Balanced Budget – Stress Test Your Budget

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Corporations stress test their budget all the time, so why shouldnâ€™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 testÂ 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 couldÂ 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 exercisedÂ Â 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

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One 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.Â 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.

Life After Age 65

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This is an entire repost from Sun Life Financial. We thought our readers would find this interesting. We are doing many posts about retirement and looking for different viewpoints. This is about Life After Age 65. Men and women have different views of life after 65; Sun Life Financial study finds

Does the “Men are from Mars, Women are from Venus” idea fit when it comes to retirement?

Life After Age 65 – the Article

TORONTO, Jan. 21 /CNW/ – The gender gap seems to have extended into Canadians’ views of retirement, with twice as many men (32 percent) than women surveyed saying they want to work past age 65, according to the second edition of the Sun Life Canadian Unretirement(TM) Index.

“We also found that men and women had diverse opinions around what factors should be considered in a retirement plan, with women more likely to cite long-term care, low-interest rates, and death of a spouse,” said Kevin Dougherty, President, Sun Life Financial Canada. “Interestingly, Canadians, on the whole, were significantly more confident about their retirement if they had worked with a financial advisor for a year or more than those who did not have an advisor.”

Other Findings

Other survey findings show that men and women think differently about financial planning and confidence in retirement:

– Seven in 10 women (71 percent) who said they will be working past
age 65 said they will be doing so to earn enough money to pay for
basic living expenses compared to 65 percent of men. More women
(61 percent) also believed their company pension would not be enough
to live on compared to men (56 percent).
– Forty-nine percent of Canadian women surveyed were very confident
they would have enough money for basic retirement living expenses
compared to 57 percent of men.
– Twenty-nine percent of women were very confident they would have
enough money to enjoy the lifestyle they want compared to 36 percent
of men.
– Women tended to be less confident about the overall economy and their
personal finances compared to men.

“Women have substantial reasons for worrying that they won’t have enough money to enjoy the lifestyle they want in retirement,” said Alison Konrad, Professor of Organizational Behavior at the Richard Ivey School of Business, University of Western Ontario. “The average Canadian woman earns about 66 percent of what the average Canadian male earns. So even though women tend to put a larger percentage of their income into their retirement nest eggs, men save almost $1,900 more each year.”

Measuring Canadians’ overall retirement confidence

The Sun Life Canadian Unretirement(TM) Index measures Canadian workers’ confidence towards issues that influence retirement. The lower the index number, the more negative or pessimistic the outlook is on issues that influence retirement.

This second of multiple studies yielded an overall index score of 51 on a scale of 0 to 100, compared to a score of 50 in December 2008. This compares to the American Unretirement(SM) Index score of 44.

Confidence levels were significantly higher for Canadians who worked with a financial advisor. The overall index score was 51 for all working Canadians surveyed. Those who did not have an advisor scored 48, while those Canadians surveyed who have worked with an advisor for a year or more were much more confident, scoring 54.

The Index is a blend of confidence scores in five sub-indices: Macroeconomics (score = 40), Government Benefits (score = 47), Personal Finance (score = 49), Employer Benefits (score = 47), and Health (score = 70).

Which of these describes what you think you will be doing at age 66, shortly after the normal retirement?

    -------------------------------------------------------------------------
                      Women    Men  Women    Men  Women    Men  Women    Men
                     --------------------------------------------------------
                      30 to  30 to  40 to  40 to  50 to  50 to  60 to  60 to
                         39     39     49     49     59     59     65     65
    -------------------------------------------------------------------------
    Working full time    7%    13%    13%    17%    13%    21%    15%    32%
    -------------------------------------------------------------------------
    Working part time   24%    29%    19%    31%    26%    35%    31%    36%
    -------------------------------------------------------------------------
    Fully retired/
     not working for
     money              68%    57%    68%    51%    59%    43%    53%    31%
    -------------------------------------------------------------------------
    No longer living     1%     1%     1%     1%     2%     1%     1%     1%
    -------------------------------------------------------------------------

What should a retirement plan address?

