I retired early and elected to start receiving my Canada Pension in 2010 at age 60. As I result my pension was reduced by 30% (.5% for every month prior to age 65) and I currently receive $675.20/month. At the time, the general consensus among many financial advisors was based on the old adage, “one in the hand.” In other words, it was worth taking the reduction to receive the reduced benefit for five extra years.
With changes made to the program beginning in 2012, if you choose to take CPP early, the reduction is greater. For example, if you retire in January 2015 at age 60, your pension will be reduced .58% for every month prior to your 65th birthday (to a maximum of 34.8%) and a January 2016 retirement will lead to a reduction of .60% per month until age 65 (a total reduction of 36%).
For a recent Toronto Star article, Some math on taking CPP early or late, Adam Mayers asked two actuaries and a financial planner for a few rules of thumb readers could use. Although there isn’t a simple one-size fits all answer, here is what they told him:
If you need the money to live on, take it as soon as possible.
If you have health problems or have a family history of short life spans in retirement, take it as early as possible.
If you think you can invest the money and come out ahead take it early. But be warned you will need a pretty hefty rate of return because you will pay tax on the pension and tax on the profit unless you can put it into an RRSP or a Tax-free savings account (TFSA).
Yih’s table reveals that if you take CPP at age 60 in 2015, (assuming you qualify for the maximum CPP at age 65) your benefit will be $643.31/month (reduced from $986.67).
Alternatively, if you wait until age 65 to collect a higher amount, you are foregoing the $38,598.53 to get more in the future. It will take until age 74 (the breakeven age) to make up the $38,598.53 you left on the table.
If you think you will live past age 74, the math suggests you should wait until age 65 or later to start receiving CPP. Unfortunately no one knows how long they will live. However, the Canadian Business Life Expectancy Calculator is one way to get a rough idea if you will live to a ripe old age. For example, I am currently age 64 and the calculator says I will live to 87.01 years.
You can apply for CPP at age 60, but if you continue to earn income beyond that age, you will still have to make CPP contributions until at least 65. A self-employed person will have to make both the employer and employee contributions. After age 65, CPP contributions are optional to age 70.
Based on your age, financial situation, projected life expectancy and whether you intend to keep working for some period of time after you retire, your financial planner can help you decide what the best time is for you to apply for CPP.
A recent policy paper from the C.D. Howe Institute[I] documents how the current mandatory minimum withdrawals from registered retirement income funds (RRIFs) and similar accounts have not kept pace with the increased life expectancies of Canadians – a problem for retired Canadians trying to balance their need for current income against the risk of outliving their savings.
Since 1992, the Income Tax Act has obliged holders of RRIFs and similar accounts to withdraw annual amounts, dictated by an age-related formula, that rise until holders must withdraw 20% each year. But in 1992, the federal government was in a deficit position and needed cash. Now it is close to surplus and the timing of the receipt of those taxes is less critical for the government.
To the RRIF holder, however, the minimums pose a threat. They oblige the holder to run tax-deferred assets down rapidly. Today, people can expect to live much longer after retirement, and real returns on investments that provide secure incomes are much lower. RRIF holders now face serious erosion in the purchasing power of tax-deferred savings in their later years.
Back in 1992, a 71-year-old man who withdrew the annual mandatory minimum from his RRIF could expect to deplete 25 per cent of his initial balance’s real value upon reaching his life expectancy, and had virtually no chance of seeing its real value drop more than 90%. Now, he can expect to live to see his initial balance drop about 70%, and faces a 1-in-7 chance of seeing its real value drop more than 90%.
In the same year, a 71-year-old woman making minimum RRIF withdrawals could expect to deplete about 40% of her initial balance’s real value upon reaching her life expectancy. Now, she can expect to deplete about 80% of it. And she faces a 1-in-4 chance of seeing its real value drop more than 90%.
The study authors William B.P. Robson and Alexandre Laurin admit these are stylized examples that will not apply to everyone. Some seniors, especially those who do not anticipate living long, will want to withdraw tax-deferred savings faster than the RRIF minimums. In the coming decades, more seniors, enjoying better health and working at less physically demanding jobs than their predecessors, will work longer and replenish their savings notwithstanding the disadvantage of losing tax deferrals after age 71.
Couples can delay the impact of the drawdown rules by gearing their withdrawals to the younger spouse’s age. High-income seniors whose incremental withdrawals do not trigger OAS and GIS clawbacks will find the burden of paying ordinary income taxes on them tolerable. As room to save in TFSAs grows, more seniors will be able to reinvest unspent withdrawals in them, avoiding repeated taxation.
For other seniors, however – even if they do have room to reinvest in TFSAs – these forced drawdowns make no sense. These seniors include those whose withdrawals – reinvested in TFSAs or not – trigger clawbacks and other income and asset tests; who find tax planning and investing outside RRIFs daunting; who cannot easily continue working; or, who anticipate sizeable late-in-life expenses such as long-term care.
