Did you know that according to the Financial Consumer Agency of Canada, less than half (46%) of Canadians have a budget, yet the vast majority (93%) of those who do budget stay within it most of the time. What does this mean for you? It means that if you put in the effort to start a budget, you will probably stick to it. It also means you can feel more confident about your future – a budget can completely change your financial destiny.
Last week I talked about some of the common myths of retirement, here is a continuation of some of those myths.
Myth #4 – Never touch your capital.
Conventional thinking and approaches often work on keeping your assets intact. That may work for the wealthy, whose investments generate plenty of cash flow so that they can preserve their capital for their children and grandchildren.
For the rest of us, it’s okay to spend your capital as a way of providing lifetime income. While saving may be a goal in itself during your working years, plan on an orderly spending of what you have saved during retirement. Isn’t that what you planned? It really is okay to spend your capital. That’s what it is there for.
The idea for many is to spend down in retirement. That’s why you save. Work with a retirement income planner on ensuring that you have enough capital to provide you with the cash flow you need no matter what happens; no matter how long you live. Look at alternatives to provide legacies for children and favourite causes while giving you the cash flow you’ll need.
Myth #5 – You need 70 to 85 percent of your current income level in retirement.
A growing number of analysts and researchers on retirement income and spending patterns have found that most people will be fine if they target 50% of their pre-retirement earnings. Statistics Canada has many years of supporting data on this.
You see, the focus should be on consumption dollars, what you spend on yourselves and your own lifestyle. For most Canadians, that excludes mortgages, child rearing costs and saving for retirement – things you wouldn’t necessarily be spending money on during retirement. You will need 100% of your consumption dollars and some extra money in the early, active years of retirement for those special trips and experiences you have dreamed about for years. Your actual replacement income goal will depend on your marital status, whether you own a home, whether you have children and how much money you earn, so the range can go from 40 to 60 percent.
Working with an advisor trained in the unique field of retirement income planning can prove greatly beneficial in order to work out what you need and what you want to do throughout the various phases of your retirement.
Myth #6 – You need that initial level of retirement income, indexed for the rest of your life.
I’m sure you can come up with a list of things that don’t fit the “set it and forget it” philosophy. Set the cruise control and forget it. Set the room temperature and forget it. Invest in a certain investment that has a particular risk associated with it and forget it. You need to make adjustments as the situation changes, as your needs and priorities change. Retirement income planning works like that.
Retirement isn’t one long vacation. It isn’t one period in your life. It represents the longest set of phases in your life. Each phase will have different needs for cash flow.
You’ll need more money in your early, active years. You then settle down to a more normal retirement where expenses drop. Then late in life, poor health, the loss of your spouse or partner, losing your driving license and your attitude and behaviours may cause you to spend even less money.
Yes, you may require money for long term care needs, but hopefully you planned for that before your retirement so that those needs aren’t coming out of your regular cash flow late in life. The amount of money you’ll need and the most efficient means of getting are important points you should review yearly. Set up an investment and income stream that is flexible and adaptable to changing circumstances. Stress test the plans, strategies and components to make sure they continue to do the job they were designed to do. Life changes and your needs for income will change with them.
Grant Galloway, CFP, CLU, CHS
Grant can be reached at firstname.lastname@example.org or at 519-579-7324 ext. 1 or 1-866-328-7324 Toll Free
Wouldn’t it be great if your retirement could feel like your last vacation? It can, with proper planning and a strong discipline!
We are experiencing a silver Tsunami. The leading edge of the Boomers turned 65 six years ago. On average, 1,250 Canadians turn 65 years old every single day. Most Boomers were born between 1961 -1965. That’s why you feel everyone has been turning 50. And people are living longer, much longer.
With all of this happening, it’s small wonder that the media, politicians and the financial services business are all talking about retirement. That kind of focus may be good, because of what it means for savings habits and pressures on goods and services.
There are a lot of myths we have to be wary of if we want to ensure we have an adequate retirement income that lasts a lifetime.
Myth #1 – Retirement planning is just for older people
The definition of retirement is changing and even though it may seem like a long way off, use that to your advantage. Much like dieting and exercising, starting a plan and sticking to said plan are the hard parts.
Every little bit of savings helps and will make it easier, if you start early enough. Harness the power of compound interest where planning and saving a little now on a regular basis can let money work for you: 24 hours a day, seven days a week…for decades. Your money seems to grow slowly at first then starts to balloon as you get older, even if you put in the same amount of money.
Every year you delay means you’ll need to save more money and perhaps take on more investment risk in order to reach your goals.
Myth #2 – I’ll never be able to save enough for retirement
It’s surprising, even shocking, that with all of the attention devoted to an aging society and the need to save for retirement, that so few people are inspired to get started. Many do have a doom and gloom attitude about retirement. Myths aren’t helping matters.
