Retirement Planning – How much do you need?

The answer is $1,050,976. I wish it was that easy! A million dollars sounds like a lot of money but it no longer guarantees a five-star retirement. People are living longer and will need to have enough money to support themselves for 25 to 30 years in retirement.

Typically I see clients spend more money when they initially retire. This is the time in their lives when they are still healthy and full of energy. They travel more, focus resources on hobbies and other interests and do many of those things they have been putting off during their working years.

10 Keys to Retirement Planning

  1. Set a savings goal to replace 60% to 70% of your gross working income
  2. Maximize contributions to a company pension if available
  3. Start saving early, take advantage of compounding investment returns
  4. Make monthly contributions to retirement savings plans (RRSP & TFSA)
  5. Reinvest tax savings from RRSP contributions
  6. Reduce investment costs (commissions, mutual fund fees etc)
  7. Eliminate all debt (mortgage, car loans, line of credit)
  8. Make your plan tax efficient to take full advantage of income splitting
  9. Maximize government benefit plans (CPP, OAS, GIS) if applicable
  10. Review your plan and make the appropriate adjustments

The Fraser Institute recently published a survey showing many Canadians believe they’re heading into retirement shy of their goals by hundreds of thousands of dollars.

There are geographic differences, of course: Those in the Atlantic region believe they’re short by $673,000, those in Quebec by just $267,000, those in Ontario by $649,000, those in Saskatchewan and Manitoba by $334,000, those in Alberta by $479,000, and those in British Columbia by $814,000.

Don’t be caught short of your retirement goals. Plan now, start saving, invest wisely and enjoy a comfortable life style during your retirement years.

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Retirement Crisis: Public Service Pensions

Pension mathematics remains a mystery to most Canadians. Canada’s pension system is unfair and unsustainable. Given the overly generous public sector pensions and the continued declining of a taxpaying workforce to pay for those pensions, Canadians face a very real crisis.

The problem lies in the fact that government employees have the traditional defined benefit plan. It guarantees retirees 60% to 70% of the employee’s salary in retirement. Plus some plans included very generous medical coverage and are indexed to inflation. Although, the employee is required to contribute to the plan, the government (the employer) has to match the contribution. What happens if the pension plan doesn’t have enough money and becomes underfund? The government has to make up the short fall!!

Yes, the money comes from taxpayer’s pockets, yours and mine!

The financial crisis has added more strain to an already fragile system. Many public service pension plans are struggling to meet their financial obligations to retirees, especially since the crisis put huge burdens of extra debt to federal, provincial and municipal budgets.

The average Canadian is expected to save 18% of their income to accumulate a nest egg that will provide adequate income to replace 60% of their working income. Government employees are required to contribute a lot less to their pension plans. Plus they enjoy the following advantages:

  • Lower management fees
  • Better quality investment managers
  • Diverse investment options to reduce risk
  • The ability to invest in a variety of assets (sport teams, toll roads, shopping malls)
  • The capability to invest in startup companies before the general public
  • Able to buy large stakes in public companies and influence management
  • Government employees’ require no investment knowledge or make any investment decisions
  • Pension income is guaranteed by taxpayer’s dollars for life

Possible Reforms to the Pension System

  1. Increase contributions by government employees into the pension plan
  2. Increase eligibility age for CPP from 60 to 65
  3. No cost of living increases when pension plan is under funded
  4. Reduce benefits when pension plan is underfund for more than 3 years
  5. Nearly every developed country in the world has already raised, or is in the process of raising, its public pension retirement age to 67 or 68

It is simply not fair that government employees are enjoying a deluxe standard of retirement living on the backs of ordinary Canadian tax payers. Why should we have to pay more taxes, reducing our ability to save for our retirement?

It is time to put pressure on our elected officials to put fairness into the Canadian pension system.

Buying a House: Part III – Buying Tips

Before you go shopping get pre-approved for a mortgage. Add your down payment to the mortgage amount and now you have a maximum budget that you can spend.

Step One: Neighbourhoods

Where would you like to live? Measure your commute time to work and access to public transportation. Living outside of a big urban centre may allow you buy a bigger house for less money. Check out what is important to you like; access to schools, shopping, parks/playgrounds, day care, doctor/dentist, hospitals and closeness to family & friends.