Moreover, foreseeable demands on individual and public resources suggest we should be encouraging saving, rather than discouraging or at best complicating it. Roughly 203,300 Canadians are now age 90 and older; in about 25 years that number will roughly triple. To the extent future seniors have ample assets to finance their needs – especially those such as health and long-term care that rise with age – all Canadians will benefit.
Therefore, the authors of the paper argue minimum drawdowns from RRIFs and similar vehicles should start later and be smaller, or even disappear entirely.
They say that since tax is payable on RRIFs upon the death of the last to die of the account holder and his/her spouse, in a present-value sense, elimination of mandatory minimum withdrawals would have no significant fiscal impact for the government. Elimination would also have the additional benefit of removing the need for future updates as longevity, yields and possibly other circumstances change again.
Table 1 below illustrates how the RRIF minimum drawdown schedule could be modified to reflect both the increased longevity of Canadians in 2014 and revised interest rate assumptions.
[I] This blog contains excerpts from the C.D. Howe Institute report Outliving Our Savings: RRIF Rules Need a Big Update:
Age
Current RRIF Prescribed Minimum Withdrawal
RRIF Minimum Withdrawals to Replicate 1992 Account Depletion Probabilities
71
7.38
2.68
72
7.48
2.72
73
7.59
2.76
74
7.71
2.80
75
7.85
2.85
76
7.99
2.91
77
8.15
2.96
78
8.33
3.03
79
8.53
3.10
80
8.75
3.18
81
8.99
3.27
82
9.27
3.37
83
9.58
3.48
84
9.93
3.61
85
10.33
3.76
86
10.79
3.92
87
11.33
4.12
88
11.96
4.35
89
12.71
4.62
90
13.62
4.95
91
14.73
5.36
92
16.12
9.48
93
17.92
10.54
94+
20.00
11.76
Source: Outliving Our Savings: RRIF rules need a Big Update: C.D. Howe Institute
[1] This blog contains excerpts from the C.D. Howe Institute report Outliving Our Savings: RRIF Rules Need a Big Update:
Hi, as part of the SavewithSPP.com continuing series of podcast interviews with personal finance bloggers, today, I’m talking to Tom Drake, author of the personal finance blogs Canadian Finance and Balance Junkie. He also partners on three other sites and writes guest posts on several others.
Tom lives with his wife and two boys in Edmonton. He’s a financial analyst for all of the Sobeys stores west of Ontario. He’s always looking for ways to reduce any expenses, while continuing to save money, in part because his wife is a full-time homemaker.
Welcome Tom.
Hi Sheryl, thanks for having me here.
Q. When did you start blogging Tom?
A. I started in early 2009. I hadn’t really thought about my personal finances too much prior to that. I was never totally terrible with money, but in about a six month span, we got married, and soon after that, we were expecting our first child, and we were also looking to buy a house when the market dipped in early 2009. So those three things kind of put personal finance right at the forefront in my mind.
Q. What were your goals for the blog when you started blogging, and have they changed over time?
A. Well, they have a little. When I first started, it was certainly more about the three major events that I’ve already mentioned. Nowadays, I try to cover as many personal finance topics as possible because through Google searches and even people emailing me directly I discover a lot of topics that I can kind of help them with their own personal finances, even if it’s not something that I’ve had to deal with myself.
Q. How frequently do you blog?
A. Lately it’s been about two or three times a week on the “Canadian Finance” blog. I have multiple blogs, so I’m probably doing something every day. I also post one to two times a month on “Balance Junkie,” and soon I’ll be writing on “Retire Happy” as well.
Q. What other blogs do you have?
A. Well, within Canada, it’s the Canadian Finance blog and Balance Junkie and I’m also a partner with Jim Yih on Retire Happy.
Q. To what extent is there an overlap between the topics that you would feature or write about on your own blog and that, for example, you or Jim or his other bloggers would post on his blog?
A. Well, Jim Yih is very dedicated to the retirement niche, which I honestly haven’t thought about it much. I save money in my RRSP and have savings in my TFSA as well, but I don’t have a huge retirement planning goal right now. So I don’t cover those topics as much. So I’d say my blog is about more general personal finance issues and his is very targeted on retirement issues.
Q. So what will you be writing about on Retire Happy?
A. On Canadian Finance, I cover a lot of tips on how to save money, reduce your utility bills and such. Most of the people who read Retire Happy are beyond that, and they’re looking for ways to use their money better. So I’ll probably be covering things like making sure that your credit card has a decent rewards plan and products like TurboTax. Just about anything that can help people use products that are out there and add something a little more than just retirement to that blog.
Q. Now, you say that retirement hasn’t been your focus as yet. May I ask how old you are?
A. Just about to turn 37 this week.
Q. I see, well, you know what, you’re getting closer to that break point. I think 40 is when the light goes on.
A. Yeah, exactly. I do save a decent amount. I just don’t have a full retirement plan. I don’t know if I’m going to retire at 50 or 70 at this point.
