Extreme Savers

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Extreme SaversWhat are extreme savers? Every once in and while you run across people who really seem to have their act together when it comes to saving money, while others just seem to squander it and are always running short. These people could be called extreme savers or perhaps they just make efficient use of their money. We know of people with two incomes, who never seem to have any savings.

Yet they freely spend their money on new cars, dinner out all of the time and lots of material things. They seem to have a lot, they throw out a lot of stuff and seem to be really enjoying life. Try talking to them about retirement and the answer is that they cannot even consider retirement until they are 65 at least. Sometimes they even run short of cash before payday.

Extreme Savers – Retire Early

While the extreme savers are looking at retiring at 50 or 55 at the latest. Remember the freedom 55 advertisements. We do not see much of that anymore after the severe recession we have just been through, yet there are people who can and do afford to retire early and have done so on their own without any outside help or huge inheritance. Just how do they manage to accomplish such a feat, while raising a family, buying a car, a house, and all of the other things that go along with living the lifestyle of an affluent person in North America?

It seems that the basic philosophy is to pay cash for everything and not to purchase anything until you have saved sufficient funds to pay for what you wish to purchase. Can it be that simple? Most people today carry multiple credit cards, they have a loan for their car and a mortgage on their home. if they are lucky that is all they have, yet they pay thousands of dollars in interest on these items, while an extreme saver manages to save all of this interest by paying cash for everything. With all of this extra money, not only do things they want to buy cost less, they can save even more money.

Some Examples

A few examples will easily demonstrate what a difference it makes. Let’s assume that you have a car loan. The bank or loan company is usually obligated to tell you by law, how much you pay in interest over the life of the car loan. For most situations at current interest rates, this can amount to several thousand dollars which you tack onto the price of the car. For a car valued at $35 thousand with a loan over 4 years, this extra cost in the form of interest might add up to over four thousand dollars. Imagine if you had that money and wanted to just save it! Now you are earning interest on the money you saved. It just continues to compound and your savings add up quickly.

Extreme Savers – Examples

I recently read an article about a family who had a nice home, two older cars all paid for, they had raised two kids who were now in university, and combined they had savings over two million dollars saved for retirement! They were in their early 50’s and had medium-level jobs. How did they amass such a fortune?

According to them, it was pretty simple. They just lived reasonably, paid cash for everything, and only bought things when they needed to. They did without if they did not have the cash to pay for something. Now you might say that they were so frugal that they and their kids were missing out on life, in fact even depriving their children of a normal childhood. Well, it could not be further from the truth.

Maybe they did not have the latest model cars every year, maybe they did not have the latest electronic gadgets at the same time everyone else did, and maybe they did not go on expensive trips like everyone else in their neighborhoods have done. However they do have two cars, they do go on trips and they do purchase electronic gadgets after the prices have declined. Instead of being early adopters, they are fast followers, buying a flat-screen TV for example after the prices have dropped from the thousands to around $500. A perfect example is that you can buy a 3D TV now for several thousand dollars. Wait a year or two and they will be down to around a thousand, more affordable, and more features.

Summary

Anyway, you get the point, which we will summarize in case you missed a few:

  • Pay cash for everything
  • Be a fast follower rather than an early adopter
  • Do without until you can afford it
  • Save as much as 50% of your income for retirement
  • Live within your means
  • Plan for the long term so that your retirement years are comfortable
  • Invest wisely
  • Diversify your investments

Hopefully, this post has given you some ideas about how to become independently wealthy, become an extreme saver and yet be able to enjoy life and all that is has to offer. Having a nice nest egg or retirement fund gives you a lot of independence and just maybe you can retire early instead of working until you are 65 or older.

Feel free to add your comments about extreme savers or retiring early. However we delete spam comments, so make sure they are adding some value to this post so that our readers can benefit. Good luck with your savings plans!

How Will You Make Your Money Last

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How Will You Make Your Money LastHow will you make your money last as long as you live? That is a question that many people ask themselves who are contemplating retirement.  Some people are very fortunate and will have pensions from their employer that kick in when they retire and will be payable as long as they are alive. Unfortunately, consumers who fall into this category are in a small minority. Most of us must rely on our savings, possibly an old-age pension and a Canadian pension in Canada. The United States has similar social plans. What many people do not realize is that these pensions are not sufficient to live on and you must have savings or company pension to provide you with the proper level of income that you feel you may need. If you have not retired, you may still have time to save enough money to enhance your retirement.

Calculate Your Expected Income

In order to answer the question of how will you make your money last you need to know how long you need it to last. There are many assumptions you can make and you can find information from various sources that will help you gather this information to calculate your income and also how long your savings will last.

The premise is to balance income with expenses during retirement for longer than your statistically expected lifetime. Here is some of the information you will need.

– Planned retirement age

– Expected age at death, plus 5 years as a buffer ( base this estimate on your parent’s age when they passed away)

– Total savings at the time of retirement

– Total of all pension income at the time of retirement ( obtain estimates from your company and government )

– Income you feel that you need to maintain the lifestyle you wish to lead in retirement

– Total of all debt payments at the time of retirement

– You need to make assumptions about the average inflation rates as well as your income from your savings, usually in terms of a percent interest rate of income.

Calculate How Will You Make Your Money Last

There are several programs available that you can plug in these variables to help you calculate how long your money will last. Examples include Quickens Income Retirement Planner. This program and others like it will walk you through the exercise of entering the above information and even help you determine your expected life span.

The output can be quite enlightening, providing you with information about how long your funds will last, based on your assumptions, and then provides an opportunity to change various variables to perform sensitivity analysis.

If you first find that you are coming up short and will run out before your expected life span ends, adjust some of the assumptions to see what needs to change in terms of desired income, retirement age, amount of your savings, etc.  The next step is critical and can have a huge impact on your life. As you adjust the variables, it is important to be realistic because if you are not, you may end up with a rude surprise later in life.

Sensitize Your Assumptions

By playing with the variables you may quickly see what you have to do to ensure that you have sufficient funds to last as long as you need. For example, if you decided to retire at age 55 and find that you are coming up short in income in later years, adjust the retirement age and see what the impact is. Retirement age changes can be dramatic and can make a huge difference in your savings. Another alternative is to retire at age 55 as planned, but then work part-time to supplement your retirement income.

Inflation rates and interest income rates are other significant assumptions that you will make. Small changes in inflation can really impact your outcome.

The point is if you play with the variables you will begin to understand what you need to do to endure that you can retire and live the lifestyle that you would like. Unfortunately, many people start this analysis a year or two before they retire and they then get a rude surprise. They experience a serious change in lifestyle and cannot do some or many of the things they had planned during retirement.

Develop a Concrete Plan

Regardless of when you develop your plan, once you have gone through this process, develop a plan to meet your needs and achieve the goal you are aiming for. Calculate whether you have sufficient funds for your retirement. You can then take the steps needed to make sure you will be comfortable.

Develop your plan, follow the plan and re-evaluate your plan at least once per year. Start early in your life and adjust the plan as life throws various curve balls at you. By following these simple steps you not only will know how you will make your money last. But you will also virtually guarantee your retirement objectives.

Comments are appreciated.

