Tag Archives: RRSP

Sept 22: Best from the blogosphere

By Sheryl Smolkin

I recently put together a list of 40 highly-regarded but very different personal finance blogs and this week Best from the Blogosphere taps into this resource to bring you some new voices.

Switching careers is a life-altering decision, and one that needs to be thought through with care. The gals at Frugalista Finance have been there and done that. In Careers 101: Planning for a career change, they compile a step-by-step checklist to help you make sure you’re on the right track to career bliss.

If you are lucky enough to have a defined benefit pension plan, you may wonder if there is any point also belonging to the Saskatchewan Pension Plan or contributing to a personal registered retirement savings plan. The author of the blog Use RRSP with DB Pension? on “Blessed by the Potato,” says the answer depends on a few factors, chief amongst them your expected tax rate in retirement versus your tax rate now (or in the near future if you choose to contribute now but defer the deduction).

Have you been waffling about finding a financial advisor? Sandra Schmidt, an advisor with Sun Life in Vancouver says there are five financial planning milestones an advisor can help you prepare for:

  • Buying your first home.
  • Merging your finances.
  • Starting a family.
  • Setbacks.
  • Retirement.

Dan Bortolotti is an investment advisor with PWL Capital in Toronto and author of the award-winning blog Canadian Couch Potato: Your complete guide to index advising. While Dan is well known as an advocate for using exchange traded funds, he readily acknowledges implementing such a strategy is more complicated if you and your partner have several accounts.

The Model portfolios he typically recommends are ideal for investors who have a single RRSP account. But life isn’t so simple once you’ve accumulated a significant portfolio. Chances are you’ll be managing two or three accounts, and if you have a spouse there may well be a few more. In Managing Multiple Family Accounts he says it’s generally most efficient to consider both partners’ retirement accounts as a single large portfolio.

And finally, in order to enhance their income, many people opt to get a part-time job in addition to their regular day job. Nelson Smith on Financial Uproar mines twitter postings to come up with a humorous series of tweets he calls How Not To Get A Part-Time Gig. Bad grammar and spelling certainly don’t help these people make their case.

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 with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.

How to save for retirement (Part 3)

By Sheryl Smolkin

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See Part 1 and Part 2.

In the first two parts of this series on how to save money for retirement we focused on how to get started and some of the registered and unregistered savings plans available to Canadians.

This final segment looks at some other ways (in no particular order) you can both grow and preserve your retirement savings. And making sure your children are educated to effectively manage their finances is a big part of this discussion.

  1. Keep fees low: You ignore investment fees at your peril, says Toronto Star personal finance editor Adam Mayers in a recent article. The simple chart below illustrates what happens if you invest $6,000 a year for 40 years in a registered retirement savings plan. It assumes your RRSP earns a little over 5% a year and ignores taxes.
    1. In a utopian fee-free world, your money is worth $785,000 in 40 years.
    2. In a 1-per-cent fee world, you’ll have $606,000 (23% less).
    3. In a 2-per-cent fee world, you’ll have $435,000 (45% less).
    4. Annual fees in the Saskatchewan Pension Plan (SPP) average 1%.fees
  2. Understand your risk tolerance: You should have a realistic understanding of your ability and willingness to stomach large swings in the value of your investments. Investors who take on too much risk may panic and sell at the wrong time. Other factors affecting your risk tolerance are the time horizon that you have to invest, future earning capacity, and the presence of other assets such as a home, pension, government benefits or an inheritance. In general, you can take greater risk with investable assets when you have other, more stable sources of funds available.
  3. Develop an asset allocation plan: Once you understand your risk tolerance, you can develop an asset allocation strategy that determines what portion of your retirement account will be held in equities (stocks) and fixed income (bonds, cash). The investment allocation in the SPP balanced fund is illustrated below.
  4. Rebalance: The asset allocation in your portfolio will change over time as dividends are paid into the account and the value of the securities you hold goes up or down. Rebalancing helps you reap the full rewards of diversification. Trimming back on a winner allows you to buy a laggard, protect your gains, and position your portfolio to benefit from a change in the market’s favorites.Balanced-Fund-Web
  5. Auto-pilot solutions: Balanced funds including the SPP balanced fund are automatically rebalanced. In your RRSP or company pension plan Target Date Funds (TDFs) are another way to ensure your investments reflect your changing risk profile. Developed by the financial industry to automatically rebalance as you get closer to retirement. TDFs are typically identified by the year you will need to access the money in five year age bands, i.e. 2025, 2030 etc. They are available in most individual registered retired savings plans and in your employer-sponsored group RRSP or pension. However, all TDFs are not alike so consider the investment fees as compared to the expected return before jumping in.
  6. Educate yourself: Personal finance blogs contain a wealth of information about everything from frugal living to tax issues to how to save and invest your money. You can find out about some of them by listening to our podcast series of interviews on savewithspp.com or reading the weekly Best from the Blogosphere posts. Some posts are better than others so caveat emptor. But blogs like Retirehappy and Boomer & Echo have huge archives so you can find answers to virtually any virtually personal finance question.
  7. Choose your retirement date carefully: We are living longer so your money has to last longer. And starting in April 2023, the age of eligibility will gradually increase: from 65 to 67 for the Old Age Security (OAS) pension. Even if you are among the minority who have a defined benefit pension, retiring early means you will get a reduced amount. Whether you keep working because you need the money or you love your job, you will have a more affluent retirement if you work full or part-time until age 65 or longer.
  8. Develop other income streams: One of the things that stayed with me after reading Jonathan Chevreau’s book Findependence Day is the importance of having multiple income streams in retirement. So even if you are saving at work or in an individual RRSP, don’t put all your eggs in one basket. While you may not want to work at your current job indefinitely, you may be able to use your skills or hobbies to do something different after retirement. For example before I retired I was a pension and benefits lawyer. Now I augment my retirement income by writing about workplace issues.
  9. Start RESPs for your kids: The following two Globe and Mail articles by financial columnist Rob Carrick brought home to me the impact that your children’s debt and failure to launch can have on your retirement.
    1. Carrick on money: Will millennials ruin parents’ retirement dreams?
    2. Parents of Gen Y kids face their own financial squeeze