Q. Unlike Tim Stobbs who says he’s retiring at 45.
A. Oh, that would be nice, but I’ll say 50 at the earliest.
Q. There’s probably over a dozen well-known personal finance bloggers or more in Canada. What’s different about your blog? Why do you think it’s a must read?
A. Well, I think with any personal finance blog, readers are going to gravitate to someone that kind of fits their situation. So as a family man in my mid-30s, I get a lot of readers that sort of fit that same mold. Also, archived articles from other staff writers I have had from time to time add a different dimension.
Q. How many hits do you typically get for each blog?
A. I don’t really look at it per post. So much of it is search traffic. I get a few thousand in a day. But as a total network of all the sites that I own, or am in partner with, we get over 500,000 page views in a month.
Q. Wow. You said all the sites that you own or partner with. You’ve told me about two and about working with Jim. Are there others?
A. Yes, Jim Yih gets all the credit for this model, which is basically taking a 50/50 partnership where we focus on our strengths. I like writing personal finance posts, but I’m not as efficient at it as a lot of these other writers. So the people I partner with are really good writers.
Jim’s been writing for over a decade in newspapers and on his own site, even before we turned it into Retire Happy. I’ve also partnered up with Miranda Marquit down in the States. She can be found pretty much in any personal finance blog that you look at. She’s a big freelancer.
These people don’t want to deal with creating a site, working on things like search engine optimization, how to monetize the site, so they actually make some money from it. Those are more of my strengths actually than the actual writing. So it’s been a good partnership with both of them.
And the third person I’m partnering with is Kevin at Out of Your Rut which is another American blog. Again, he’s more of a freelancer. But he has a site and we work to make sure that site makes money as well and gets the traffic.
Q. One of the more popular blogs you’ve posted related to the Smith Maneuver, which allows you to deduct mortgage interest as an investment expense. Can you tell me how that works?
A. Basically what you need is a re-advanceable mortgage. And what that means is as you pay down your principle, you have a home equity line of credit that will increase. So if you pay $500 down on your principle, your L.O.C. increases by that amount. You can use that line of credit to invest in dividend bank stocks.
The goal is that the stocks you pick have a higher dividend percentage than the interest rate you’re paying on your mortgage. Then you can use those dividends to accelerate your mortgage pay down. So ultimately your debt level stays the same.
A lot of people don’t like that, because you’re not really reducing your debt, and you’re leveraging it for investing. But I’m comfortable with it. The dividends I have are certainly making a higher percentage than what I’m paying on a mortgage currently. Obviously, the risks are the way that the mortgage rates go in the future. But dividends have some preferential tax treatment as well, which also helps.
Q. So when did you implement a Smith Maneuver personally?
A. Probably about 2010. Buying my house in 2009, I got the Scotia STEP mortgage which includes a line of credit. But since I had exactly a 20% down payment, I couldn’t actually borrow anything yet because I hadn’t paid down any additional principle. So after about a year of that mortgage, I started out with the Smith Maneuver, and using that extra equity on the house to invest in stock.
Q. So you’ve got a day job. You’ve got two kids. You’ve got your work with your own blog and others. What advice would you give to busy people to fit it all in?
A. I don’t get a lot of sleep. So if you can do a 19-hour day, you can fit a lot. But otherwise, certainly prioritize family first. Obviously, I’ve got my day job. But as soon as I come home, I spend time with my family. Once the boys are in bed, then I go into business mode and write a blog post or deal with various technical issues and such, up until 1:00am or later.
Q. That’s amazing. I’m one of those people who needs my sleep. So you’ve mentioned a number of people you’ve worked with, but who are your favourite personal finance bloggers?
A. Well, some of the ones that originally got me into personal finances haven’t been blogging as much, like Mike at Money Smarts or Preet at Where does all my money go?
Million Dollar Journey is certainly the reason I started blogging. It’s what got me into the Smith Maneuver too actually, and so I still read that one quite a bit. And I read Jim Yih’s stuff a lot. But Robb at “Boomer & Echo” is certainly a great writer.
Q. So if you had to look at all the time you’re spending on this, are you doing it for love or are you doing it for money?
A. I do make a full-time income with my online business, but my wife is staying at home with our kids. So it’s her full time income basically. It’s worth it to juggle sort of both jobs right now, to allow her that time with the kids.
Q. If you had only one piece of advice to people who want to save money and optimize their savings, what would it be?
A. I think the biggest advice for me is basically to have a positive cash flow. I’m not a big fan of budgeting myself. It’s something I don’t think people always stick to. But the cash flow is just simple calculation to make sure that you’re bringing in more than you’re spending. So you want to make sure you’re saving and covering all your bills. And you certainly want to make sure that you’re not going into a negative cash flow. It’s the simplest way to improve your finances.
