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Retirement Planning for Women: RRSP Basics

Tuesday, January 31st, 2012

To play any game, it is important to know the rules and how they may affect the outcome or result of the game. Not to suggest that planning for retirement is a game, but knowing how RRSP rules can affect your retirement planning is very important. Below are a few of the “must knows” for your RRSP planning.

1. Maximize your contribution

The more you put away the more you will have. It is important to know the maximum allowable limit for your financial situation. Currently for 2011, you can contribute 18% of your prior year’s earned income up to a maximum of $22,450 less your pension adjustment (PA) and your past service pension adjustment (PSPA). Remember also that carry forwards of unused contributions from 1991 onward can also be contributed.

2. Contribute Today

The sooner you contribute, the sooner your savings start growing for your retirement. The compounding of interest returns can make a big difference on your RRSP balance over time.

3. Spousal RRSPs

Contributions can be made to a spousal RRSP that will allow income splitting at retirement which in turn will reduce the amount of tax that you will pay. Contributions are limited to your personal limit.

4. No More Foreign Content Limit

• 30% foreign content limit in RRSPs and registered pension plans is now a thing of the past.
• Canadian investors now have the option to invest up to 100% of their retirement plans into foreign securities, without penalty.
• Opportunities for money managers to seek out the best investment opportunities wherever they exist is wonderful news for Canadians – provides the opportunity for greater diversity and more attractive risk-adjusted returns.

5. Consolidation

Consolidating your assets leads to more efficient asset management as well as reduced costs. You should discuss with your advisor why consolidation would be right for you

Financial Planning: It’s that time of year again. How do you measure up?

Monday, December 19th, 2011

As the year comes to an end, it’s a good time to step back and seriously ask ourselves, “Have I achieved all that I wanted to?” It’s important to check in with yourself – in your relationships, career, health or overall well being. You can’t improve what you don’t measure!

It applies to your finances as well. If you were a business, you’d be preparing your year-end financial statements. You’d be cross checking your goals that you set at the beginning of the year and measure them against what you’d achieved. If you fell short, you’d look over your last year’s plan of action to see where things took a turn.

You need to do the same thing with your personal finances as well. Your family and your home are like a small business. You need to set meaningful and realistic financial goals for your personal life. Your family members need to be on the same page in terms of your financial goals. You also need a way to measure your success and celebrate your achievements – just like you would with a business.

This is something everyone at every stage in life should be doing and doing every year.

If you’re a young family, you may be overburdened with the costs of raising young kids and paying for the basics. Your objectives down the line will include staying on budget, reducing debt and possibly saving for a home. The start of a new family is an ideal time to develop a relationship with a financial planner. Your family needs to have financial goals that can be discussed, reviewed and amended (if need be) at the very least, on an annual basis. A financial planner can help with this. It’s a great way for a young family to start healthy financial discussions and set and achieve financial goals from the get-go.

A more mature family may be overextended with soccer, hockey or other extracurricular expenses. As your family grows, debt may be increasing so you might be cutting back and finding ways to bring in more income. Helping the kids with college is also in the near future and so more sacrifices need to take place. Did you put your plans to cut back and save more into action? If not, what went wrong?

How about if you’re one of the many “sandwich generation” families who not only bear the costs of their adult kids still living at home but also are taking care of mom and dad. What financial changes did you want to see happen and did they occur? Was it time to encourage the kids to leave the nest or are they still at home but finally paying rent and pitching in for food and other costs?  Were you able to create a realistic budget for the family including cutting back on some of the more frivolous expenses? How is that going? Are mom and dad able to financially pitch in a bit to at least cover the costs of their care?

An empty nester may need to be seriously planning for their ideal retirement. This could mean setting up an aggressive savings strategy, or focus on getting the last of the mortgage paid down. Planning late in life for retirement will always mean sacrifices, such as thinking about down-sizing in the coming years, working later than you hoped to or retiring on less than you ideally wanted to? It’s all a numbers game and your financial planner can help with this.

