Separating retirement myths from reality

By Sheryl Smolkin

In the first two months of every year, oceans of words are written trying to help people understand why retirement savings is important and how best to grow their money.

However, a recent TD Poll reveals Saskatchewan and Manitoba residents still have a variety of misconceptions about their retirement finances, from when they should start saving to the amount they will need.

Here are four retirement savings myths that continue to proliferate in spite of ongoing efforts by financial institutions, governments and the media to enhance the financial literacy of Canadians.

Myth 1: You should focus on eliminating debt before saving for your retirement.

The majority of survey participants (63%) in Manitoba and Saskatchewan think they should focus on eliminating debt before saving for retirement, and 59% feel they should never retire with any debt.

If you have a mortgage, you have debt. With most mortgages amortized over 25 years, if you wait to start saving until your mortgage is paid off, you will never accumulate enough to retire. It’s important to pay down as much debt as possible before retiring, but it’s also essential to strike a balance between reducing debt and saving for retirement.

Myth 2: In an economic downturn it’s safer to sell your investments and only put your money in guaranteed investments.

Those in Manitoba and Saskatchewan are the least likely to believe that putting money only in guaranteed investments is the safest strategy durng an economic downturn (32% vs. 42% nationally).

Consumer prices rose 2.3% in the 12 months to December 2011, following a 2.9% increase in November. GICs may be safe, but at best they are currently earning about 1.5 per cent – much less than inflation.

An advisor can help you determine the right asset allocation for your portfolio, which will optimize potential returns without exposure to inappropriate levels of risk.

Once you have a plan, stick with it. Trying to time the market doesn’t work, even for the experts. If you sell everything and move to fixed income investments when markets are down, you will not participate in the gains when the inevitable recovery occurs.

Myth 3: The older you get, the less money you spend/need for day-to-day expenses.

With more than half of Manitoba and Saskatchewan residents believing this to be true, they are the most likely in the country to feel that your expenses will decrease as you age (55% vs. 46% nationally).

But if you plan to travel, continue membership in pricey clubs and eat in expensive restaurants, your cost of living in retirement could be more rather than less.

Also, don’t forget to take into account everyday expenses such as dental and health care, or unforeseen expenses such as accidents or home repair.

Work with an advisor to estimate what your expenses will be in retirement, and to ensure that you are saving enough now to pay for these future expenses when you no longer have a pay cheque.

Myth 4: You don’t need to have money in the stock market to grow your retirement nest egg.

Sixty-four percent of people in Manitoba and Saskatchewan do not believe that investing in the stock market is required to establish a financially-secure retirement.

When it comes to retirement savings, it’s important to establish a good balance and have a variety of investments and savings products, including equities, bonds, and savings vehicles such as SPP, RRSPs or TFSAs.

Your portfolio should also contain a mix of conservative and more aggressive investments, depending on the number of years you have until retirement and your comfort level, which will help you maximize your retirement savings.

Saving money is as easy or as hard as you make it. As fellow moneyville blogger Krystal Yee recently wrote in RRSP baby steps: The $12.50 solution, you don’t have to start by saving hundreds of dollars from every pay cheque. Find a number that works for you – even if it’s only $25 bi-weekly – and have it automatically deducted from your bank account as soon as you get paid.

Also read:

How worried should you be about retirement?

Do you really need an RRSP?

Sheryl Smolkin is a Toronto lawyer, writer and editor. She can be contacted through her website or you can follow her on Twitter @SherylSmolkin.

Is topping up 2011 SPP contributions on your “to do” list?

To-do

If you are like most of us, maximizing contributions to the Saskatchewan Pension Plan and other retirement savings plans is at the top of your “to do” list every February.

Because 2012 is a leap year, you have until Wednesday February 29th to increase your 2011 SPP contributions to the annual maximum of $2,500.  SPP must receive your contribution on or before the deadline.

If you want to make sure you get your money to us in time, consider contributing:

  • In person or by telebanking at your financial institution.
  • By phone using your credit card; or
  • Online from the SPP website.

And don’t forget that throughout the year you can also make monthly contributions by pre-authorized chequing from your bank account or contribute by mail.

