One in five Canadians look to home equity for retirement funding

By Sheryl Smolkin

Financial planners will tell you that when you are planning for retirement you should not include home equity as a potential source of income. That’s because you have to live somewhere, and increasing numbers of older, healthy Canadians hope to “age in place,” at least initially.

However, for many Canadians the equity in their home is their greatest asset. So the findings of a new HSBC study that 20% of pre-retirees believe that income from downsizing or selling a property is likely to help them pay for life after work are not surprising. But income from downsizing or selling property is currently helping only 5% of retirees to fund their retirement.

Among pre-retirees who have started saving, people that have either stopped and/or faced difficulty (29%) are most likely to consider using property downsizing or sale income than those who did not face difficulty.

Those closer to retirement are more likely to think that income from downsizing or selling property will help them fund their retirement. Pre-retirees who are committed savers (26%), are the most likely to think that income from downsizing or selling a primary or secondary property will help them to fund their retirement. Those who are comfortably affluent (13%) are the least likely.

Looking forward, working age people and retirees of all ages have plans to change their living arrangements in the future. These include moving to:

A smaller home: 59%
A retirement home: 59%
A care home: 49%
Another city/ town in the same country: 33%
Live closer to family members/children: 27%
A bigger home: 26%
Another country: 15%
Live with my children: 13%

 

Sixty-two percent of people in their 50s plan to move to a smaller home in the future compared to 59% of people in their 40s and 49% of people 70 or over. Sixty-three percent of people aged 60 or over plan to move to a retirement home at some stage, compared to 55% of people in their 40s. Those who have received some sort of retirement advice are also more likely to think they will move to a smaller home (65%) than those who have received none (41%).

I must confess we buy lottery tickets every week (aka a tax on the statistically- challenged) in the vain hope that if we win “the big one” we’ll be able to renovate a large bungalow in a central part of Toronto and rent or buy a pied-à-terre in Ottawa where our daughter’s family lives.

However, in the meantime, as long as my husband and I are in good health, we are planning to stay in our three-story North York home. Currently Joel is using the basement apartment as a work room where he makes beautiful cutting boards, bowls and other decorative items. But when the time comes that we need help to remain in our home, the apartment can be used by a live-in caregiver.

At least that’s the plan for now! No doubt as the years go by and we move through the “go-go, go-slow and no-go” stages of retirement, our plans may change. And it is comforting to know that if we do live into our 90s, that the equity in our home is available to help finance a variety of options later in life.

Sept 26: Best from the blogosphere

By Sheryl Smolkin

You are back to work after your summer holiday. You have used up all your vacation days for the year. It’s dark outside when you have to get up for work. You’d like to retire early, but life is expensive and forever is a long time.

What are you willing to give up both now and later to achieve your goal? Do you have what it takes to live very frugally? Here are some blogs and blog posts that may give you some ideas if packing it in really early is at the top of your bucket list.

Engineer Tim Stobbs who lives in Regina, Saskatchewan is the author of Canadian Dream: Free at 45. While his objective initially was to retire at age 45, he’s pushed that date back to age 40. His ultimate goal between investments and home equity is a net worth of around $1 million. With a net worth in August 2016 of $883,000, he is getting close to meeting his target. He has some Dark Fears but has come to realize it is impossible to cover off every possible contingency in advance.

Freedom 35 is written by two married engineers in their early 30s living in sunny California to document their journey to financial independence and early retirement. Their Progress to Freedom 35: 2016 Q1 Update reveals that depending on the following projected withdrawal rates, they are less than three years away from bidding adieu to their employers:

Projected retirement date at 3% withdrawal: May 2022
Projected retirement date at 4% withdrawal: Sep. 2019
Projected retirement date at 5% withdrawal: Jan. 2018

Mr. Money Moustache was a thirty-something retiree when he started his blog. He and his wife retired from real work back in 2005 to start a family. “This was achieved not through luck or amazing skill, but simply by living a lifestyle about 50% less expensive than most of our peers and investing the surplus in very boring conservative Vanguard index funds and a rental house or two,” he writes. “Yet the whole country seems to be living ridiculously expensive lifestyles while thinking they are completely normal, and then being baffled when they have no money left over to buy their own freedom.”

getalifetree

Living a FI describes himself as a 38-year old happily retired dude (formerly a software engineer) living in Boston. He says that if you are close to the end of your early retirement journey, what you need to do is Build a Vision of Life Without Work. His favourite approach to managing the transition between work and retirement was created by Ernie Zelinski, author of several early-retirement lifestyle books.  He named the technique the “Get-A-Life-Tree.” (see above). “If you follow this method, you’ll easily wind up with tons of stuff to do, scattered over a few pages,” he explains.