An early retiree might need to revisit the budget that they set when their income dropped 30% to 40% after they stopped working. If you’re in this position, are you eating your savings away too  quickly or increasing your debt load at an awfully fast pace? Or have you maybe lived frugally over the years so you could save as much as possible for retirement – but now find yourself hesitant to finally spend and enjoy your nest egg? Are you taking the trips you envisioned you would or learning a new hobby you wanted to learn? At this stage of the game, your financial advisor can help you determine the best way to invest your money and how to pull out an income so as not to deplete the monies too quickly.

If you’re in the ‘elderly’ stage of retirement you may want to seriously look into later in life care options. Do you want to move into a care facility sooner rather than later? Is there somewhere in particular you would like to go? Or is staying in your house as long as possible the priority? Can your budget afford to bear all of the in-home care you might require? When it comes to your will and estate planning – is everything as you wish it to be or have you made some mental changes that need to be put to paper?  Do you want to start gifting some of your estate now and can you afford to be doing this?  Do you feel your adult children are financially responsible enough to receive a large inheritance or should trusts be considered?  Your financial advisor can help guide on this or direct you to the right people to deal with.

No matter what age you are, you should be conducting an end of the year review:

• First and foremost, the three most important elements of your financial health- emergency savings, income protection and your will and estate plan. Do you have at least six months of your monthly costs put away in a savings stash somewhere? Do you have enough insurance in place to protect against the loss of income due to disability or death and do you have a valid Will and powers of attorney/Representation Agreements in place?

• Review your budget (hopefully you have some type of family budget). Where did you overspend and under-spend? Was your budget realistic or too hopeful? Maybe a new budget needs to be created to more accurately reflect your spending patterns or keep to the existing one and cutback?

• What is your networth today (what you own minus what you owe)? What was it 12 months previously? Are you richer or poorer than you were a year ago? Understand why your networth either increased or decreased. Did it go up because you stuck to your budget allowing you to increase your savings or is it just a paper increase (such as the value of your home or stocks going up)?

• Review your financial goals. What are you saving your money for? Do you have a plan in place to achieve your goals? And how are you doing?

As we move towards the end of 2011, I encourage you to take time to review your financial goals, make changes where need be and continue on or set new financial goals for the coming year. By doing this, you’ll be more likely to achieve your long-term financial objectives you will feel more in control of your money, and you’ll enjoy the peace that comes from knowing you have a plan.

Image Credit: k.steudel

Top 10 Retirement Planning Lessons

Monday, November 28th, 2011

Dave and Colleen both retired early simultaneously from very high-stress careers and moved to the Gulf Islands. Through years of hard work, they have a good government pension and decent RRSP savings.

(Image credit: Dr. Hemmert)

Top Ten Lessons Dave and Colleen Have Learned from Retirement

1- You can retire at the same time.

Many people recommend not retiring at the same time. Dave and Colleen found that being able to support each other and work on their new life together was very valuable.

2- Stress does not go away

Work stress of course goes away, but stress from other areas of life seems to fill in a fair bit of what was removed. The significant thing is that these items are actually important: health, family, and the like. These stressors are not meaningless work-related items but the important parts of life.

3- You should have your hobbies and projects setup and ready

Retirement planning isn’t only about the finances. You should have developed, or be developing, your interests outside of work, so you can start on these as soon as you retire. You do not need to have spent a lot of time on these (who has the time when working), but have identified what you want to spend your time doing. Dave took a woodworking course at night and now spends part of each day working on furniture projects. Colleen enjoyed jewelry design, now sells at the local farmer’s market.

4- Physical space from each other is important

You used to spend 8-10 hours away from each other 5 days a week, now you are together all the time. Develop a plan for some physical space away from each other. Heading to the gym at different times or a workshop is a great idea. Arrange so you have some time apart most days.

5- People at your old job really do not care you are gone.

The day you leave, life goes on at your old job, and it really is as if you were never there. Do not visit too much, they are busy, have made changes, and may not really want to hear how wonderful retirement is.