“I’ll never be able to save enough for retirement.” That may seem true when you’re young, starting a family, paying off those school debts and dealing with a mortgage. Instead, you figure your income will go up in the future and you’ll work on developing your money management skills and habits then.
Don’t fall into the trap of thinking it’ll be easier to save for retirement in just a few more years. After all, there are competing and expensive needs no matter how old you are.
First you pay off your college debt and the next thing you know, you’re helping your kids pay off theirs. Then there is the house, wedding expenses, home renovations, grandkids and the list goes on and on. One day you’ll stop and ask yourself, ‘Where did the time go?’
Every year you delay starting to save ultimately means you’ll need to save more in order to get on track for a retirement that’s getting closer and closer.
The best time to start saving for retirement is when you are young and just starting to work. But if things just didn’t work out that way for you, then consider starting now. Let the power of compound interest work for you as long as possible.
Myth #3 – I need $500K, $1M, $2M to retire
The fact is that your “number” can vary greatly depending on your personal situation and goals, how long you expect to live, whether you will be single or with a spouse/partner and when you will retire.
Consider asking an advisor who specializes in retirement planning, or better yet, retirement income planning!
Consider trying some of the tools available from trusted sites produced by large financial institutions. And don’t forget government benefits like the Canada or Quebec Pension Plan (CPP/QPP) and Old Age Security. If you want to maintain the same lifestyle before and after retirement, your number is tied to how much income you will need to provide the same consumption dollars. That’s the money you normally spend on your own lifestyle. Add some extras to that bucket list of yours for those early years of retirement when you will be most active and spend more money.
Grant Galloway, CFP, CLU, CHS
Grant can be reached at email@example.com
So – it’s official! My wife, Melissa and I have moved into our new house – and we’re loving it. To continue on my home-buying theme, I thought it was important to talk about how we prepared ourselves for the move and share tips to alleviate some of the stresses.
I’ll start with a common-sense concept – being organized. Try as hard as you may to be ready, things are going to fall through the cracks. For us, there were a few unexpected hiccups along the way.
A month before our moving date – I contacted truck rental companies to arrange a moving truck. Melissa and I had decided that we could handle one last DIY move. Given the timing of the year (end of June); many rental companies were unable to provide us with the equipment that we needed. Thankfully, there are a number of options in the KW area. Make sure you have this arranged sooner rather than later – best advice: once you know your moving date, call for movers or equipment right away!
At that one month mark – you should also make it a priority to finalize everything with your Mortgage lender. Make sure they have all the confirmations they asked for (paystubs, ID, confirmation of down payment, purchase agreements etc.); and arrange a time to sign your documents. If possible, ask your lender to mail your copies to the new house after closing so they don’t get lost amongst your other boxes and personal effects.
About two weeks prior to our closing date, I followed-up with the lawyer to make sure we were ready to sign our paperwork. Unfortunately for us, the office we intended to use was at capacity and couldn’t help us out. We were in a bit of a panic to find a new law office – but it all worked out. My advice, contact your lawyer about a month before your closing date; do not leave this to the last minute! Your real estate lawyer must go through a series of pre-work items before you sign – the more time you can give them, the better!
The week before our move date, we started packing. This was plenty of time to get our boxes organized, labelled and arranged; it also gave us a little bit of time to purge items we no longer wanted or needed. This is key! Move only what you want to move – the extra set of golf clubs you’ve been holding onto for years are ready to find a new forever home.
If you are employing the moving services of family and friends, it’s best to be in touch with them a few days prior to the moving day. Confirm when and where they should arrive, if you need them to bring anything (ex. dollies, tie-downs, tools, blankets etc.), and give them a rough estimate of the time they are needed for. Despite my best efforts, I had two of my five helpers back out. Knowing this in advance of the actual move date really helped ease the anxiety.
On moving day, make sure you keep your necessities accessible. You’re going to want to have cash, phone chargers, coolers, food, medication, a first aid kit, disposable plates/cups and garbage bags at the ready. Melissa and I made sure that both locations and vehicles had supplies in them. This kept us from having to run out to the corner or grocery store for anything on moving day.
If you have pets – you should consider leaving them with a family member, friend or boarding them for the day. Our dog Ollie wasn’t an exception to the rule – he’s very well-behaved and always tries to be helpful, but his involvement wasn’t necessary. So, he went to stay with Grandma for the day.
Lastly, I would strongly recommend that you focus on keeping things simple. I did not… I had booked an appliance delivery and cable installation on the moving day. In hindsight, it just complicated things – it meant I had to work around the schedules of others more than I wanted to. Yes, it was nice to have the WiFi ready on day 1; but it really wasn’t necessary. The fridge, stove and dishwasher didn’t get hooked up until later in the week, so having them take up room was really no benefit to me. Focus on what’s important, get everything to the new location without damaging it; and keep your moving team (and yourself) comfortable, happy and safe.