    -----------------------------------------------------------
                                                  Women    Men
    -----------------------------------------------------------
    Won't have money to leave to heirs              42%    37%
    -----------------------------------------------------------
    Changes in marital status                       48%    37%
    -----------------------------------------------------------
    Family members have unforeseen financial
     needs                                          54%    50%
    -----------------------------------------------------------
    Financial market risk                           60%    58%
    -----------------------------------------------------------
    Death of a spouse                               67%    56%
    -----------------------------------------------------------
    My rate of return won't be high enough          66%    59%
    -----------------------------------------------------------
    Employment risk - job market or personal
     health problems                                65%    59%
    -----------------------------------------------------------
    Employer health benefits stop when I stop
     working                                        62%    63%
    -----------------------------------------------------------
    Money will be locked in when I need it          66%    64%
    -----------------------------------------------------------
    Low interest rates                              71%    60%
    -----------------------------------------------------------
    Money won't last my full lifetime               67%    64%
    -----------------------------------------------------------
    Long-term care needed                           72%    60%
    -----------------------------------------------------------
    Poor health results in extra costs or
     care needed                                    71%    68%
    -----------------------------------------------------------
    Inflation                                       79%    71%
    -----------------------------------------------------------

Methodology

The study was conducted by Fleishman Hillard from August 17, 2009, to September 9, 2009. Telephone interviews were conducted by Interviewing Service of America using a random-digit-dial (RDD) sampling method. Quotas and weights were applied to gather a sample of 1,202 people working either full- or part-time, representing the Canadian working population between the ages of 30 and 65. The sample was also representative in terms of gender and region census break. Analysis and construction of indexes involved the application of factor analysis. Final indexes are based on summated averages across the attributes which make up an index.

Age groups were divided by workers in their 30s, 40s, 50s, and 60+ and by three ranges of total assets, not including the net worth of the person’s place of residence (less than $100K, between $100K and $500K, and greater than $500K). This sample has a margin of error of plus or minus three percent at the 95 percent confidence interval.

How Much Do You Need to Retire

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So How Much Do You Need to Retire? When it comes to financing their retirement, confusion reigns among Canadians and Americans. Some think the magic number is at least $550,000, while others believe they must save at least $1 million. They feel they need this amount to meet their lifestyle and to last for the time they will live during retirement. Many realize that they need more savings. They will need to continue working after the normal retirement age of 65.

There are many other issues to the uncertainty, including the myriad of retirement savings theories, assumptions, and rules of thumb. For example,

how much money you need to save,
the rate of returns,
how long you will live,
what nursing homes cost,
whether you want to give money to your kids and
when you should do that.

In this post, we will focus on retirement and living comfortably, not bequeathing something to the family.

How Much Do You Need to Retire

Determining how much money you will need to save for retirement is unique for each individual. It is often more complex than using a simple theory. There is no one-size-fits-all solution. Common retirement savings theories should be carefully reviewed before being adopted. We will discuss a number of areas, and we urge readers to draw their own conclusions. They should make their personalized decisions based on their situation and their needs.

Government Pension Plans – CPP, OAS, Social Security

The belief that one’s retirement can be adequately funded through government payouts and public pension plans is a myth. Canada Pension Plan or US-sponsored Government plans will not provide enough. Indeed, these payments will certainly help with your retirement. They will not substantially replace your income unless you are already on the poverty line. For example, in Canada, if you were making $50,000 a year, you can expect around $17,000 from the CPP and OAS per year. This is roughly about 35% of your current income. This is a massive drop in income if you have no other income to rely on.

Company-Sponsored Pension Plans

If you are lucky enough to have a company-sponsored pension plan, you are well ahead of most consumers who do not. Employees are encouraged to request an estimate of their pension plans when they retire if they maintain current contributions. There are many different types of plans, so it is important to review the details. Speak with the benefits group to understand what your payments will be. The most common are “defined benefit plans” and “defined contribution plans.”

Do You Need All of Your Income in Retirement

The theory that one needs 70 percent to 80 percent of their pre-retirement income is just that—a theory. It is a good starting number to aim for since many of your expenses will be lower during retirement. For example, you will no longer need to contribute to unemployment and pension plans, which can cause a significant drop in requirements. Also, you are no longer going to work, so any expenses associated with travel to work are also not required.

However, you have to do something, and many people like to travel and pursue some of the activities you never had time to do while working. The best approach is to make a list and a budget of ongoing expenses and outline what you want to do during retirement. Whether hiking or cruising, you will need money to do these things. You will soon know whether you have enough money or not.

