All posts by Marie Engen

Retirement Planning for Late Starters

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We’re always hearing dire warnings about how woefully unprepared boomers are for retirement. An Ipsos-Reid survey done for CGA-Canada reports that 25% of their respondents have never made a savings contribution and 29% said they had no money left over to save after paying expenses.

So, what if you’re now in your 50s, still have a mortgage, and have a measly retirement fund? You held off with your savings for whatever reason and chances are you’re now thinking more about retirement and how you want to spend your time.

Related: A simple way to boost your retirement savings

What do you do now?

If you’ve arrived late to the retirement savings game then you have your work cut out for you. This is a critical time for retirement planning.

For many Canadians, their 50s are the peak earning years and they could still have 10 – 15 years left in the workplace.

Typically there is a decline in spending as many larger financial commitments are hopefully behind you, or are winding down. There should be a big push to optimize this and work to accumulate your nest egg. You’ll have to set aside more of your earnings and consider some cost-cutting options.

For most people, learning to spend less is about breaking bad habits. This may be the last shot you have to impose some meaningful discipline on your finances. Stop throwing away money on stuff you don’t really want or need.

Pay down high interest credit-card debt as soon as possible. Pay off your mortgage. Take the money spent on mortgage payments and providing for your children and whisk it away into your savings. You probably have loads of unused RRSP contribution room, which can generate huge tax returns.

Make the most of new money. Consider putting any bonuses, tax refunds or other lump sum payments directly into savings.

You may have to reduce your style of living. Consider downsizing to a less expensive-to-operate home. Tell grown children still living at home to start fending for themselves.

Basically – spend less.

If you and your spouse can do that for 10 – 15 years while earning average salaries or better, it should provide enough for a typical middle-class retirement.

Where do I start?

Figure out where you stand financially.

Assume you don’t sell your house and you receive $25,000 to $30,000 a year per couple from CPP/OAS and you have no employer pension.

Building flexibility into your Retirement Plan

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Prospective retirees want a simple formula for making their retirement plan. There are hundreds of calculators that will crank out numbers showing how many years until you can retire, how much you need to save, and how long your money will last. It’s a good place to start, but don’t stake your entire future on the results.

You spend decades preparing for a comfortable retirement, planning to spend time playing golf or travelling the world. But, if a financial disaster strikes, those dreams may not translate into reality. Unexpected financial crises that disrupt savings are far more common than anticipated.

If your retirement plan only works as long as nothing goes seriously wrong, you are not properly prepared for retirement. It’s important to plan ahead. Knowing how you will handle certain crises can go a long way toward minimizing the financial fallout.

What kind of surprises can derail a retirement plan?

They can include:

  • Lost income.
  • Providing financial support to an adult family member.
  • Paying significant health care costs for yourself or a family member.
  • Divorce or loss of spouse.
  • Investment underperformance, or investment fraud.
  • Unanticipated major home repairs, especially after a natural disaster.
  • Changes in tax rates and legislation.

Let’s look at three situations that can derail your financial plan.

1.) Unpredicted early retirement

How would your retirement plan be impacted if you lost your job due to company downsizing? Do you have the marketability to find comparable employment elsewhere in a reasonable amount of time? Would you receive the same salary, or be forced to accept a lesser amount?

Lost income might be due to forced retirement for health reasons.

Not only would there be loss of income, you might have to dip into your savings earlier than expected. There could be expensive medical costs not covered by your provincial health plan.

2.) Providing financial support to family members

People over the age of 50 have the opportunity to beef up their retirement accounts with additional contributions. What if your child is forced to return home and/or require financial support due to a job loss, divorce, or health crisis? There may not be room in the budget to make those catch-up contributions.

As life expectancies increase, aging parents may require some expensive medical support or long-term care.

A lot of people currently care for two generations of family members.

3.) Investing challenges

Key investment objectives for retires are income and preservation of capital. Liquidity is important. Growth as well.

Investment challenges facing retirees include: Continue Reading…

Generating Retirement cash flow from your Investments

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Once you stop working your objective shifts from growing your investment portfolio to generating income from it. Many retirees obsess over generating enough retirement cash flow from their investments. They prefer a predictable stream of income to partially replace their previous salary income.

Here are some strategies for getting cash flow from your retirement portfolio:

1.) Income only

This option is popular with retirees who want to maintain the value of their assets. Using this strategy, the retiree subsists on whatever income their bond and stock holdings generate.

Pros: As it doesn’t involve tapping into principal, this approach provides some insurance that a retiree won’t outlive assets. Investors tend to be more relaxed with short-term market volatility while receiving regular payouts.

