Monthly Archives: April 2010

Long-Term Financial Planning Key To Lasting Relationships

1 Reply

Long Term Financial Planning Key To Lasting RelationshipsWhile money issues can often be the “elephant in the room” for couples, it is a well-known fact that sound financial management can directly contribute to a successful, long-lasting relationship. Long Term Financial Planning is one area that can smooth a couple’s relationship. Let’s face it. If there is sufficient money to meet the family’s needs, there is one less thing to argue about. Many couples find themselves arguing over money. They could avoid the entire issue by sitting down with a financial planner. By establishing a sound plan to deal with their daily expenses and save sufficiently for retirement.

Once both sides understand the fundamentals of a sound financial plan and what the plan will give them when they retire, there will be much less stress in the relationship. A common goal for a team to aim for goes a long way toward establishing and solidifying a relationship. Both partners must be involved, and both must understand the process and the same goals and objectives. If not, there may be more basic issues to address, which will not be discussed in this blog.

Once you have decided to save for retirement and have a set of goals and a plan of how you will get there, it is time to develop and implement some tactics that will enable your plan and goals to be met.

Long-Term Financial Planning – How to Get Started

To begin the process of easing the financial stresses of managing a long-term relationship, consider the following points:

Set a Date – Set a “date” to discuss your financial future

  • While it may not sound as romantic as a four-course candlelit dinner, meeting with your financial planner will help couples look at the big financial picture
  • Best of all, working with a financial planner does not have to cost you a cent
  • Develop your combined goals and plans. i.e., when do you want to retire, where would you like to live, and what do you want to do when you retire? Focus on general terms since your plans may change as you get closer to retirement.
  • These plans and goals should be discussed before you meet with your financial planner. This way, you will be prepared for the discussion, and although you may need to make some adjustments after your planner gives you additional information, you will get much more out of the first session.

Discuss Your Plans with a Financial Adviser

  • Be prepared when you visit your financial adviser
  • Have all of your goals and plans ready to discuss
  • Have an inventory of your current investments, income, and expenses
  • Both husband and wife should attend this meeting; in fact, both should attend all meetings to ensure that they are fully informed and have an opportunity to contribute.
  • One of the major issues with financial planning is for one member to delegate the planning and execution to the other spouse and then have no clue as to whether they will have enough money.

Discuss your investment Risk Tolerance

  • Your adviser should discuss your risk tolerance
  • Risk tolerance is used to help you decide what investments to focus on
  • Many people cannot deal with high-risk stocks in case they lose their value
  • The basic rule is that if you lie awake at night worrying about your investments, then you are invested in investments that are too risky for your risk tolerance
  • Another rule is that your risk tolerance should decrease with age since you have less time to make up for losses
  • Your adviser will recommend a plan for your investment and show you what you need to save to meet all of your plans and goals

Start Saving Early for your Long Term Financial Planning

Note that the earlier you start saving, the better the chance of achieving your goals and retiring early. Someone at age 25 has a better chance than someone who begins planning and saving at age 45, for example.

We would be remiss if the issue of diversity is not mentioned as part of your retirement plan. Whatever you invest in, never place all of your investments into one investment. Regardless of how great it is, if this investment were to go south, i.e., significantly decrease in value, your retirement plan would be in serious jeopardy. Spread your investments across blue chip investments that match your risk tolerance.

We talked about spousal RRSPs earlier.  A spousal RRSP will help you to split income when the money is finally withdrawn from the RRSP. At the same time, the higher-income spouse will maximize his or her advantage from an income tax perspective.

Spousal RRSPs are an excellent way for loved ones, married or common law, to plan for their financial futures. The benefits of income splitting and the savings couples can realize from it will help to set them up for financial success. But will also help to ease the stress that finances can put on a relationship over the long term.

A Spousal RRSP allows couples to take advantage of income splitting. This means the higher income earner contributes money to the RRSP of the lower income earner. The end goal of both individuals having more equal incomes upon retirement. The higher income earner deducts the RRSP contribution even though he or she is contributing to a spousal RRSP. This system offers many rewards, including the potential for larger tax refunds. Also, a greater return on retirement savings for each individual.

Maximize Benefits – Gain Full Benefits of Spousal RRSPs

Couples can realize the full potential of a combined income by using a Spousal RRSP.

