Saving money so you can save for retirement

By Sheryl Smolkin

SHUTTERSTOCK Put $1 in a retirement savings jar every time you use a savewithspp.com idea.

Over the last year, the focus of savewithspp.com has been to make sure the Saskatchewan Pension Plan is no longer “Canada’s best kept secret.” We have discussed key elements of the program and why it is a great pension plan for both individuals and employers across the country who want to help their employees save for retirement.

In a series of podcasts we’ve also introduced you to the people behind the SPP and a well known group of financial experts.

But we know that one reason many people don’t save for life after work is that they don’t believe they can afford it. After paying the rent, putting food on the table and dealing with a pile of other family bills each month, there is nothing left to save.

Yet most of us can easily save a dollar or two every day, and over time it all adds up. Whether you make coffee at work instead of buying fancy lattes, take better advantage of discount coupons or comparative shop online there are hundreds of ways to be more frugal and still enjoy life.

So beginning this week I will be blogging for savewithspp.com about ways to save money in your everyday life. And I need your help. I have lots of ideas, but you have even more.

In every blog, I will list the “themes” for the next two weeks.

  1. Send your money saving ideas related to this theme to socialmedia@saskpension.com.
  2. Pictures illustrating your suggestions are welcome.
  3. Reader suggestions relating to the weekly topic will be posted on the Saskatchewan Pension Plan Facebook page.
  4. If your idea is selected for posting, your name will be entered in a quarterly draw for a gift card.

Every week I will also link to “the best of” blogs written by other personal finance bloggers. And from time to time, I will post podcast interviews with interesting people who can suggest more terrific ways to make your pay cheque go further.

New blogs will be posted each Thursday. One way to make sure you don’t miss any of them is to enter your email address on the right hand sidebar of savewithspp.com to receive notifications of new posts by email. You and your friends can also follow the Saskatchewan Pension Plan on Facebook.

Furthermore, we challenge you to put a dollar in a “retirement savings jar” every time you take advantage of a money saving idea on savewithspp.com. You’ll be amazed at how fast it adds up.

To get you started, here are the themes for the rest of December:

6-Dec Entertaining Holiday entertaining on a budget
13-Dec Christmas shopping 10 frugal last-minute Christmas gift ideas
20-Dec Boxing Day How to beat the Boxing Day blues

I can’t wait to hear all of your fantastic suggestions.

Wishing you and yours, a happy and healthy holiday season!

Why fees make a difference

By Sheryl Smolkin

If you save for retirement with the Saskatchewan Pension Plan, the Contribution Fund allows you to invest in a professionally managed balanced portfolio or a short-term fund. The composition of the balanced fund at September 30, 2012 is illustrated below. On average, annual fees are targeted to be one percent.

Yet a recent article in the Globe and Mail by columnist Rob Carrick reveals that the average management expense ratio (MER) — that’s the ratio of fees to the total amount of money in the fund — is 2.37 per cent for six types of retail balanced funds he reviewed.

Carrick also notes that yield on a five-year Government of Canada bond — that is, the annualized return from the interest you receive — is about 2.5 per cent right now. A five-year provincial government bond yields about 2.9 per cent. Subtract the average balanced fund fee from these yields and you’re not left with much. Those same fees will grind down your returns from the stocks in your balanced fund, though not quite so dramatically.

How much of a difference do fees make? Take a look at the following two scenarios:

  1. If starting at age 30 you save $2,500/yr. in the SPP for 35 years with an average annual net interest rate of five per cent you will have savings of $237,090 at age 65.
  2. If starting at age 30 you save $2,500/yr. in a retail balanced mutual fund for 35 years with an average net annual interest rate of 3.63 per cent (lower because admin expenses are 1.37 per cent higher than in SPP) you will have savings of only $177,235 at age 65.

That’s a difference of almost $60,000. And the results are much more dramatic if you deposit $2,500/year for 35 years and transfer in another $10,000/year from your RRSP. Earning 5 per cent a year in SPP, your balance would be $1,185,454 but if you only earn 3.63 per cent in a retail balanced mutual fund you will save only $886,176 or 25 per cent less.

For more information about SPP investments, see Investments.

Sign up for eUpdates to get up to the minute news about SPP.

Also read:
Better investment fee and performance disclosure might help
ETFs vs mutual funds
Investment fees dragged into the spotlight

October 2012 returns

SPP posted a return of 0.43% to the balanced fund (BF) and 0.06% to the short-term fund (STF). The year to date return in the BF is 6.59% and in the STF is 0.42%.

Market index returns for October 2012 were:

Index  Oct 2012 return (%)
S&P/TSX Composite (Canadian equities) 1.07
S&P 500 (C$) (US equities) -0.30
MSCI EAFE (C$)
(Non-north American equities)
2.42
DEX Universe Bond (Canadian bonds) -0.19
DEX 91 day T-bill 0.09

A comprehensive investment update to the end of the third quarter is available on our website at saskpension.com.