6- Take time to participate in volunteer work.

If you are already involved in some volunteer work, you can of course spend more time at that. For any new volunteer work, take some time and carefully review what you want to do. There are hundreds of opportunities out there, try a few to pick what you want to do.

7- Have a small nest egg for the first year outside of your budget.

If at all possible, try and have a few thousand saved away so you can start on your projects, go on a trip, or buy some things you have wanted. If this does not effect your first years budgeting, it will be easier.

8- A truly fixed income after years of increasing income takes getting use to

Most professional’s salaries increase over the years, so the idea that your income is now truly fixed can be daunting. Work with your financial advisor on a needs and wants budget. Make sure you can cover the needs and adjust the wants as time and conditions change, but do not be afraid to spend the “wants” if conditions are right. You are retired and you should enjoy it!

9- Take realistic life expectancy into account when planning.

One of them has usually long-lived relatives on all branches of their family tree. The other has some fairly short branches on their tree. While a bus can hit anyone tomorrow, they have planned their cash flow, pension choices and life insurance with these life expectancy issues in mind.

10- Retire as soon as you possibly can.

Retirement is wonderful! The chance to do what you want, when you want is invaluable to your own physical and mental health, as well as the health of your relationship.

Dave and Colleen retired the first day they could draw a pension, and would recommend that people work with their financial advisor to put together a realistic retirement plan, and making do with less is absolutely worth it to be retired.

And a bonus #11

11- Have a great financial advisor like Rhonda, and LISTEN TO WHAT THEY TELL YOU!

Women’s Retirement Planning: What Happens When You Have Different Goals?

Monday, November 14th, 2011

It’s your second marriage or you married late in life. Keeping your finances separate seemed the sensible thing to do. The basic costs such as the mortgage, utilities, taxes and insurances were split 50/50. You took care of your own personal needs and lifestyle costs. You have your own savings and retirement accounts.

This seems to be working perfectly fine and you assume it will continue on even into retirement. You have your pension from your 30 years of service that will cover your entire half of the basic costs. In addition, you aggressively saved over the years. When the mortgage was paid your portion of the payments was redirected right into your RRSP. You did everything right with the help of your road map created many moons ago by your financial advisor. Retirement planning has never been a worry for you.

Then the day comes when you decide it is time to take it easy and either slow down at work or stop working permanently. Your dream was to start traveling with your spouse, taking up hobbies and entertaining more. This ‘retirement’ phase looks to be quite eventful and worry free due to your years of planning and saving.

However, it dawns on you one day that you and hubby have never actually discussed retirement and what possibilities lay ahead for you both. So one day you approach them and are shocked to learn that their version of ‘retirement’ is quite different from yours. What do you do then?

Retirement Planning With Separate Accounts

Your goal was to stay in the family house as long as possible. Maybe even do Reno’s to accommodate future health issues – anything to avoid the care home life. You also assumed costs in retirement will increase as you are no longer working 50 to 70 hours a week and then going home and zoning out in front of the TV. You now have a lot of time on your hands to fill and you plan on spending whatever it takes to make your days interesting.

Unfortunately your spouse has never planned for retirement. This is marriage number two for them. They lost half their assets and half their pension 10 years ago as an aftermath of the divorce. Trying to pay child support and half their current living costs has left very little extra for savings. If anything, they have racked up their line of credit and now have a lot of debt and very little RRSP’s. Retirement has never been on the radar even though they are entering their late fifties now. They just assumed they would continue to work until health issues kicked in and then sell the home, down size and hopefully have a bit of money from the sale for some lifestyle costs.

However, you want to retire at age 57 when your full unreduced pension kicks in. You now find out that your spouse is planning on working until they drop dead. So what do you do?

Open the Retirement Planning Conversation

Well this is where a lot of frank conversation needs to take place and a lot of compromises and sacrifices. A ‘no blame’ open discussion on what your dreams and expectations are is important.