Is $1 Million Enough

The “magic” 1 million dollar assumption is just an assumption. It depends on your lifestyle and when you plan to retire. Someone who retires at 65 and does not plan any major travel or expensive projects may find that $1 million is more than enough. While retiring at 55 and planning major trips every year, they may find that they will need more funds. Again, prepare a budget and plan out your expenses vs. your income. For example, you can withdraw $50,000 20 to 22 times, depending on interest rates, before the $1 million is gone.

Five Percent Withdrawal Plans

Using four percent to five percent of accumulated savings annually during retirement is a pretty common approach. If your investments earn more than 5%, they will likely last during your retirement. If they earn less than 5%, they will decrease each year, and you may run out. Focus on good-quality income-earning investments to avoid running out of funds.

Delayed Retirement

Planning to delay retirement and continue contributing to your savings plans is always a good idea in order to afford retirement. Even delaying retirement by two years can make a huge difference in your assets and help ensure that your investments last longer.

So, How Much is Enough?

There are many considerations when it comes to planning one’s retirement, and consumers are urged to develop different scenarios and evaluate how much money they will have for retirement. The variables you should consider include the following:

The age at which you wish to retire
Pension plan income you will receive at retirement
The type of lifestyle you want to lead
Your health
Whether you have outstanding debts going into retirement
Your expected retirement expenses include housing, food, etc.
Your current savings in registered and nonregistered accounts

It is important to know your retirement goals and objectives, identify your sources of retirement income, and start planning as early as possible. Review your plan at least once per year and more often if you have a major change in your life. These changes can include – loss of job, death in the family, moving, and, of course, retirement.

You may find that your retirement goals and lifestyle choices change over time, and consequently, the amount of money you need will change.

Ten Financial Rules to Follow

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When you are in control of your finances, your income, and your debt the feeling is truly empowering. Now is the time to get control. Interest rates, which have been low for some time, will begin to rise in late 2017 or 2018 and that usually means inflation is not far behind. Now is the time to focus and make sure your financial game is in perfect working order. Here are Ten Financial Rules to Follow for your investment plans.

Ten Financial Rules to Follow

Take control of your finances

Take the time to develop a financial plan that meets your personal goals. Brush up on your financial know-how through courses and seminars. Whether you are a small investor or have a large investment base, getting in control will truly be empowering and it will set you free from worry about your finances. Map out a plan and follow it. Adjust it as the financial landscape changes. Review it regularly and fine-tune it as needed.

Pay down your debt

Paying your own debt first is an obvious kind of thing to do, however, there is a priority in terms of which debt to pay. Store credit cards carry the highest interest rates, sometimes upward of 28%. This debt is what you should focus on and pay off first. You will and must meet all of your obligations at the same time. Make sure you pay all of the monthly installment payments on your other debt to avoid bad credit ratings. Once you pay the credit card debt, focus on the next highest-interest debt that you have until it is paid off.

Spend less

Once you decide to pay off your credit cards, you will have less to spend, however, you want to make sure you are not racking up new debt at the same time. Set a budget that allows you to live within your means. Spend less at least for a while. You will find that the extra money you gain will be useful in reducing debt and also saving for the future. This is a life-changing habit to form and it is important to spend less so that you can reduce debt as well as not create new debt.

Save more

Most Canadians save on average less than 5% of their personal income. We used to save about twice that and the folks in the US save even less than we do on average. Try to get into the habit of saving 10% and have it taken directly off your paycheck so that you do not even need to think about it. After a while, it will be just another deduction on your paycheck and you will benefit by building your savings which will come in handy if you are laid off or better still for retirement.

Develop a personal investment policy statement

Large companies do this because it is a professional way to manage money and manage a business. Why should you not do this as well? Write out your goals and review them at a minimum of once per year, more often if the market is volatile or you have additional money to add to your portfolio. Take into account your tolerance to risk and also decide between the growth of stocks vs. income from dividend stocks and bonds/GICs.

Re-balance

As part of your investment plan review, review the balance of investments that you have between bonds, stocks, mutual funds, or other investment vehicles that you may have. Try to diversify your investments and strike the right balance of stocks, bonds, and mutual funds. Does your current investment mix meet your investment goals and your investment plan? As the markets increase and recede, you may need to re-balance your investments to keep the right balance in your investment account.