Cons: Days are long gone where you could buy GICs and bonds yielding a safe 10 or 12%. Retirees in the 1990s were dismayed to see the interest on renewals drop from double-digit to mid-single digit rates, and now you may not get much more than 2%.

More investors are leaning towards dividend-paying stocks. A basket of dividend-paying stocks might generate 3% or 4% without taking on too much risk. Given these current low returns, the securities in a portfolio may have trouble generating a livable yield. Depending on your income requirements, you’ll likely need quite a large amount of invested capital to generate the income you desire.

Related: Why Living Off The Dividends No Longer Appeals To Me

Be careful when hunting for yield. Dividends are not guaranteed. Changes to a company’s dividend policy could occasionally result in payouts being reduced or eliminated altogether.

In reality, most investors will need to dip into their principal anyway to meet unexpected large expenses.

2.) Total return strategy

Here, retirees reinvest all income, dividends and capital gains back into their holdings at their target allocation after taking the amount they need for annual living expenses.

Pros: By rebalancing, it forces the investor to sell appreciated assets on a regular basis while leaving underperforming assets in place, or adding to them.

Cons: If there is a prolonged market downturn, withdrawals can drastically erode capital and reduce future return potential. That argues for holding a comfortable cushion of at least 3 –5 years worth of living expenses in liquid form – cash or cash alternatives. Continue Reading…

Is fear keeping you out of the stock market?

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The biggest concern for many investors is the fear of losing their money. The stock markets have shown some volatility the last few weeks, and the recent screaming headlines in the financial media do nothing but encourage panic.

Some people think the latest bull market has overvalued stocks and a major market meltdown is imminent. They are sitting on their cash and waiting for the right entry point.

According to a BlackRock survey, 70% of adults aged 25 to 36 are also clinging to cash assets. Apparently, these Millennials don’t have much trust in the stock market and are afraid of another large market crash. This puts them at risk of not having enough saved to enjoy a comfortable retirement.

It’s true. Investing in equities does carry risks. Market corrections (drop of about 10%) are common. Bear markets (drop of 20% or more) will likely occur during an investor’s lifetime.

Even a reasonably diversified portfolio of stocks lost about half of its value during the 2008-2009 market crash. However, avoiding equities completely isn’t the best strategy. The stock market can be good to investors who have the discipline.

What can you do to get over your stock market fears?

1.) Educate yourself

Combat your fears with knowledge. Learn the basics: how the markets work so you can prepare yourself for future market conditions. The more you know, the less afraid you become, but avoid information overload.

Stop reading the gloom and doom reports in the financial media. Your financial education should not come from the news media. They need something to report and tend to sensationalize short-term market events to grab our attention. Just because something appears in print doesn’t guarantee that the information is correct. Look for reliable sources.

Investing magazines and books can provide useful information.

Knowledge is freely available on the Internet. Basic investing information is available at sites like Get Smarter About Money and Canadian Securities Administrators. Some social media sites, forums and financial blogs are worthwhile if written by knowledgeable authors.

Lack of confidence and second guessing yourself can paralyze your decision making. If you’re afraid of picking the wrong investments, turn to a professional for help. You could also try one of the many well-publicized model portfolios that have yielded good returns.

2.) Take a long-term investing approach

The biggest fear of investing is losing a lot of money in a short period of time.

Investing is a long-term process and is most likely your only way to reach your long-term financial goals.

Consider the benefit of investing sooner rather than later. Time is on your side.

Don’t keep monitoring your portfolio. This is psychologically hard, but don’t let short-term losses bother you too much. No one likes losing money, but it will be temporary. You’re not going to need this money to survive tomorrow, or next month, will you?

Acknowledge short-term market risks, but trust in long-term historical gains and commit to long-term investments. Continue Reading…

Creating retirement income: a Fixed Payment Strategy

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Once you stop working you may want to simplify your investment strategy. Your objective shifts from growing your investment portfolio to generating income. Flat and unpredictable markets, combined with historically low interest rates, can make this a challenging time in terms of creating retirement income.

One idea for creating a reasonably consistent level of monthly income is with a Monthly Income Fund. These funds have been around for quite some time. They hold a variety of government, municipal and corporate bonds, preferred shares and dividend stocks, and the payments come from a combination of interest and dividends, and sometimes, return of capital.

With these investments, cash flow is based on the number of units you own, not on the market value of the assets.

In non-registered accounts, the distributions can be more tax efficient than interest earned on GICs and bonds. However, keep in mind that there can also be taxable distributions in December (just as in other mutual funds) in addition to the monthly payout amounts.

Comparison of monthly income funds

Monthly income funds are sold by Canadian banks and mutual fund companies, and are also available in ETF versions.

The following chart is a comparison of some funds sold by Canadian banks as well as two popular ETFs. Continue Reading…