Remember, Rome wasn’t built in a day – and no one expects your house to look like it belongs on the cover of a magazine while you are moving in.
For more information about moving and the home buying process – check out CMHC’s website: https://www.cmhc-schl.gc.ca/en/co/buho/hostst/index.cfm
Recently, we discussed things you need to be aware of when buying a home – I want to talk specifically about the various options to building your savings for the all-important down payment.
Let’s say you’re a young adult, just establishing your savings plan – with the ultimate goal of, one day, owning a home. The minimum requirement for a down payment is 5% (*The minimum down payment requirement for mortgage loan insurance depends on the purchase price of the home. For a purchase price of $500,000 or less, the minimum down payment is 5%. When the purchase price is above $500,000, the minimum down payment is 5% for the first $500,000 and 10% for the remaining portion. Mortgage loan insurance is available only for properties with a purchase price or as-improved/renovated value below $1,000,000), with Canada Mortgage and Housing Corporation (CMHC) insuring your Mortgage.
There are a few ways of going about saving this money – I’d recommend using a Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA). Each have unique costs and benefits.
RRSP Savings and the Home Buyers Plan – If you are currently, or have considered contributing to an RRSP, there is a program designed to allow you to withdraw up to $25,000 from the plan (without penalty) to put towards a down payment. The plan requires that you repay the amount back to the plan, just as if you borrowed it. If you don’t make repayments over the allowed 15 year period, you would claim 1/15th of the withdrawal as income in the given tax year.
What I like best about this strategy is, you take advantage of your smart investment moves and open an opportunity for another investment. This plays very well into long-term building of your net worth and, if your employer is making matching contributions to your RRSP, you can quickly build up your savings balance.
Running short on your RRSP contributions? It might be worth considering an RRSP investment loan to catch up on unused contribution room. The increased contributions can drastically reduce your taxable income and yield a larger tax refund.
A really smart move would be to contribute that tax refund to your loan – or, contribute the refund to your RRSP’s.
More information on the Home Buyers Plan can be found on the Canada Revenue Agency website: http://www.cra-arc.gc.ca/hbp/
Tax-Free Savings – Similarly to RRSP’s the interest earned on any deposits in your TFSA are exempt from taxation – meaning, your hard earned dollars will receive interest and you will not need to claim the returns as income. Withdrawals from the plan are very simple – there are no penalties, and the funds can move freely from the plan to your down payment without filling out any extra paperwork.
You cannot, however re-contribute the money taken from the TFSA until the following calendar year. And, there is no additional tax benefit for contributing money to your TFSA.
While the TFSA is a great investment vehicle for short or long-term investing; I am of the firm belief that, when it comes to down payments for first time buyers – it’s best to take advantage of the Home Buyers Plan mentioned above.
So, you may be asking yourself, what if I don’t have an RRSP or a TFSA and I’m not very good about saving money – what else could I do?
Well, some Mortgage companies, Banks and Credit Unions will offer a personal loan for your down payment – but I’d caution against this. In addition to making payments for the Mortgage, Property taxes, heat/utilities, insurance – you’re also going to have to make an additional loan payment. If your budget can sustain this – by all means, it’s worth looking into further.
Alternatively, you could also venture in the direction of having a gifted down payment from a family member or really good friend (and trust me, they’d be a very good friend if they are willing to give you money to buy a house). This is becoming more of a norm in the home buying market. With house prices rapidly increasing in the region, you may feel like you’ll be playing a game of cat and mouse – your savings grows, but the price of housing grows too. So, sometimes having Mom and Dad or a grandparent help out, is a great hand up.
Here are some great links to CMHC’s website for more information and tools:
CMHC – Homebuying Step by Step: http://www.cmhc.ca/en/co/buho/hostst/index.cfm
CMHC – Ready, Set, Home App: http://www.cmhc.ca/en/co/buho/buho_018.cfm
** Ready Set Home is a tool to help homebuyers, especially first-time homebuyers, make informed choices when buying a home. Ready Set Home offers tools to guide you to figure out how much you can comfortably afford to spend as well as keep track of all the details during your home buying process.
CMHC offers Purchase Plus Improvements program
My recent blogs have focused on purchasing and building new homes. I wanted to pause, re-focus and tackle a topic that is near and dear to my past: buying a house and renovating. I’m going to focus on, specifically, borrowing to accomplish both goals.
First, let me take a moment and explain a little. Typically, you buy a house – you scrimp and save for a down payment, and whatever savings is left you allocate this to your renovation; or maybe you dip into your personal line of credit; or, maybe you apply for a Home Depot/Lowes Department Card. Both seem to be the typical approach to buying and renovating. Though, I propose that there is an easier way to go about this whole project.