If you make regular monthly contributions, you’ll hardly notice it, and at this time next year you will already have “contribute to SPP” crossed off your “To Do” list

How to save tax dollars

By Sheryl Smolkin

We all know we ought to maximize Saskatchewan Pension Plan and other retirement savings plan contributions so we can retire comfortably sooner rather than later.

But the fact that your SPP contribution is deducted directly from your income for tax purposes and lowers the total income taxes you pay not only makes saving easier – it makes you feel like you’re getting a break!

You must have available RRSP room to make an SPP contribution. SPP contributions should be reported on Schedule 7 of your income tax form and claimed on line 208. Both your application and your contribution must be received by SPP before a tax receipt will be issued. SPP contributions will also be taken into account in determining RRSP over-contributions.

Spousal contributions are also permitted and if you have available RRSP room, you may contribute and receive a tax deduction for both your personal account and your spouse’s account.

Reduce taxes at source

Although you may look forward to getting money back after you file your income tax return in April, let’s face it — where possible, the best strategy is to avoid paying unnecessary taxes in the first place.

If you contribute to SPP by payroll deductions your employer can reduce the income tax you pay at source. But if you make regular monthly contributions which have not been automatically deducted by your employer, a letter of authority from a tax services officer must be provided in order to reduce income taxes deducted.

To get this letter you have to complete a Form T1213 Request to Reduce Tax Deductions at Source and provide documentation showing you are making regular SPP contributions to support the request for a tax deduction at source. It may take four to eight weeks for the Canada Revenue Agency to process the request.

Tax treatment of benefits

When your spouse has been named as beneficiary, death benefits from your account can be transferred directly to his/her SPP account or to an RRSP, RRIF, or guaranteed life annuity. Tax-deferred transfer options are also available if the beneficiary is a financially dependent child or grandchild.

All annuity payments from SPP are taxable in the year received and are eligible for the $2,000 pension income credit and for pension income splitting. Each year you will receive a T4A for the benefits that you have received in that year. Withholding tax is determined using a schedule prescribed by Canada Revenue Agency (CRA).

Your SPP account is also tax sheltered. You may continue contributing to your account until the end of the year in which you celebrate your 71st birthday or until you begin receiving a pension from SPP, whichever is earlier. You can continue contributing to the Plan if you are receiving SPP survivor’s benefits.

Key SPP tax benefits

  • Personal tax deduction available.
  • Spousal tax deduction available.
  • Contributions and earnings are sheltered from tax until received as income.
  • SPP annuity income is eligible for the pension income credit and for pension income splitting.

  

Also read:

RRSPs and related plans

RRSP myths are just that

Why you should never borrow for RRSPs

Deductions at tax time make RRSPs popular

Sheryl Smolkin is a Toronto lawyer, writer and editor. She blogs for the Toronto star on moneyville.ca and can be contacted through her website. You can also follow her on Twitter @SherylSmolkin.

December 2011 investment results

Volatility sums up market performance for the fourth quarter of 2011 and in fact for the entire year that was 2011. The European debt crisis and continued concerns about the economic recovery in the U.S. top the list of investor concerns. The seemingly endless rollercoaster with respect to these issues has marred investor confidence. As one writer put it, “markets moved from optimistic to pessimistic in a heartbeat.”

Canada’s economic picture remains strong but our commodity-dependent economy will feel the effect of slowed growth in the U.S. and global economies. The high levels of personal debt are cause for future concern when borrowing rates rise.

SPP’s balanced fund returned -1.0 per cent after administration costs while the short-term fund return, after administration costs, was 0.6 per cent for the year. The top ten holdings, portfolio composition and returns are summarized in the accompanying tables.

SPP portfolio
at December 31, 2011
Balanced fund return* Benchmark Short-term fund return*
Short term 1.1% 1.0% 1.1%
Bonds & mortgages 9.8% 9.8% 1.1%
Cdn. equities -9.4% -8.7% n/a
U.S. equities 1.2% 4.6% n/a
Non-North American equities -11.4% -10.0% n/a
Cdn. Real estate 13.7% 10.6% n/a
*Gross return before administration expenses
Top 10 balanced fund holdings
Canadian Equities % of Portfo-lio U.S. Equities % of Portfo-lio Non-North American Equities % of Portfo-lio
1 Toronto Dominion Bank 7.0 Pfizer 3.6 Cash 2.6
2 Canadian Natural Resources 5.4 Markel 3.0 HSBC 2.4
3 Bank of Nova Scotia 5.3 Johnson & Johnson 2.8 Novartis Ag 2.4
4 Canadian National Railway 3.9 Intel 2.7 Adidas 2.2
5 Saputo 3.8 Apple 2.6 Canon 2.2
6 Transcanada 3.3 Proctor & Gamble 2.6 Samsung Electr. 2.1
7 National Bank of Canada 3.1 3M 2.4 Tesco 2.0
8 Teck Resources 2.7 Wells Fargo 2.3 Nestle 1.9
9 CAE 2.6 Chevron 2.2 BMW 1.7
10 Toromont Industries 2.6 Merck 2.1 Royal Dutch Shell 1.6

