Hub Blogs

Hub Blogs contains fresh contributions written by Financial Independence Hub staff or contributors that have not appeared elsewhere first, or have been modified or customized for the Hub by the original blogger. In contrast, Top Blogs shows links to the best external financial blogs around the world.

Retired Money: Seniors prefer term Guaranteed Lifetime Income to Annuities

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Annuities continue to get short shrift from those nearing or in Retirement, but if you describe them with a different label — like a Guaranteed Lifetime Income — they are viewed much more favourably, according to a study released Tuesday. I summarize the main results of the Canadian Guaranteed Lifetime Income Study in my latest MoneySense Retired Money column, which you can access by clicking on the highlighted headline: Guaranteed Income is a No Brainer: Just Don’t Call it an Annuity.

The study was conducted by Greenwald & Associates and CANNEX for two Canadian insurance companies, Great West Life and Sun Life in February with 1,003 Canadians aged 55 to 75 with financial assets of at least $100,000 (not counting a home. It found only 45% are highly confident they will be able to maintain their standard of living in retirement, assuming a life expectancy of 85.

I’d argue that the majority who ARE confident are probably the beneficiaries of employer-sponsored Defined Benefit pension plans, ideally the kind of inflation-indexed ones that many public servants enjoy. They are of course becoming much less common in the private sector.

This site and my various columns have long argued that, to paraphrase Pensionize Your Nest Egg co-author Moshe Milevsky, DB pensions and Government-provided equivalents like CPP and OAS can be regarded as REAL pensions, because they provide a guaranteed stream of income for as long as you live.

By contrast, investment portfolios comprising RRSPs, TFSAs, group RRSPs and Defined Contribution plans do not in themselves constitute the kind of “real” pension that Milevsky says should be one part of a diversified retirement income strategy. It’s up to retirees to convert their retirement nest eggs into real pensions and one of the most common ways to do this is to buy annuities.

Consider that investors hoping to live on RRSP/RRIF interest, dividends and capital gains have no guarantee their money will last as long as they will. With still-low interest rates and the possibility of stock-market losses, and the constant spectre of rising inflation, longevity risk and the possibility of outliving your money is a real concern.

The study lists several perceived positives and negatives of annuities and segregated funds. And it found the percentage of Canadians who rate GLI as a “highly valuable” supplement to government retirement sources like CPP and OAS has jumped from 60% in 2015 to 80% today.

Note too that Longevity and outliving savings is a particular concern for women, along with not being able to afford long-term care expenses. It’s a fact that women have longer life expectancies,  and the study shows their retirement worries are greater as a result.

Women more concerned about running out of money in old age

The study conducted by CANNEX and Greenwald & Associates found 34% of women are highly concerned about not being able to maintain their standard of living once they retire, compared to only 17% of men. Continue Reading…

Become a Mistress of Money this Mother’s Day

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By Heather Compton

Special to the Financial Independence Hub

There is a Mother’s Day gift I wish I had the power to give to all the women I love and even to women I’ve never met. I would give them the gift of a title and all the qualifications and knowledge to go with it – “mistress of financial affairs”. Now I must admit the English language gives the term “master” a much more powerful and commanding sound of authority than “mistress” but I want my gift infused with feminine, not masculine power.

What did you learn about money from your Mother? I’m so grateful to my Mom, a fiscally prudent depression era Scot. She lived to her late 90s and raised four daughters to take an active interest in managing their own financial lives. Mom was always a believer a woman should have money to call her own and she regularly squirreled away a few dollars from the household allowance provided by my Father. Yes, he was a man of his times.

The White Knight

In my years as a financial advisor I saw women too often abdicate responsibility for their financial life. They told themselves creative stories such as “I just don’t have a mind for that stuff and my husband, boyfriend, or father just does a better job”. Some singletons believed there was a white knight out there, just around the corner, who would arrive to change or improve their financial situation. Many were understandably exhausted with all the other work and household responsibilities they carried or they felt that if they managed the day to day bill paying they could leave the big-picture financial decisions to their partner. Please don’t do it – off-load laundry or cooking or toilet bowls – never money management. A “right relationship” with money is too important – and it’s never to late to acquire it

Pick a label

We women hold many titles or labels throughout our lifetime – this month, of course, the first to come to mind is mother but we may also be a daughter, sister, wife, friend, teacher, student, employee – the list goes on and on. Continue Reading…

Generation X feeling the Retirement squeeze

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Generation X, and to a lesser extent the Millennials, are already starting to feel the retirement squeeze, according to a Franklin Templeton-sponsored survey released Thursday.

Details are in my column in Friday’s Financial Post, which you can retrieve by clicking on the highlighted headline here: Generation X is ‘stretched beyond their financial limits’ and struggling to save for Retirement. 