Get tax efficient

Being tax efficient is just good business sense. Take advantage of all of the programs to defer or decrease your taxes. Can you increase your deductions, defer taxes to another year or share your taxes with your spouse? If you do not have the time, if you are uncomfortable, or if you just do not want to do your taxes, hire an accountant to review your taxes to make sure that you are getting all the tax deductions you are entitled to. Even if you do your own taxes every year, you might benefit from having an accountant review your taxes for one year to see if you missed anything.

Get insured

Most people have car and house insurance. Many do not have life insurance or disability insurance. If you have this kind of insurance through your job, review it to make sure that your family could continue to live comfortably without your income. If you do not have life insurance or disability insurance, consider purchasing this type of insurance. You do not want to leave your family destitute and poor.

Don’t give up

If you are investing in high-quality stocks, bonds, and mutual funds, chances are you can weather any storm. In 2009, we saw one of the largest drops in the stock market in history. Watching your investments drop in some cases up to 40% is very hard to take. Staying true to your investment plan and sticking with high-quality investments will usually bring consistent returns as well as withstand financial shocks over the long term.

Ten Financial Rules to Follow – Review, adjust, and enjoy

Consumers really need to take responsibility for their own investment plans and their own retirement. Continue to review your plan. review your investments and make adjustments as time goes on and the markets fluctuate. Maintain diversity and maintain a balance with your investments. Stick to blue chip and remember the golden rules of investing.

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.

The recent economic and stock market downturns have taught people the need to spend responsibly, within the context of a financial plan and their lifestyle. Having a solid financial foundation in place frees you up to do all those things that give your life more meaning. These Ten Financial Rules to Follow could make a difference for you in terms of quality of life.

Consolidating Investments

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I strongly believe in diversification to avoid jeopardizing your total investment and possibly losing your entire portfolio. There have been recent examples of people who have placed their nest eggs with one personÂ ( recent Ponzi schemes ) and lost everything. The returns sounded good and these people wanted to consolidate their investments in one place so it was more easily managed.

Consolidating Investments

I read several articles recently were the writer indicated that there were some reasons that you would want to consolidate your investments. I will repeat them here for your consideration and then discuss them in more detail.

It is easier to track and re-balanceÂ your assets
Lower Fees
Fewer dead trees
No more orphan accounts
Peace of mind

There is always a balance between diversification and consolidating accounts under one investment adviser or one set of investments. The fundamental rule is that you do not want to risk everything you have with one adviser or one investment. If the adviser is not what he purports to be or if the investment goes south then you have lost everything.

There is a case for having a reasonable amount of diversification, and there is a case for consolidating many accounts and investments into several to avoid a financial meltdown while making it easier to manage over all. Never put all of your eggs in one basket. Lets look at a few of the suggestions in more detail.

It is easier to track and re-balanceÂ your assets

There is no question that it would be easier to track your assets and re-balance them as needed if all of your assets are in one place. One of the benefits of having everything in one place is monitoring asset allocation andÂ making sure you are investing following the guidelines appropriate for your risk assessment.

Still, our belief is that you really should diversify across several accounts with different advisers to avoid all of the eggs in one basket syndrome. A benefit of this approach is that you can get advice from two advisers and compare their suggestions and strategies to make the best decision for your personal investments. This takes more time and effort, however it is the best long term strategy by far.

Lower Fees

There is no question that if you have multiple accounts, you are going to have to pay multiple fees , one for each account. It may be $50 an account, but that is $50 you do not have. Consolidating accounts can certainly save you money in this area .

Compare the advantage to diversification. You have $100,000 to invest. You can place this all in one account and have it managed by a single adviser with a $50 fee each year for the account. All o your eggs are in one basket, and if that adviser does not do what he or she is supposed to do, then your full $100,000 is at risk.

Diversifying across advisers certainly means you will probably pay $50 twice, but at least if one adviser goes bad, you still have $50,000 of your money. We just have to look at the recent Ponzi schemes that even sophisticated investors got caught up in.

Fewer dead trees

Consolidation of accounts certainly means less paper and less mail to your home with account statements. That is an advantage for sure. But all you are doing is reducing a bit of paper.

