October 2012 returnsNovember 15, 2012
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)
|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 GriffithsNovember 8, 2012
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.
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
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.
SPP or TFSA?October 18, 2012
By Sheryl Smolkin
You have $2,500 to contribute to retirement savings in 2012. Should you contribute to a tax-free savings account or the Saskatchewan Pension Plan?
Before answering that question, it is helpful to review some basic SPP and TFSA concepts.
You can contribute a maximum of $2,500/year to SPP providing you have RRSP contribution room. To find out how much RRSP room you have available in 2012, look at line A of the RRSP Deduction Limit Statement on your 2011 income tax notice of assessment or notice of reassessment.
Your SPP contributions are tax deductible and investment income accumulates tax sheltered. SPP contributions plus interest are also locked in. Unused contribution room is carried forward.
You may elect at anytime between age 55 and 71 to receive an SPP pension or move your SPP account balance into a locked-in RRSP. By age 71, amounts in a locked-in RRSP must be converted to income using a prescribed registered retirement income fund (pRRIF) or life annuity product. You must begin making minimum prescribed withdrawals from your pRRIF in the following year.
Both SPP annuity payments and pRRIF withdrawals are fully taxable income at your marginal tax rate. If your SPP benefits or pRRIF withdrawals push your income over specified limits, a portion of Guaranteed Income Supplement, the age credit and Old Age Security payments may be clawed back.
You can contribute up to $5,000/year to a TFSA regardless of your age or income level. Contributions are not tax-deductible. However investment income (including capital gains), accumulates tax free. When funds are withdrawn from a TFSA, no income tax is payable.
You can withdraw funds available in your TFSA at any time for any purpose — and the full amount of withdrawals can be put back into your TFSA in future years. Re-contributing in the same year may result in an over-contribution amount which will be subject to a penalty tax.
Neither income earned in a TFSA nor withdrawals affect your eligibility for federal income-tested benefits and credits. You can provide funds to your spouse or common-law partner to invest in their TFSA.
By the numbers
All other things being equal, whether or not you will be able to save more in the SPP or a TFSA depends on two key factors.
- Your marginal tax rate when contributing as compared to your marginal tax rates when you expect to withdraw the money.
- How you use your tax refund.
Generally speaking, if you think your marginal tax rate will be significantly lower at retirement than during your working career, saving with SPP makes much more sense than in a TFSA.
But how you use your tax refund is also important. Canada Revenue Agency calculations when the TFSA was introduced assume the tax refund generated by contributing to a retirement savings vehicle is also contributed to the account.
In these circumstances, investing in either the SPP or a TFSA will result in about the same net withdrawals at retirement. However, many of us look on our tax refund as “mad money” and do not earmark it for further retirement savings. In these situations, the TFSA comes out ahead.
That money can be withdrawn from your TFSA account and contribution room is restored in the next year may be attractive in some cases. However, replacing money you withdrew requires considerable discipline. In contrast, money saved in your locked-in SPP account will be there at retirement when you need it.
Your financial plan
SPP vs TFSA. It’s not an either/or proposition. A financial advisor can review your personal situation and help you decide the best way to maximize your retirement savings.
Depending on your income level, expenses and the amount of income you need in order to retire, you can benefit from having both kinds of accounts plus an RRSP.
To paraphrase David Chilton in TheWealthy Barber Returns:
- If you go the SPP* route, don’t spend your refund.
- If you go the TFSA route, don’t spend your TFSA.
- Whatever route you go, save more.
* Chilton used RRSP in this phrase.
Understanding SPP annuities
September 2012 returnsOctober 11, 2012
SPP posted a return of 2.01% to the balanced fund (BF) and 0.05% to the short-term fund (STF). The year to date return in the BF is 6.14% and in the STF is 0.36%.