Step Two: Type of House

Look at your lifestyle; will you be happy in a condo, townhouse, semi-detached or detached house. What features are important to you (size of living space, number of bedrooms, bathrooms …etc.)? Are you willing to roll up your sleeves and buy a fixer upper or do you prefer new?

Step Three: Get some help

Find an experienced real estate agent. Hire a lawyer to look after legal issues and review contracts. Hire a home inspector if you plan on buying a resale. Look at the recent selling price of properties that have been sold in the area. Talk to friends and relatives regarding their house buying experiences.

Step four: Make a checklist

  • How old is the house
  • In-law apartment or potential rental space
  • Lot size, back yard, patio, deck
  • Is it on a quiet street
  • Updated kitchen & washrooms
  • Exterior finish – brick, stucco, aluminium siding, wood siding
  • Type of heating – oil, natural gas, electric
  • Has plumbing & electrical been updated
  • Air conditioning, alarm system, wood or gas fireplace
  • Private or shared driveway, garage or carport
  • Unfinished or finished basement
  • New roof or needs replacing

Step Five: Avoid Paying Too Much

Bidding wars on the same property can be fabricated. The listing price is set below market. The rooms are painted in a light or natural colour and furniture has been removed to make the rooms look bigger. A good real estate agent will know if the house is listed below market. Be patient, wait for the right house and buy for the right price.

Buying a House: Part II – Down Payment

Based on my last blog, you should have a rough idea of what you can afford. Now can you save the required down payment to purchase your first house? Boosting your savings rate from 10% to 15% of your gross family income will give you a better chance of achieving your goal.

Don’t forget about closing costs! Multiply 3% of the house price for lawyer fees, house insurance, title insurance and land transfer tax. Depending on your closing date you may need to pay some pre-paid expenses like property taxes.

To reach your savings goal, I strongly recommend a forced saving plan. Allocate a set amount of your weekly or bi-weekly pay check into a RRSP to take advantage of the first time “Home Buyers’ Plan”!

Advantages

  • Tax free personal withdrawal of $25,000 ($50,000 per couple)
  • Interest free loan
  • Refunds can be added to your saving plan
  • You have 15 years to repay the withdrawals
  • Income on investments grows tax free
  • No withholding tax on withdrawals

Disadvantages

  • Your retirement plan will lose income
  • A missed repayment will be added to your income
  • Must make an annual repayment of 1/15 of the withdrawal

Check out the CRA web site to see if you qualify as a first time home buyer. Plus have a good look at their withdrawal and pay back conditions. Contributing $50,000 over time into RRSPs could result in adding another $10,000 to $15,000 to your down payment.

Saving for a down payment can be reachable. It would only take three years to save $25,000 by transferring $700 a month into your RRSP. Save the refund and a couple could have $65,000 for a down payment.

Don’t wait to find your soul mate, start saving now, so that you and your soul mate will have someplace to live.

Buying a House: Part I – Affordability

The first step in house buying is figuring out how much house can you afford. The calculation depends on your family income, borrowing costs, the size of the down payment and your monthly debt payments.

Affordability Rule 1

The first rule is that your monthly housing costs shouldn’t be more than 32% of your gross monthly income. Housing costs include your monthly mortgage payments (principal and interest), property taxes and heating expenses. This is known as PITH for short — Principal, Interest, Taxes and Heating ( if buying a condo, include half of the monthly condo fees)

Affordability Rule 2

The second rule is that your entire monthly debt load should not be more than 40% of your gross monthly income. Your entire monthly debt load includes your housing costs (PITH) plus all your other debt payments (car loans or leases, credit card payments, lines of credit payments, student loans etc.). You have calculated these on the Monthly Debt Payments form. This figure is called your Total Debt Service (TDS) ratio.