Registered educational savings plans allow you to accumulate money for your children’s education tax free and receive government grants that add to your savings. When the money is paid out, your child pays taxes, typically at a lower rate. Saving for your kids’ education now so they can minimize student loans down the road is one of the best investments you can make in your future ability to retire sooner rather than later.

  1. Raise financially literate children: And last but not least, educate your children about money so they grow into financially responsible adults. Every event from the first allowance you give your kids to buying Christmas gifts to planning for college is a teachable moment. Someday your offspring may be managing your money and ensuring you are properly taken care of. That’s when all of your great parenting skills will definitely come home to roost!

Aug 11: Best from the blogosphere

By Sheryl Smolkin

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I’m on a mission to find new retirement bloggers to feature in this space who have interesting insight for SPP members of all ages who are planning to retire in the near or distant future.

I discovered Your retirement income blueprint today. This week’s blog Donor-directed taxes – You decide who gets your money! Is fascinating. If at age 71 you don’t need your mandatory RRIF withdrawals to live on, melt down your registered account and the tax liability through a donor-directed charitable giving fund and direct your tax dollars to causes you care about. The net result may also reduce your income to a level where you can avoid the OAS clawback.

GetSmartAboutMoney.ca tackles the perennial question How much you need to save for retirement? It also includes 7 tips for last minute savers including some tough love. The author suggests if you have to choose between saving for retirement and your children’s education, put money in your RRSP first. Let your children get jobs or borrow to help pay for their education. Later, you may be able to help them pay off their student loans, which carry lower interest rates.

On My Own Advisor, Mark tells Gary’s story about how he and his wife retired comfortably on less than $1 million in invested assets which seems to be the big, scary number these days. They bought a 35’ 5th wheel and a truck to tow it a they spend winters in Myrtle Beach and come back to Canada in the summers. They also can afford occasional cruises to warmer climates.

The Blunt Bean Counter Mark Goodfield is posting “the best of previous blogs” while he concentrates on improving his golf game this summer. In One Big Happy Family – Until We Discuss the Will he tackles the taboo subject of whether you should discuss your will with your family.

And Retired Syd who writes Retirement: A full time job, just finished up a five-week visit to Manhattan on her annual home-exchange vacation. She saw the city with the fresh eyes of a tourist, as she guided friends around. The notes she receives from readers help her to also view her retirement (six years and counting) in a new and more appreciative way.

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 with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.

BOOK REVIEW: THE REAL RETIREMENT Why you could be better off than you think

By Sheryl Smolkin

7Aug-The+Real+Retirement

The Real Retirement by Morneau Shepell Chief Actuary Fred Vettese and Bill Morneau, Executive Chairman of Morneau Shepell was released and extensively reviewed by the media in 2013.

However, I decided to circle back to this book over a year later because it is much more optimistic than many of the personal finance books I have reviewed since January.

Most financial writers seem to be trying to guilt readers into forgoing consumption during their working lives in order to accumulate sufficient RRSP savings to generate 70% of pre-retirement income.

In contrast, Vettese and Morneau present well-reasoned arguments to illustrate that income replacement of 50% or even less post-retirement will result in a “neutral retirement income” (NRIT), i.e. similar patterns of consumption for retirees.