Market index returns for September 2012 were:
|Index||Sep 2012 return (%)|
|S&P/TSX Composite (Canadian equities)||3.43|
|S&P 500 (C$) (US equities)||2.90|
|MSCI EAFE (C$)
(Non-north American equities)
|DEX Universe Bond (Canadian bonds)||0.67|
|DEX 91 day T-bill||0.10|
Talking to David ChiltonOctober 4, 2012
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 new series of financial expert interviews with the Wealthy Barber himself…David Chilton.
The Wealthy Barber has sold more than 2 million copies in Canada, and last year — some 20 years later — The Wealthy Barber Returns was published.
I recently heard David speak at the Human Resources Professionals Association conference in Toronto and was delighted when he agreed to do an interview for the Saskatchewan Pension Plan Financial Expert podcast series.
Q1. In your first book The Wealthy Barber, the well-to-do barber Ray Miller’s first and most important rule is take 10 per cent off every pay cheque as it comes in and invest it in safe interest-bearing instruments. Why do you think so many people have so much difficulty overcoming their inertia and taking that first important step?
A.1 It isn’t necessary to invest only in interest-bearing certificates. If you are a long-term investor building for retirement, Miller was fine with allocating some of the money towards growth-oriented vehicles like equities or mutual funds that have equities in them, but the basic thrust of saving 10% of every pay cheque is absolutely the key.
The problem today is that we love to spend, and so we resist any savings technique that limits our ability to go out and buy things. Also, society has taken on so much debt that it has squeezed our ability to save. It’s tough for people to set aside 10% of their net or gross income because they’re servicing debt now. We love to spend we love to keep up with the Jones’s, but to some extent, we’re sacrificing our future.
Q2. You acknowledge that it’s only human for the desires of Canadians to run well beyond our stream of “needs” into our pool of “wants,” but still maintain that many people have too much stuff. Do you think people should be making sacrifices today in order save for the future?
A.2 I do. And I hate the word “sacrifice.” It has such a negative connotation. I would argue after seeing thousands of people and their personal finances, that people who are saving successfully are happier, because they’re less stressed about their financial future. They are not caught up in that race to consume as much as they can.
Remember, nobody is suggesting massive cuts to your spending and an austerity budget. Let’s be realistic here, let’s set aside at least 10%, hopefully more. It’s doable. It doesn’t require major cutbacks – just spending a little less here and there to force savings.
Q3. How can people resist the temptation to buy more clothes, or jewellery or electronics – whatever discretionary spending is distracting them from saving for the future?
A3. It’s interesting. People who read my book say even reading about the psychology of spending has helped them have a little bit of a mind shift. But there are some safeguards that you can put in place. The problem in the last 20 years has been the ubiquitous availability of credit. It’s so easy to mindlessly swipe your credit card or write a cheque against your line of credit. If you want human nature to have less ability to sabotage you, take it out of the equation.
So you are seeing more people staying away from lines of credit now and I notice a lot of people going back to a cash-based spending system. They are taking out cash on a Monday and saying, my budget is $450. That money is in their wallet for everything from groceries to gas. When the money runs out, so does the spending. I love that approach because when the money leaves your wallet you feel a little pain and realize it is a finite resource.
When you are swiping debit or credit cards mindlessly, it’s too easy to spend and hard to keep track of. Spending quickly increases to an unacceptable level.
Q4. Tell me about the four liberating words of advice you give to people who come to you for help because they are overspending. Do they really work?
A.4 That is the chapter I hear the most about in the book and it’s a very simple concept. People really expect deep advice from me, but what I say is you’ve got to start saying to yourself and to others, “I can’t afford it.”
It’s hard at first, but when you start saying it then you realize, it’s not admission of failure it’s just accepting the reality. In fact it’s stress reducing because you are accepting the reality, you’re no longer stretching beyond your needs.
I cannot believe all the letters and phone calls I’ve had from people across the country who say they love the chapter. They’ve become used to it, they are embracing it and they are actually enjoying it.