Compare to receiving paper for two accounts with diverse investment advise and guidance that allows you to compare and make more informed decisions. Sure you get more paper m but won’t you feel better and worry less if the advice from two advisers match up? I think again the diversification angle is much more valuable than saving a couple of pages.

No more orphan accounts

This is a weak benefit at best. True, there are less accounts to worry about should you move and forget to advise the institution about were you are moving to . The institution does not know where you are, cannot find you and the account becomes orphaned. This does happen, however if you are dealing with a credible investment adviser, you will be discussing your investments on a monthly basis.

This will occur with any account. The solution is to make sure that you always update the company with your up to date contact information. Also you should be providing next of kin and back up contact information for every account. Again a little more attention on your part will also make sure this never happens.

Peace of mind

This is one of the weakest points anyone could make. I would be more worried if all of my investments were invested through one adviser. Or even worse in one investment. There is certainly no peace of mind in locking everything you own in one investment.Â There are various schemes that are going on and have been in the news recently. I would be lying in bed awake at night worried if I had done the right thing. Even so-called friends of the family have been found to be as corrupt as anyone when it comes to money. Protect yourself and make sure that you are well diversified at all levels.

Hopefully this post makes sense to readers. If you agree or disagree, I would like to hear your thoughts on what you think about consolidating investments vs. diversification of your life savings.

Variable vs Fixed Interest Rates

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There has long been a discussion around whether variable rate interest rates for mortgages and loans are better than a fixed interest rate for these same financial vehicles. The debate always gets interesting when interest rates are about to change. Consumers get worried, about whether they will end up paying more interest because rates are rising and they did not lock in soon enough. Conversely, many consumers also worry that they are locked in too soon when interest rates start to fall. So what is the right strategy for consumers around this huge issue of fixed vs variable interest rates? After all, it is your money.

Variable vs Fixed Interest Rates

Well, we think there are a number of factors to consider and they will vary in importance for most people. As a result, it is a very personal decision based on the financial position you are in. The plans you have for the future regarding your property and your ability to deal with risk associated with changing interest rates. We will try to discuss the major issues and provoke people to think about their situation before they make a decision. At the present time in early 2016, it looks like interest rates will stay flat for another year. You can never tell when they will change, but that is what the experts are saying at the present time.

Some Background First

A fixed interest rate loan or mortgage is just that. The interest will not change for an agreed-to time frame, usually called the “term”. At the end of the term, the bank will offer you a new interest rate and term for your loan or mortgage if you have not already paid it off.

A variable interest rate loan or mortgage will vary in relation to the prevailing bank rate announced by the Fed in Canada or the United States. If it goes up, your bank is likely to increase the rate they charge you. If it goes down, they will lower the rate they charge as well.

When the bank rate is, let’s assume 2%, then the banks will charge you one or 2 % over that level. It depends on how competitive your bank is for a total interest rate of 3 or 4%.

Factors to Consider

These factors are not listed in any relation to importance, since individual consumers may rank them quite differently based on their personal situations.

Stress – Some people just cannot deal with the unknown of whether the interest rate will change and whether your monthly payments will change or not. If it keeps you up at night worrying, why put up with that, lock it in.

Changing Monthly Payments – each time the interest rate changes, the amount of interest you owe and the corresponding monthly payment will change. As long as it is going down it is ok, however, if the interest rate is going up and there is going to be a significant impact on your budget, then you may want to switch to a fixed interest rate loan or mortgage.

Planning to Sell –

When you sign up for a fixed-rate mortgage you are saying that you will pay a certain amount for the life of the term based on the agreed-on interest rate. If you plan to sell during that period of time and the interest rates have fallen, the bank is going to charge you a penalty plus administration fees to discharge the mortgage when you sell your home. The penalty will roughly amount to the difference in your rate and the rate that the bank will lend the money out at the time you close. This can amount to thousands of dollars, so it is a good idea to think about this.

With a variable rate mortgage often you will only pay the administration fees to discharge the mortgage.

Saving Money – Variable rate loans and mortgages often have lower interest rates than the fixed rate loans and mortgages being offered by banks. This is only true at the time you take out the mortgage. Interest rates do change and they can go up and down, however, at the time you sign, the variable interest rate is usually lower than the prevailing fixed interest rates. This is an excellent way to save money especially if you feel that for the foreseeable future, interest rates are not likely to change much.

