Tag Archives: Macleans

April 2: Best from the blogosphere

With the abolition of mandatory retirement in Canada, when you opt to actually leave the world of paid work for good is your own decision. There are financial milestones that may influence you  such as when you think you have saved enough to support yourself in retirement, but when you are ready to let go is also dependent on many more intangible factors.

After all, you not only need to retire from your job or your encore career, but you have must have something to retire to. For example, in the last several years I have joined a choir, been elected to the choir board and started taking classes at the Life Learning Institute at Ryerson in Toronto. Yet I’m still not quite prepared to give up my part-time business as a personal finance writer.

I was reminded of this conundrum reading a personal column by David Sheffield in the Globe and Mail recently. He wrote, “Turning to the wise oracle of our time, Google, I search: When do you know that it is time to retire? Most answers are financially focused: ‘When you have saved 25 times your anticipated annual expenditures.’ One site tackles how to be emotionally ready to quit work: ‘The ideal time to retire is when the unfinished business in your life begins to feel more important than the work you are doing.’”

The changing face of retirement by Julie Cazzin appeared in Macleans. She cites a 2014 survey by Philip Cross at the Fraser Institute. Based on the study, Cross believes Canadians are actually financially—and psychologically—preparing themselves to retire successfully, regardless of their vision of retirement.

“The perception that they are not doing so is encouraged by two common errors by analysts,” notes Cross. “The first is a failure to take proper account of the large amounts of saving being done by government and firms for future pensions …. And the second is an exclusive focus on the traditional ‘three pillars’ of the pension system, which include Old Age Security (OAS), the Canada and Quebec Pension plans (CPP/QPP), and voluntary pensions like RRSPs.”

He notes that the research frequently does not take into account the trillions of dollars of assets people hold outside of formal pension vehicles, most notably in home equity and non-taxable accounts. Also, he says the literature on the economics of retirement does not acknowledge the largely undocumented network of family and friends that lend physical, emotional and financial support to retirees.

Retire Happy’s Jim Yih addresses the question How do you know when it is the right time to retire?  After being in the retirement planning field for over 25 years, Yih believes sometimes readiness has more to do with instinct, feelings and lifestyle than with money. “I’ve seen people with good pensions and people who have saved a lot of money but are not really ready to retire.  Sometimes it’s because they love their jobs,” he says. “Others hate their jobs but don’t have a life to retire to.  Some people are on the fence.  They are ready to retire but worry about being bored or missing their friends from work.”

If you are still struggling with how to finance your retirement, take a look at Morneau Shepell partner Fred Vettese’s article in the March/April issue of Plans & Trusts. Vettese reports that few people are aware it can be financially advantageous to delay the start of CPP benefits. In fact, less than 1% of all workers wait until the age of 70 to start their CPP pension. However, doing so can increase its value by a guaranteed 8.4% a year, or 42% in total. And by deferring CPP, he notes that workers can transfer investment risk and longevity risk to the government.

Tim Stobbs, the long-time author of Canadian Dream Free at 45 attained financial independence and left his corporate position several months ago. In a recent blog he discusses how his focus has shifted from growing his net worth to managing his cash flow. His goal is to leave his capital untouched and live on dividend, interest and small business income from his wife’s home daycare. He explains how he simulates a pay cheque by setting up auto transfers twice a month to the main chequing account from his high interest savings account.

Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.

Written by Sheryl Smolkin
Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.

Group vs Individual RESPs: What’s the difference ?

The “holy trinity” of tax-assisted savings plans available to Canadians are TFSAs, RRSPs and RESPs. RESPs (Registered Educational Savings Plans) are primarily designed to help families to save for post-secondary education.

Each year, on every dollar up to $2,500 (to a life time maximum of $50,000) that you contributed to an RESP for a child’s education after high school, a basic amount of the Canada Education Savings Grant of 20% may be provided. Depending on the child’s family income, he/she could also qualify for an additional amount of CESG on the first $500 deposited, which means $100 more if the 2017 net family income was $45,916 or less and up to $50 if the 2017 net family income was between $45,916 and $91,831.

In total, the CESG could add up to $600 on $2,500 saved in a year. However, there is a lifetime CESG limit of $7,200. This includes both the basic and additional CESG. Lower income families may also be eligible for the Canada Learning Bond (CLB) that could amount to an additional $2,000 over the life of the plan.

Contributions to RESPs are not tax deductible, but the money in the account accumulates tax-free. Contributions can be withdrawn without tax consequences and when your child enrolls in a university or college program, educational assistance payments made up of the investment earnings and government grant money in the RESP are taxable in the hands of the student, generally at a very low rate.

When our children were young, we purchased Group RESPs for them and their grandparents also purchased additional units. I was so impressed with the program that I even took a year before transitioning from family law to pension law and sold RESPs.

Each child collected about $8,000 from the plan over four years of university, which helped them to graduate debt free. Fortunately, both my daughter and my son took four straight years of university education so there was no problem collecting the maximum amounts available to them minus administrative fees.

However, I’ve come to realize the potential downside of Group RESPs so we started contributing $200/month to a self-administered plan with CIBC Investor’s Edge for our granddaughter soon after she was born. She is now 5 ½ and as I write this, there is already $22,000 in the account.

Our decision to self-administer Daphne’s RESP was influenced in part by what I learned from other personal finance bloggers about the potential downside of group plans.

Robb Engen notes that group plans tend to have strict contribution and withdrawal schedules, meaning that if your plans change – a big possibility over 18 plus years – you could forfeit your enrollment fee or affect how much money your child can withdraw when he/she needs it for school.

With a Group RESP, contributions, government grants and investment earning for children the same age as yours are pooled and the amount minus fees is divided among the total number of students who are in school that year. Typically the pool is invested in very low risk GICs and bonds.

In contrast, there are no fees in our self-administered plan other than $6.95 when we make a trade. The funds are invested in a balanced portfolio of three low fee ETFs. We can easily monitor online how the portfolio is growing and as Daphne gets closer to university age we can shift to a more cautious approach.

Macleans recently reported that the total annual average cost of post-secondary education in Canada for a student living off-campus at a Canadian university is $19,498.75 and it will be much higher by the time your child or grandchild is ready to go off to college. So learn as much as you can about RESPs, get your child a social insurance number, set up a program and start saving.

However, as Engen suggests before you choose a group or individual RESP provider make sure you read the fine print and ask about:

  • Fees for opening an RESP;
  • Fees for withdrawing money from a RESP;
  • Fees for managing the RESP;
  • Fees for services and commissions;
  • What happens if you can’t make regular payments;
  • What happens if your child doesn’t continue his or her education; and
  • If you have to close the account early, do you have to pay fees and penalties; do you get back the money you contributed; do you lose interest and can you transfer the money to another RESP or different account type.

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Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.

Written by Sheryl Smolkin
Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.