The S&P/TSX Composite Index lost 8.7 per cent during the year.

  • Health Care and Telecommunications were the top performing sectors while Information Technology was the weakest.

U.S. equities returned 4.6 per cent in Canadian dollar (C$) with seven of the ten sectors in positive territory.

  • Utilities and Consumer Staples experienced the strongest performance
  • Financials and Materials were the weakest sectors.

The MSCI EAFE Index returned -10.0 per cent in C$ terms as the dollar appreciated against eight of the twelve currencies in the Index.

  • Only two of the twenty-two countries in the EAFE Index had positive returns in C$ with Ireland leading the way.
  • Not surprisingly, Greece had the lowest return at -61.9 per cent. Developed markets outperformed emerging markets.
The Canadian bond market returned 9.7 per cent during 2011. The Bank of Canada maintained its overnight rate at one percent during the quarter and the U.S. Federal Reserve maintained it key interest rate at a target range of 0 to 0.25 per cent.

To view a printable version of this post please click here.

Talking to Warren Wagner

Warren Wagner

Warren Wagner podcast

Hi,

My name is Sheryl Smolkin. I’m a pension and benefits lawyer and journalist. Today I’m continuing our series of interviews with the people behind the scene at the Saskatchewan Pension Plan. I’m talking to Warren Wagner, Chair of the Saskatchewan Pension Plan Board of Trustees.

Warren is currently the Regional Director for Saskatchewan of the Canadian Diabetes Association and previously for 35 years he was a Regional General Manager with the Canadian Imperial Bank of Commerce.

Welcome, Warren.

Thank you Sheryl.

Q. Warren, what is the Board’s role in the operation of the SPP?

A. Like other pension plans we have a Board of Trustees that is responsible for insuring that the plan acts in accordance with good governance and fiduciary responsibilities. So really our responsibility is to make sure that the members of the plan have their interests protected and the goals and objectives of the plan are carried out.

Q. How are Board members appointed?

A. The Saskatchewan Pension Plan’s Board is appointed on the recommendation of the province’s Minister of Finance. The appointments are then made by an order-in-council of the Saskatchewan government.

Q. How long is the term for each member?

Typically it is three years. Usually people serve on the Board for one or more terms, hopefully to provide their continuing experience and knowledge of the plan.

Q. The SPP is 25 years old this year. What do you think are some of the most important developments over the past 25 years?

A. Good question. First of all, I think the fact that it has been in operation for 25 years is probably one of the most important features of the plan. In the financial industry there are a lot of plans, investments and programs that have come and gone, yet the SPP has proven to be durable, fairly stable and predictable.

When you look at the plan’s history and performance over the past 25 years, the SPP has returned in excess of 8% each year with nominal management fees. So you have a plan that is strong, simple to understand, well-managed and provides the opportunity for people and small businesses in the province of Saskatchewan and beyond to invest for the future.

Q. What is the Board’s vision for the SPP over the next 25 years?

A. What we really see is the opportunity for SPP to expand on the good things it is doing for the individual contributors today but also to become the small business plan of choice going forward.

There are about 70,000 small businesses in Saskatchewan, as an example, and the majority of these do not have a pension plan for their employees. The reality is that employers would like to have something to help their employees, but they need something that is simple, easy to understand, inexpensive and a plan that is not going to require a tremendous amount of their time to administer.

We’re happy to say the SPP meets all those criteria so we think that there is an excellent opportunity for the plan to grow by providing this good pension opportunity for both individuals and small businesses.

Q. Now the contribution levels were increased at the end of 2010. Do you envisage that going forward further increases might be in the cards?