Volatile Interest Rates –

In periods of high inflation or in periods of economic downturns and depressions/recessions, the interest rate that is quoted by the banks can change often. During periods of economic growth and high inflation interest rates tend to rise. During recessions and depressions, interest rates tend to decline in order to stimulate the economy and get things moving.

Consumers should take this forecast of interest rate volatility into account when they are making their decision along with the other factors mentioned as part of their decisions to take a variable or fixed interest rate loan or mortgage.

Competitive Rates – Many newspapers will list current interest rates offered by banks and other lending institutions each week. For the most part, they are all pretty close since competition is pretty fierce, however, it never hurts to have a discussion with your loan officer to see what kind of deal they may give you.

Sometimes even shaving a quarter percent off can make a big difference in the total amount of interest you pay. It never hurts to ask and the worst that will happen is that they will say no!

In Summary

Assess your risk tolerance for changing interest rates. Assess the impact on your monthly payments. In addition, assess your plans to sell or keep your home over the next several years. Also, where do you anticipate interest rates are headed as inputs to your decision? Note that you can and should compare fixed and variable interest loans and mortgages from various companies to ensure that you obtain the most competitive rates.

Tax Efficient RRSP Investing

Your RRSP can also be an insurance plan. More and more people are either losing their jobs, retiring early, or finding out that their companies have gone bankrupt with no provision for retirement benefits. Donâ€™t depend on anyone else but yourself. Put a plan together which is diverse and plans for emergencies and unforeseen conditions. An RRSP is one of the building blocks for this plan.

The following tips may help investors invest efficiently and maximize their savings for retirement to ensure a retired life that is comfortable and allows you to do the things that you plan to do.

Know your contribution limits

As RRSP contributions are 18% of an individual’s earnings from the prior year, the amount of income needed in 2009 to generate the maximum contribution room of $21,000 is $122,222. Looking ahead, the RRSP contribution limit for 2010 has been increased to $22,000. If you were unable to maximize your contribution in previous years, you may be able to contribute even more than $22,000 for 2010.

In recent years, RRSP contribution limits have been increasing by $1,000 per year. 2011 will mark the first year that the RRSP limit increase will be indexed to inflation, at $22,450, generated when 2009’s income is at least $124,722.

Leverage a Spousal RRSP

Higher-income earners can take advantage of their spouse or partner’s lower tax rate once they begin withdrawing from their RRSP in retirement. Contribute to a Spousal RRSP now. Higher-income contributors receive a tax deduction for contributions made to their spouse or partner’s plan. Spousal contributions do not interfere with the other spouse’s or partner’s own RRSP limit.

Remember that a Spousal RRSP does not allow an individual to exceed their personal RRSP maximum contribution threshold. Which can be allocated between the individual’s own account and that of their spouse.

Remember RRSPs are for more than retirement

RRSPs can be used to invest in financial goals other than retirements, such as education or a first home. First-time homebuyers can withdraw up to $25,000 tax-free from an RRSP under the Home Buyers’ Plan (HBP). They can repay the funds, interest-free, over a 15-year period. However, failure to repay will cause the amount to be included in the income.

Under the Lifelong Learning Plan (LLP) investors can also withdraw up to $10,000 in a calendar year. And up to $20,000 in total from an RRSP to help pay for training or education for yourself or your spouse or partner. The LLP withdrawal must also be repaid, over a 10-year period to avoid having it included in income.

Even though early withdrawals generate taxable income, sometimes you will have no choice but to withdraw early to replace lost income. This is not something you should plan to do, but it can be part of your income insurance plan.

Contribute early, contribute often

If you can afford to contribute to an RRSP, do so. It’s never too early to start contributing. But you might regret not doing so sooner. As with all investments, the more time you can give your plan to grow, the better.
Many investors find it much easier to make small but regular contributions than to come up with large lump sums annually. Consider setting up a regular investment plan to help make contributing to your RRSP a priority all year long.

After making your RRSP contribution, apply to the CRA using Form T1213 for a reduction of payroll tax at the source. By doing so, you can benefit from your tax reduction throughout the year on each paycheck, instead of waiting until you file your tax return in the spring of 2011.

