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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

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).