Initially, they note that there are three phases of retirement:

Phase 1: From retirement age to the mid or late 70s or even later if you are healthy you are most likely to travel to exotic locations and pursue expensive hobbies. Therefore your income requirements will be highest in this phase.

Phase 2: In the second phase of retirement you may have diminished physical or mental capabilities. If so, you will travel less and cut back on strenuous activities. Therefore you will spend less money.

Phase 3: In the last years of your life you may be more physically or mentally impaired. You may need to be in a nursing home, or if you are wealthy enough, in an upscale retirement home with nursing care.

As a result, planning to spend more in the first decade of retirement will not necessarily mean that you will run out of money before you run out of time.

I thought it was particularly interesting that when considering available resources that can generate retirement income for Canadians, unlike many other personal financial writers, the authors also factor in the value of “Pillar 4 assets” including real estate, business equity and non-registered savings.

They use the following population breakdown in their calculations:

Income Quartile Average total income (couple)
Quartile 1 $29,000
Quartile 2 $53,000
Quartile 3 $78,000
Quartile 4 $110,000
Quartile 5 $204,000

The bottom quartile is dropped out because it is assumed that government benefits such as CPP, OAS and the GIS will provide better than average income replacement.

For the most part, Quartile 5 is also excluded since a couple with an income of over $200,000 has typically saved in RRSPs and has other Pillar 4 assets that can augment retirement ravings.

Vettese presents an example of a couple in Quartile 3 with $78,000 in annual income at age 65 and assumes they saved 6.5% annually in an RRSP from age 30 until retirement, Once their RRSP balance is converted to a RRIF at age 65, including government benefits they will have an income after retirement of $48,600/year.

Although retirement income for this couple is just 62% of their pre-retirement income, they no longer make RRSP and CPP contributions; have EI deductions and other employment costs; and pay a mortgage or child-raising costs. Their income taxes are also much lower.

The net result is that they have $14,000 more in disposable income to spend post-retirement! Although each family’s financial situation differs, the authors conclude that an NRIT which equalizes consumption before and after retirement generally only requires about 50% of pre-retirement income.

A calculations using a couple in Quartile 4 ($116,000 before retirement) reveals that the NRIT is just 44%. Furthermore, they can achieve their NRIT with 35 years of RRSP contributions equal to 3.5% of household income. And in general the higher the income level, the lower the NRIT.

This book is an interesting read because it presents a different perspective on the perennial questions, “How much will I need in retirement?” and “How much do I have to save to accumulate the amount I will require?”

While Vettese and Morneau suggest the answers to these questions may be “less than you think,” it doesn’t mean you don’t have to save at all. And all of the scenarios assume you retire free of mortgage and other debt. They also presume a drop in employment expenses and taxes payable that may not apply in your situation.

But if you thought the only thing you have to look forward to is Freedom 75, reading this book will cheer you up. Retiring at age 65 may in fact be a perfectly reasonable objective and you might even be able to afford a nice annual vacation or two while you are still well enough to travel.

The Real Retirement can be purchased online from Chapters for $15.64.

Fred Vettese
Fred Vettese
Bill Morneau
Bill Morneau

Splitting your pension on marriage breakdown

By Sheryl Smolkin

SHUTTERSTOCK
SHUTTERSTOCK

 

When a family splits up, pensions accrued by one or both spouses (including the Canada Pension Plan) and the family home may be the most valuable family assets. This blog discusses the Saskatchewan rules for pension credit-splitting of non-government pensions.

If both partners live in Saskatchewan their pensions (including the balance in their Saskatchewan Pension Plan) form part of family property. The Family Property Act establishes as a general rule that each legally married spouse, common-law spouse and same-sex spouse is entitled to an equal share of their family property, subject to various exceptions, exemptions and equitable considerations set out in the legislation. For example, property acquired before the commencement of the relationship is exempt from distribution.

The court may divide the family property or may order that one spouse pay the other spouse enough money to equalize their shares. Alternatively, the spouses may make an agreement about how to divide their property. The agreement will be binding if it is in writing and each spouse has received independent legal advice.  If a member has named the soon to be former spouse as a beneficiary, that person will continue to be the beneficiary unless the member files a change with the plan.

