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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

Retirement? No Worries – I have my inheritance

Monday, September 12th, 2011

If you’re betting on your inheritance for the retirement of your dreams, you might want to think again.

While most women assume that large sums of money may be coming their way, in reality it’s often not as big as they think. Here’s some financial planning for women advice: Until that money is actually in your bank account you cannot be guaranteed how much, if any, will be left to you.

Are You Sure You Are Inheriting That Much?

There are a variety of factors that can affect your inheritance that will impact your financial status and retirement plans.

Some scenarios to consider

• Mom passes on and dad remarries leaving the bulk of his estate to the new wife.  Any remaining is to be split equally amongst her 3 kids and his two.
• Dad gifts out to his favorite son 80% of his estate before he passes. Leaving the remaining 20% to be split equally upon his passing to the beneficiaries (including the favorite son).
• Mom & Dad know their son is not good with money or is a spendthrift and so they leave the bulk of the estate to the grandkids ‘in trust’. Alternatively, they put the son’s portion ‘in trust’ to pay out a small monthly annuity for the rest of his life.
• Dad makes a bad investment decision with the bulk of the money and so very little is left to the estate when he passes.
• Some beneficiaries rely on that “$1 mil Vancouver home” that their parents own. The only problem is that Mom and Dad took out a line of credit against the equity in their home to fund their desired retirement lifestyle, leaving a small estate for their children.
• Mom and dad decide to move into an expensive, non-subsidized retirement home……….for the next 20 years. There goes that inheritance!

The Realities of Modern Retirement

There was a time we retired at 65 and lived to 67. Funding those golden years was not too challenging. However, today we are living longer and healthier in retirement. We are filling these days with enjoyable and sometimes costly activities or adventures. If we need ‘later in life’ care services or facilities, it may cost a considerable sum of money.  Beneficiaries can’t always be guaranteed that there will be enough money left over to fund a year in retirement, let alone the next 20.  This makes it even more important to plan your own retirement based on your own financial means.

If you have not seriously considered funding your retirement through your own means then start today! Here are some financial planning for women essential areas to consider.

• Do you have a company pension plan? If so, are you contributing to it along with your employer? If you’re unsure, speak with your HR department.  If it is a defined contribution plan, ensure that the investments selected are appropriate for where you are in life and what your end means are.

• Are you betting that Government pensions will still be around? Thinking about retirement is very different if you’re 55 versus 35. I wouldn’t include Government pensions in my retirement calculations if I were any further than 15 years out from my retirement date. However, the good news is the farther you are from retirement the longer you have to save and the more you will benefit from compound interest.

• Lastly, how are your savings looking? If you’re unsure if what you’re contributing, and how your investing is going to get you through, possibly 20, years of retirement you definitely should meet with a Financial Advisor. Driving to Alaska from Florida without a map or GPS may seem easy (keep going North and West); however, having a well thought out, detailed plan will make the likelihood of reaching your destination more certain.

If you do inherit a large sum of money, you may feel the urge to do something rash like quit your job and start spending lavishly. Hold off these urges until you sit with your financial advisor. It may shock you how much money you will actually need to put aside to fund 20 plus years of retirement. Especially if you have no savings or pension plans. Once the monies are gone, they are gone forever.

Bottom line financial planning for women advice; don’t live your life now on the basis that an inheritance will happen.  Save through your own means to guarantee the retirement you want.

Photo Credit : Images_of_Money

What will retirement cost me?

Monday, September 5th, 2011

A lot of women wonder “What will retirement cost me?” In order to figure out, you need to sit down and crunch some numbers.

First, start with the basics. How much does it currently cost you to run your household? The bare essentials – mortgage/rent, utilities, insurance, taxes, car/house maintenance, food & essential clothes/personal hygiene items?

Write these down, but understand that these costs will probably be reduced in retirement. For example, your mortgage may be paid and your kids have left the nest. You may able to go from two cars to one so your insurance, maintenance and gas costs will decrease. Estimate your current expenses and take out the costs you expect will be reduced or eliminated. This is the approximate amount in today’s dollars you must have coming in retirement income. You might have to add medical and dental expenditures that are no longer covered by your employer though.

Let’s look at an example:

Sue and Jim, ages 49 and 51

Necessities budget pre-retirement

• Mortgage $2,000 month
• Utilities $ 200
• Insurance (2 cars and home insurance)  $ 500
• Maintenance (cars/home) $300
• Food $800
• Personal clothes & hygiene (2 kids and 2 adults) $500

Total $4,300 a month

They plan to retire in 14 years when Jim is 65 and Sue is 63

Necessities budget retirement

• Mortgage $0
• Utilities $ 200
• Insurance (1 cars and home insurance)  $ 300
• Maintenance (cars/home) $150
• Food $400
• Personal clothes & hygiene (2 adults) $200
• Medical/dental $200

Total $1,450 a month in today’s dollars

So in today’s dollars, Sue and Jim may need approximately $1,450 a month to pay the basic overhead costs in retirement. This would be just short of $2,200 in 14 years’ time assuming your basic costs go up 3% a year. Compare that to what you know you will have coming in from pension income. Any shortfalls between these two numbers will need to be covered by your savings.