Start by writing down all your fixed retirement costs. Now tally up each of your ‘guaranteed’ pension income. Can you each pay half your costs with your pension income? If you can- GREAT! Technically you can retire. The basics are covered. If one of you can’t pay your share then compromise needs to take place.

• Are you willing to downsize the home freeing up some cash for your partner?
• Are you willing to pay more than half your share of the basic costs if it keeps you in the home?
• What if your partner works part-time? Would that cover his shortfall?

If retiring sooner than later is important to you and making that transition with your partner is equally important then you will need to make some real sacrifices if his pension income and savings doesn’t cover his share of the costs.

Next you both need to tackle your individual bucket lists. What do you want to do in your retirement? What dreams and aspirations do you have? Or how do you want to fill your days. If as a couple you have figured out how to pay the basic costs you then need to discuss the “extras”.

Lifestyle costs can get expensive. They can add anywhere from $5,000 to $50,000 to your budget. If your spouse is challenged just to make their half of the basic or fixed costs then the “extras” might really be unachievable. What then? Do you have the pension income and savings to fund both your activities? Are you willing to pay more than your fair share and again its all about compromise and sacrifices?

If you really resent paying the bulk of your retirement expenses you will have to either except that retirement will be a ‘solo’ journey for you. And you also may have to accept some changes you didn’t want to make such as selling the home, relocating to a more affordable city and having less of the extras.

There is no right or wrong way to live in retirement or decisions how to fund it between spouses. It is whatever agreement each couple has decided works best for them. Often in second marriages people keep their finances separate due to their negative and costly past experiences and because they want to ensure hefty portions of their savings passes on to their children (ensure the Will is properly set up for this). Sometimes couples keep their finances separate because they married late in life and have a hard time compromising or sharing their hard earned monies. Again neither is a right or wrong but you need to discuss your expectations and dreams so when retirement comes you are not completely floored to learn you will be taking the journey on your own.

Is 65 the new 40?

Monday, October 10th, 2011

It used to be that we stopped working at age 65 and lived out our few remaining years in leisure (if we were one of the lucky ones who lived past 65). If you are 65 or older today, living to age 80 is not unrealistic. Have you given much thought to how you plan on spending the next 15 to 20 years of your life?

We are healthier than ever before and this translates into many more years of active productive living. This also means ensuring there is enough income coming in to cover whatever lifestyle we have chosen. This means that the face of financial advice for women is changing.

The focus of this ‘new retirement reality’ seems to be on ‘choices.’ For example, you may decide to phase out of your existing career and use your knowledge and skills and go into business for yourself. You may plan on bringing in enough income to keep you afloat while meeting all the other needs that working provides – purpose, structure, belonging, fulfillment, socialization. Or perhaps you may find an easy, stress-free part time job more enjoyable – Wal-Mart is always looking for greeters! If the financial situation is looking good, volunteering or babysitting the grandkids may be more fulfilling. Travel and other active hobbies may be what you are looking for while you are healthy and able to enjoy them.

No matter what your version of the perfect retirement is, you need to do some planning. A financial advisor for women can help. If you were expecting to stop any type of income producing work at your desired retirement age you need to ensure you have enough pension income and savings to support the next 20 non-earning years. You need to do this while keeping the rising costs of living in mind, especially in the area of services relating to the aging population. Taking a realistic look ahead and planning carefully will help ensure that this next phase of your life will meet your expectations.

I would suggest that you sit down and consider what you see for the next twenty foreseeable years. If you have a spouse, you’ll want to sit down with them as well and share what you both see for the ages 65 and beyond. Consider your current health, your individual interests, your shared passions, and each of your less tangible needs. After all, there are things that employment provides beyond just a pay cheque.

After you consider the options, take a realistic look at what income you have coming in to support your ideal retirement. Look at your CPP, OAS and your company pension. You’ll need to meet any shortfall by your savings or the equity in your home. If not, you’ll need to turn your experience into some type of income generating work. Alternatively, you may consider finding some type of work involving a hobby or a passion you have. This will make working in this phase of life more meaningful and probably more enjoyable.