Under the Saskatchewan Pension Benefits Act, pensions can be divided in a number of ways:1

  • If the member of a defined benefit (DB) pension plan is not yet receiving a pension and is not eligible for an unreduced benefit, the other spouse can have a lump sum transferred from the plan to a locked-in retirement vehicle like a locked-in registered retirement savings plan or another registered pension plan. The lump sum is calculated by assuming the member terminates membership in the pension plan. This calculation typically results in a very low value for the pension (ignoring possible early retirement benefits, future increases, etc.).2
  • If the member of a DB pension plan is not yet receiving a pension and is eligible for an unreduced benefit, the non-member spouse can either take an immediate lump sum transfer (see 1 above) or he/she can defer the division and the non-member can also receive a pension when the member retires.
  • If the plan member spouse is receiving benefits from a DB plan or an annuity from the SPP, the non-member spouse will receive his/her portion of the pension payment directly from the administrator. By default this pension is only paid in accordance with the form of pension elected by the member at retirement (i.e. life only, joint and survivor benefit) and therefore may not continue after the member’s death. However, the plan has the option of converting the spouse’s share to a pension payable on his/her life (not all plans offer this option). In addition, the plan may offer the non-member spouse the option to take his/her portion as a lump sum.
  • RRSPs (both locked-in and not locked-in) and defined contribution (DC) pension plans (including the Saskatchewan Pension Plan) do not need to be valued on marriage breakdown.

This is because, unlike with a DB plan, RRSPs and DC pensions are simply tax-deferred investment accounts and so the value at any point in time is equal to the account balance. For this reason, a valuation is not necessary to determine the pre-tax value for these assets.

However, in many cases, a proper income tax adjustment should be calculated. For more details on the reason for the income tax adjustment, see the question ‘Does the value of a pension have to be adjusted to reflect income tax?’ pension valuation frequently asked questions on the BCH Actuarial Services Inc. website.

Locked-in DC plan balances are subject to the same transfer restrictions as lump sum transfers from a DB plan described in 1 and 2 above.

During separation or divorce, either you or your spouse can transfer existing RRSPs to the other, without being subject to tax, provided that:

  • You are living apart when property and assets are settled; and
  • You have a written separation agreement or a court order.

Note that federally regulated pension plans (i.e. banks, airlines, rail) may not divide the pension in the same manner as mentioned above and may only allow the division options available under the federal Pension Benefits Standards Act.

Under the federal Pension Benefits Standards Act, up to 100% of the benefits earned during the relationship can be assigned to the spouse. If a portion of the member’s pension benefits are assigned to the spouse, the non-member spouse is deemed to have been a member of the pension plan and have terminated their membership in the plan.

Most federal pension plans have established administrative policies as to how the non-member spouse can receive their share of the pension, however, typically they will have the choice of an immediate lump sum transfer or a deferred pension in the plan if the member is not retired and they will receive a pension from the plan if the member is retired  (the plan may offer a lump sum option and they may convert the spouse’s pension to one payable for their lifetime). For more information, click here.

Federal government pensions are divided in accordance with Pension Benefits Division Act which only allows an immediate lump sum transfer from the pension plan to the non-member spouse. For more information, click here.

1. This blog is based in part on information provided on the website of BCH Actuarial Services Inc. and the material is reprinted with permission. In all cases of marriage breakdown you should consult with a family lawyer and/or an independent actuary who will advise you regarding the laws and actuarial valuations that apply to your situation.

2. A division of a pension on marriage breakdown must not reduce the member’s commuted value to less than 50% of the member’s commuted value prior to the division.

Apr 28: Best from the blogosphere

By Sheryl Smolkin

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This week the country mourned the untimely death of Jim Flaherty, the former federal finance minister. In Goodbye Jim, Canadian Dream Free at 45 blogger Tim Stobbs says the most important lesson he learned from Flaherty is “life is short, so don’t spend all your time working. 

With the deadline for filing 2013 income tax returns extended to May 5th because of temporary system shutdowns due to the Heartbleed software bug, procrastinators have several more days this week to delay the inevitable.

However, there are some cases where it may be a good idea to defer taking tax deductions you are entitled to this year to a later year. In the blog Taxes: When it Pays to Procrastinate or Defer on Young and Thrifty we learn that you will get more “bang for your buck” on your RRSP deduction if you contribute this year but do not take the deduction until a later year when you are in a highrt income bracket. The same goes for your educational tax credits.

Financial Procrastination can also result in making bad financial decisions, says Dave on Canadian Dream Free at 45. For example, he recently accepted the first house and car insurance package offered to him, instead of making the time to shop around (a serious personal finance no-no).

For many people, the reason to scrimp and save during their working life is to leave a legacy for their children. But on Boomer & Echo, Marie Engen says if you have sufficient money to Leave A Legacy Before The Will Is Read, consider giving your children a financial boost when you are still alive to see them enjoy it. Helping with a down payment on a house, funding RESPs for your grandchildren and family vacations can be very gratifying.

Finally, Squawkfox questions Repair or replace: When does it make sense to mend the threads you’ve got? She says it depends whether the item is busted or just worn out. It costs $50 to repair the heel and sole her eight year old blue Fluevog boots instead of $350 to replace them so she opts for the repair. But she regretfully acknowledges that even good quality items won’t last forever.

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 with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.