Thanks very much Tom. It was a pleasure to talk to you.
Thank you. It was great conversation.
—
This is an edited transcript of the podcast you can listen to by clicking on the graphic under the picture above. If you don’t already follow Tom’s blogs “Canadian Finance and Balance Junkie” you can find them here and here. Subscribe to receive blog posts by email as soon as they’re available.
Every family has multiple financial priorities. If you have small children and a big mortgage it is often daunting to think about saving for anything more than a family night out at a local fast food restaurant.
But one way to manage your money is to pay yourself first by allocating specific amounts to savings and having these amounts moved into different jars (or accounts) as soon as your paycheque is deposited into your account.
In Part 2 of the series “how to save for retirement” we will focus on several of the tax-assisted or tax–deferred savings plans available to you and some tips for using them effectively.
Government benefits: Every working Canadian must pay into the Canada Pension Plan or the Quebec Pension Plan until age 65. In addition, Old Age Security is payable to Canadians or legal residents living in Canada who lived in the country at least 10 years before age 65 and Canadians or legal residents living outside Canada who lived in the country at least 20 years before age 65. Lower income OAS recipients may also be eligible for the Guaranteed income Supplement (GIS). But changes to government benefit programs mean you can take benefits later or in some cases earlier (with a penalty). When developing a retirement savings plan you should understand how these programs work and the benefits you can expect to receive. You also need to decide when it makes the most financial sense for you to start collecting CPP and OAS.
Saskatchewan Pension Plan: The Saskatchewan Pension Plan is a defined contribution pension plan open to all Canadians with registered retirement savings plan (RRSP) room. You can contribute up to $2,500/year or transfer in up to $10,000/year from another unlocked RRSP. Low fees (one percent/year on average) and consistent returns (average of 8.13% over 28 years since inception) make SPP an excellent investment. The program is very flexible because how much you contribute and when is up to you. Funds are locked in until your selected retirement date, between ages 55 and 71.
Registered Retirement Savings Plan: In 2014 you can contribute 18% of your previous year’s income to a maximum of $24,270 to your RRSP minus specified amounts contributed to other registered savings accounts. Unused contribution room can be carried forward. You can find your RRSP limit on line (A) of the RRSP Deduction Limit Statement, on your latest notice of assessment or notice of reassessment from the Canada Revenue Agency.
RRSP withdrawals: One weakness of an RRSP as a retirement savings vehicle is that you can withdraw money at any time. If you do withdraw RRSP funds you will pay tax on withdrawals at your normal tax rate, the contribution room is lost and you lose the benefit of future tax-free compounding. However, the Home Buyers’ Plan and the Lifelong Learning Plan permit you to withdraw amounts from your RRSP in specific circumstances without triggering a tax bill and require you to repay the money, usually over 15 years.
Tax deductible: Contributions to SPP, RRSPs and other registered pension plans are tax deductible. If you participate in one or more of these plans and have not already arranged to have less tax taken off at source, you may get a hefty income tax return. There are lots of ways to spend this windfall including taking a vacation or paying down debt. However, in his book The Smart Debt Coach, author Talbot Stevens says reinvesting your tax returns into an RRSP is the best way to get the full benefit of compounding in the plan.
Deferring tax deduction: There is no minimum age for an RRSP. In order to make contributions to an RRSP account, a minor needs to have earned income the previous year and have filed an income tax return. If a thrifty young person or anyone with a low income makes RRSP contributions, deferring taking the tax deduction until they are in a higher tax bracket means they will get a bigger bank for their savings bucks. The last RRSP contribution a taxpayer can make is in the year they turn 71.
Tax Free Savings Account: A Tax Free Savings Account (TFSA) allows you to currently save $5,500 a year. Contributions are not tax deductible, but investment earnings accrue tax free in the account. If you withdraw money, you can re-contribute the amount to the account in the next or subsequent years without any penalty. You can only begin making contributions at age 18 but there is no upper age when you have to stop contributing. How do you decide if a TFSA or an RRSP is best for you? Gordon Pape says TFSAs are better for short-term savings goals and if you don’t want to undermine possible eligibility for government benefits like the GIS. But if your income will be lower in retirement he suggests saving in an RRSP.
Automatic withdrawal: Whether you participate in a company pension plan, SPP, RRSP, TFSA or a combination of all or some of the above, set up automatic withdrawal so a specified percentage of your income is moved into these accounts every payday. David Chilton made “pay yourself first” a popular mantra in The Wealthy Barber, first published in 1989. If savings are skimmed off the top, you will learn to live on less while you get on with the business of day-to- day living. And when you do retire, you will have a significant part of the nest egg you need to live on.
Automatic escalation: To find out how much you need to save for retirement, you need a financial plan. But in a recent column in the Globe and Mail, personal finance expert Preet Banerjee suggests that in the absence of a plan, the rule of thumb should be at least 10% or as much as you can save. In other words, you are not going to have enough if you keep saving a flat dollar amount each year. But if you select a percentage of income and ensure you increase your contributions every time you get a raise, it is more likely that you will reach your retirement savings goal.