Save

Meeting Retirement Goals

1 Reply

Canadians Uncertain About Meeting Retirement GoalsA recent study by the Bank of Montreal revealed some interesting statistics about Canadian retirement plans and meeting retirement goals. We refer to this retirement study throughout this post. We also suspect that Americans reading this post will have similar statistics. Or possibly even worse since Canadians are known for higher savings rates than Americans. Also, for our American readers, an RRSP is similar to your 401k. We certainly do not want to be like this guy in the picture with no savings at all for retirement. Meeting Retirement Goals is a key objective for many consumers.

Canadians Uncertain About Meeting Retirement Goals

Eighty percent of Canadians are not confident that their RRSP investments will provide enough to meet their retirement goals. Â In fact, most people do not have retirement goals. They have no idea how much money they will need in retirement. Or how much income they will have during retirement. This is a really scary situation for many people. Since it is a well-known fact that government programs will not even come close to providing a reasonable income. This will place most people below the poverty line if they do not have other income from other sources.

Canadians have uncertainties about meeting their retirement goals. They are not sure they are taking the right steps in planning for retirement, according to a survey released today by BMO Financial Group.

The survey, conducted by Leger Marketing and commissioned by BMO, found that:

  • One-third of Canadians have no Registered Retirement Savings Plan  (RRSP) investments
  • Of those who do, an overwhelming majority (80 percent) are not confident that their RRSP investments will provide enough for their retirement
  • Nearly half do not feel they contribute enough to their RRSPs to meet their retirement goals

The survey focused on RRSP’s and did not assess other investments that Canadians may have. In Canada, RRSPs are the tax-free savings vehicle of choice for most people. Income within the RRSP is not taxed until it is withdrawn from the RRSP, and the contributions to an RRSP can decrease the total amount of tax paid in a given year. Some Canadians, probably a relatively small number, will have savings outside the RRSP. However, all income from these investments will be taxed in the year the income is generated.

How Much Do You Need for Retirement – Meeting Retirement Goals?

Research also showed that Canadians are not certain how much they need to set aside for a comfortable retirement:

  • One in four respondents (25 percent) said they simply do not know how much is required
  • More than half (54 percent) estimate that they will need to accumulate at least $550,000 to achieve their goal

There is no magic, one-size-fits-all number. The amount you will need will largely depend on your circumstances and the kind of retirement lifestyle you want. The key is to determine what you want your retirement years to look like and then start budgeting for them.

Start by developing a budget based on your current lifestyle based on your current income, and your current expenses. Take into account all expenses, including those that are discretionary and non-discretionary. Once you have this baseline, develop a post-retirement budget based on your expected income from all sources and your expenses during retirement. Both income and expenses will change when you retire. Income will change since you are no longer collecting a paycheck. You may be collecting a pension if your company provides a pension, and you may also collect CPP and Old Age Security payments.

Your expenses will change a lot. There will no longer be work-related expenses; however, you will have much more time. Many volunteer their time; however, they also travel and find additional things to do, which usually cost money. Be realistic in your budget planning for post-retirement activities.

Improve Your RRSP Relationship

According to the survey, most Canadians appreciate the importance of regularly contributing to an RRSP:    -  Most (56 percent) said they believe successful investors contribute   to their plans either annually (22 percent) or monthly (34 percent)

In reality, however, only 37 percent say they make regular contributions to their RRSP

One-third (33 percent) of Canadians do not contribute to an RRSP at all

The fact that so many Canadians have no money in RRSPs is troubling. Fewer employers are providing pension programs, and people cannot count on the Canada Pension Plan to meet all their financial needs in retirement. Canadians must start contributing to a plan regularly at the earliest possible age.

At the very least, you will be decreasing your tax obligation in the year you contribute to an RRSP. If you are concerned about losing money in the markets, go to a conservative approach to investing within your RRSP. Many Canadians and Americans lost a great deal of money during the last crisis in the markets in 2009. If you invested conservatively, chances are you have regained all of that loss and then some. Risky investments have not fared so well.  Stick with quality mutual funds even if the return is not so high.

About the Survey:

The survey sought responses from a national random sample of 1,516 Canadian adults, 18 years of age or older, and was conducted between January 4 and January 7, 2010. This survey is estimated to have a margin of error of +/- 2.5 percentage points 19 times out of 20.

We have posted other articles on this blog about the diversification of investments as well as with investment advisers. The bottom line.  Do not invest all your savings into one investment.  Start by investing a small amount from each paycheck. Before you know it, you will have a nice amount saved up, and once you get used to not having the funds to spend, the saving will be easier. Start now by seeking a financial adviser to assess your situation and the tax savings you can obtain.