Discuss your plans with your adviser

Make time to discuss your options with a professional financial adviser.
Remember, you’re building a long-term plan. Take time to sit down with an advisor. Get their help in choosing the right solutions. Get started today in saving for the retirement lifestyle you want. Also, discuss your plan with your spouse. Make sure that he or she knows where you are invested and what your contributions are. Involve your spouse in discussions with your financial advisor. Both you and your spouse should have joint financial plans with similar goals, and practice diversity. Avoid investing in too good to be true investments. Before you leap, talk it over with someone and think about it for several days.

Retirement Planning

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Retirement is a really big step for most people. There are many issues to think about when you retire which represents a lot of change for both you and your spouse. Most people do not even think about retirement planning until a few weeks before they walk out the door. Some companies will encourage people to think about retirement. They will even send them on courses, however, most do not simply because of the cost.

Everyone should take it on to do their own retirement planning well before they retire so that they can approach it without fear or nervousness. The most important issue most people think about is whether they will have enough money to live the life they wish without having to sacrifice their quality of life. This is an important element, however, there are many other items to consider as well.

We will focus on the financial issue in this post, however, we wanted to list some of the other areas everyone should think about as well before they retire. We will cover these issues in subsequent posts.

Issues to Consider as Part of Retirement Planning

This is a simple list. We would appreciate your comments if we missed any.

Downsizing Homes
Pre-retirement expenses such as car and house repairs
Travel planning
Volunteering
Cabin Fever
Spousal Conflict
Grand-kids
Second Homes
Health Issues

How Do I Know If I Have Enough Money

This is probably the single most important question for many people. I once met a friend of ours who was forced to retire at age 65. He had been well paid, had saved while working, and was going to receive a very good pension. On top of that, his wife had retired with a pension as well. He was very concerned as to whether he would have sufficient money to live the way he wished during retirement.

At first glance you might conclude, that of course he has enough money! He has two pensions and savings to live on, what more could you want? Well, it is not that simple. Both he and his wife had their kids later in life, so one was still at university and neither was married or holding down jobs of their own yet. He was still supporting them in a fairly high-quality lifestyle. However, these areas are really not the issue. Everyone has their bills to pay and some are higher than others.

The real issue is that he did not know what his income was and he did not know what his expenses were now or going to be post-retirement. He had never had a budget and did not have any idea of how to go about building one. This is really the first step towards retirement planning. Build a budget that is fairly reliable and takes into account unforeseen expenses that we all know happen along from time to time.

Retirement Planning Fundamentals

The fundamental thing you have to do is build a realistic retirement planning budget. This is the only way you will know for sure what your income will be and what your expenses will be. If revenue-less expenses are negative then you have a problem and need to make some cuts on the expense side somewhere.

Also, account for major expenses that you know are going to come along. You can either save for them, pay for them a lump sum from savings or pay for them through a loan over time. They are not going to disappear and you need to deal with them and include them as part of your retirement planning exercise.

A good example is that most people need to replace their car every 5 or 8 years. Some people will do so more often, while others will be longer, but sooner or later you’re going to need another car. In your plan, decide when you think this will happen and plan accordingly.

This same approach can be applied to all other areas as well. My friend was concerned about paying for two weddings. These will happen and he needs to include them in his planning for post-retirement. He was also concerned about expensive upgrades that he was thinking about for the house. These kinds of retirement planning expenses are optional unless you are talking about the furnace, water heater, air conditioning, or roof. Build your plan with everything in it and then decide what you can actually pay for.

Examine Your Options for Retirement Planning

There are optional expenses that can be either spent or can eliminate from your lifestyle. There are also options with respect to work now as well. Another friend of ours has a very good pension and can live on it quite comfortably. However, it is not enough to allow her to do some of the things she wants to do. She loves to travel 3 or 4 times every year and when she travels she likes the best.

For her, the option is to go back to work on contract for part of the year. She continues to collect her pension however the extra money she makes allows her to pay for her trips and other upgrades around the house. There is another big advantage for her in this scenario as well. She gets out every day and she is with people every day which is very good for her.

So if your budget income comes up short for your retirement planning task, then another option is to take on a contract job that allows you to live the life you wish.

Summary

The first step to retirement planning is to do a budget and then take the steps you need to make the budget work for you to avoid a shortfall in funds, while at the same time allowing you to live the life you wish.