Consider insurance: Nobody expects to become disabled or die young, but it happens more often than you think. Regardless of how much you are saving for retirement, an unexpected loss of income can derail all of your short and long term goals. You may have some life insurance, disability insurance and maybe even critical illness insurance at work. Review your coverage with a financial advisor to determine if you need more individual coverage or if you can afford to self-fund the risk.
In Part 3 of this series we will focus on some basic investment principles that will help you grow your retirement savings.
It seems to me that I live and breathe retirement planning every day. I read about retirement planning. I write about retirement planning. And I frequently visit our money online to reassure myself that one of these days my husband and I will actually embark on the retirement we have planned for.
After reading numerous personal finance blogs, books and articles I have concluded that people who have good “financial hygiene” from a young age are the ones that are most likely to be successful over the long haul in saving for retirement.
Therefore, over the next several months in a three part series, I will discuss 30 ways you can grow your retirement savings, from before you start your first job until after you’ve locked your office door for the last time.
Invest in yourself: In order to get a well-paying job with future prospects of growth you will need some form of post-secondary education and on the job experience. In addition, you will need to continue enhancing your skills and abilities throughout your life. Jobs for life have become the exception rather than the rule, and you are your own career manager.
Develop a financial plan: Regardless of how much money you have to live on and what your personal or family expenses are, you need a budget. Allocate amounts to rent, utilities, food, other recurring expenses, discretionary spending and savings. Then stick to your budget and revise it annually, or more often as required.
Decide how much you will need: When retirement is 30 or 40 years away, it is impossible to accurately figure out how much money you will need. However, financial planners typically calculate that most people will need 50% to 70% of their income while working to retire on. You can start with a somewhat arbitrary number when you are young and adjust it as you get closer to retirement age.
Calculate how much to save: There are many retirement savings calculators online that will help you calculate how much you have to save to generate the annual income you need to fund your retirement. It is important to select a conservative annual rate of return both before and after retirement and keep in mind that a 65 year old can expect to live an additional 20 years or more.
Start saving early: In your 20s and 30s saving for a wedding or a car or a house or your children’s education may be at the top of the list. Nevertheless, the earlier you start saving for retirement, the greater the power of compounding and the smaller the amount you have to save on a regular basis to reach your goal. The Saskatchewan Pension Plan allows you to save up to $2,500 per year between ages 18 and 71.
Have an emergency fund: Over your working career, there will be periods in which you are out of work or unexpected expenses arise. Financial planners typically suggest that you have an easily accessible, liquid emergency fund of at least three months’ pay. In this way, your longer-term savings goals will not be permanently derailed if you have temporary setbacks. A Tax Free Savings Account is a great place to invest your money as funds withdrawn in one year can be replaced in the following year without any penalty.
Avoid consumer debt: There is good debt and bad debt. An affordable mortgage to buy a family home is good debt. High interest credit card bills are bad debt. Your rule of thumb should be that unless you can pay off your credit card in full each month, don’t use it. Airline points and cash back deals on credit cards are tempting, but if you are on a tight budget spending cash only can help to inhibit over-spending.
Forget the Joneses: As your family grows and your income increases, it may be tempting to buy more tech toys, a bigger house or take more expensive vacations. But you don’t have to keep up with the Joneses. If over extending yourself means you go into debt and have to forgo saving for retirement, you could be heading for Freedom 85. And you won’t be satisfied with a modest lifestyle when you do retire.
Save at work: If your employer offers a defined contribution pension plan or a group RRSP, chances are that your contributions will be matched up to a certain percentage of income. Enroll as soon as you are eligible to receive this “free money” and contribute enough to get the maximum employer match.
Reduce withholding taxes: One of the advantages of contributing to a pension plan or an RRSP is that you get a tax break. However, if you wait to the end of the year to get a refund, you are giving the government an interest-free loan. If you are making regular contributions to a personal or workplace retirement savings program you can file a T1213 Request to Reduce Tax Deductions at Source to CRA.
In Part 2 of this series featured next month, we will discuss 10 more ways you can grow your retirement savings.
Do you have any ideas for saving money? Share your money saving tips with us at http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card. And remember to put a dollar in the retirement savings jar every time you use one of our money-saving ideas.
Today in savewithspp.com we continue our series of interviews with personal finance bloggers. Dave Dineen’s blog “Dave’s retirement journey” appears on Sun Life’s brighterlife.ca
Dave retired in December 2010 in his mid-50s. Before retiring, he spent 30+ years in marketing for several financial services companies, most recently, for Sun Life.
He writes about what it actually feels like to be retired – the pitfalls, as well as the joys. He shares many real-life experiences and what they’ve taught him about how to retire successfully.