Doing nothing is really not an option if you want a comfortable retirement that meets your needs and plans. Meeting Retirement Goals is your highest priority.

Balanced Budget – Stress Test Your Budget

2 Replies

Stress Test Your BudgetCorporations stress test their budget all the time, so why shouldn’t ordinary consumers do the same thing – stress test your budget. Planning cash flow and monthly payments whether you are a CFO for a large major corporation or a homeowner trying to manage his budget and meet his monthly payments is of the utmost importance to avoid missing payments and being declared delinquent on loans or mortgages. They also assume worst case scenarios and assess whether their companies can handle these situations and survive.

Stress Test Your Budget – Personal

Consumers can do this easily by stress testing their budget while at the same time, saving themselves thousands of dollars in interest payments. For example, if you buy a home and go with the minimum down payment, your monthly payments are going to be high.

The interest rate you pay will be higher and the total amount of interest you pay will be thousands of dollars higher than it needs to be. Those dollars can be used for other things for your family, however unfortunately it is all going to the mortgage company.

On the other hand if you make the maximum down payment and also make extra payments each year to your mortgage, you can save thousands of dollars in interest charges which of course are always better in your account than the mortgage companies. Over the life of a mortgage, you can literally save thousands of dollars depending on the term of the mortgage and the interest rate.

A proper stress test requires a detailed budget that includes all of your expenses for your current lifestyle and the home that you have or are purchasing. Make sure that you are very realistic and include all of the miscellaneous things that we all purchase from time to time.

If you do not have a balanced budget, then you will have some more work to do to make sure that you are not spending more than what you are taking in.

Plan for Emergencies

Once you have a balanced budget, the next step is to assess what emergencies could occur that would place stress on your budget and your ability to meet your budget. Various things come to mind, however it really depends on your personal life.

Examples include major car repairs, a new roof, furnace repairs, additional children, loss of job etc. Any of these items can place major stress on your budget. Determine what the impact is. Assess what you would need to do to accommodate this additional expense on your budget.

During good times, it pays to pay your mortgage down as fast as possible. You can save thousands in interest charges. Plan to save for these emergency expenses. You may not know which one will occur.

However for most of us there will be an emergency of some kind that we will need to deal with. Develop a savings plan as part of your budget that calls for some amount of money to be set aside from every pay check.

A savings plan will give you the freedom to deal with your emergency when it comes. Without causing catastrophic problems for your budget. If you suddenly need a new roof for an example, you can draw from your savings instead of taking out a new loan

A new loan payment could jeopardize your budget and put it in a negative loss situation or putting it another way you are spending more than you are taking in.

We have added a few tips to consider for your review of your budget.

Stress Test Your Budget Top Tips to Consider:

Develop a budget

  • Stress test your budget to see how well you can absorb emergency expenses
  • Make sure you have a balanced budget, cut expenses if it is not balanced
  • Your budget should include a savings plan for emergency expenses
  • Review your budget. Stress test  your budget at least once per year. Also after any substantial change in your financial situation

Buying a house is a major financial commitment, so we have included a few tips covering this area as well.

Take a shorter mortgage amortization:

  • The shorter the life of the mortgage, the less you pay in interest.
  • Cutting your amortization period by 5 years from 30 to 25 years could  save you over $53,000 in interest. You will be mortgage-free faster and your monthly payments will only increase by $84

Make a larger down payment:

  • If you can provide a bigger down payment, it’s an excellent way of helping you pay less interest over the life of your mortgage.

Make sure you can afford what you signed up for:

  • Stress test your financial budget using a mortgage payment based on a higher interest rate
  • Total housing costs (mortgage payments, property taxes, heating costs, etc.) should not consume more than one-third of household income.

Make pre-payments when you can:

  • Pay weekly or bi-weekly instead of monthly.
  • Take advantage of 20+20 prepayment privileges:
  • Increase your mortgage payment (principal and interest) by up to 20 per cent over the current payment. This option can be exercised   once each calendar year, at any time, without charge.
  • Prepay up to 20 per cent of the original mortgage principal each calendar year.

Always make sure you save for a rainy day:

  • If you are up to your maximum in debt, you may not be well prepared for the leaky roof along the way.
  • Have savings payments deducted directly off of your pay check so you are not tempted to spend your savings.