And finally, ThinkSaveRetire is Steve’s blog about financial independence and taking control of his life. He figures that if he is still working at age 43 he has done something wrong. Here are several of his “must reads” if you want to get the most out of his journey.


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.

Does CPP expansion help low income earners?

By Sheryl Smolkin

Low earners stand to gain little from an expanded Canada Pension Plan (CPP), according to a new C.D. Howe Institute report. In “The Pressing Question: Does CPP Expansion Help Low Earners?”, authors Kevin Milligan and Tammy Schirle show the large differences in the net payoff from the expanded CPP for lower and higher earners.

Federal and provincial finance ministers agreed in June to expand the Canada Pension Plan. Under the status quo, CPP offers a 25% replacement rate on earnings up to a cap of $54,900. The expanded CPP will add a new layer that raises the replacement rate to 33.3% up to a new earnings cap of about $82,900 when the program is fully phased in by 2025.

To pay for this, both employer and employee contributions will be raised by one percentage point up to the existing earnings cap, and by four percentage points between the old and new earning caps. This expansion will be phased in during the period 2019 to 2025 for contributions, with benefits being phased in over the next 50 years commensurate to contributions paid.

This reform will substantially raise expected CPP benefits for most young workers now entering the workforce. For lower- and middle-earning workers, the higher replacement rate will lead to an eventual benefit increase of about 33% over existing CPP benefits.

For a high-earning worker, the maximum CPP benefits will increase more than 50% over the status quo. These expansions are large enough to make a noticeable difference for the younger generation of workers as the expanded CPP matures over the coming decades.

However, the C.D. Howe study authors note two important shortcomings of the new package hamper its effectiveness, both related to low earners.

First, low earners are already well covered by the existing suite of public pension benefits – many now receive more income when retired than when working. Why expand coverage where it is not needed? As a contributory pension, the CPP risks worsening the balance of income between working and retirement years for low earners.

Second, the income-tested withdrawal of some government-program benefits wipes out much of the impact of extra CPP benefits for many low-earners. Around one-third of Canadian seniors currently receive the income-tested Guaranteed Income Supplement (GIS), so concerns about interactions with income-tested benefits have a broad base.

In order to be eligible for the GIS in 2016, a single, widowed or divorced pensioner receiving a full OAS pension cannot have over $17,376 individual income. Where a couple each receives a full OAS pension they will not be eligible for the GIS if their combined income exceeds $22,944.

To summarize these issues: expanding CPP for low earners risks making some Canadians pay for pension coverage they don’t need. To make matters worse, extra contributions may reduce the living standards of low earners today for modest net rewards in retirement tomorrow.

The CPP agreement-in-principle reached by the finance ministers may address some of these concerns by offering an improvement to the Working Income Tax Benefit alongside the CPP expansion. It is possible that an expanded WITB could effectively counteract increased CPP contributions by some low earners, but no details of the WITB expansion have been provided to date. Nevertheless, low earners would still face the problem of CPP-GIS interactions that undercut the impact of expanded CPP benefits.

In a Globe and Mail article, authors Janet McFarland and Ian McGugan also note that expanded CPP does not do much to help people who do not collect CPP in the first place. That describes many senior women who spent most of their lives as homemakers and so earned little or nothing in CPP benefits. About 28% of single senior women over 65 live in poverty, according to a study this spring for the Broadbent Institute by statistician Richard Shillington of Tristat Resources.

In addition they say the planned CPP changes will also do only a limited amount to help affluent savers because the maximum amount of income covered by the plan will increase to only about $82,800 by 2025. Therefore, those with six-figure incomes will still have to save on their own if they want a retirement income that will replace a considerable portion of their incomes above the expanded limit.

Sept 19: Best from the Blogosphere

By Sheryl Smolkin

The discussion about whether or not to buy a home and if home ownership is a good investment rages on, particularly among younger people living in expensive urban areas who may be contemplating the purchase of their first property.

While purchasing property is definitely a huge financial commitment, there is also a strong emotional component in every decision to make an offer for real estate. Even if the house turns into a “money pit,” it’s YOUR money pit and no one can kick you out unless you default on the mortgage.

Sean Cooper, who bought a house at age 27 and paid off his mortgage three years later, believes the home ownership dream is still alive and well. He says, “By being laser-focused on paying down your mortgage quickly, you can reach financial freedom years sooner…..A paid off home gives you choices: you can quit the rat race, travel around the world, start your own business or take a job you truly enjoy.”