How will you pay for that? Sources of retirement income

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Sources of retirement incomeSources of retirement income determine just how much you will have when you retire. Yet half of Canadians expect pensions to be their largest source of retirement income. Many Canadians have no idea how much they will receive from the various pension sources that are available. This includes any pension that they might receive from their employment. How can a person plan financially for their retirement? Especially if they do not have any idea of what their Sources of retirement income will be when they retire? How do they know much they need to save to give them the lifestyle they wish to have without having this basic level of information?

Many Canadians and Americans for that matter believe they will likely need to work well into their retirement years to give them the kind of lifestyle they wish to have.  Let’s look at the possible sources of income for a person aged 65 in Canada. Americans reading this post will be able to do their own assessment as well by looking at the pension sources they have in their country.

The common sources of retirement income at age 65 are:

Company Pension plan – the amount you receive will depend on how many years you have paid into the plan and how much you have paid. Early withdrawal prior to 65 will decrease the amount that you will collect from the company plan and also the type of plan the company offers.

Canada Pension plan – the amount you receive will depend on how many years you have paid into the plan and how much you have paid. Early withdrawal prior to 65 will decrease the amount that you will collect from the CPP

Old Age pension – this is a fixed amount which all Canadians will collect. However, if your income from other sources is higher than a prescribed amount the government will claw back some or all of the OAS pension.

RRSP investments- you can contribute to an RRSP until age 69 and then you must convert the RRSP to an RFIFF and start withdrawing money from the plan. You can also withdraw at age 65 as well, however, there will be less to withdraw.

Other Investments – these are investments you may have outside of your RRSP. These could consist of investment properties, mutual funds, as well as the family home.

Supplemental pension amounts if your income is below a certain level

Part or Full Time

Part-time or full-time work after 65 – many Canadians will supplement their income by continuing to work beyond 65. There is the added benefit that this work keeps them involved and active in the community and challenges their minds with interesting work.

Canadians expect part-time or occasional work (26 percent) and income from their own investments (24 percent) to be supplementary sources of income during retirement. Thirty percent of Canadians aged 35-54 expect to be working in retirement, suggesting the concept of traditional retirement is disappearing.

Regardless of your current age, it is important to develop a budget based on the expected income from various sources. This is really the first step to assess if you will have sufficient funds for retirement. It may take some digging to find the estimates for each pension source; however, it will be worth it to assist in planning your retirement. Your HR person can assist you with the company pension plan estimates and the government websites will help with the CPP and OAS pensions. Of course, all numbers will be based on the assumption that you work until 65 to maximize your pension income. Usually, if you retire early, the pensions will be decreased by some amount to reflect less time for your pension contributions.

Get Advice

Once you have these numbers a financial advisor can assist you. They can estimate the amount of money you will need to save to provide the lifestyle you are looking for. Your savings plan will be based on this amount needed. It should generate the amount of money you will need at retirement. You will need to make assumptions about inflation. Also the percentage of income you will generate based on your investment profile and risk tolerance. Invest conservatively and diversely to protect your retirement savings

Having enough money for a comfortable retirement (68 percent) is the most important consideration in deciding when to retire. However, half of Canadians (53 percent) who have established financial goals feel they are somewhat short. Or nowhere close to where they think they should be to ensure a comfortable retirement, up from 36 percent in 2007.

The amount of money saved that a person will need at retirement is a very personal number. It depends on the amount of pension income as well as on personal goals, plans, and expectations for retirement. On average, retirees have a goal of nearly $270,000 as the amount of money required for a comfortable retirement. This is down from nearly $450,000 in 2007. People not yet retired think they will need nearly two and half times that amount. Or  almost $660,000, down from almost $900,000 in 2007.

Clearly, the recent economic turmoil during 2008 and 2009 has had an especially sobering effect on consumer’s savings objectives. The fluctuation of the investments during this time has scared many people and caused them to rethink their retirement plans. Fortunately, if you are invested in conservative solid investments, they are generally returning to the pre-downturn numbers that we were used to.

Retiring With Debt

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Retiring With DebtThe following poll by RBC seems to indicate that many Canadians and by extension, Americans, are retiring with some form of debt. This debt includes mortgages, loans, and credit cards. It is a big concern for retirees. they worry about whether they can pay their bills while living on a fixed income. This apparently is a lot more common than most people like to admit!

There is really nothing wrong with retiring while still owing some debt. However, you must take ownership of it. Set up your budget to be able to deal with this debt. Review your income levels when you retire. Take the steps you need to be able to pay your debt as well as the remainder of your expenses.

Take the time to read the results of the poll following. We will add a few comments at the end of the poll that we have re-listed here.

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Four-in-ten Canadians retiring with debt: RBC Poll

Inflation and taxes are top concerns for Canadians over the age of 50

TORONTO, April 26 /CNW/ – Four-in-ten Canadians (39 percent) over the age of 50, who have assets of at least $100,000, retired with some form of debt, and one-quarter (22 percent) entered retirement with a mortgage on their primary residence, according to the first annual RBC Retirement Myths and Realities Poll, which examines Canadians’ expectations and experiences in retirement.

The majority of retirees (70 percent) feel it is still important to be able to save part of their income, yet more than one-quarter (28 percent) have acquired new credit products since they retired.

“More and more, Canadians are carrying debt into retirement, which is not necessarily a bad thing,” said Lee Anne Davies, head, Retirement Strategies, RBC. “Having access to credit in retirement can be beneficial to managing income and cash flow and provide additional flexibility. To help make your retirement dreams a reality, our advice is to start early and prepare a comprehensive financial action plan that will keep you focused on paying down debt and saving, as well as establishing a budget for both your pre-and post-retirement years.”

Inflation and Taxes

Inflation and taxes are among the top concerns for retirees, with more than one-third (35 percent) worried that inflation will negatively impact their retirement income, compared to 43 percent of pre-retirees. Six-in-ten (62 percent) retirees worry about taxes on their income, with two-thirds (66 percent) believing the percentage of their income required for taxes will rise in the next 10 years. Retirees say they are currently living on 56 percent of their pre-retirement income, indicating that spending drops significantly in retirement.

“It’s not uncommon to be concerned about maintaining a sustainable level of income in retirement, but costs you never counted on may also arise,” added Davies. “For example, our poll found that almost one-in-five retirees spend over $1,000 annually on prescription drugs. Working with a qualified advisor can help you prepare for taxes, inflation, and unexpected costs that may impact your retirement goals.”

These are some of the findings of the RBC Retirement Myths & Realities poll conducted by Ipsos Reid from March 10-19, 2010. For this survey, a national sample of 2,143 adults aged 50 and over with household assets of at least $100,000 from Ipsos’ Canadian online panel was interviewed online. A survey with an unweighted probability sample of this size and a 100 percent response rate would have an estimated margin of error of +/-2.1 percentage points 19 times out of 20 of what the results would have been had the entire population of adults in Canada been polled. All sample surveys and polls may be subject to other sources of error, including, but not limited to coverage error, and measurement error.

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Are You Retiring With Debt

So what should you do if you carry debt into retirement? Pretty much continue as usual provided that you have the income to support the debt. Make sure you can meet your monthly payments without difficulty.