Thanks for joining me today Dave.
My pleasure Sheryl. Great to talk to you.
Q: More and more people are now saying they are aiming for Freedom 70 or older. You’ve achieved Freedom 55. Why did you decide to retire so early?
A: Well, a few reasons really. My parents were dairy farmers and my dad died at age 62 before he could retire. And before that, my parents’ vacations actually fit between milking the cows in the morning and milking them again at night, 365 days a year. So I decided to retire while I was young enough, healthy enough and vital enough to do the things I wanted to do.
My career choices along the way, also really led to my retirement. My first career was as a journalist. My second career was in marketing with big financial companies like TD Canada Trust and Sun Life where I created retirement websites and wrote retirement newsletters, blogs and brochures. So I know quite a bit about retirement.
And my third and kind of final career – if there is such a thing as a final career in life – was in market research. In that position I created Sun Life’s Canadian Unretirement Index, which has really contributed to how we understand the idea of retirement and the reality of how retirement is changing in this country.
Q: How are you funding such a long retirement?
A: I’m going to be 58 this year, so I can’t apply for CPP any earlier than two years from now. I can’t apply for OAS for over seven years. And I don’t want to start my workplace pensions too early and get really small payments.
So for now, my wife and I are living off two sources of income. Our basic day-to-day living costs are paid from a stream of dividends on her non-registered investments. The income I get from freelance writing and marketing is what we’re using for the “nice to haves” like travel or even to up our TFSAs.
Q: How many hours a week do you devote to freelance writing and marketing consulting?
A: It really varies. Actually when I retired, I had no intention of freelancing, but I kept getting offers from people who needed some help and knew what I could do. I’ve done work for people even while I’ve been away traveling in England, Scotland, Wales, Italy and Spain. All it takes these days is a laptop, a phone and Skype.
Q: Can you estimate what percentage of your pension income you are earning from your freelance work? 20%? 40%?
A: Oh, it’s more than either of those numbers. It’s made a tremendous difference. So much so, that after more than three years, we actually have yet to touch a penny in our RRSPs or our TFSAs or our pensions. We are preserving our retirement savings and enjoying a better retirement lifestyle than we really expected.
Q: So, let’s get to your blog. What have some of your most popular blogs been about?
A: Well, my blog “Dave’s Retirement Journey,” really is my personal story. And people are interested in living a good life without going through their money too quickly. In our case, we travel a lot. We were on the road almost 12 of our first 36 months of retirement.
So, one of my most popular blog posts was around spending money slowly while you’re taking a long trip. By the way, we just got back a couple of weeks ago from three months in Europe where we ate like royalty, lived centrally in wonderful cities and we did fun things. Yet we still arrived home with a zero credit card balance.
Q: How important do you think it is to retire without debt?
A: Oh boy, it is absolutely necessary. In my mind, if you are in debt, you are not ready to retire. Obviously, if poor health or a job loss forces you out, you kind of have to muddle through somehow. But otherwise, I believe even thinking about retiring with debt is just crazy.
Q: One of the things that you blogged about is how downsizing in retirement doesn’t always work. Can you tell us a little bit about your home and cottage buying and selling and where you’ve finally landed in terms of your housing choices?
A: Yes, it really was complicated. A couple of years before retirement we sold our big four bedroom house and downsized to a one bedroom city condo, plus a cottage. But we realized the upkeep on the cottage was keeping us from travelling, so we sold it. Then we found that the one bedroom condo on its own was too small and my wife really missed her garden. So we ended up selling the condo as well right about the time we retired. In the end, we bought a new condo in Stratford, Ontario, which is in the MoneySense list of the best places to retire in Canada.
Q: With the benefit of over three years as a retiree, what are several unexpected things you’ve learned?
A: Boy, I love that question. I’d say that the first thing is that if you’re the kind of person who’s disciplined enough to have saved well for retirement, then you’re probably going to find it pretty easy to adjust to the financial discipline of living within your means in retirement.
Another unexpected thing for me has been the power of social media. A couple of years after retiring, I remembered that I had a profile on LinkedIn. I figured I’d better go in and update my profile to show that I was retired. Within a day, someone that I hadn’t worked with in 17 years reached out to me as a result of that LinkedIn update, and asked if I was interested in doing some freelance work for them in the marketing department at Investors Group. Another of my freelance clients actually has paid Google so that if somebody searches for my name, that client’s website comes up.
And I suppose a third unexpected thing I’ve learned along the way is that I actually like doing some freelance work. That’s a big surprise to me, because I really thought that I’d closed the door to work.
Q: So what was the best investment you ever made?
A: This will sound odd, but I believe my best investment was actually to buy a good-quality treadmill about five years ago. It helps keep my wife and I healthy, and to us that’s more valuable than a big tall stack of money.
Q: If you had one piece of advice for Canadians thinking about retirement, what would it be?