A. At this point we are still very pleased that the contribution level was increased from $600 to $2,500 a year, which is a very significant increase. We’re just in the process of digesting that at this time. However, we have had discussions internally about the need to either look for indexing of that limit or requesting a staged limit increase over the next few years.

Thanks so much for answering my questions today. I’m sure both members and prospective members will be impressed with the sound governance structure in place at the Saskatchewan Pension Plan.

 

Thank-you Sheryl.

FAQ: Pension payments

SPP members may begin receiving benefits from the Plan any time after age 55 and must be retired from the Plan by the end of the year in which they reach 71. At SPP, “retirement” simply means you are receiving pension payments. You can still be employed and receive a pension from SPP.

You may choose an annuity from SPP and receive a pension for the rest of your life, transfer the funds to a locked-in account with a financial institution, or choose a combination of the annuity and transfer options.

Here are some FAQ about pension payments. For more information, see the SPP Retirement Guide.

Q. How much will my pension be?

A. If you elect to receive a pension, the amount of your monthly payment will depend on which annuity option you choose, your age at retirement, your account balance, and the interest and annuity rates in effect when you retire.

Q. How does an annuity work?

A. A SPP annuity is the easiest way to access your SPP savings. Funds stay invested with SPP – no transfer fee – and the Plan assumes the investment risk and the obligation to pay a pension for your lifetime.

Your annuity choice cannot be changed after payments begin. Each option provides different death benefits. Annuities offered by SPP as well as their features are:

Life Only Annuity

This provides the highest monthly payment with no survivor or death benefits payable. All pension payments stop at death.

Refund Life Annuity

At death your beneficiary receives the remaining account balance. The death benefit is calculated by subtracting total payments received from account balance at retirement. You must specify a person(s) or estate as beneficiary. The beneficiary designation can be updated at any time before your death.

Joint and Last Survivor Annuity

At your death, your surviving spouse or common-law partner receives a monthly payment for the rest of his or her life. The continuing benefit for your joint survivor is 100%, 75%, or 60% of your monthly pension, as chosen at retirement.

Q. Can I transfer my money out?

A. At retirement time, one of the options is to transfer your account to a Locked-in Retirement Account (LIRA) or a prescribed RRIF with another financial institution.

Q. Can I get my money out in a lump sum?

A. If you have a small pension benefit of $20.88 or less per month at your retirement date, you may choose to take your money out in cash less a 10% withholding tax (sent to Canada Revenue Agency) or transfer your account into an RRSP.

Pay yourself first

By Sheryl Smolkin

Saving for retirement is hard. You fully intend to put away a percentage of every paycheque but mortgage payments, car payments and new shoes for your children get in the way. When you have a few dollars in your pocket after paying the bills, travel and the latest tech toy are powerful magnets.

But you can make saving much easier, by adopting one simple financial planning principle: “Pay yourself first.”

“Pay yourself first” as a cornerstone of investment philosophy was popularized in this country by David Chilton, the renowned author of The Wealthy Barber. Simply put, it means that before you pay your bills, before you buy your groceries, before you do anything else, set aside a portion of your income to save. The first bill you pay each month should be to yourself.

Decide on the purposes for which you want to save and the amount you want to save each pay period. Then arrange for automatic withdrawals by your bank or other financial institution.

Here are three reasons why paying yourself first makes sense:

  1. You are making savings a priority. You are telling yourself that your future is just as important as all of the current expenses you are responsible for.
  2. You are developing sound financial habits. Most people spend money in the following order: bills, fun, savings. By putting savings first, you put the money aside before you find reasons to spend it.
  3. You are building a cash buffer. Regular cash contributions are an excellent way to build a retirement nest egg. You can also allocate a portion of your savings for an emergency fund or to purchase a home. Paying yourself first gives you the freedom to choose.

You can even use the tax system to “Pay yourself first” and get a raise. If you are saving regularly in the Saskatchewan Pension Plan or a registered retirement savings plan, you can complete a T1213 form and request permission for your employer to deduct a lower amount of taxes at source,

By reducing your withholdings at source, you are paying yourself and not the Canada Revenue Agency first, and increasing your net take home pay. You are effectively giving yourself a raise all year long, not just once at tax time.