Sometimes debt payments can hamper your lifestyle. It can prevent you from doing some of the things that you would like to do in retirement. You may want to think about making some changes. One way or another you should reduce your debt. You might have to use some of your savings. You might have to downsize your home. In addition, you might have to go back to work part-time or full-time. Some people will have to do all of these things to rid themselves of debt.

Make it a priority to avoid adding debt. Living on a fixed income it will be even more difficult to pay off additional debt as it builds up. If you have high-interest debt such as credit cards, consolidate these into a loan. Or the line of credit with a low-interest rate. Destroy the credit cards or just keep them for emergency situations. Credit cards routinely charge in excess of 18% interest. At these rates, you will have a difficult time paying them off. Loans and lines of credit are currently around 5 or 6%. Loan interest and loan payments are much lower allowing you to reduce your principal much faster.

Add your comments to our post. We would be happy to consider them and add them to our blog. All reasonable and constructive comments accepted.

Ten Years to Retirement-Are you Ready

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Ten Years to Retirement-Are you ReadyTen years to Retirement – are you ready: Most people do not think about this aspect of retirement. They just know that they want to retire. They cannot wait until they walk out the door from the office. However, it is always a good idea to plan your retirement in all aspects. Planning 10 years in advance seems like a long time ahead of time. However, with a 10-year window, you may still have time to fine-tune and make adjustments to your financial plan to get ready for your retirement.

This assumes of course you do not wait until 10 years before retirement to suddenly start saving for retirement. All of us should save for retirement. Start with your first job and then when we get close to retirement. We just need to fine-tune things to be ready for our leisure years. Saving from when you start work means that you have money working for you. Increasing your retirement nest egg for a much longer period of time. If you only begin 10 years before retirement you will have to save relatively large amounts of money.

Ten Years to Retirement-Are you Ready: Meet With Your Financial Planner Now

If you do not have a financial planner, it might be a good idea to find one and ask them for help in evaluating whether you are ready for retirement or not. Financial planners will provide this service as a free service with the understanding that you will give them some business and either transfer your investments to them or begin investing with them. They get paid through commissions on any investments you may make through them.

We strongly believe in diversification, not only of your investments across mutual funds, stocks, and bonds but also across investment advisers. Never place all of your investments, especially your retirement funds, in one investment or with one investment adviser. There just have been too many stories of seniors being ripped off by people and/or the investments not doing well. You just have to recall Enron or the market crash of 2009 to know what the potential impact is. Ten Years to Retirement-Are you Ready?

Ten Years to Retirement-Are you Ready for Financial Planning Tools

Most good financial planners will have various tools available that can be used to develop a profile for you. They can also develop a cash flow for you well into your retirement years based on your income, current savings, planned retirement date, and expected life span. In addition, you and the financial planner will make assumptions about the level of inflation and the amount of income you should expect for your investments. Most will error on the safe side of the assumption to provide you with a conservative estimate.

A combination of graphs and reports should be expected and you should be able to quickly see whether you have sufficient savings and retirement pension income to assess your financial health in retirement years.

It is never too soon to do one of these plans, however, 10 years in advance of retirement is a good time to take stalk of your financial health.

Make Adjustments and Get Ready for Retirement

Doing a financial health assessment 10 years in advance of retirement provides you with sufficient time to make adjustments. As we said before this assumes you already have savings and are not starting at the beginning.

For example, you might find that you need to work an extra year or so to achieve your financial objectives, or you may find that by increasing your savings rate, you can actually retire earlier than you thought from a financial perspective. Of course, there are many other issues to take into account other than finances. Focus on these separately to make sure you are ready for retirement.

With this assessment, you will have a clear picture of what you need to do to get ready. However, you are not done yet. Be prepared to re-evaluate your financial plan every year and also after any major change in your life. You may find that no changes in your approach are necessary. On the other hand, if inflation is high, interest rates change significantly, etc, you may need to make adjustments to your plan. This is all good and part of everyday normal planning for your financial adviser. In fact, he or she should be encouraging you to review your plans every year.

Retirement Earlier Than Planned

Some of us are forced into retirement earlier than planned for a variety of reasons. For some it is health issues, for others, it is the economy and our companies need to downsize. Whatever the reason, you need to be prepared financially for this kind of thing. Although it is not fair or nice, it is reality and the only person who will look after you is yourself.

If you are faced with this situation, some belt-tightening is probably in order. You should quickly re-assess your plan, then decide what you need to do re getting a job or developing additional income if it is needed.

A word of caution. In these situations, some of us tend to take more risks and go after higher-income investments to make up for losses in income. This is dangerous especially when you are so close to retirement. Something is better than nothing which is what could happen to your investment nest egg if you invest in the wrong thing. Discuss this strategy carefully with your adviser and ask for more than one opinion. You should have spread your investment across several advisers, so use them to gather various opinions.

Comments on this blog are welcome and encouraged. Ten Years to Retirement-Are you Ready?

What Life Stage are you in Financially

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What Life Stage are you in FinanciallyDo you know what life stage you are in financially? Many of us do not, and before we know it, we are walking out the door to retirement if we are lucky or getting laid off if we are unlucky.   Each life stage has different requirements financially, and with good planning, you can prepare for each stage and come out ahead of the game so that when you are finally ready for retirement, you have sufficient funds for your retirement. The chart at the left depicts one writer’s view of various life stages. Most people will find that they fit into this chart at some point. You need to ask yourself where you are and are you meeting the requirements at this life stage.

What Life Stage are you in Financially

Pre-marriage, pre-home, pre-kids – in other words, you are single with no commitments and probably starting your first job. Marriage, a new home, and kids – lots of expense, and your single largest purchase is during this stage. Your home will be the largest investment, and your kids will represent the largest expense. These can be difficult years with never enough money to go around for all the needed things that you would like to provide for your family.

Pre-retirement- kids are at university, you have a couple of weddings to pay for, and retirement is only a few years away. Expenses are still high due to university costs and, of course, weddings. However, your house is paid off, and you have more funds available to save and also pay your expenses.

Retired – the first few years include adjusting to not working or perhaps working part-time to fill the days. Many people will travel, the house is paid off, and you take up golf or other sports. It is an active time, and you can also enjoy the grandchildren.

Late Retirement – Time to slow down. There are a few illnesses to deal with, some friends are no longer around, you have grandkids, and you are spending more money on medical issues.

Financial Requirements for Each stage

It is a complex life with lots of demands for money as different events unfold and require money to pay for them. New cars, clothing, housing, vacation, weddings, travel, repairs and it never seems to stop.

On top of that, there are always speed bumps along the way that jeopardize your quality of life. It might be a job change, being out of work for a while, or even a medical emergency. Whatever they are, they can be dealt with proper planning and savings plans.

If you are handy with a spreadsheet and so inclined, you can develop a financial model that will help you decide how much you need to save for every area and life stage of your life. Most people are not and need a much simpler approach that has common sense and is easy to implement.

Common Sense Approach to Your Life Stages – Financially

Following a few simple rules will ensure you have sufficient funds for your needs. Putting them into action and sticking to them is much more difficult. It takes discipline and perseverance, but the result will ensure that you have a quality of life that matches your income level.