Q5. Home renovation is a bottomless money pit that many people get sucked into in the hope of improving their property value or keeping up with the Joneses next door. When it comes to renovating or anything else, what are the four most expensive words in the English language?
A.5 Since the book has come out, I’ve come to think that I understated the case of excessive home renovation. We’ve received so many emails and letters from people saying if you think your examples are bad, look at mine.
I am not against home renovations. I renovated my own home a few years ago. The problem with home renovation is you do one room like your kitchen or your basement and the rest pale in comparison. And all of a sudden the cycle of renovation rolls on. With lines of credit making cash available, it’s very difficult to resist the temptation. I think of all the people I see who have line of credit problems, about 50% got that way through excessive home renovations.
Q6. The cost of housing has gone up tremendously over the years in Canada. Can homeowners depend on the value in their homes as a source of income in their retirement?
A.6 Well, not really. Seniors don’t necessarily want to sell their home in retirement. They like the neighbourhood. Many don’t move because they want to have the extra space at home so the grandkids can come and stay over. These are the kind of real life things that enter into decisions that so often are forgotten in financial books.
Many people do have a fully- paid home that has in fact risen significantly in value, but they can’t turn it into a financial asset or split an income off from it. They could take out a reverse mortgage, they could take out a line of credit but of course, those have their risks. You’re turning compound interest into your enemy instead of your friend, and a lot of people are hesitant to do that even when it does make some sense.
You have to be well diversified. And I am not against home ownership. In fact I’m very pro home ownership. But I think it is unfortunate how many Canadians I cross paths with who have emphasized home ownership exclusively as they built up the asset of their net worth statement and that’s a tough one because they don’t have any other assets to fall back on or to generate an income in retirement.
Q7. I know from your talk at the HRPA conference and your book that you live in a modest 1300 sq ft. home and granite counters don’t turn you on. What do you like to splurge on?
A.7 Probably more experiences than stuff. I am not a stuff guy at all. I can’t remember the last time I bought anything significant on the stuff front. But I do like to go to sporting events and playoff games, especially of my beloved Detroit Tigers and I’ll take the odd trip and bring my kids along.
I tend to be not a big spender, not because I am cheap. In fact I am quite the opposite. It is more because I don’t get a big kick out of stuff. I like relationships. And my hobbies are relatively inexpensive. Golf, is a little bit expensive, but I’m into a hockey pools and I love to read.
When I do splurge it’s probably on a trip. A second big weakness I have is that I eat out often because I travel so much. I am always on the go, and I don’t know how to cook so I eat out a tremendous amount. I did a spending summary in the process of writing the second book and I went “holy smokers.” It’s not just the sodium content that’s killing me here, it’s the cost too.
Q8. When do you plan to retire?
A.8 Never, I love what I do. I like to travel. I don’t want to travel as much going forward as I get older because it’s a bit of a burden being in an airport every day. But I really do enjoy my career. There are a lot of new things I want to try. I honestly don’t see ever retiring, particularly from speaking. Speaking is a favourite part of my job and I don’t know why I would ever leave it.
Thanks David. It was a pleasure to talk to you today. I know our listeners will be delighted to hear your common sense advice. And if they haven’t already done so, I’m sure they will want to get their hands on a copy of your new book, The Wealthy Barber Returns.
My pleasure. Thank you for having me.
August 2012 returnsSeptember 20, 2012
SPP posted a return of 0.20% to the balanced fund (BF) and 0.04% to the
short-term fund (STF). The year to date return in the BF is 4.05% and in the STF is 0.31%.
Market index returns for August 2012 were:
|Index||August 2012 return (%)|
|S&P/TSX Composite (Canadian equities)||2.65|
|S&P 500 (C$) (US equities)||0.41|
|MSCI EAFE (C$)
(Non-north American equities)
|DEX Universe Bond (Canadian bonds)||-0.10|
|DEX 91 day T-bill||0.08|
Can my spouse join SPP?September 13, 2012
By Sheryl Smolkin
If both you and your spouse have individual RRSP contribution room of at least $2,500, each of you can contribute up to the annual maximum to your own Saskatchewan Pension Plan accounts. You can also each transfer $10,000 a year from individual RRSPs to your personal SPP accounts.
