk to, and then a new business opened up called "The Mortgage Place". "Perfect" I thought, "this must be the place to get a mortgage". It was not until much later that I realized my mortgage was with a bank and "The Mortgage Place" was actually a mortgage broker.
I was fortunate that I engaged their services, although I was totally unaware at the time of the $300 they tacked on to my cost of getting a mortgage.
However, they did manage to get a full half a percent off of my interest rate that I would not have fought for. That half of a percent saved me $650 over the next 5 years, so it was a good investment, but if you can save half a percent on today's mortgage of $150,000 over a 25 amortization period that would amount to a $9550 saving. Well worth the effort of shopping around every 5 years to ensure you are getting the lowest rate possible.
Shop your mortgage every time the term ends. Do not automatically renew with the same institution.
In 1981 there were not as many options as now to using the services of a mortgage broker. The internet has provided access to information for the masses in a lot of areas and mortgages are no exception.
www.ratehub.ca provides a wealth of information on mortgages, including rate comparisons, and like so much about the web that I like....it's free! Simply telling your mortgage holder that you can get a better rate elsewhere may result in them offering it to you. The squeaky wheel DOES get the grease, so don't be shy about asking.
One of the best pieces of advice I received was from one of my co-workers. The railroad is full of interesting characters with lots of stories to share, but this guy was well-respected and had another career in real estate outside of the railway, so I acted on this one.
His message was simple....On any mortgage, get the shortest amortization you can afford and make principle pre-payments with any extra cash you get.
When I learned how a principle pre-payment was applied to my mortgage, I was amazed at how much I could save by utilizing it. In the beginning of a mortgage repayment the interest is front end loaded so the amount you are actually paying on the principle is quite small (at the interest rates I was paying then). If your weekly mortgage payment (always pick weekly accelerated, it shortens the amortization) is $300 the interest is over half of that amount, at the start. When you prepay the principle the amount is applied by moving you down the schedule as far as the amount will take you adding up the principle amounts from each week. The interest portion associated with each principle payment is your savings, therefore a $1000 payment will save you that much at least in interest.
You can't beat that rate of return!
Make sure you include an all-in-one mortgage product like Manulife One in your comparison. The interest is not frontend loaded and it may be worth the monthly admin fee they charge.
www.ratehub.ca/best-mortgage-rates/all-in-one
The mortgage calculator at www.ratehub.ca is quite good, but even the amortization schedule there does not break down the payments to a weekly level, so divide the numbers by 52 to get an idea of the weekly amounts. When you are living paycheque to paycheque it helps to put all your expenses in that format so you know what you are paying for.
Just for fun (and by fun, I mean, the banks') try doubling the interest rate on the mortgage calculator and look at the effect on your interest and principle payments....scary eh?
More on mortgages and home buying later.
Friday, 18 January 2013
Financial Planners
I have been thinking about writing some articles on personal finance for a number of years now, primarily because I want to pass on to my children the lessons I learned over the years. I don't have any special knowledge or tricks that can guarantee wealth, but the tidbits I did pick up are a lot more than what was ever taught in a class curriculum.
Now they are starting to teach personal finance in the classroom and are suggesting it should be integrated and supported from home. I can understand that being beneficial, but there are a generation of adults out there who grew up in a house where finances were a private matter not to be discussed and did not receive any education about it either.
The website www.getsmarteraboutmoney.ca is a good resource and will provide a wealth of information not to be duplicated here, but the questions to ask a Financial Planner need to be highlighted and brought front and center. I think most people do not want to spend the time necessary to learn all the options and actively manage their own portfolio, but it is important to remember one thing going in.
No one cares about your money as much as you.
You can hire the best manager in the world, but you cannot turn your back on your account and let others make decisions on your behalf without your input. Learn enough that you can understand the language and monitor his/her performance closely. I learned the hard way that just because someone is charging you for their service, does not mean they are diligently working on your behalf. A lot of them are well-meaning and honestly feel they are providing a service, but they are just passing on recommendations from their head office and not spending time figuring the best way to accumulate wealth for you.
A fee based planner must make more than their fee to justify their cost, and their performance is very easy to monitor. A commission based planner is merely a mutual fund salesman who is not obligated to protect your best interests. The method and amount of their payment is very difficult to ascertain, therefore it is difficult to judge their performance. He/she is legally free to suggest strategies that make them the most money, without taking into account the impact on your portfolio.
There has been much talk about introducing legislation that requires Financial Planners to make decisions based on what is in your best interests. One would think that was a no-brainer when you are the one paying for their services, but welcome to the world of finance, where the institutions write the rules.
I was invited to attend a workshop put on by the Ontario Securities Commission and this failure in investor protection was discussed and generally agreed to be necessary. Here is what the OSC came up with;
A number of respondents commented on our initiative to re-evaluate the adviser-client relationship to consider whether an explicit statutory fiduciary duty or other standards should apply to all advisers and dealers in Ontario. While some respondents were quite supportive of this initiative, others noted the current common law fiduciary regime is effective and no further work is required.
In consultation with the CSA, we plan to complete a thorough analysis of this issue and a research paper will be published for comment.
So....no action, just more talk about what is obviously needed. There is a "Request for Comments" paper, just a scant 50 pages, detailing the predicament this potential requirement could pose.
If you have the time, read through the report....or just add your comment to the ones already posted. You have until April 12, 2013 before comments are closed.
For those interested in what the CSA is, a voluntary coalition of provincial securities regulators, here is their website.
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