A: That’s a tough question. I think Canadians need all kinds of advice when it comes to retirement. But I think for me it all starts with thinking about what kind of retirement you want to have. I like to use a simple analogy.
In your working career, chances are, somebody else wrote your job description. And at the end of your life, somebody else is going to write your epitaph. But it’s that in-between part that you get to write.
So what kind of retirement do you really want to have? Figure that out and of course seek all the help you need to deal with the financial stuff.
Thank you, Dave. I really appreciate talking to you today.
My pleasure, Sheryl.
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This is an edited transcript of the podcast you can listen to by clicking on the graphic under the picture above. If you don’t already follow Dave’s retirement journey on Sun Life’s brighterlife.ca, you can find them here. Subscribe to receive blog posts by email as soon as they’re available.
For the last five years all Canadians over 18 have been eligible to open a “Truly Fantastic Savings Account” (aka a Tax-free Savings Account). These accounts are a particularly valuable retirement savings option for lower-income people who will not be taxed at a reduced rate after retirement and more affluent Canadians who have used up all of their RRSP contribution room.
You can open a TFSA at age 18 even if you are not earning income, as long as you have a social insurance number. TFSA contributions are not tax-deductible, but investment earnings accumulate tax-free. You can also continue contributing to a TFSA beyond age 71 when RRSP contributions must end.
According to the BMO Annual TFSA Report released in late December, almost half of Canadians (46%) now report having TFSAs – up 23% from 2012. However, one-third of account owners are still not fully familiar with how TFSAs work. As a result, since opening an account, one in 10 people have over-contributed and paid a tax of one percent per month on overpayments.
To avoid a penalty tax, you must understand how much you can contribute each year, the way unused contributions are carried forward and when withdrawals can be replaced.
Starting in 2009, TFSA contribution room accumulates every year even if you do not file an income tax return or open a TFSA. The annual TFSA dollar limit for the years 2009, 2010, 2011 and 2012 was $5,000.The annual TFSA dollar limit for the years 2013 and 2014 is $5,500.
The TFSA dollar limit is indexed based on the inflation rate. The indexed amount will be rounded to the nearest $500.
Investment income earned by and changes in the value of TFSA investments will not affect your TFSA contribution room for the current or future years. For an example, if you earn $1,500 in interest on your 2013 balance, you can still contribute $5,500 in 2014.
The TFSA contribution room is made up of:
Your TFSA dollar limit ($5,500 per year beginning in 2013 plus indexation, if applicable);
Any unused TFSA contribution room from the previous year; and
Any withdrawals made from the TFSA in the previous year.
The mistake that many people make is to withdraw funds and re-contribute them in the same year, after they have made their maximum contribution for the year, thus triggering an overpayment.
For example, assume that at age 18 in 2011. Jane opened a TFSA. At the end of 2012, Jane had contributed $10,000 to her account and had used up all of her 2011 and 2012 contribution room.
In January 2013 she contributed the maximum amount of $5,500 for the year.
In March 2013 Jane withdrew $10,000 to buy a new car.
In September 2014, using her annual bonus, Jane re-contributes $10,000 to her TFSA.
Jane will have a $10,000 over-contribution that will be taxed at 1% per month until the end of 2013. To avoid triggering the tax, she should have waited until the next year (January 2014) to pay back the money she withdrew from her account in 2013.
Your TFSA contribution room information can be found by going to one of the following services:
If the information that CRA has about your TFSA transactions is not complete or if you have made contributions to your TFSA this year, use Form RC343, Worksheet – TFSA contribution room, to calculate your TFSA contribution room for the current year. If CRA has deemed your unused TFSA contribution room to be a specific amount and you believe it is incorrect, instead of using this form, contact CRA for more information.
So keep records about your TFSA transactions to ensure that you do not exceed your TFSA contribution room. CRA will also keep track of your contribution room and determine the balance of room at a particular time for each eligible individual based on information provided by TFSA issuers.
Whether you are saving for retirement or for other long-term goals, the key is that you have to spend less than you earn.
In What is “Saving?” Gail Vaz-Oxlade says it’s also important to distinguish between saving to buy a car or go on a vacation which is planned spending and saving for another chapter in your life like retirement.
Big Cajun Man says in I did my RRSP and TFSA Now What? that opening accounts and depositing money are just the beginning. Unless you develop an investment strategy and make sure you aren’t paying exorbitant fees, your money won’t grow the way it should.
The Toronto Star’s Ellen Roseman recently wrote a great column about How to plan for retirement on a low income. She says people who expect to receive the guaranteed income supplement (GIS) to top up their old age security (OAS) pension after age 65 should save in a TFSA and not an RRSP because TFSA withdrawals will not impact GIS eligibility.
First Foundation is an Alberta and Saskatchewan based financial services company. In their owngrowprotect blog they have started a 52 week money challenge. The author of Go To Disney Land or Pay Bank Fees, Your Choice! calculates that his family can save over $500 per year by shifting to no-fee banking which in ten years will add up to a family visit to Disneyland.