Here they are :

  • Live within your salary and stick to your budget
  • Set aside 10% of your income for retirement
  • Save an emergency fund that is equivalent to one year’s salary
  • Start early, on your first paycheck saving for retirement
  • Invest in quality investments, avoid junk stocks and bonds
  • Diversify; never put everything into one investment
  • If it sounds too good to be true, then it probably is
  • Constantly monitor your savings plan and budget
  • Adjust your expenses as needed to avoid generating additional debt
  • Pension plus savings should meet 90% of your pre-retirement income
  • Adjust your savings plan if you fall behind – market adjustments, inflation, etc.

Discussion About Life Issues

Many people get in over their heads, as the last two years have demonstrated with all the foreclosures and bankruptcies. Consumers losing their jobs and also taking on too much debt is a really bad combination that came together at the same time.

This is the essence of the first rule or guideline. Never take on more debt than you can afford, and make sure you have sufficient emergency savings for at least a year, not counting your retirement savings. In other words, live within your means. Sure we have all heard of many people getting rich on lucky speculation in real estate or the stock market, and yes, this does happen. However, for most consumers, the slow, steady approach is the best because there are 100 who do not for everyone who gets lucky on investment.

The next two guidelines are also very important. Saving for retirement. The earlier you start, the easier it gets and the more fund you will have for retirement. Near-term emergencies will always happen throughout your life.   They will vary by family. But rest assured they will occur, and having a savings account equivalent to at least one year’s salary could mean the difference between financial ruin and time to find another job or recover from a serious illness.

It is difficult to meet these savings guidelines. However, you will be very thankful if you take the time and the discipline to meet these guidelines if a serious disruption in your life occurs.

We will discuss these issues and others in this blog later this year. Let us know if you have comments or other ideas about how to deal with life’s curve balls.

Interest Rate Fluctuations

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Interest Rate FluctuationsDoes interest rate fluctuations mean that  interest rates going up? One of the good things about the past recession or depression as some people would call it is that the interest we pay on loans and mortgages have been at historical lows. Many people would say this might be the only thing good thing about this  recession. If you lost your job, or your home or have gone further in debt you probably are not interested in what is occurring with loan and mortgage interest rates.

Interest Rate Fluctuations – Will they Change

However many of the worlds governments are letting their constituents know that interest rates are about to begin rising.  How much and exactly when interest rates will begin to rise is not yet known, yet most informed sources feel that they will begin to rise in the second half of 2010. There are various strategies that one should consider depending on whether you are an investor or a borrower.

Note that any suggested advice we discuss in this blog is just that advice. We do not have a crystal ball and we really have no idea what will occur, however it is one writers opinion. Make your own assessment , read lots of material and make your own independent decisions.

Investor Strategies

If you are an informed investor, then you probably have a diverse investment portfolio with blue chip investments distributed among stocks, mutual funds and bonds across the various market sectors. That’s a big mouthful, however the message is do not ever put all of your eggs in one basket!

Typically when interest rates go up, existing bond values fall to maintain the overall yield, while new bonds being issued will have to offer higher interest rate yields to match the market interest rate. Dividend paying stocks also will decline so that overall yields will match the going interest rates on the market.  Of course many other events can influence the value of the stock, such as corporate earnings and other market issues which will impact the overall value of the stocks value.

So what should you do when you see that the government is about to increase interest rates. If you are betting that the increases will be relatively minor, that they will not need to fight serious inflation, then you can take your time and be somewhat more careful about your plans.

Most people are long term investors, aiming at generating income and growth of their portfolios. With this in mind, fluctuations in interest rates and their corresponding impact are less troublesome. However there are some things you can do to make sure you take advantage of increasing interest rates and avoid the loss of income as interest rates decline.

Interest Rate Fluctuations – Bond Ladders

Creating a bond ladder allows you to invest in bonds with maturities over various years. For example if you have $100,000 , then investing $10,000 with a maturity in subsequent years lets you take advantage of bonds maturing every year instead of all at once when interest rates are low. You may not be able to invest all of your money at the highest interest rates, however your overall average will be higher than the lowest market interest rate.

As interest rates drop, you may find that bond lenders may call their bonds early. With this option, which many bonds have, the bond owners can pay off their bonds early. They issue new bonds at a much lower interest and save thousands of dollars. This is not a good situation for many investors who might be counting on this income. As you invest in bonds, always inquire whether the bond is callable or not and when. You will need to make your decision to purchase a callable bond, based on your assessment of where interest rates are headed.

We really like bond ladders with non callable bonds when interest rates are declining and especially when they are rising. We also like keeping approximately 5 to 10% of our portfolio in cash. If interest rates are headed up we can take advantage of the increasing rates.  By cash we mean money markets or GICs with early maturity dates. You will not make much money, but every little bit counts. You will be ready when a good deal comes along.

What to do If you are Borrowing Money

Interest rates are currently expected to rise. What should you do if you have a mortgage? Or a loan, or planning to borrow a large sum of money?

If you believe interest rates are going to rise significantly, it may be time to lock in your mortgage or loan so that you will not be hit by a financial shock when they do increase. You may find that there are hundreds of dollars added to your monthly payment when interest rates do rise.

If interest rates stay low for some time, you can actually save money by staying with an open mortgage. The interest rate will be tied to the bank rate. There is some risk to this approach because you could get caught if interest rates increase rapidly.

Bottom Line

If you are a risk taker, then you will take a more aggressive approach. You will be avoiding locking in your mortgage or loan for up to 5 years or more. On the other hand if you worry a lot or cannot withstand a financial shock, take a different approach. Locking in interest rates will protect you from fluctuations in monthly payments as interest rates change! At least you will not lie awake at night worrying about this issue.

Comments are welcome as are suggestions about what to do in this current situation.

Getting Ready for Retirement

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Getting Ready for RetirementGetting Ready for Retirement is such a big topic, and there are so many different issues that people need to consider before they retire that it can seem overwhelming for many people. Everyone is different of course and has many needs as well as things they would like to have or be able to do. Unfortunately, we cannot have it all and need to make many compromises. The number and kind of compromise really depends on two major factors. The first is your health, because if your health is not good, then it really does not matter how much money you have. Of course the 2nd factor is sufficient money to do the things that you would like to do.

Both health and money can be controlled to a certain extent by yourself, although sometimes outside issues get in the way, however for most people it is really up to you how you spend your retirement and depends on the decisions that you make in younger years. I recently saw an 82 year old women riding an electric bike on the bike trails in Palm Springs. If she can do this, then there is lots of hope for the rest of us!

We will discuss a lot of issues in this post, some of which will apply, while others will not have any impact on you. Just skip over those that do not interest you or do not apply to your situation. We guarantee that there is something for everyone in this post, so read on and enjoy. Here is the list of topics that we are covering. Feel free to add others by leaving a comment at the end of this post.

Getting Ready for Retirement – Health

  • Exercise
  • Eating Healthy
  • Dealing with Health Issues
  • You Need Friends in Retirement
  • What will I do In Retirement

Getting Ready for Retirement – Investing

  • Common investment mistakes
  • investment diversification
  • 10 % Investment plan
  • retirement planning
  • Tax Efficient RRSP Investing
  • Variable vs fixed interest rates
  • Consolidation investments
  • Ten Financial Rules to Follow
  • How much do you need to retire
  • Life after 65
  • Balanced Budget – Stress Test Your Budget
  • Long-Term Financial Planning Key To Lasting Relationships
  • How will you pay for that? Sources of retirement income
  • Interest Rates Going up
  • What Life Stage are you in Financially
  • How will you make your money last
  • 10 Years to Retirement are you ready
  • When Should You Retire

Getting Ready for Retirement – Health

Exercise

No Matter what age you are at, exercise is part of staying healthy and living well into retirement. Exercise will always help to burn off those extra calories, and it will also help to regulate the heart, the lungs and all of your muscles. You will feel good about yourself and be able to enjoy that much more of life.

