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.

Better Retirement choices: An elegantly simple solution

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By Doug Dahmer

Special to the Financial Independence Hub

“Life,” philosopher Albert Camus contended, “is the sum of all your choices.”

Do you think otherwise?

Good or bad. Easy or hard. Right or wrong. Every choice you make will impact your life to some degree.

Choices with little impact are often made without much thought and the trouble is this casual approach to decision making tends to be deployed on bigger and more impactful choices.

In my profession, as a retirement income specialist, I see poorly made choices all the time. They, unfortunately, tend to be life altering, irreversible and totally avoidable. Like a doctor passing along a gloomy prognosis, I am heartbroken to see the look on peoples’ faces when I tell them how a choice they made will put them at a disadvantage for the rest of their lives.

And, as I said, many of these damaging financial choices are often avoidable.

 The Retirement Risk Zone Years (TRRZY)

The years leading up to, and the early years of retirement are packed with important choices that can create turning points in your life. We call this period of your life ‘The Retirement Risk Zone Years’ (TRRZY).

TRRZY has aptly earned this acronym because this phase of life contains the highest concentration of high-impact choices that can lead to turning events, both good and bad, in people’s lives.

It is important to recognize that the number and frequency of tough and important choices increases during this time. In addition, the implications of choosing poorly intensify as both time and flexibility have turned from friend to foe. Successfully creating your best possible retirement years is directly linked to how well you navigate the challenging choices of TRRZY.

Over this nearly two-decade period we must adapt our thinking to a new reality. Strategies that served us well during our savings years can turn on their heads and start to work to our disadvantage as our flow of funds reverses from saving to spending. Those who fail to recognize and adapt to this new thinking have a high propensity for making poor choices, many of which they will regret in future years.

Turning Points during “TRRZY”

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Retired Money: Everything you wanted to know about LIRAs but were afraid to ask

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We’re now well into RRSP season, as the last two days of Hub posts demonstrates. See RRSPs: getting past the contribution inertia (a guest blog by Sage Investors’ Aman Raina), and my latest FP article, reprised on the Hub as Why RRSPs are less critical for Millennials than for the Boomers.

Over at MoneySense, my latest Retired Money column has been published, and it looks at the closely related topic of LIRAs (Locked-in Retirement Accounts, which have been termed “the RRSP’s less flexible cousin.” You can find the full column by clicking on this highlighted headline: Unlocking the Mystery of LIRAs.

In a nutshell, LIRAs are also known in some provinces as Locked-in RRSPs, which is exactly what they are. Unlike regular RRSPs, from which you can withdraw funds (and pay tax) if you need it at any time, LIRAs generally prohibit you from making any withdrawals before 55. Granted, when you’re younger that prohibition — illustrated above as a locked piggy bank — may seem frustrating but the idea is to protect our future retired selves from our current “tempted to spend it all” current selves.

As TriDelta Financial wealth advisor Matthew Ardrey told me, you’re going to see a lot more about LIRAs in the coming years. Whether you’re leaving a classic Defined Benefit pension plan or a more market-tied Defined Contribution pension plan, the job market these days is in such flux that a lot of people are going to have to start learning about what happens when you leave an employer pension plan earlier than you might once have envisaged.

LIRAs will multiply as Boomers reach Findependence

In the case of leaving an employer that provided you with a DB pension, you’ll be getting a lump sum based on the so-called “Commuted Value” of the pension at the time you leave (whether voluntarily or due to corporate layoffs or restructuring). I suggest that those who value the certainty of future DB pension payments plan eventually to annuitize such plans, likely the end of the year you turn 71. Continue Reading…

Why RRSPs are less critical for Millennials than for the Boomers

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The TFSA and an expanded CPP means Millennials will depend less on RRSPs than the Boomers did

My contribution to the Financial Post’s first RRSP special report of the season can be found by clicking on this headline: For Boomers, the RRSP decision was easy but for Millennials, things are a little more complicated. The piece, which also appeared on page FP 10 of Wednesday’s print edition, recaps the three big advantages of RRSPs, articulated by regular Hub contributor Adrian Mastracci.