And Mark Seed from My Own Advisor asks the million-dollar question how much money do you need to retire well? He says that the magic number is indeed $1m or more. Even if some costs disappear in retirement like saving for retirement itself and mortgage payments there are costs in your future like property taxes, utilities, gas and food that are going to grow over time.
For those of you who think saving $1m before you retire is an unattainable goal, frugal lawyer Dave explains how he reached $1M net-worth by the age of 34 in this post on the Million Dollar Journey blog. It helped that he rode his bike to work instead of buying an expensive car like many other young lawyers in his firm.
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.
It’s only February 11th and it feels like personal finance writers should have run out of things to say about RRSPs by now, but somehow they still find more to write about.
One of the more interesting things I came across this week was the results of a BMO survey that reported 69% of Canadians expect the Canada Pension Plan (or Quebec Pension Plan) to cover their retirement costs with nearly one-third, planning to “rely heavily” on it. This is despite the fact that CPP has an average monthly payout of less than $600 a month! And many people are also pegging their hopes on an inheritance or a lottery win to fund their golden years.
Well, someone once told me that lotteries are “a tax on the statistically challenged,” so you should probably take careful note of Brenda Spiering’s blog on brighterlife.ca discussing how much you can contribute to an RRSP.
The annual maximum contribution for 2013 is the lesser of $23,820 and 18% of your earned income for the previous year. But you may also have unused contribution room from previous years that has been carried forward and you can over-contribute up to $2,000 without a penalty.
But don’t forget to save some RRSP contribution room to make your $2,500 maximum Saskatchewan Pension Plan contribution.
Also, check out Gail Vaz-Oxlade’s interesting 2014 RRSP Update. Did you know that kids CAN have an RRSP although they can’t have a Tax-free Savings Account until they’re 18? If a child contributes when she doesn’t have to pay any tax, don’t claim the deduction. Hold it for later when her income and her tax rate go up so she gets a bigger bang for her buck.
On moneysmartsblog.com Mike Holman pokes a few holes in the RRSP Myth that an RRSP is only advantageous if your marginal tax rate in retirement is lower than your marginal tax rate when contributing.
He gives examples to show that when you make a contribution to an RRSP the tax deferred from RRSP contributions is calculated at your marginal tax rate (or close to it, if your RRSP contributions span more than one tax bracket). However, when you withdraw money from your RRSP or RRIF – the tax is calculated using your average tax rate (after other income sources such as pensions) which is typically lower.
Finally on retirehappy.ca, blogger Scott Wallace weighs in on the new Pooled Pension Plans to be offered by the federal government and some provinces such as Quebec and Saskatchewan. PRPPs are intended to provide a savings vehicle for small business or self- employed people who don’t have access to larger pension plans..
Scott says the industry already has low cost Group RRSPs and DC pension plans. And of course my readers already know that SPP allows employers to set up an easy, no-cost workplace plan. That’s why I agree with Scott that the real issue is not creating new kinds of retirement savings accounts but finding ways to make more people save!
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.
RRSP season is in full swing and since the beginning of the year, we have been bombarded with a media blitz suggesting few Canadians are saving enough and exhorting us to maximize contributions to our retirement savings plans by the end of February.
If you wonder what all this retirement planning is for, anyway, take a look at Sandi Martin’s blog or boomer & echo. She says planning for that inevitable day when you stop collecting a paycheque, or invoicing clients, or collecting ad revenue is an exercise that will let you spend more money than vaguely worrying about “saving enough” or “running out” will.
In order to save enough to retire worry-free, you need to figure out how much you will need. On the Canadian Finance blog Tom Drake suggests that for every dollar of annual income you need in retirement you should plan to have $20 in savings. That doesn’t include the value of your home because it is not earning income.
You can save in many different kinds of accounts including the Saskatchewan Pension Plan, employer-sponsored pension plans and RRSPs. But Jonathan Chevreau at MoneySense says investing in a tax-free savings account (TFSA) should be a priority for most Canadians. In fact he says the moment you make your January contribution, you should start accruing for the next year’s installment, even if it means parking in short-term cash vehicles and paying a little tax for the balance of the calendar year.
Brighter Life discusses how you can pay yourself from your retirement savings when you retire. Some of the options are annuities, registered retirement income funds, and payments from several kinds of locked-in accounts holding funds transferred from locked-in company pension plans.
And Jim Yih on retirehappy.ca reminds us that one area of tax planning that does not receive enough attention is the designation of beneficiaries when it comes to Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs).
When you open up an RRSP or RRIF, you are opening up a special contract under the Income Tax Act, which allows you to designate one or more beneficiaries. Far too often, this is done too casually and without enough thought. More importantly, as your circumstances change, like marriage, divorce or children, you should consider reviewing your beneficiaries to make sure you have the right people designated.
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.