However, if you have sufficient RRSP room and your spouse does not, your spouse can open an SPP account to which you are the contributor. You can contribute up to $5,000/year in total ($2,500 for each of you) into the two accounts and get a tax deduction for the whole amount.
When it comes to RRSP transfers to SPP, your spouse can only make a transfer from an RRSP in his/her own name. You cannot make a $10,000 transfer from your RRSP to your partner’s spousal account.
Two major advantages of a spousal SPP account are that you can contribute double the amount each year and income split at retirement. Also, if both of you elect annuity options and one of you dies first, the surviving partner will still have a stream of income.
Also check out:
Derek Foster: Idiot Millionaire CBC Radio Saskatoon interview – August 13, 12
A pension solution for your business Saskatchewan Broker – Winter 2011
Roseman: Want to save tax? Look to SPP Moneyville.ca – March 6, 2012
Talking to Gordon PapeSeptember 6, 2012
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 new series of interviews with financial experts. My guest is Gordon Pape.
Gordon is an author of over 40 books, a newsletter publisher, journalist and all around financial guru. He writes regular columns for the Toronto Star and moneyville.ca among dozens of other media publications.
At age 75, he has just released a new book called Retirement’s Harsh Realities and it doesn’t look like he is planning to retire anytime soon. Today we are going to talk about annuities, and why an annuity purchase can be an important strategy for making your money last as long as you do.
Q. Everyone contemplating retirement has two key questions. How much will I need and how can I be sure I won’t run out of money? How would you answer these questions?
A. How much you need depends on the individual and the type of lifestyle you want to lead after retirement. A study done by Statistics Canada a few years ago found that people in their 70’s were spending about 95% of what they spent when they were in their 40’s. Yet conventional wisdom says you only need about 70% of your pre-retirement income if you want to maintain your standard of living. Based on those numbers it suggests that in fact you need more.
You need to look at your expenses in retirement and your sources of income such as CPP, OAS, an employer-sponsored pension plan if you have one and personal savings. There is no magic number.
You need to plan for the fact that people are living longer. Something to consider especially after the age of 80, is putting some money into a life annuity. It’s not a great place to put your money right now because interest rates are so low, but once the economy starts to pick up again and interest rates start to rise that’s the time to lock in a life annuity that guarantees you an income for as long as you live.
Q. Tell me how an annuity works.
A. You’ve saved money in a RRSP, you’ve converted it to a RRIF at 71 and the government requires that you draw down a minimum amount from that fund each year. As the years go by, unless you’re able to invest at a rate that keeps up with the rate of the minimum withdrawals, the value of the fund is going to eventually drop.
By the time you get to your early to mid 80’s, the depletion rate is too fast. You might consider using a chunk of you RRIF or all of it to purchase a life annuity from an insurance company, in exchange for a flow of income for the rest of your life.
The down side is you don’t have the money anymore. You won’t have an estate you can leave but it will be cash flow for the rest of your life
Q. Why have annuities fallen out of favour recently?
A. Low interest rates and the fact that people don’t like the idea of giving up their capital. They like to be able to control their money, so they can leave something behind for their children. When you buy an annuity you lose that possibility. However, you can buy annuity that guarantees the income for a certain period of time so if you die within the period your children will get some money.
Q. When is the best time to buy an annuity? Why?
A. The longer you wait, the more money you’ll get from the annuity. The company will pay you less money at 65 than 80 because your life expectancy is longer. If you can maintain a rate of return in your RIF around 6% then the optimum time would be within your 80’s.
Q. What questions should retirees and prospective retirees ask when they are shopping for annuities? What different kinds of annuities are available?