On Millennial Revolution, FIRECracker does the math to see if she and her partner The Wanderer would be richer if they bought a house in 2012, instead of investing their $500,000 down payment and renting. Based on Toronto Real Estate Board figures for the period, she estimates she would have made a respectable 7.8% if she sold in 2016. However, expenses like real estate commission, lawyers’ fees, maintenance, utilities and additional furniture would have reduced their profit. so by investing instead of buying, their gains were 2.61 times the gains from the house.

On their very first outing with a real estate agent, Jessica Moorhouse and her husband bought their first place, officially becoming homeowners. They ended up buying a two-story stacked townhouse in Toronto’s west end. “We knew that if we found a place that ticked off all of our boxes and was within our budget, we needed to act fast,” she says. “Places like the one we got do not come around often, and I am seriously so thrilled we’re living in this place!”

Those of you who already live in your own home and want to move up face the classic homeowner’s conundrum: Should you buy first or sell first? The choice depends on the people, the house and the city, realtors say, though there are some constants that hold true for most situations. “If it’s a seller’s market, then you need to be buying first. If it’s a buyer’s market, then you need to be selling first,” Ara Mamourian, broker and owner of Spring Realty in Toronto says.

And once you do own a home (or at least the bank does) the next question you will likely face is Should You Save Money or Pay Extra On Your Mortgage? Bridget Eastgaard’s spreadsheet shows that after 25 years, homeowners who opted to put $5,000 extra into a their TFSA instead of towards their mortgage, would come out $80,000 dollars richer than the person who thought it was worthwhile to put the cash towards his mortgage, just to become debt-free five years faster. Nevertheless, she acknowledges it really only works this way because mortgage rates are so low in Canada.

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.

Majority of Canadians would change jobs for retirement savings

By Sheryl Smolkin

What’s most important to you when you are looking for a new job? A higher salary? Career development opportunities? Dental benefits? You may be surprised to learn that a new survey from ADP Canada reveals that retirement benefits such as a pension or a group Registered Retirement Savings Plan (RRSP) can be a deciding factor in a job change.

According to the survey, over three-quarters of Canadian workers (77%) say they would consider jumping ship if, all other things being equal, another employer offered retirement support. Furthermore, there was no significant difference in willingness among different age groups, with almost 78% of Millennial workers saying retirement benefits would prompt a job change.

Employees also report that medium-sized businesses (51-500 employees) are the most at risk to lose talent (86%) if they do not offer a retirement savings arrangement as compared to small businesses with under 51 employees (70%) or larger organizations with over 500 staff (74%).

“We were surprised to see the difference in willingness to change jobs among employees in mid-sized companies, versus smaller organizations“ says Sooky Lee, Division Vice President and General Manager HR Business Process Outsourcing at ADP Canada. “This could be because employees in larger organizations expect their employers to have more robust programs around retirement.”

Although the data shows that retirement support is a competitive factor, employers should note that compensation takes many forms, and is just one factor in employee retention. “In a competitive labour market, retaining top talent becomes more difficult, so organizations should combine a competitive financial package with other perks.” Lee explains.

Other factors important to survey participants “beyond the money” include:

  1. Working Remotely: Some employees may appreciate the flexibility of working from home regularly or on a casual basis.
  2. Flex-time: Flexible hours can allow workers to manage busy home and work commitments, which can decrease their likelihood to jump ship.
  3. Compressed work weeks: Some companies offer employees the option of working a little longer for four days so they can take a fifth day or half-day off. Consider special summer hours that let employees slip out a little early on Fridays.
  4. Extra time off: Offering someone extra time away from the office to unwind is a nice way to say thank you for long hours or show appreciation for good work.
  5. Casual day or casual workplace: Dressing down to support a charity or as part of your corporate culture can boost employee satisfaction.
  6. Gift of giving back: Give employees time to volunteer in their communities or provide donation-matching programs.

The Saskatchewan Pension Plan offers employers the opportunity to add a smart, simple and flexible pension plan to their total compensation package. There is no cost to join or set up payroll deductions for the plan and no required payments. Contributions can be made by the business, employees or both.

SPP is locked-in until age 55 following the initial six-month refund period. This ensures that that contributions made by the employer and the employee are used for retirement. SPP is also portable so when employees move away they can continue the pension plan the company started for them.

For information about SPP for business, click here.

Sept 12: Best from the Blogosphere

By Sheryl Smolkin

Blogging is essentially self-publishing. Because it is so easy to get started, it’s not surprising that there are new blogs popping up on every subject daily. I must admit it’s easier to keep going back to the ones I know and like instead of constantly monitoring some of the newer (or new to me) guys on the block.