As you can see, the planning process is essential to feeling fulfilled and being comfortable through retirement. A BC financial advisor can greatly help in with this process. They can do all the number crunching for you and help devise a plan to achieve your ideal retirement.

7 Keys to Taking Control of Your Family’s Finances for the First Time

Monday, October 3rd, 2011

Are you a passenger when it comes to the family finances? With busy lives, household chores are often dived up to help families muddle through the chaos of daily life.  That is why it is not uncommon for one partner in a relationship to manage the day to day household spending, savings and other financial affairs.

If we knew for certain that no hardships lay ahead (divorce, death, physical/mental disabilities) then leaving our financial well-being in the hands of our trusted spouse might be ok. Unfortunately, life is rarely that ‘crisis free.’ None of us know what lies ahead or when we may have to take the reins of the family affairs. It is best to be reasonably knowledgeable and up to date on the family finances.

 So do you know the state of your family’s financial health? If your spouse were no longer in the picture would your financial situation deteriorate? If a sudden change in your health made working implausible would you have enough disability insurance and savings to get by? What if you die, would your family be able to financially continue on intact?

Understanding the family’s financial affairs doesn’t mean you need to be an economic expert or a stock market guru it just means you need to have a good understanding of the big picture of your financial house. These seven keys will help.

• Wills & powers of attorney- You need to understand what they are and ensure they are always up to date and relevant.
• Insurance - It is vital that you have regular insurance ‘check-ups’ to ensure that at all times you are more than adequately covered for any of life’s misfortunes.
• Emergency funds- Do you have any and if you do, do you have access to them? If you don’t have enough savings to cover at least 6 months of your monthly overhead costs then, at the very least, make sure you have access to a line of credit.
• What’s coming in and what’s going out- You need to have a general understanding of what income the household is bringing in and how much is going out each month. If you are constantly in the red then it’s time for a family meeting to discuss necessary cutbacks or ways to make more money.
• What is the family’s networth? What do you own minus what you owe? - Your house, savings, RRSPs minus your mortgage, line of credit and credit card debt = your networth. If in the negative big time then a good financial goal could be to reverse this position so one day you own far more than you owe.
• What are your family’s financial goals and do you have any savings strategies in place to achieve these goals? -As time consuming or uninteresting the annual visits to your financial advisor may be it’s really important to show up and participate. You don’t want to find yourself all of a sudden divorced at 55 or widowed at 60 and in a state of panic because retirement at any age is no longer plausible. Plan as a couple while ensuring your financial health will remain intact should something happen to the union (death/divorce).
• Finally, know where all the above documents are kept-Will, Powers of Attorney, Insurance papers & documents of all your assets and of your debt. You never know when you will need to access them and quickly. It is best to have a safety deposit box for such papers. If you are really organized, scan the documents and store on a USB in a safe location outside the home. Again, a safety deposit box is the best place.

Image credit: Images_of_money

What happens to my retirement when my spouse dies?

Monday, September 19th, 2011

When you’re building the financial means to fund your retirement years, one of the areas that people often skip over is how this picture might change if either you or your spouse should die. This is an especially an important consideration if you’re a women, as women on average still outlive our men.

Rather than retirement planning with blinders on, it’s important to face some facts. You have to plan for the possibility that your spouse will not be there for your entire retirement.

How to plan for the inevitable:

Step 1: How much are your ‘basic’ retirement costs?

What are the basic costs you estimate to have in retirement? For example, assume you are in retirement today. What are your fixed monthly/yearly costs (i.e., your mortgage, utilities, food, taxes, insurance, hygiene/personal)? Which of these costs do you expect to continue to have in retirement? For example, your basic costs today are around $4,500 a month. At retirement you expected these costs to drop to around $2,300 (today’s value). Assuming your mortgage is paid, you have only one car and the kids have finally moved out.

Step 2: How much would these basic costs change if there is only one of you?