I talk a lot about CMHC (Canada Mortgage and Housing Corporation) – they are the folks who insure Mortgages with less than 20% down. They have programs for green financing, new to Canada purchasers, rental properties, vacation/secondary properties – but they also have a fantastic program for renovations. The program is called “Purchase plus improvements” and it deals specifically with Mortgages where the renovation budget is rolled into the balance of the purchase loan.
So, let’s pump the brakes a little here and talk about the reason behind the program. We know that as years go on, home fashions change, home systems age and become less efficient and there just aren’t enough builders and land to be building new homes. If you’ve ever spent a rainy afternoon watching HGTV or the DIY network – you’ll see that renovating a property can significantly change the look and value of the home; and taking this route is becoming more and more popular.
CMHC recognized a shift in the market – there are homes in desirable neighbourhoods that aren’t as desirable as they once were – so they created a program whereby the purchasers are able to finance their renovation project into the balance of their Mortgage. The work these buyers undertake will improve the market value – and CMHC approves the loan to be in excess of the purchase price, but in line with the return on equity with renovations.
Here’s an example of a purchase plus improvements loan we recently completed (names and addresses have been replaced with fictitious ones)
Buyers: John and Mary Smith
Address: 111 Neighbourhood Avenue, Kitchener
Purchase Price: $300,000 Renovation Budget: $30,000
Down Payment: $16,500 (5% down + 5% of renovation budget)
Renovation plans: Remodel main bathroom, paint interior of entire home, replace air conditioner, build deck and replace main level flooring with hardwood
Improved Value: $330,000
Total Loan (net of CMHC Premiums): $313,500
$285,000 for purchase of 111 Neighbourhood Avenue
$28,500 for renovations
Because John and Mary included the renovations in their Mortgage – they avoided having to pull more funds from their savings or borrowing this money from a personal line of credit. They were able to realize the potential of this home by fixing up some of its needs – and now they have the house exactly as they wished. The pre-work they invested into researching the renovation paid off big in the end.
More information pertaining to the CMHC program can be found on their website:
Wondered where to get the biggest bang for your buck on renovations? Here are some great resources:
Kathy McCleary – HGTV: http://www.hgtv.com/design/decorating/clean-and-organize/which-home-improvements-pay-off
Scott McGillivray – HGTV: http://www.hgtv.ca/incomeproperty/article/top-5-renos-for-return-on-investment/
Mike Holmes – HGTV: http://www.hgtv.ca/holmesinspection/article/where-to-put-your-reno-dollars/
I would consider myself to be environmentally conscious – I recycle, use the green bin and try to keep as much garbage out of our landfills as possible. But owning a home and being green goes beyond just what you put out at the curb every week.
When working with our builder, we talked a lot about resource consumption (water, electricity and natural gas), so we’ve elected for a high efficiency gas furnace, heat recovery ventilator, on-demand hot water heater, energy efficient windows & doors, spray foam insulation. During my research I found some great resources and incentives that are worthwhile looking into further.
First, Canada Mortgage and Housing Corporation takes energy efficient homes seriously – so much so, that they offer a 10% refund on your CMHC premiums if your home qualifies under the Energy Star guidelines. Not only will you save money on your utility bills – but, take that refund and apply it back to your mortgage as a principal payment – over 25 years you will save hundreds in interest costs and pay your Mortgage off sooner, it’s a win-win situation!
Let’s say you aren’t building a brand new home, have you ever considered having an energy audit done on your current home?
At our last house, we did. What an eye opening experience that was!
The audit revealed where the house excelled from resource consumption and where there were areas for opportunity. We had some windows and a sliding glass door that were identified as potential leak areas, and we needed to replace a mid-efficiency furnace – these were more major expenses, however, we also noticed some inexpensive fixes: silicone replacement, receptacle insulation, programmable thermostat, energy star light bulbs, low flush toilets, flashing repairs and door seals.
We did a number of high return repairs and improved our initial score from adequately efficient to most energy efficient. The investment we made in our home went beyond the obvious electricity and natural gas savings – it helped us market our home to interested buyers, and reduced our greenhouse gas emissions by 0.6 tonnes per year.
If you have been considering ways to go green here are some great resources for more information:
Home Energy Efficiency – Natural Resources Canada: http://www.nrcan.gc.ca/energy/efficiency/housing
Green Housing – CMHC: http://www.cmhc.ca/en/co/grho/index.cfm
CMHC Green Home Rebate: http://www.cmhc.ca/en/co/moloin/moloin_008.cfm
Energy Audit Information – Barrier Sciences Group: http://www.barriersciences.com/services