The challenges should be familiar to members of any generation (four are mentioned in the survey): it’s never easy saving money when you’re starting out in life with low wages and high expenses. But Franklin Templeton cautions against the  rationalization embraced by younger investors that they simply can  choose to keep on working if they haven’t accumulated enough assets to generate adequate income in retirement.

That may not always be an option, since ill health or corporate downsizing (to mention just two) may prevent this. You can find full details about the fifth annual edition of Franklin Templeton Investments Canada’s 2018 Retirement Income Strategies and Expectations (RISE) survey here.

Stressed GenX resigned to retiring later than hoped

More than half of Gen Xers (aged 37 to 52) are resigned to retiring later than they would want (56% in Canada, 59% in the US). While the online survey included Canadians and Americans across four generations, “this year we felt in particular that Gen X and the stress of preparing for Retirement was the predominant thing coming out of the research,” said Matthew Williams, a Franklin Templeton senior vice president, in an interview.

Continue Reading…

5 common Mortgage mistakes made by first-time Homebuyers

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By Sean Cooper

Special to the Financial Independence Hub

Buying a home is an exciting time for first-time homebuyers. It’s also a busy time. Besides hiring a real estate agent, house hunting and finding time to get all your daily errands done, you’ll also need to find time to shop for a mortgage.

While it can be easy to treat your mortgage like an afterthought, by doing that you’re doing yourself a big disservice. Buying a home is most likely the single biggest financial transaction of your lifetime, so it’s important to give it the attention it deserves: that includes your mortgage.

Many first-time homebuyers shop for a mortgage based solely on the lowest mortgage rate, when there are so many other (more important) factors to consider. That’s just one of the common mistakes first-time homebuyers make. Let’s look at this and four more common mortgage mistakes to avoid.

Mistake #1: Skipping the Mortgage Preapproval

It’s hard to go house hunting if you don’t know how much you can afford to spend on a property. A mortgage preapproval helps you come up with a budget for the property you’d eventually like to buy. By providing your mortgage broker with some basic personal and financial information, such as your income, employment history and how much you’ve saved up towards a down payment, they’ll be able to take that information to the lender and get a mortgage preapproval. A mortgage preapproval tells you the maximum amount you can spend on a home. It also usually comes with a rate hold. You’re typically guaranteed a mortgage rate for between 90 and 120 days. If rates go up during this time, you’re guaranteed the lower rate. If rates go down, you get the lower rate. It’s a win-win situation for homebuyers.

Mistake #2: Shopping based solely on the Mortgage with the lowest rate

Many first-time homebuyers are fixated on getting the lowest mortgage rate:  too fixated. They use mortgage rate comparison websites to find the mortgage rate with the lowest rate, yet forget to consider other, more important factors. As I write in this post, the mortgage with the lowest rate may not be the best mortgage for you: quite often it’s not. It’s important to consider what I like to call the “3 mortgage P’s” – penalties, prepayments and portability. Of course, there are other factors to consider, such as fixed versus variable and standard versus collateral charges. Mortgage brokers know mortgages like the back of their hand since that’s all they deal with. A mortgage broker can help identify the factors that matter most to you and choose the mortgage that’s the best fit.

Mistake #3: Not considering other options besides the 5-Year Fixed Rate Mortgage

As Canadians we are very risk averse. Continue Reading…

A Canadian compromise on TFSA contribution room  

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By John De Goey

Special to the Financial Independence Hub

Canadians are notoriously nice consensus seekers.  The old joke might be that they tend to never cross the road because they consistently prefer to be in the middle.  If that’s the case, I’d like to propose a “Canadian” solution to the ongoing debate about how much should be allowed to contribute to their TFSAs annually.

You may recall that the limit is currently set at $5,500 and is likely to go up to $6,000 in a year or two (TFSA contributions are indexed to cumulative inflation and go up in $500 increments when thresholds are passed). You may also recall that for one brief year, the limit was set at $10,000 in keeping with a political promise made by a party that is no longer in power in Ottawa.  The debate, it seems has mostly revolved around the benefit of incremental tax relief for those who might not need it.

You may recall that I have argued that there is an unfair cap put on RRSP contributions because the 18% limit that applies to most people essentially penalizes the small percentage of Canadian income earners who make more than about $145,000 a year.  Similarly, some people like CIBC’s Jamie Golombek have pointed out that many Canadians are opposed to using RRSPs because they will end up paying tax down the road when making RRIF withdrawals.  The point made by Golombek* and others including yours truly is that people should be thinking about the concept of ‘tax bracket arbitrage’ when contributing to government plans. If you’re in a higher tax bracket now as compared to in retirement, contributing to your RRSP makes more sense.  If you’re in a lower bracket, the TFSA makes more sense.  If you think you’ll be in the same bracket, it makes no difference.

Continue Reading…