Now add on non-essential everyday costs such as gifts, donations, subscriptions etc.  Let’s assume that is another $400 a month. So to cover the necessities and incidentals, Jim & Sue need about $1,850 a month in incoming income in today’s dollars, or $2,716 in 14 years’ time when they retire.

Once you have the basics covered then you need to spend some time contemplating what you would like to do with your time. We are living longer and retirement now extends upwards of 20 to 30 years. How will you fill your days?

Consider what’s important to you. The options are wide open.

You could:

Leaving the high stress career as soon as it’s financially viable.

Change your pace of life.

Spend more time with the family, kids, grand kids and your spouse.

Take up a hobby or learn a new craft.

Improve your health.

Sell the home, down size and maybe even start traveling.

Work part-time or volunteer.

If you were to retire today what would you most like to be doing? Make a list, a ‘retirement bucket list’ and start pricing each activity in today’s dollars.

For example, if my health is good I would like to travel once a year for a month to some location outside of North America. So what on average would it cost you to do this in today’s dollars? Maybe start pricing out air fare, hotels and other related costs.  If on average it would cost you $10,000 a year and your estimate you would travel for the first 5 years of your retirement then you need approximately $50,000 in todays dollars to fund this. Use a ‘future values’ calculator to determine what amount you will need when you retire http://www.calculatorsoup.com/calculators/financial/future-value.php

Jim & Sue’s retirement bucket list

• Jim golf twice a week $400 month
• Sue babysit grandkids 3 times a week – zero cost
• Jim & Sue volunteer at the local animal shelter once a week – zero cost
• Sue to get more involved in jewelry making  $300 month
• Go away one weekend a month to some nearby town $500
• Jim & Sue go to gym 3 times a week- $100 membership
• Dine out once a week at a nice restaurant $150 month
• Misc spending $500

Monthly they need an extra $1,950 in today’s dollars or just shy of $2,900 when they enter into retirement.

So to cover the necessities, incidentals and their ‘retirement bucket list’, Jim & Sue need after tax about $3,800 in today’s dollars or $5,600 in 14 years’ time to fully fund their retirement. Any shortfalls will have to come from savings or other means (i.e.: selling the home and buying a condo to invest the difference to fund shortfall or aggressively saving for the next 14 years).

Speak with your financial advisor to determine how much you need in retirement and how much you must start saving today.

Photo Credit – Wanderlinse

11 tips to make the most of your RRSP

Monday, August 29th, 2011

Your registered retirement savings plan is a key to making sure you have enough money when you retire. Although this is an essential retirement planning step, many women don’t know how to maximize this type of investment. With these tips, you can make sure to make the most of your RRSP and get the benefits that you’re looking for.

Retirement Planning Tips for Your RRSP

1. Start early – As soon as you earn an income you can start contributing to an RRSP, all the way up to the age of 71. It pays to start early and benefit from the compound interest you accrue over time. Even if you only contribute a small amount each month, it will add up. Start with a $25 savings per month at the beginning of your career vs. trying to catch up at age 40.

2. Contribute the maximum if possible – You can contribute up to 18% of your earned income up to the maximum (in 2011, the maximum is $22,450). Try to get as close to that maximum as possible. Look at your “Notice Assessment” from the Canada Revenue Agency (CRA) to see how much you can contribute. Make monthly contributions to the RRSP, make a lump sum contribution or consider taking out an RRSP loan to contribute. These loans often are available at prime or prime plus one. Once you take out the loan, you can pay it off with your tax rebate.

3. Catch up on the maximum if you haven’t contributed it – If you haven’t contributed the maximum to your RRSP in past years, it carries over into the future. You can use an RRSP loan to catch up.

4. Invest wisely – Not only is this a good financial planning for women tip, it’s important to the growth of your RRSP as well. It is essential to get investment advice from a professional financial advisor. Depending on where you are in life, your financial advisor can help you find the right combination of stocks, bonds and cash. The right asset allocation is the Key to achieving your required rate of return.

5. Use a spousal RRSP – With a spousal RRSP, you can take advantage of late in life income splitting. You can split 50% of your ‘eligible pension income’ between yourself and your spouse, which will lower the income tax you’d otherwise owe.

6. Use your RRSP for other life events – Although an RRSP is meant for supplementing your retirement income, you can also use it for other life events like lifelong learning or a home buyer’s plan.

7. Don’t use it for debt or lifestyle changes – Don’t misunderstand the last financial planning advice for women tip! There’s a difference between funding your learning and going on an all expenses paid cruise! Don’t use your RRSP funds to pay down debt or to pay for lifestyle costs. Only take out in emergencies or during years where you have lower income.

8. Know the tax facts – Your RRSP income is not taxed unless you make a withdrawal, so hold your highest taxed investments in your RRSP and your tax preferred investments outside your RRSP.

9. Withdraw from your RRSP conservatively – Be very cautious about what you draw from your RRSP as it gets added to your overall income for the year. If your new marginal tax rate exceeds the tax you have paid you will owe Revenue Canada more.