You can contribute up to $2,500/year to the Saskatchewan Pension Plan and contribution options include directly contributing from your bank account on a pre-authorized contribution schedule.

Developing the “Pay yourself first” habit can help you build up a substantial retirement nest egg. For example, if you deposit $2,500/year in the SPP and earn five percent over a 40 year career (age 25 to 65) you will have a lump sum of about $317,000 in your account.

For additional retirement or other savings, you can also direct your financial institution to transfer regular amounts to savings vehicles like tax free savings accounts and registered retirement savings plans.

Also read:

The Wealthy Barber

The Automatic Millionaire

The Richest Man in Babylon

Pay yourself first

Pay yourself first?

Pay yourself first

Sheryl Smolkin is a Toronto lawyer, writer and editor. She blogs for the Toronto star on moneyville.ca and can be contacted through her website. You can also follow her on Twitter @SherylSmolkin.

Talking to Katherine Strutt

Katherine Strutt podcast

Interview Transcript

My name is Sheryl Smolkin. I am a pension and benefits lawyer and journalist. Today I’m kicking off our series of interviews with the people behind the scene at the Saskatchewan Pension Plan. I’m talking to Katherine Strutt, the General Manager of the Plan.

Welcome Katherine. Thanks Sheryl.

Q. Who can join the SPP?

A. Anyone between the ages of 18 and 71 can join the plan no matter where they live or work. So while most of our members are from Saskatchewan, anybody from the rest of Canada can also join and be part of the plan.

Q. Why do Canadians need a pension plan? Most of us are eligible for CPP and OAS, plus anyone with a house effectively has a chunk of savings.

 A. Well, if you think of retirement savings in Canada as a three-legged stool, on the first leg you have Old Age Security which is a universal program. On the second leg you have the Canada Pension Plan which is a workplace-based pension. And those two are the foundation for most people’s retirement savings. The third leg is individual retirement savings and that’s where the SPP fits in.

So it’s important to have some personal savings and the SPP provides a vehicle which is easy to use and gives members a strong return at a very low cost. Your home is a very important part of your personal savings but you cannot necessarily rely on that as your main source of funds for retirement.

Q. With an alphabet of savings options, why do you think Saskatchewan residents and other Canadians should consider the SPP as part of their retirement savings strategy?

 A. Well as I said, the SPP is simple and easy. We provide members with a true pension plan. That’s the difference between us and a Group RRSP. And you can’t get that anywhere else on a personal basis. Members get access to a large institutional plan for a fee of about one percent or less.

This would compare very favourably to retail mutual funds which typically would charge anywhere from 2% to 3%.

Q. How much can each member contribute?

 A.  Each member can contribute up to $2,500 per year based on their own individual RRSP limits. They can transfer in another $10,000 each year from an RRSP, a RRIF or an unlocked pension plan.

Q. How does an individual know where to put his money first – pay off debt? SPP? RRSP? TFSA? It’s a challenge to figure all of these out.

A. It sure is, and it is certainly a very individual decision, but I believe it isn’t an either/or proposition. People can be paying down their debt the same time as saving for their retirement through the SPP. As their financial situation improves, they can increase their contributions to the SPP.

Q. What if a plan member can’t afford to make contributions because of unexpected other expenses?

 A. That’s where the SPP is so flexible. If people need to stop making contributions for a while and then start up again, they can do so without penalty. It’s very flexible and very easy to use.

Katherine, thanks so much for taking the time to talk to me today. I know both members and prospective members will be very interested in your answers to my questions. 

 

Katherine Strutt Interview, December 2010

Katherine Strutt podcast, December 10, 2010

Millionaire teacher’s first rule of Wealth

By Sheryl Smolkin

High School English teacher Andrew Hallam started investing when he was 19. In an excerpt from his book Millionaire Teacher published on moneyville.ca, Hallam talks about the benefits of starting to save early and the power of compound interest:

“…Buried in the dull pages of most school math books is something that’s actually useful: the magical premise of compound interest.

Warren Buffett applied it to become a billionaire. More importantly, so can you and I’ll show you how.

Starting early is the greatest gift you can give yourself. If you start early and if you invest efficiently (in a manner that I’ll explain in this book) you can build a fortune over time, while spending just 60 minutes a year monitoring your investments.”

Read more