There are some of us that believe you have to run marathons and climb mountains to stay healthy. In reality you just have to get out there and walk at a fast pace for at least 30 minutes 3 times per week. This is the minimum really and if you can do more, great. If you have trouble doing even this amount, then start smaller and work up to it. Even a 10 minute walk a couple of times a week will help and as you build up stamina, you will be able to go further and further.

Take walks in your neighborhood, chat with the neighbors and get to know your area. Go for walks in some of the parks in your area and other places that interest you. Let’s face it it gets pretty boring if you go to the same place every day for a walk. None of us can really stand that. Plan some of your walks with a friend and plan to go new places. This will bring more interest and challenge to you as well as your friends that you invite a long.

Remember to always bring water with you and always tell someone were you are going and when you will be back. They can keep an eye out for you and come looking for you, should you run into some difficulty. Walking can be fun and you see so much more of the outdoors with the fresh air.

Walking is only part of staying healthy. This brings us to our next topic, and that is eating healthy food.

Eating Healthy

Eating healthy is so important, and there are many aspects to it which can make it very complicated for a lot of people. Often they will just give up and indulge themselves in the foods that they really enjoy. There are all kinds of diet plans out there, some work and some don’t. However the bottom line is that no diet plan will work regardless of how good it is , until you have made the commitment to yourself that you are going to lose weight and do what needs to be done.

Without this commitment, there is really no hope of losing weight and keeping it off. Sure, all of us can lose weight for a while, but them we just fall back to our old habits and on the pounds go again. Change your lifestyle and make the commitment to yourself that you are going to lose weight and keep it off. Combine it with a great exercise plan, and you will lose weight, be more healthy and feel great.

A sensible plan without all of the complications means managing your portion size and then burning off some of those calories. You might exercise like crazy and still gain weight because you are eating far more than you should.

Decrease your portions, use a smaller plate, split meals with a friend when you go out and drink more water. If you have just eaten, and want to eat something additional, wait 10 or 15 minutes and your stomach will tell you that you are full and does not need more. Avoid desert or at least make the size much smaller.

If you live in America, you probably already know that the American restaurants serve large food portions. It is way too much for most people, yet they seem to find away to cram all of that food into their stomachs. For years now my wife and I have been splitting meals. Not only do we decrease the calories we eat which is the objective, it has the side benefit of saving us money at the same time. Most restaurants do not object to this practice.

Watch your portions and if you have to snack, check the calories to avoid eating more than you should. Eat some vegetables, or other low calorie snacks to pacify that craving that all of us get from time to time.

Remember that you want to strive for a negative energy balance i.e. Energy in the form of food  less energy expended in terms of daily activity and exercise should be a negative number if you are trying to lose weight.

Dealing with Health Issues

Staying healthy is a full time business for all of us, and sometimes we just cannot avoid dealing with some health issue that creeps up on us. We have talked about exercising and eating properly. As we get older, we have more and more of these health issues to deal with, and eventually they will prevent us from being able to travel, golf or whatever we like to do in retirement.

Each person has their own goals for retirement, however after having talked to many people who have worked as long as they could, taken retirement and then found within one or two years that their retirement is severely limited due to health issues. Sometimes it is bad knees or bad hips, while in other cases it is a stroke or heart attack.

Our recommendation is to enjoy every day and make the most of every day. Do not put off your retirement just to make a few extra dollars unless you absolutely have to .

You Need Friends in Retirement

When you retire, you suddenly are not going into the office any longer. You do not get to see your friends and colleagues at work,  some of which you might have worked with for many years. Your days can be much more limited in terms of people you see and deal with. All of this can bring on a sense of loneliness and even a fall in terms of self worth. Many people will go back to work either part time or full time just to regain that social part of their life that they are now missing.

A solution to this issue is to focus on building and maintaining friends well before you retire. These are friends that you will carry into retirement and people you will spend time with once you retire. Whether it is playing cards, playing golf, various sports , traveling together all of these activities can be shared with your friends. The point is to find activities that you and your friends can enjoy together  both before and after retirement.

People with friends, lots of friends, are often much happier about themselves and enjoy life much more. It takes work, it takes staying in touch with people, it takes helping people and much more. It is all worth it and will help you both in retirement as well as pre-retirement. Really this is something we should all do regardless of what age we might be.

A word of caution! Don’t mistake the collegial activities that go on at work for friends .  Some may be carried over from work to retirement, however many of these activities are part of the networking that we all do to maintain good relationships at work and to help us find new jobs etc. We should all continue to participate in the sports activities and activities at work, however what we are saying is that sometimes these relationships do not carry over to retirement since networking with a retired person does not help much with ones career inside the company that you are no longer part of.

Those people will quickly drop off your radar screen since they are focused on their jobs and careers and have not realized that they should also be focusing on maintaining friendships throughout life.

What will I do In Retirement

Retirement can be a big issue for anyone who has not done some planning or at least taken the time to think about what they will do with themselves once they retire. Now you have from 8 to 10 hours every day to fill that work filled before you retired. In addition you had something to talk about when you came home at night and had dinner with the family.

Now with all of this extra time on your hands, what will you do with your time? The worst thing you can do is begin tailing your spouse and trying to manage your spouse. You may find that you have a mutiny on your hands.

Developing a plan, hobbies, and things to do will help immensely with your enjoyment of your retired years. Not everyone has hobbies or the money to follow some of these things. Not everyone wants to follow hobbies, and realistically you cannot work on your hobbies all of the time. One of the things that many people have found is that they need to have many things to do that interest them and fill their days.

Planning your days the way you would at work with every hour planned is not the way to go either. Fill your days with both planned activities as well as spontaneous activities as well. In order to do this you need to retain your flexibility and willingness to take advantage of things as they occur, which means something else may get delayed. Before you know it you will wonder were the time is going. Personally we are at the stage, where we take 3 month holidays. Not only are our holidays filled , they are not long enough! For example, I am writing this post over several days, because there are just too many other things that I need to get done in the mean time.

We have talked about some of the non money issues and we also need to discuss some of the money issues as well. Let’s face it, if you do not have sufficient money to do some of the things you want to do, then retirement might be frustrating for you or you need to work longer than you had planned. Focus on planning financially for retirement as early as possible. You will have a much better chance of attaining your goals if you start early.

Investing for Retirement

There are many issues to think about when it comes to retirement and one of the most important is that of money. If you do not have enough, or have to live on a very tight budget, retirement life may not be what you thought it was going to be. Living with the children, or living in an area with low rent is not everyone’s idea of retirement life. Fortunately everyone with a little bit of financial planning and starting early when you first begin working can make a huge difference in your welfare.

We will cover a number of areas that may be of interest. If they do not apply then move onto the next. Comments are welcome.