But one blog that I must confess I’m becoming addicted to is Millenial Revolution by Kristy Shen and Bryce Leung. The two 30 year olds write about how they got rich and retired to travel the world by not joining what they call “the home ownership cult.” Start with their How we got there series. See my comments on their strategy from the perspective of a semi-retired boomer in Rent vs Buy: A reality check.

But I’m also working my way through a list of the 2016 Top 25 Retirement Bloggers on Personal Income. Many of the blogs on the list are directed at U.S. readers, but much of the commentary on retirement is generic. Here are a few I sampled this week:

In A Wealth of Common Sense Ben Carlson writes about What it takes to retire early. He cites stories from other bloggers who:

  • Retired early by using rental income and moving abroad.
  • Saved $1 million by choosing to live in a place with a low cost of living to retire in their early 40s.
  • Retired in their 30s (Shen and Leung noted above) by avoiding home ownership in an expensive real estate market.

He concludes that to retire really early you have to save lots of money and have very little need for a large annual income in retirement.

Retire by 40 author Joe Udo analyzes the rule of thumb from the early retirement community that suggests you need to accumulate 25x your annual expenses. This benchmark is derived from the 4% withdrawal rate. So if you have 25x your annual expenses, the premise is that you would be able to support your lifestyle by withdrawing 4% from your investment every year. But Udo retired at 38 and four years later he says lifestyle inflation can easily erode retirement savings. So he suggests that extreme early retirees may need a cushion of 30x annual expenses or even more to cover a possible 50 years of retirement.

Mark Miller blogs on retirementrevised. When not to save for retirement may appear to challenge conventional retirement savings orthodoxy, but in fact it makes perfect sense. He says for many people, saving for retirement actually should be fairly low on the financial priority list – well behind the more immediate goals of building a rainy day fund and reducing their consumer debt.

Our next life by Mr. & Ms. ONL asks What Are Your Early Retirement Deal-Breakers? They are not willing to move to a low cost-of-living area they don’t like just to get by or give up a home base entirely and embrace a fully nomadic life. Nevertheless they say, “Life is short, our time here is precious, and even if we have only a short time to climb mountains around the world like we hope to, it will be more time than we would have had if we’d stayed on the usual career treadmill.”

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.

How spending declines with age

By Sheryl Smolkin

A recently retired actuary I once met at a conference told me that retirees worry primarily about their health and their money. Even retirement savings that seemed perfectly adequate when you hand in your office keycard for the last time seem to be eroded by the unrelenting drip, drip of inflation.

That’s why the lucky few who have indexed or partially indexed defined benefit pensions (most common in the public sector) are the subject of “pension envy” by the 80%-85% Canadians who do not have access to any form of workplace pension.

But according to a new C.D. Howe research paper by actuary Fred Vettese, retirees actually spend less on personal consumption as they age. He says, “This decline in real spending, which typically starts at about age 70 and accelerates at later ages, cannot be attributed to insufficient financial resources because older retirees save a high percentage of their income and, in fact, save more than people who are still working.”

Vettese cites evidence showing that compared to a household where the head is age 54, the average Canadian household headed by a 77-year-old spends 40% less. None of this drop in spending is attributable to the elimination of mortgage payments because they are not considered consumption. Much of the fall in spending at older ages was traced to reduced spending on non-essential items such as eating out, recreation and holidays.

The author focuses on public sector pension plans, which are fully indexed to inflation. His findings show that these plans could move to partial indexation, generating significant savings. “Given that more than 3.1 million active members are contributing to public-sector pension plans, the total annual savings could add up to billions of dollars, he says.” At the individual level, he suggests these savings would allow public-sector employees to increase current consumption or to reduce debt.

Given this phenomenon, cost-of-living indexation of workplace pension benefits could be reduced without sacrificing consumption later in life, Vettese concludes. He also notes that, “Reduced pension contributions would free up money to be spent today when families struggle to raise children and pay down mortgages on houses, thereby raising plan members’ collective economic welfare over their lifetimes.”

The average resulting reduction in required total employer/employee contributions to public-sector plans is of the order of $2,000 a year per active member. There are over three million active members in Canada’s public-sector DB pension plans, most of which provide full inflation protection or strive to do so to the extent that funding is available.

Nevertheless, Vettese says Pillar 1 (OAS/GIS) and 2 (CPP) pensions should not be subject to any reduction in benefits or contributions because these plans are generally designed to cover basic necessities, such as food and shelter. In the absence of evidence to the contrary, he believes it is reasonable to assume that spending on such necessities does not decline very much, if at all.