We will discuss some of the issues mentioned in this blog in future posts.

Ten Percent Investment Plan

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Many of us are like the ostrich with the head in the sand when danger is around. Especially when it comes to thinking about and planning for our retirement. For the young, it is so far off that there is no need to think about it. While people are in the middle of their lives, they have too many other financial pressures to give much thought to. By the time we are in our 50’s and 60’s, panic has set in. We realize that we will not have the kind of retirement we had all planned since our savings are too low.

This usually means working a lot longer, sometimes well past age 65. Some people want to work, while others never want to work again. Let’s at least have a choice.

How Can We Avoid this Panic?

The answer is quite simple. It does take some willpower and some perseverance. However, if you start saving early enough for your retirement, it can be quite easy to have large retirement savings when you retire. The best part is that after a short while, you will not even miss the money you save each week from your paycheck. Just take 10% and put it in a savings account. Somewhere you cannot touch it for any reason until you retire. Let’s illustrate this with a couple of small examples.

If you were to start setting aside $100 a month until retirement at age 60, at an average of 7% interest rate, you would have $239k in your savings for retirement. If you retired at age 60 and lived until age 80, you would receive $22k per year. Not bad for just setting aside $100 per month!

We use this example to illustrate how easy it is to build up a retirement plan by saving a small amount each month. We go further by suggesting that a person should set aside 10% of their salary yearly for retirement. Ten percent is certainly affordable. Once you get used to being without the money, you do not even think about that 10% you are setting aside.

The Ten Percent Investment Plan Solution

Let’s assume that you make $50 thousand a year and are disciplined to set aside 10% or $5000 per year in your retirement savings plan. $5000 per year sounds like a lot, but it is only $416 monthly. You might have done without a car or some other convenience, but that should be an easy sacrifice to make your retirement comfortable.

So with our example, you will set aside an average of $5000 a year into a savings plan at an average of 7% interest rate until age 60. By the time you are age 60, you will have $998k or almost a million dollars saved. If you live for another 20 years until age 80, you can afford to draw $94k per year from your retirement plan. Wow, that is not too shabby! All for just setting aside 10% a year.

Some Issues to Consider – Ten Percent Investment Plan

Now some people will say that there is no way I can afford to set aside %5000 a year in my early 20s. True, our best earning years are later in life. However, if you always invest 10%, you may end up only setting aside $2k a year initially, but in later years as salaries increase, you may find that 10% means you are investing as much as $10k a year. This will more than make up for the difference in the beginning years.

Can you make an average of 7% return every year? Probably over the lifetime of your savings plan. You will make significantly less in some years, while in others, you will make significantly more. Based on past market statistics, it should average around 7% over the 40 years or even a bit higher.

But the government will tax me and take a lot of my earnings. This is true, and that is why you need to invest your money in a tax-free savings account ( Canada) or an RRSP ( Canada ), or a 401 K ( United States ). These accounts will let you build up your nest egg without being taxed by the government while saving for retirement. When you retire and begin withdrawing funds, you will be taxed at the tax rate commensurate with your total income.

This is Your Life. Take Care of Yourself

We have seen over the past decade that several really big companies have suffered badly or gone out of business. Also, the volatility of the markets has caused many retired or pre-retirement people to wonder if they will have enough money to be comfortable.

We have all learned that we must look after ourselves and not depend on our company or government to look after us. That means we must take responsibility for our savings investments and practice good savings techniques and strategies. This means we need to be involved with our investments.

Diversify

Be extremely careful and invest wisely. Avoid placing all of your investments in one place. If it is too good to be true, then it probably is. Just think about the recent Ponzi schemes that have come to light. Investors lost millions of dollars when the investment was too good to be true.

Diversify investments across multiple companies, diversify investments across multiple advisers, and then pump them for information to make decisions about the best approach for your investment strategy.

Summary

Invest 10% of your income every year into triple-A investments inside a tax-free account, diversify your investments, and avoid investments that sound too good. Start early in your life with your 10% plan, and in no time, you will have a nest egg that will help ensure your comfort during retirement.

Placing the 10% in your investment savings plan every year takes discipline. It also takes discipline not to touch this nest egg when you are short of money or need to buy a house.