Common Investment Mistakes

If you are investing your savings over a lifetime, chances are that you will make a few mistakes along the way. You may purchase a stock that declines, and you lose your money, or the hot mutual fund does not climb the way you thought. Maybe the fees were much higher than discussed. There are a host of areas that many people will not consider as they invest their hard earned money and save for retirement. There are a few mistakes that can have a really major impact on your retirement plans. These you have to avoid!

All of Your Eggs in One Basket => Always Diversify

If you place all of your investments in one investment you are taking a huge risk. If that investment goes south, you could lose all of your savings. We just have to recall Enron and Nortel. Both companies were flying high and both companies are worthless today and yes, some people lost their life savings. Always follow a balanced diversified investment plan.

A balanced diversified plan will include investment in bonds, mutual funds and stocks and cash. It will include investments across most major sectors of the economy and most investments should not form a major part of the overall total. This approach should protect you from major hits on your retirement plan.

Using Only One Financial Adviser=> Use several Advisers

The majority of investment advisers are legit and will provide you with great advice, however there have been a few that basically walked away with all of the money their clients had.  If it does not sound right or you are uncomfortable with a particular investment ask for a 2nd opinion.

Even if you have great confidence in your adviser, it is still a great idea to have a 2nd opinion. Investing is a complex business in a complex market. It is impossible for anyone to know everything, so ask around and get other opinions. Get involved and study the investment decisions prior to placing your money in any investment.

High Risk Investments = > A balanced portfolio

Some investors will place all of their investment in high risk investments hoping to make a huge return on these investments. You should never place everything or even a high percentage in high risk. A balanced portfolio as discussed earlier is always the best route.

When you are young you can afford to take these chances, since time is on your side and you can recover from major losses, however as we get older, High risk investments should form a lower part of your investment especially if you need the income. Most people will shift to income-oriented investments as they get older.

Over Confidence = > Always question all of your decisions

This is one of the biggest mistakes we all make and it impacts everything we do. Investing is a complex business and it is always a good idea to talk to other experts and seek varied opinions. If some one disagrees with your approach, always get to the root of the disagreement and examine your own reasons for the approach you are taking.

At the end of the day, you are the one to lose money, not your advisers and not your friends. Over confidence can caused you to follow a stock all the way to the bottom without even knowing it until it is too late.

Following the Herd => Make your own informed decisions

There is definitely a herd tendency to investing and it is difficult to step out of line when everyone else seems to be doing what the herd is doing.We only have to look at the stock markets over the past few years to see the effects of this herd mentality.

Still if you are able to make your own serious decisions and not be too greedy, you can get in when stocks are low and out when they are high, well before the herd figures out what to do.  Many members sell when stocks have dropped and buy when they are high, which is exactly the wrong thing to do!

Timing Your Selection = > Invest for the long term

We would all like to time our investments perfectly to capture the lows and sell high. Unfortunately most of us are just not that astute and do not have the tools available to us to make this happen.It is incredibly difficult to time it just right either for the highs or the lows.

What the good investors do is to invest in excellent quality stocks and invest for the long term, taking in dividends as well as gains in the market. If a company does not do well and appears in trouble, your monitoring of the investment should capture this and allow you to get out in time.

Control of Your Investments = > Manage your portfolio

We all know that you cannot just watch your garden grow. You need to add fertilizer and remove the weeds from time to time and then make sure it gets watered at regular intervals.

Your investments are like your garden. In order to have a healthy investment portfolio, you need to monitor your investments, make adjustments from time to time when the balanced portfolio gets out of line and you need to make strategic choices when there are significant market changes taking place. Work with your adviser, but never relinquish control to anyone but yourself. Retain the control over the investments, how they are managed and how they are reinvested as they mature.

Paying too much in Fee’s

We all feel that we pay too much in fee’s, however there are some you just cannot get away from, while others are negotiable. If you are managing your own portfolio, use a discount brokerage house to do your trades. However if you are working through a financial adviser, the only way he gets paid is when you place trades through him or her.

You received the advice for free, so now you have to pay. However you can split your portfolio and minimize the fees as a result with some under your discount broker and some under your financial adviser. When purchasing mutual funds, ask for an explanation of the fee’s, how they are paid and when. There are huge differences among mutual funds!

Investment Diversification

We have touched on investment diversification earlier in this post. The basic message is to avoid placing all of your nest egg with one adviser and in one stock or mutual fund. Good advisers will work with you to determine your risk tolerance and your objectives. There are a series of questions that they will take you through to help you make these decisions.

Once you have an idea of what kind of investor you are, he will recommend a series of stocks and mutual funds for you to invest in that should be spread across several market segments as well as domestic and international markets. They should also match your risk tolerance profile. If you cannot sleep at night because you are worried about your investments, then you are probably invested with too much risk for your profile.

With proper diversification, when one market segment is down, others are pulling their weight and maintaining your overall portfolio value. If you are invested in good quality stocks, they will recover even in the face of the kind of downturn we experienced in 2008 and 2009! It takes constant monitoring and lots of care to make sure that your investments will be there when you retire.

10 % Investment Plan

This is something I have taught my kids from when they were young enough to start getting an allowance. Take 10% of whatever you make, save it, lock it away, invest it wisely and watch it grow. Once you start this savings plan, and get used to not having your 10%, pretty soon it will just be part of your normal everyday life.

If you start early, and do not touch your savings until you are ready for retirement, you will have a nice little nest egg to enjoy. In fact it may be a large nest egg depending on how long you have been saving and the types of investments you have chosen.

For those of you who also have a retirement plan, this savings plan is really icing on the cake which will allow you to do pretty much everything you want when you retire. If you do not have a retirement plan, you will still need to set money aside in retirement plans.

There is a huge temptation to borrow from these savings plans as yo ugo through life. A new car, a new roof on the house, a larger mortgage are just some of the things that come up and make you think that it might be a good idea to borrow from the 10% savings plan.

Try to resist. You will find a way to pay for these things. Do not jeopardize your retirement. It is very hard to save your money and so easy to spend it.

Retirement Planning

Many people wait until a few years before they retire before planning for their retirement. While it is ridiculous to try to tell a 30 year old to plan his retirement when they are focus on climbing the corporate ladder and trying to raise a family, there are a few things that can be done early and will help in the long run.

For example, start your 10% savings plan, invest in RRSP’s or 401k’s, review your companies pension plans and most important have an investment plan that makes you independent of the many curve balls that life throws at you. Layoffs, being fired, companies going into bankruptcy, health issues are just a few of the things we all need to plan for and have a back up plan regarding how we will support ourselves as well as our families.

As you get closer to retirement, you can get more detailed. Were do you want to live, should you down size,  vacation homes, places to travel and other activities too numerous to mention. Consider all of the personal things that are important to you and begin planning how you will approach them in retirement. You do not have to make decisions until you are ready, but at least you have thought about them.

Work with your investment adviser or develop your own spreadsheet to estimate your income level once you retire. This will help with your decision as to when to retire and how much money you will need to live the kind of life you want to live once you hang up the shingle.

Tax Efficient RRSP Investing

Being tax efficient about your investing is important because it can make a huge difference about the amount of money the government refunds to you or collects from you.