I have heard the three phases of retirement described as “go-go”, “slow-go” and “no-go.” My mother at 88 no longer drives a car and can’t to get out to shop very often anymore, so I am prepared to concede that many of her expenses have been reduced. However, her memory isn’t what it used to be and she has had several bad falls, so paying for 24-hour care in her own condo is a huge drain on her assets. Also taxis to multiple doctor’s appointments and medical supplies are expensive.

While Vettese suggests partially eliminated or reducing inflation-protection for indexed pension plans could allow public-sector employees to enhance current consumption and reduce debt, I’m not sure that’s necessarily a laudable or desirable objective. Mom saved and scrimped all her life and because my Dad was a disabled WW2 veteran she gets a tax-free, indexed pension for life. She also collects CPP and OAS.

I’m glad she has the additional disposable income so she can stay in her own apartment with the necessary support system as long as possible. Even though older retirees may no longer go on extended vacations or eat in fancy restaurants, they still have other equally compelling expenses in order to live out their remaining days in dignity and comfort.

Now if we could only figure out a way to help raise the bar for all seniors to be able to afford the same well-earned privilege.

How will your kids pay for higher education?

By Sheryl Smolkin

Going to school after high school can be costly.

A student attending trade school, college, CEGEP or university full-time today can expect to pay between $2,500 and $6,500 per year—or more—in tuition. Books, supplies, student fees, transportation, housing and other expenses will only add to that total.

In fact, full-time students in Canada paid an average of $16,600 for post-secondary schooling in 2014–2015. That is more than $66,000 for a four-year program.

If you are saving for your children’s post-secondary education, give yourself a pat on the back. Canadian parents are ahead of their counterparts in other Western nations in saving for their children’s post-secondary education.

Close to three-quarters (72%) of Canadian parents are saving for their children’s post-secondary education, putting them ahead of parents in the U.S. (65%), Australia (53%) and the U.K. (46%), according to The value of education: foundations for the future report, which includes responses from parents in 15 countries and territories.

However, only 30% of Canadian parents are funding their children’s university or college education through a savings plan specifically for education. Almost one-quarter (22%) are taking that funding from general savings, investments or insurance policies and 66% are using their day-to-day income to get their kids through school.

RESP
That’s a shame because by saving in a registered educational savings plan you are eligible for the Canada Education Savings Grant and the growth in the fund can be tax-sheltered until the student eventually withdraws money for school expenses when he/she is likely to be earning less than you are now.

Employment and Social Development Canada pays a basic CESG of 20% of annual contributions you make to all eligible RESPs for a qualifying child to a maximum CESG of $500 in respect of each beneficiary ($1,000 in CESG if there is unused grant room from a previous year), and a lifetime limit of $7,200.

ESDC will also pay an additional CESG amount for each qualifying beneficiary. The additional amount is based on net family income and can change over time as net family income changes.

For 2015, the additional CESG rate on the first $500 contributed to an RESP for a beneficiary who is a child under 18 years of age is:

  • 40% (extra 20% on the first $500), if the child’s family has qualifying net income for the year of $44,701 or less; or
  • 30% (extra 10% on the first $500), if the child’s family has qualifying net income for the year that is more than $44,701 but is less than $89,401.

Unused CESG contribution room is carried forward and used when RESP contributions are made in future years provided that the specific contribution requirements for beneficiaries who attain 16 or 17 years of age are met.

Impact on your retirement
Given the increasing cost of post-secondary education it is not surprising that many Canadian parents are also concerned about how their children’s educational costs will affect their own finances, with 43% worrying about the cost and 31% concerned about how paying that expense will affect their other financial commitments. If their financial situation becomes difficult, many parents’ long-term savings and retirement plans may be in jeopardy.

Exactly half of Canadian parents believe funding their children’s schooling is more important than contributing to long-term savings and investments and 43% state that they prioritize their children’s post-secondary educational expenses over saving for retirement. More than half (54%) said they would be willing to go into debt in order to afford university or college expenses.

In addition, survey results reveal that Canadian parents are thinking about these expenses early in their children’s lives as 28% of parents start planning ways to fund these expenses when the child is born; 9% before the child is born; and 24% look at these issues before their child begins primary school.

Even so, half of Canadian parents expect their child to contribute financially toward those educational expenses and 39% say their university-aged children are helping to fund their own education, which is one of the largest proportions of all of the markets surveyed, the study notes.

To estimate your child’s future education costs and see how your planned RESP including contributions and grants will cover those costs, plug some numbers into the GetSmarterAboutMoney.ca RESP Savings Calculator.