The 5 Financial Stages of Life

What financial stage are you in?

As we go through different stages in our lives, our financial goals will often change, sometimes dramatically. Where do you fit in this financial picture? Keep in mind, your goals may differ from the average person. For instance, you may decide to start a new business in the Early Career stage of your life. Or, you may decide to focus on travel during this time period, rather than purchasing large ticket items like a car or a house. In any case, mapping out your financial stages of life is a good start to recognizing and developing the goals that are important to you!

5 Financial Stages of Life

 

Need advice to help you reach your financial goals? Contact us at Your Neighbourhood Credit Union, where we making banking simple, personal, and friendly.

 

How to leave your bank and start a new relationship with a credit union in 5 simple steps

notepad, pen, glasses and cup of coffee

There’s never been a better time to switch from your bank to a credit union.

From ever-rising fees, to poor service, to criticism over aggressive sales practices, Canadian banks have come under heavy scrutiny in the past year. So what stops angry and frustrated bank customers from immediately closing up their bank accounts and embarking on a new relationship – with a credit union?

At YNCU, the number #1 reason we hear is ‘it’s too much work to switch.’ And the truth is it can be complex and time consuming. On the other hand, it can be a smooth and relatively painless experience. Much depends on attitude, as well as having an organized approach.

Here are some things to consider if you’re planning to switch your bank accounts:

Chequing and savings accounts

Your first step is shopping around and deciding where you are taking your business. Before closing out your bank account, open up a personal chequing or savings account at your new financial institution.

Remember to go through several monthly statements from your existing account since they’ll have nowhere to go once you close your old account.

Here’s a handy account switching checklist courtesy of Your Neighbourhood Credit Union.

Depending on your bank, you can close a chequing or savings account at a branch by phone or online. There is usually no fee to close a chequing or savings account. BMO charges a $20 fee if the account is closed within 90 days. CIBC charges a $20 fee to close and/or transfer accounts to other financial institutions. Royal Bank’s $20 fee is waived if you close the account in person.

Credit cards

Credit cards and bank accounts are independent of each other. So you can have a credit card with one financial institution and a bank account elsewhere. Cancelling a card can be done at a branch or by phone and should be effective immediately.

There is no fee to close a credit-card account. Of course, you still have to pay the outstanding balance, fees, carry-overs and interest.

Remember that pre-authorized payments set up on the credit card will no longer be processed, so you’ll need to provide billers with your new credit-card number.

calculator and banking statements

Personal loans

You will first need to decide which new personal-loan product you want and apply for it through your new lender.

Once you’ve qualified, you’ll need to notify your current lender in person and pay the balance plus interest either by cheque or debit at the time of closing, or your new financial institution can arrange to pay out the loan for you.

Mortgages

For a conventional mortgage, it’s a good idea to wait until the mortgage term matures to avoid paying penalties. But you should start looking at mortgage rates several months before your term ends.

Plan to give yourself several months before the renewal date to pre-qualify with a new lender (you can lock in a rate 90 days in advance of the renewal date). This lead time allows the financial institution to process your mortgage application, which requires a property appraisal for a fee and proof of income and employment. The lender also needs to do paperwork to get a payout statement from your current lender indicating the mortgage balance.

Banks will charge a discount fee of several hundred dollars to transfer the mortgage title to your new lender but credit unions will sometimes cover it (try to negotiate this!).

If you decide to transfer your mortgage before the term matures, you’ll have to pay a penalty. Your mortgage document will have the formula to help you estimate the amount. But your bank will tally the exact amount.

Remember to provide the new mortgage details to your home insurer.

Investments

You can hold your registered savings wherever you want, including those that are employer-matched. In addition to simplified record-keeping (one statement and one slip at tax time), consolidating your savings means you could get a better rate on higher balances.

To transfer registered investments, such as RRSPs, RIFs and TFSAs, you’ll need to meet with your new financial institution and bring your statements. Once you settle on the appropriate investment vehicle, the adviser will fill out a transfer authorization form, which will be sent to your bank to request the transfer.

There is a transfer-out fee per transfer. Since you’re a new customer, it’s worth asking your new financial institution to cover this fee.

The transfer process takes several weeks to complete.

If you hold non-registered investments, such as GICs or term deposits, it’s advisable to wait until the maturity date to transfer them to avoid penalties.

Source: Chu, Showwei. How to Break up with Your Bank. Special to The Globe and Mail. Published Thursday, Apr. 06, 2017.

Should you contribute to a RRSP or TFSA? (Part 2)

Hand drawing money sign, "Where to Invest"

TFSA vs RRSP?

Last month I talked about when to use the RRSP vs TFSA. This week I will touch on this topic further.

RRSP’s are optimized when you make contributions when your tax rate is high, with the strategy to withdraw these funds at a later date (like retirement) at a lower tax rate.

Let’s take a deeper dive into this.

Suppose you earn $75,000 per year today. Making a $1000 contribution this year will save you $296 in taxes (29.65% tax rate). When you retire and you have a smaller income (for example, $40,000), you will pay $200 in taxes (20% tax rate) on a $1,000 withdrawal.

This tax savings can be further magnified by the fact that your original $1000 contribution has gained value since it was initially purchased. (The ‘time value of money’ effect)

During retirement, seniors have the ability to split income, including pensions and RRSP/RRIF accounts once over age 65. This can generate significant tax savings.

So why a TFSA then?

TFSA’s are an additional option to help Canadians save that is tax deferred. If you are in a high marginal tax rate, you will want to utilize the RRSP first. If your tax rate is low now, and you expect it to be higher in retirement than it is today, a TFSA is your best option.

All things being equal, if your tax rate never changes from now into retirement, than it makes no difference which one you choose (at least from a tax planning perspective)

The following illustrates this point.

TFSA vs. RRSP

(Notice the after tax outcome after 20yrs is identical when tax rates stay the same)

Source: Investment Planning Counsel, http://www.deferthetax.ca/rrsp_vs_tfsa

 

I would caution you when looking at these options to ask yourself what the intended purpose is for these funds? Tax savings today do have consequences in the future. The TFSA offers tremendous liquidity and the ability to take funds out and re-contribute back in. Once you access funds from an RRSP you can’t re-contribute unless you have RRSP room available.

Although these plans don’t seem overly complicated, making the right decision on how to build them is critical to their success. Mastering the basics is a good start, but seeking the advice of a qualified Financial Planner/Advisor can make a big difference down the road.

Grant Galloway, CFP, CLU, CHS

Financial Planner

Myths about retirement – Part 2

family on beach

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.

 

Cheers

Grant Galloway, CFP, CLU, CHS

Financial Planner

Grant can be reached at ggalloway@yncu.com or at 519-579-7324 ext. 1 or 1-866-328-7324 Toll Free

 

 

Debunking Retirement Myths

young couple sitting on chairs on the beach

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  ggalloway@yncu.com