Talking to Alison Griffiths

Alison Griffiths podcast
(We apologize for the quality of this recording.)

Hi, my name is Sheryl Smolkin. I’m a lawyer and a journalist. Today I’m pleased to be continuing the Saskatchewan Pension Plan’s series of interviews with financial experts. My guest is Alison Griffiths.

Today I am going to ask Alison to share with us the answers to some questions about retirement savings she has written about recently.

Alison is an award winning financial journalist, best-selling author and broadcaster. She has hosted two acclaimed television shows, Maxed Out for W Network and Dollars and Sense for Viva.

For many years she wrote a a popular financial column for the Toronto Star and her  weekly column for the Metro chain of papers “Alison on Money” continues. In addition to her frequent speaking engagements and workshops, she has just released her ninth book: Count on Yourself. It’s a wonder she ever finds time to sleep!

Q. Financial institutions would like us to believe that every Canadian who is earning even a few dollars should save in an RRSP or pension plan for retirement. Do you agree? Can you give me examples of cases where this may not apply?

A. Ideally it’s good to save for your retirement one way or another. However, there are a couple of situations where people should examine that automatic RRSP contribution.

Situation 1

A post-retirement net income of less than about $16 000 is about roughly the cut off for a single person with a guaranteed income supplement. There have been a few cases that I’ve come across in the last few months where individuals who were getting the guaranteed income supplement after age 65, get to the required RIFF withdrawal age in their 70’s and suddenly they’re bumped out of that supplement payment which they’ve been relying on. If you think you’re going to be on the edge than it might be better to put it into a tax free savings account or a non-registered account

Situation 2:

Those who may face a claw back from government programs because of higher income. After the age of 65 you get an age amount personal exemption in addition to your existing personal exemption, but that exemption starts to get clawed back after a net income of only about $33 000.

It’s worthwhile looking at that post-retirement income, looking at the government benefits you’re going to get and for higher income people you might be better off and have more flexibility if you deposit to a TFSA or a non-registered account.

Q. What’s more important – paying off debt like a student loan, or starting as early as possible to save for retirement?

A. Students with carry forwards of tuition deductions and a student loan should take the first three or four years post-graduation and really hit that student loan instead of making RRSP contributions. It’s very worthwhile. Then they are in a situation where they can start contributing to their RRSPs without having to decide whether to pay off their student loan or or contribute to RRSPs.

Q.Is it better to contribute monthly or to deposit a lump sum one or more times a year?

A. For most people contributing monthly is a good idea. Investing every month, you’re going to sometimes invest at a market high but you’re going to also invest at a market low, so you smooth out those bumps via dollar cost averaging. Also the discipline is important.

Q. You recently wrote a column advising readers not to take out a loan to max out their retirement savings every year. Can give our listeners a few reasons why you don’t think that’s a good idea?

A. The reality is that rarely do I see it work out even when interest rates are low. It’s not just because the investment return plus the tax deduction has to be higher than the borrowing cost. You also have to pay the money back. The fact is it gets loaded onto the general debt individuals carry for three or four years and they never ever quite pay it off.

Q. How can people find out how much their investments are costing them?

A. The best way to do it is to look at the mutual funds you have. On Morningstar.ca you can easily type in the name of your fund. A report pops up that gives you a snap shot. You’ll see your MER – management expense ratio figure there, and that’s the percent you’re paying.

One thing you need to remember about mutual fund fees is that they have to be considered as a hurdle. The mutual fund has to jump over the hurdle of that 2.5% fee before you even start making money.

Q. How important are fees? If I’m investing $100, a 2.5% fee of $2.50 doesn’t sound like much. How much difference can paying say 1% instead of 2.5% MER on an investment make in terms of accumulated retirement savings over time?

A. It makes a huge difference – in small amounts of money it doesn’t seem to be too much. However, the difference between 1% and 2.5% over 15 years on a $10,000 investment is $5,000 in lost return. The other issue to think of is that not only do high fees reduce your gain, but they maximize your losses – in times of market volatility your losses get magnified.

Q. In your latest book you relate some humorous anecdotes about how people are more ready to discuss intimate details of their sex life than money. Why do you think finances and financial planning so hard to talk about?

A. Not only is money personal, but it also seems a lot of our self worth revolves around money, how much we have, how much we earn. When you poke at people’s self worth by revealing what might make them appear to be negative compared to somebody else, then they start to get very uncomfortable.

We also worry about getting ripped off by the people we’re in a relationship with. But as a result we don’t develop the confidence or the language skills to discuss money when it becomes necessary.

Thanks Alison. It was a pleasure to chat with you. I know Saskatchewan Pension Plan members will be eager to read your new book Count on Yourself and they will also want to check out your articles in the Toronto Star articles and other media.