Most people will want to invest in their RRSP’s or 401k’s when their income are at their highest level so that they reduce their taxes by the maximum amount. Once you retire, your income will be reduced and most people will find themselves in a lower tax bracket. This is the time to begin cashing in your plans at a lower tax rate and overall you pay less taxes to the government.

If you have trouble understanding this, don’t worry about it. Just invest in RRSP’s while you make your maximum amount of money and don’t cash them in until you retire. Talk to your accountant to review the details. Many bank managers can also assist you in this area as well.

Variable vs Fixed Interest Rates

Another area that we would like to cover are interest rates that you pay on loans, mortgages and even credit cards. These are all loans with various payment terms and interest rates that can vary a lot. The simplest one and the most expensive are credit cards.

Credit cards start around 16% and can go all the way up to 28%. They are the most expensive loans you can use to carry a balance on. The interest rate does not change that much, so you could say that it is fixed, however it is one of the most expensive in the market. Always pay the balance on time to avoid these high exorbitant rates.

Consolidation of Your Investments

This seems contrary to our recommendations that you should diversify your investments. However some of us will over do it and have far too many different investments that make it impossible to manage and keep track of.

We like to stick to keeping the maximum value of each investment to no more than 5% of the overall total. If all of your investments match this level then you would have 20 funds or stocks in your portfolio. As funds or stocks grow, you will need to sell some to bring them back to the 5% level and re-invest the proceeds into other areas.

If on the other hand your limits were set at 1%, you would have 100 different investments and at this point it gets difficult to manage and monitor. You are investing for the long term, however it pays to monitor your investments and make adjustments from time to time.

Most people will find their own comfort range, and land somewhere between 20 to 50 funds or stocks.  More than that, you probably need to consolidate!

Ten Financial Rules to Follow

The following comments reflect 10 rules that we think just about everyone should follow:

Take control of your finances – don’t ignore your bills and credit cards, take control of them and develop a plan to achieve your objectives. Once in place you will feel much better and empowered!

Pay down your  debt – This is the best way to save money. Pay down your debt and save huge amounts of interest that you would otherwise pay with after-tax dollars.

Spend less – or put another way, live within your means. Set a budget, make sure you set 10 % aside for your savings and retirement and stay inside your budget to prevent going further into debt.

Save more

The more you save the better off you will be in retirement or in a situation were you are laid off and need to have some savings to get you through a layoff while you look for another job. This is your safety cushion.

Develop a personal investment policy statement – This is really a statement of your plans related to your finances.  How much you will save, how much you will borrow and how quickly you will deal with existing debt. Set objectives and develop tactics about how you will achieve your objectives.

Re-balance – re-balance debt to minimize your payments and interest payments. Pay off credit card debt which carries the highest interest rates and consolidate loans such that your payments meet your ability to pay and minimize your interest payable.

Get tax efficient – Invest in tax-efficient savings plans, particularly when you are paying the most in income tax. You can reduce the amount of taxes you pay to the government by investing in tax savings plans.

Get insured

Iif you have a family, it is particularly important to make sure you have life insurance as well as disability insurance. Disability to cover you if you can no longer work and life insurance to provide for your family if you are not around to provide for them.

Don’t give up – Sometimes times get tough and you just have to pick yourself up and keep going. There are many stories about people going bankrupt several times only to make it really big. If you happen to lose a lot of money, learn from your mistake, move on and start again, and don’t make the same mistake twice.

Review, adjust and enjoy- don’t sit back, stay involved and continuously monitor your investments and make the required adjustments as needed. Overall enjoy your life; we only get to live this life once.

The following statements really do not need any additional comments. They are self explanatory!

Diversify, never put all of your hard-earned money in one stock etc or even with one investment adviser.

If it is too good to be true, then it probably is not true.

Take control of your investments and learn what you need to know to make informed decisions.

How Much Do You Need to Retire

The question that everyone wants to be answered! Unfortunately there is no easy answer to this question because everyone’s situation is different. Some people will still have debt, while others will have a full pension. Some will still have kids in university, while others will have multiple families they need to consider in their financial planning.

With so many variations, the approach that you may want to consider is to look at your current income and expenses. Make sure you have a really good idea of what these are since many people do not even know what their expenses are now, let alone when they retire. This is your starting point.

Review the Numbers

Next review all of these numbers and estimate how they will change on the day you retire, including both income as well as expenses. There are several good tools available such as Quicken to help you prepare this analysis. Take into account all pension income from your company as well as any you might get from your government.

Now that you have an estimate for the year you retire, continue with this same approach for the five years following retirement. Be prepared to make adjustments each year as expenses and revenue change. Once you know if you have sufficient money for your retirement, you will be able to decide if you need to make any changes to balance your income with your expenses. If you come up short i.e. you are spending more than you take in, you may have to consider cutting back on your expenses or work a bit longer.

Life After 65

Some people like to continue working after they turn 65. They like the social part of it and the extra money is nice as well. Others cannot wait until they are finished working. I guess they really did not have a good experience with work or they have many other things to do in their lives. But life after 65 is not the end. There are the grand children, the nieces and nephews to visit and look after. Some will travel and others will do volunteer work and help the community in many different ways.

In fact the number 65 is not what it used to be. Many people are retiring at 50, 55 , 60 and some are working well into their 70’s. For some people work is what the love and the people they work with . Take the time to figure out what is best for you and what you find satisfying. Figure out what makes you happy and follow this guide to fully enjoy your life after you retire from your job or jobs.

Balanced Budget – Stress Test Your Budget

We have talked a lot about budgets and planning your retirement, figuring out what your income will be as well as your expenses during retirement. Getting to this stage is very important and you have made a great step forward if you have developed a financial plan for when you retire.

For those of you who want to be really sure that you can withstand all that life throws at you from a financial perspective, doing a stress test on your financial plan is an excellent way to build in additional safety and protection for you and your family.

Get Started

Start by decreasing your income after retirement by 10%, leaving your expenses as they are. What is the impact? Do you still have sufficient funds or do you need to tighten your belt and cut back on your expenses? With this simple test you can quickly determine how exposed you are if your income declines for some reason.

Next, increase your expenses across the board by 10%. This is the same as saying that there is going to be rampant inflation of 10% or more. What is the impact? Do you have sufficient funds to cover these higher expenses? Or do you need to cut back on something? Depending on the severity, you may even have to go back to work or delay your retirement by a year or two to give you that additional safety margin you need.

Complete these stress tests every year and adjust as required.

Long-Term Financial Planning Key To Lasting Relationships

In many families one spouse or the other will look after the financial planning aspects for the family. In most cases, one or the other takes an interest. They will follow up on all of the financial issues that need to be dealt with.

In reality the more involved both parties are in the planning and understanding the plan as well as the quality of life that they will have during retirement the better their overall relationship will be. If one is worried that the other has not planned sufficiently to deliver a good quality of life or is in the dark about what to expect in retirement, then relationships tend to suffer.

Build on Trust

Some of the best relationships are built on trust and full disclosure of all family elements. However this means that both have to get involved. Both have to meet with financial advisers. Both have to jointly participate in decisions about the investment strategy and investment decisions regarding specific stocks and mutual funds.