If you are going through retirement on your own, most likely the food bill will drop a quarter to a half, the utilities may go down a bit, personal/hygiene is reduced, etc. However, the major costs like the tax and insurance owed on the home and car will not be reduced by much. So again, let’s assume these costs drop to $2,000 a month. Will you still have enough after tax income after the loss of a spouse to cover the expenses?

Step 3: What income will be coming in between you and your spouse in retirement?

For each spouse calculate how much is coming in in CPP, OAS and company pension plan (before income splitting) on your desire retirement date. Let’s assume both people in the couple are 65.

For example,

Spouse A -Rick Spouse B – Barb

CPP 800 300

OAS 500 500

Company pension $2,700 400

Total $ 4,000 $1,200

The combined total in today’s dollars comes to $5,200. That would be more than enough to cover your estimated after tax costs of $2,300.00 (again, in today’s dollars). Now you can start planning how you will fund your lifestyle costs or the ‘fun’ things you want to be doing- golfing, travel, hobbies.

Step 4: What retirement income will be coming in if say Spouse A dies when he is 67?

Rick, Spouse A is in his second marriage. In the first marriage’s divorce settle, the wife got the RRSPs and he kept his full pension. However, he changed his pension option from 60% payout to his spouse when he passes to zero payout so as to take the maximum pension available. Barb, Spouse B, started work late in life to raise kids from her first marriage. Her $400 pension was half of her ex- husband’s pension plan. She never qualified for a pension through any of her own employment means. She was out of the work force for some time and has not upgraded her knowledge or skills. She has only been able to work at lower pay jobs and has a smaller CPP payout and no company pensions of her own.

Barb may be entitled to some survivor benefits. However, the most amount payable of the CPP Survivor benefit and the CPP retirement pension is the maximum retirement pension of $940 a month ($943).

Since spouse B is over the age of 65 and is receiving her own OAS payment she doesn’t qualify for the Allowance for Survivors (which requires that she must be low income between the ages of 60-64).

If Rick passes on Barb will have:

CPP $940 (maximum payable)

OAS $500

Company pension $400

Total $1,840 before tax

Barb`s gross income (before tax) is now $1,840 and her net (after tax) basic expenses are $2,000 a month, in today’s dollars. She will not be able to fully cover her basic no frills retirement lifestyle. Let alone hobbies, travel, entertaining or any kind of fun that costs money. The one time maximum $2,500 Canadian Plan death benefit payable to the estate helps with the funeral costs but not so much the day to day living costs.

Hopefully, Barb has the savings to cover her monthly shortfall plus fund any other retirement activities and dreams. If not, she will have to downsize her lifestyle. That may mean selling the home and moving into a condo. There by reducing her overhead costs plus creating an investment portfolio to draw some income from. Barb may not want to leave the family home. She could look into a reverse mortgage but they can be costly. What other options would have been available to her had she planned?

Step 5: Plan in advance to ensure you don’t find yourself short of money in retirement

Best case scenario, Barb has been seeing her financial advisor annually to review her goals and action plan, especially after her first divorce. She would have had a pretty good idea then that retirement was not looking too good. And a savings plan of action should have started then. The longer you have to save, the more compound interest works for you – even if it is only $25 a month. That is better than nothing.

In addition, she could have looked for employment that offered a good pension plan or any plan. Or even consider upgrading her skills and education to increase her income, pension possibilities and a larger CPP payout. The more time you have, the more options are available!

One option couples often consider is an insurance policy to fund the shortfall in income that would occur when the person with the larger pension income dies first. Your financial advisor can calculate what amount of a policy you require to make up for the monthly shortfall for the estimated life expectancy of the surviving spouse.

As a benefit- no major life changes have to immediately take place. When the spouse dies, the life insurance company cuts a cheque payable to the beneficiary (hopefully the surviving spouse), tax free and avoids probate. The surviving spouse can then `conservatively` invest the proceeds to produce income that should supplement any shortfall in the overall expenses. For the time being, the surviving spouse can remain in the family home (if left to them in the Will) and maintain the existing lifestyle.

Photo credit : Hudson