A. Research the amount of money that the various insurance companies are offering. There are tremendous variations in the rates that they are offering for the same kind of plan. There are annuity brokers who will do this for you and find you the best offer. There is no one company that consistently pays more than others. Desjardins has come up quite often, but not all the time.
It also depends on the type of plan – i.e. one company may offer money for a straight annuity with no guarantees, where as another company may offer a better rate for a joint and last survivor annuity which means it carries on until the last spouse dies
You also need to give some thought to the company itself – the solvency of each financial institution. There is an insurance fund that covers people in the event that their insurance policy goes belly up, but the fact is that you don’t want that to happen and don’t want to be forced on a fund that has limitations on it.
Q. What does it cost to use an annuity broker and who pays them?
A. The fee will be paid by the insurance company that you eventually do the business with. It’s like a mortgage broker.
Q. If someone came to you for financial advice, what portion of his assets would you advise that he put into an annuity?
A. It will depend on the individual and how large an estate they want to leave.
Q. What are the downsides of annuities?
A. The solvency of the company. Also, if you don’t get inflation protection, over a length of time obviously the purchasing power of the income that you receive is going to decline.
Inflation protection is expensive, in the sense you will get a lower monthly payment than if you do not have inflation protection. On the other hand it will guarantee that as the rate of inflation rises over the years, so will the annuity.
There are also “impaired annuities” for annuitants with a terminal illness. The annuity pays more because the purchaser has a shorter life expectancy.
Q. Would you invest in one yourself?
A. No, not at this point. I am managing my money well enough, and my wife and I have sufficiently large RRIFs that we don’t feel we need to buy that kind of insurance at this time of our life. Down the road when I am in my 80’s I may take a look at it.
Thanks Gordon. It was a pleasure to chat with you. I think Saskatchewan Pension Plan members will be very interested in your comments about annuities. They have the option of purchasing a competitively-priced annuity from the plan until age 71.
Why transfer RRSP funds to SPP?August 30, 2012
By Sheryl Smolkin
In addition to maximum regular contributions of $2,500/year, SPP members can annually transfer up to $10,000 into their SPP account from existing RRSPs, RRIFs and unlocked RPPs. In 2012, over 200 members have already transferred $1.5 million into their SPP accounts.
Since these are direct transfers between plans, there are no tax implications. As part of the transfer process, members are asked for investment instructions directing money to either the balanced fund and/or the short-term fund.
Once funds are transferred into the SPP, all of the member’s assets benefit from the plan’s low investment fees (about 1.1 per cent) and competitive returns (7.8% since inception 26 years ago).
Furthermore, contributions are creditor-protected and cannot be seized, claimed or garnisheed in any way except in the event of a court order under a marital division or Enforcement of Maintenance Order.
Both regular contributions (up to $2,500/year) and additional amounts transferred into the SPP are locked-in and are used to provide you with a pension or lump sum at retirement.
If you have money in existing RRSPs or unlocked RPPs, consider transferring up to $10,000 each calendar year to your SPP account. It’s a cost-effective, stress-free way to enhance the benefit you receive when you retire from the plan.
SPP members may begin receiving benefits from the Plan any time after age 55 and must be retired from the Plan by the end of the year in which they reach 71. At SPP, “retirement” simply means you are receiving pension payments. You can still be employed and receive pension from SPP.
You can use this form to an initiate a transfer of funds to SPP.
July 2012 returnsAugust 16, 2012
SPP posted a return of 0.18% to the balanced fund (BF) and 0.05% to the short-term fund (STF). The year to date return in the BF is 3.84% and in the STF is 0.27%.
Market index returns for July 2012 were:
|Index||July 2012 return (%)|
|S&P/TSX Composite (Canadian equities)||0.80|
|S&P 500 (C$) (US equities)||-0.32|
|MSCI EAFE (C$)
(Non-north American equities)
|DEX Universe Bond (Canadian bonds)||0.66|
|DEX 91 day T-bill||0.06|