There is so many benefits to making joint decisions. If you recall how decisions are made in the business environment, there are reviews and discussion and often a joint or group decision is arrived at. Although this takes more time and work, the benefit is that better decisions are usually made. The same is true of financial planning. If you and your spouse are jointly involved, debating your plans etc, then chances are better decisions will be made.

How Will You Pay for That? Sources of Retirement Income

I have heard many people talk about the trips they are going to go on, the cottage they are going to buy or the downsized home that they will purchase. Some will purchase new cars and other new toys as a kind of congratulatory gift to themselves for making it to retirement.

Many of these same people have no idea of what their income will be and how they will pay for some of the things that they are considering. The point of this section is to ask people to stop and consider their expenditures before making that leap. Make careful and studied decisions before you make that leap.

Once you retire, you have a fixed income that may increase slightly, but definitely does not keep up with inflation. So the money for  anything you purchase has to come from your savings or you pay each month on a monthly payment loan basis.

Interest Rates Going Up

As of April 2010, the Canadian Government has announced that the bank rate will likely increase in June. The US government may increase their bank rate by the end of the year if the US economy recovers sufficiently by that time. Australia already has increased their bank rate and other European countries are announcing their intentions to do the same.

If you are an investor with investments in CD and bonds, you will be happy about this turn of events. Since your income can be expected to rise. If you are borrowing money for a loan or a mortgage, You are going to pay more for your loan. That means that your retirement nest egg may not go as far if you still have a mortgage.

Lock In Interest Rates

Now is the time to lock in interest rates before they go up to high. They could cost you much more money in interest payments. If you are an investor you may need to wait a little bit longer. However better returns should be expected in the latter half of 2010 and into 2011.

As you plan your retirement , do stress tests and make adjustments each year. Take into account these changing interest rates. Assess the impact that they may have on your financial plans as well as your retirement. Interest rates can play a significant impact. Especially if they go up drastically. For those of you who recall the early 1980’s interest rates went up to 21% for new mortgages. These were scary times for borrowers, but great for investors!

What Life Stage Are You in Financially

Knowing what life stage you are in financially can help with your financial planning. They are generally as follows: Young and Single; Married with no kids; Married with Kids; Pre-retirement; Active Retired and Non-Active Retired.

Each phase has different requirements from a financial perspective. For example, Married with Kids extends for a long period of time. From when they are first born until the finish university, with all of the associated costs. Sometimes these phases can overlap. Anyone who has children late in life could find themselves with kids still at home. Each phase places some kind of financial stress on you. If you prepare for it, it will not be a problem for you.

Again map out your major financial expenses associated with your life phase. Match your income requirements accordingly. You may have to work longer than expected. If you find that kids, university and other expenses take up more funds than what you had planned for. On the other hand if you started saving early, have a good pension plan and managed your money carefully, you may be able to retire as planned. You can still look after all of your obligations while retired. Enjoy the good life as well after retirement.

How Will You Make Your Money Last

This is one of the biggest worries that everyone has. How will they make their money last so that they can live comfortably and still have some left for the grand kids etc? None of us really know how long we will live. We could be dead tomorrow or we could live for another 40 years after retirement. It is not unusual these days for someone to retire at 50, live for another 40 years before passing away at 90 years of age. With this scenario, you will be retired more years than the number of years that you worked. I agree that this is unusual, however some have done it. Many more people are retiring at 55 or 60 and living to 90 and 95 years of age. This is still a long time to live on your retirement savings.

Make Your Money Last

Making your money last is a combination of factors. Controlling how much you spend, having sufficient savings and pension income, taking advantage of interest rates that pay well and living within your means.

Once you retire, your income really depends on pensions and investments. For the most part it will stay pretty constant, unless you are heavily interest rate dependent and the rates change drastically. Pensions will increase based on the inflation index, which is to say, not much at the present moment. The only way you can make your money last is to control your spending.

Control Your Spending

Control your spending. Be careful about doing upgrades to your home, vacation spending, gifts to the kids etc are all within your control. Utilities , taxes at the municipal and federal levels are not within your control. You just have to pay them. Make sure that you are getting all of your deductions. Use a good accountant that ensures you minimize your tax exposure.

Controlling your spending on discretionary things is the real way that you can make your money last. However, when you are healthy, you should enjoy life. It really does not matter how much money you have once you lose your health. Having a million dollars while you lie in bed does not do you much good other than make you comfortable.

Many people are not comfortable about talking about life spans and death. You can refer to your parents in terms of how long they lived. Add 5 years because you had a healthier life style. That is as good an estimate as any regarding your life span. If you had a family member die early of heart attack chances are you will live well beyond their age. Health improvements have made significant advances.

Calculate How Long Your Money Will Last

Once you have arrived at a life span, it is a simple manner to calculate how long your money will last. There is some risk to this approach since you could live longer than your estimate. You will have to deal with it at the time.

The worst thing for many people is that they cut back. They saved and did not spend their money in case they might need it. Only to pass away or become sick before they could really enjoy it. Enjoy your life and spend some of your money. Spend it while you are healthy enough to enjoy your favorite pass times.

10 Years to Retirement Are You Ready

This is the most critical time for saving and planning for retirement. You will never achieve the level of savings that you could have if you had started earlier. However you can still make up a great deal if you start 10 years prior to retirement.

Are you thinking about retiring in 10 years. Are you confident that you will be able to work for another 10 years. Start Saving now. Save as much as possible following the general guidelines that we have outlined in this post. Are you confident that you will be able to work that long because of health issues? Or you are afraid of being laid off by your employee. Save everything you can and curtail your expenses significantly! For those of you who think that you may be a bit over confident, do the same. Overconfidence has caused many people unneeded hardship. Save every cent you can for your retirement.

When Should You Retire

The answer is different for everyone. For some they cannot wait until the day they retire. They never want to go back to work ever again. Of course, the other extreme is the person who loves to work. They enjoy the social aspect of work as well as the extra income. There are many motivators for this type of person. For some it is social, money, power, perks. Others it is a lack of a home life, lack of hobbies and things to do that interest them.

For many people they ease into the retirement. They may actually retire from one job and then continue working for a few years on contract. Or go to another job that meets their financial and personal needs. They start by working over the winter and taking the summer off. Perhaps they work 3 or 4 days a week. They gradually cut back until they finally admit that they have had enough.

A Personal Decision

Regardless of the reason, it is the right decision for that person. They enjoy life and the people around them for as long as they can. They also enjoy exercise and a proper diet. Which maintains their health and enables them to continue doing whatever they prefer.

Some of the don’t s and we will use an extreme example to illustrate are as follows. You retire at 65, spend your time at home watching TV. Occasionally doing some gardening. However, this gradually declines. Limited exercise, drink and eat more than you should, and generally become a couch potato of the extreme kind. This is by far the worst thing you can do. Since you will probably cut years off your life and be very bored.

Enjoy Life

Get out and go for walks, and get involved with the community. Volunteer, take a small part-time job, Travel to see your family, and generally participate in life!

This ends our post on getting ready for retirement. We have covered many topics that hopefully will be of interest to readers. If you did not see what you were looking for, let us know, and we will try to address it. Leave your comments in the comment area of this blog! Good luck with your retirement, and enjoy your life!

Long-Term Financial Planning Key To Lasting Relationships

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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.

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Meeting Retirement Goals

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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.