Think carefully about fixed vs. variable:

While variable rates mortgages have been a winning strategy over the long term, fixed rate mortgages (currently at historic lows) come with the peace of mind of being insulated against rate increases.

Stress Test Your Budget now just like the professionals do at major corporations.

You Need Friends in Retirement

1 Reply

You Need Friends in RetirementOne of the few things that are never talked about when you are considering retirement is the adjustments you need to make. From work to having an extended time away from work after retirement. Most writers discuss the financial side of retirement and whether you will have enough money to live comfortably. Will you be able to do some of the things you want to do? There is much more to retirement. Whether you enjoy your retirement or not depends a lot on other things such as friends, hobbies, and interesting things to do. You Need Friends in Retirement. Money is important, but so is having interesting things to do and enjoy with friends.

My wife always tells me I need to focus more on keeping up with friends and less on working. “You’ll be sorry when you retire and don’t have anyone to do things with besides me,” she warns. I think she is also worried that I will be underfoot and our relationship will suffer. She could be right. It’s easy to assume retirement planning is all about the bucks. The dollars are important, but nonfinancial issues matter too.

A Pew Research Center report shows friendships rank with sound health and finances as the factors most likely to boost happiness. The study found that retirees who are very satisfied with their number of friends were nearly three times more likely to be happy than those who are worried about relationships. A comparable gap exists between those who are very confident in their finances and those who aren’t.

You Need Friends in Retirement

Retirees with friends not only feel better about themselves, but they also have more to discuss. Most people with friends find that they are doing more extracurricular activities. Whether golf, which is often popular, cards, hiking, swimming, or whatever you and your friends find interesting, there is something to look forward to and enjoy.

The fact is, as we age, our focus tends to shift from finances to finding meaning in our lives, according to research by the MetLife Mature Market Institute. “You begin to think about how much time you have left,” says gerontologist Sandra Timmerman, “and you ask yourself, ‘What’s really important in life?'”

So what do we really find important? Social connections, for one. The Pew study found that another factor driving happiness is attendance at religious services. Retirees who attend some form of worship, even if only occasionally, are more content than those who seldom or never do. I bet this has as much to do with being part of a group with which you share time and values.

Investing in relationships

You should not necessarily address lifestyle issues with the same precision you do your finances by allocating 40% of your time to health matters, 35% to friends, and 25% to spirituality. But it can help to approach financial matters in a somewhat similar manner.

For example, just as you should diversify your nest egg, you need to have a balanced approach to retirement readiness.

And just as it’s important to visualize your retirement before you invest, you need to plan ahead for the role your friends will play in your post-career life. Start by taking stock of your social network. One way to expand your connections is by joining groups dedicated to causes you believe in or volunteering. According to Urban Institute research, retirees who volunteer are about 15% more likely to be very satisfied than those who don’t.

Increasing your priority level to maintain your friendships and enjoy their company is important to your overall enjoyment during retirement.  There is more to retirement than money and friends.

Invest time in Interesting Activities

Let’s face it, once we retire, there is a lot more time to consider life and consider what we will do next. This transition from work (getting up in the morning regularly, meeting with colleagues, etc.) to a life with lots of time on your hands can be traumatic for many people. Even with lots of friends, there will still be lots of time on your hands, so it is important to spend some time on what you would like to do during retirement.

Having lots of friends will automatically add activities. But what do you do in those down times? Prior to retirement, it is important to explore some of the hobbies that you may have given up when work was too intense. You may want to start new hobbies. You may want to work part-time. Also, you can spend more time with the grandkids, travel, or start a new business.   We already mentioned volunteering in the traditional sense. What about volunteering for a small business in return for free services? We know one friend of ours who volunteers at the YMCA in return for a free annual membership! Not only does he meet new people, he gets some exercise, and he is also contributing to the community.

Look for New Things to Do

There are lots of ideas and activities which individuals can consider. Start by writing down a list of possibilities. Set it aside for a few days, review it, add some more, cross off those that just will not work for you, and try a few. Some will work while others will not. Eventually, you will find something that catches your interest. Talk to your friends to generate ideas as well. What might not work for them might be perfect for you.

Whatever you do, think about more than your nest egg. It would be a shame to get that part right but not enjoy your retirement. Remember that it is important to strike a good balance between time spent on maintaining your nest egg, maintaining and building friendships, and finding interesting activities to challenge you and maintain your interest.