Types of Mortgages

1. Conventional mortgage – requires a minimum down payment of 20% of the purchase price. The maximum amortization period is 30 years. Terms vary from one to five years and the interest rate can either be fixed or variable. (open mortgages are also available)

2. High ratio mortgage (less than 20% down) – is insured with the Canadian Housing and Mortgage Corporation. (CHMC) The insurance cost is based upon the amount of the down payment. The minimum down payment required is 5% of the purchase price and will cost the borrower about 3% to 3.5% of the value of the mortgage. The cost is added to the mortgage and the maximum amortization period is 25 years.

3. Secured line of credit – requires a minimum 35% down payment of the purchase price and requires a monthly payment equal to the interest charges.

Go on-line and google “How much house can I afford calculator”. Put in different amounts for down payment and try changing mortgage interest rates and amortization.

Here is one example: Using a RBC calculator

Total Family Income      $90,000.00       90,000.00
Total Debt              $0.00              $0.00
Monthly Mortgage Payment        $1,900.00         1,800.00
Interest Rate             3.50%             3.50%
Property Taxes / monthly             350.00           450.00
Heating Costs / monthly            150.00           150.00
Total Monthly housing cost        $2,400.00       $2,400.00
Down Payment           10.22%           20.33%
Dollar Amount       $42,000.00      $92,000.00
Mortgage Principal amount     $368,934.00      360,526.00
Default Insurance = 2.83%       $11,621.00              $0.00
Total Mortgage amount     $380,555.00     360,526.00
Amortization           25 years          30 years
Maximum Purchase price     $410,934.00     452,556.00

This example also illustrates that the cost of a high ratio mortgage can be expensive. It will take about 15 monthly mortgage payments to pay off the default insurance of $11,621 that was added to the mortgage total. I would be very careful when borrowing money to finance a house. You don’t want to be house poor, where you cannot afford other things in life.

Now you should establish a savings goal to buy your house.

Saving for Your Children’s Education

Congratulations, you just had a baby! While you enjoy the attention of family and friends, here is a scary thought: By the time your baby heads off to college or university, you could be forced to pay up to $100,000 for an education.

The average outstanding debt from both government loans and lines of credit to get a four year degree in Ontario is $37,000 in 2014.

Option One: Self Directed RESP

Parents, grandparents, relatives or even friends are all able to open a Registered Education Savings Plan (RESP) for a future student. There are different RESPs to choose from! The Federal government has established the Canadian Education Savings Grant (CESG) program to encourage you to save. To get the grant money you need to make annual contributions to the RESP plan.

Limits & Conditions

– Lifetime RESP contributions limit of $50,000 per child
– Maximum grant money available is $7200 per child
– Grant limited to $500 per year on an annual contribution of $2500
– The grant is only available until the child is 17 years old
– The child must enroll in a qualifying educational program
– Investment income & grant money is taxable to your child when withdrawn

Termination of a Plan

– Grant money is refunded
– Contributions are withdrawn tax free
– Income accumulated in the plan is subject to 20% tax
– All income is taxable to the contributor of the plan
– To avoid tax, contributor can transfer the income to their RRSP if they have contribution room

It is important to open a plan as soon as the child is born. A $2500 contribution into the RESP on junior’s first birth will add another $500 gift from the government into the plan. If you forget to make a $2500 contribution into the RESP on junior’s second birthday, then no 500 gift from the government.

Option Two – Joining a Group RESP

It is geared to low income families that can only commit to small monthly contributions. There are costly early withdrawal fees and penalties. It is very important to read the fine print and compare different providers of group RESPs!

  1. What fees are you expected to pay, and when?
  2. Do you have a choice about when and how much you contribute?
  3. What kinds of post-secondary programs qualify?
  4. When and how will your child receive payments from the plan?
  5. What happens if the student does not go on to education, or does not complete their program?
  6. What happens if you sign up for a plan, but change your mind?

I personally don’t like Group RESP’s, if you can’t save $200 per month for a self-directed plan, then put whatever you can afford into a Tax Free Saving Account (TFSA). You control how it is invested and it grows tax free.

When relatives ask what your kids want for birthday and Christmas presents, ask for a low cost toy and a cash donation to the kids’ education fund. Toys are great but the gift of an education lasts a lifetime!

Upcoming Blogs

Buying a house: Part I – Affordability

Buying a House: Part II – Down Payment

Buying a House: Part III – Buying Tips