10. Claim your deductions – RRSPs come with a deduction each. Be sure you’re taking advantage of this tax benefit! You can always defer your deduction to a year when your income is higher in order to garner better tax savings.

11. Name a beneficiary –and update it if the circumstances warrant it (such as a death or divorce).

5 Ways to Survive Being in a Sandwich Generation

Tuesday, August 23rd, 2011

If you’re feeling the strain of caring for your aging parents while trying to raise a family of your own, you’re not alone. Being part of a “Sandwich Generation” is something that hundreds of thousands of other people are going through as well. Facing the challenges of offering financial and emotional support to your parents while you’re trying to be there for your children is a lot to have on your plate. When you add work related concerns and your own financial planning matters, the situation becomes even more complicated.

However, if you’re part of the sandwich generation, there’s hope from financial advise. With the right planning and strategies you can ensure that you survive this demanding time in your life.

1. Get clear on your financial picture.

Before you can consider commitments to your parents and children, you need to understand your financial picture. You need to get some financial advise for women. Working with a financial advisor who specializes in mid-life transitions can help you assess where you are now and make safe and secure plans for the years to come. If you know your current situation you’ll be more capable of making the right decisions to prepare for college tuition, your own retirement and any support you may need to offer your parents.

2. Have a frank talk with your parents about their finances.

In order to avoid surprises you need to know how your parents are doing financially. Sitting down with them and discussing their plans if they become ill or unable to care for themselves can help you better prepare for the future and understand your responsibilities. If you find that it’s an uncomfortable conversation to have, consider sitting in a neutral environment with an experienced financial advisor to go over the facts together.

3. Get all of the necessary legal documents in place well ahead of time.

Taking care of your aging parents may mean making decisions in their names, and this requires durable power of attorney. You may also need to have additional legal documents to ensure stability for you, your parents and your growing children. It’s a smart move to get financial advise and get these in order before they are needed. This way you won’t have to scramble around during a crisis and you can make sure you understand the details of the paperwork.

4. Hold family meetings to discuss your expectations.

Another important piece of financial advise for women is to communicate with your family. This is especially important if you need to live in a multi-generational household. Communicating can help you avoid misunderstanding and can make sure that all members of your family, young and old, feel cared for and appreciated. During the family meetings make sure everyone has the chance to talk and express their needs.

5. Get the personal support that you need.

When you’re in the sandwich generation, your pressures are more than just financial. Expect to have a few emotional ups and downs as you’re working through the issues around your increased responsibilities. Be sure to get personal support so you can handle your increased stress. You can find help from a support group, a counselor or just spending time talking with a trusted friend.

Are you in shape? Take the ‘Summer Shape-up’ test?

Monday, June 13th, 2011

Get the skinny on your financial ‘well being’ by taking the Summer Shape up Quiz.

Quiz

1. I earn enough money each month to pay all my bills? Yes/No

2. I have enough money saved to pay for emergency or unexpected costs? Yes/No

3. I have written financial goals? Yes/No

4. I have a written savings and spending strategy that I follow? Yes/No

5. I know my net worth (what I own minus what I owe)? Yes/No

6. I know where ALL my important financial documents are located? Yes/No

7. I have a Will and Powers of Attorney in place? Yes/No

8. I know where and how my money is invested and I meet with my advisor at least annually to review? Yes/No

9. I have had my insurance needs reviewed within the last 2 years? Yes/No

10. My mortgage and loan payments are less than 30% of my overall income? Yes/No

Please give yourself one point for every yes answer and then add up all your points to see how you did.

If you want to manage your money better and didn’t fare so well on the quiz, don’t get discouraged. This is the time to make a new start. Changing even a few of those ‘no’s’ to ’yes’s’ can make a real difference in your overall financial well-being. Here are a few simple tips to get you started:

· Educate yourself. There are many great websites and books available where you can find useful information depending on your needs.

· Find a qualified financial adviser/coach. If you wanted to lose weight, you might hire a trainer or join a weight loss program. Well if you want to lose your debt or build up your savings, get a good financial advisor/money coach who can create a plan and support you along the way.

· Stick to a plan. Why do diets fail? Because we do not stick with them. Make sure your financial goals/strategies are realistic and attainable. Most importantly, renew your commitment daily and follow through.

Don’t worry if at first you find it a challenge to make sense of your financial health. Like anything, it takes time. The most important thing is to just get started. Set some financial goals, follow a budget and save and you’ll be ahead of most.

The best use of your tax refund

Wednesday, April 29th, 2009

Do you remember the good old days when spending our tax refund frivolously wasn’t such a big deal? Our jobs were stable, house values seemed to be on a never-ending climb and the stock market was booming. Things were looking pretty good.  Well, we are all feeling a little less wealthy these days; our portfolios have been beaten up, the wealth in our homes have taken a blow and on top of all that, we are worried about our jobs and the stability of our income.  There is a lot of insecurity or fear out there and so spending our tax refund on a great vacation or a new flat screen TV may not be the most financially savvy thing to do.

So what should we do with this year’s tax refund- spend it or save it, invest it or splurge? (more…)