As baby boomers, both my wife and I have maximized contributions to our RRSPs almost from the moment we entered the workforce in the late ’70s (actually, in my case, only since 1984, when I rolled over a Defined Benefit pension into my first RRSP). And with no employer pension plan, my wife has continued to maximize her RRSP, to the point some of my sources tell me it’s time to stop, if we don’t wish to be subjected to onerous taxations and OAS clawbacks once we reach our 70s.

As for Millennials, the FP piece makes the argument that the Millennials enjoy two things the Boomers did not have for most of their investing careers: the Tax-free Savings Account (TFSAs, the Canadian equivalent of America’s Roth plans), and second, the newly expanded Canada Pension Plan or CPP.

As I noted in a Motley Fool special report in the fall, by the time the expanded CPP fully kicks in around the year 2065, someone who qualifies for maximum benefits and waits till 70 to receive them could get as much as $2,356 a month just from CPP, or $4,712 a month for a qualifying couple. Add in a giant untaxed TFSA and that might be all they’d need in retirement: assuming this high-saving couple maximized TFSA contributions at $5,500 a year (plus any inflation adjustments to come) from age 18 on.

To be sure, the eternal (well, eternal since TFSAs were introduced in 2009) question of TFSA, RRSP or both will depend on earning levels and tax brackets, which the FP article goes into in some depth. And it also bears mentioning that the TFSA advantage would be almost twice as compelling if the Liberal government had not acted to cut back on the $10,000 TFSA limit we enjoyed one year back to the current inflation-adjusted level of $5,500. So as it stands, high earners have roughly four times as much annual RRSP contribution room as they do for TFSAs, which is a pity.

The Hub looked at this last Friday, when another regular Hub contributor — certified financial planner Ed Rempel — performed a rigorous analysis. See TFSA or RRSP? The right answer for you. See also this nine-year-old tax expert’s analysis of the same topic that ran on the Hub in December: Baby Sitting and RRSPs: a 9-year-old’s rules for when to TFSA.

My personal inclination is to maximize BOTH the RRSP and TFSAs, which certainly should be possible if you’ve eliminated all forms of consumer debt. Most dual-income couples should be able to do both, in my view, although of course if one of them is taking temporary stints outside the workforce (perhaps for child-raising), income-splitting practices like using spousal RRSPs may make sense.

Motley Fool blog on possible ban of trailer commissions

For those who missed it week before last, you can find my latest Motley Fool blog on the Canadian Securities Administrators report on the possible ban of trailer commissions on various investment funds can be found here, under the headline Banning Trailer Commissions Could Give Canadian Investors a Wealth of Lower-Cost Products.

 

 

RRSPs — Getting past the contribution inertia

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By Aman Raina,  SageInvestors.ca

Special to the Financial Independence Hub

In the early part of the New Year we see, hear, and read a lot of messages regarding Registered Retirement Savings Plans (RRSPs). From every indication, they are important to have as a saving tool as we get older.

RRSP and Containers

Before getting to why it is important, a quick overview of the RRSP concept. The best way I can explain the concept of a Registered Retirement Savings Plan or RRSP, is that it is essentially a container. It can be a jar, a glass, a bathtub, anything that can hold something.

In terms of RRSP containers, I’ll keep this simple. You have several types to choose from:

Asset Specific RRSPs –can only hold a specific type of asset like a GIC or a mutual fund. You can hold multiple containers of Asset Specific RRSPs

Self-Directed RRSPs –can hold a variety of securities including individual stocks, bonds, ETFs, mutual funds, cash, GICs, Treasury Bills. They are much more flexible in terms of your options of what you want to put in your container. The banks and brokerages usually charge an annual fee for the privilege of using their containers, however if you have enough assets to put into the container or throw a lot of business there way, you can get it waived.

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Steps for saving Money in 2017

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By Barney Whistance

Special to the Financial Independence Hub

With a new year come new resolutions and new hopes. You hope to have a better life by maintaining good health, having emotional stability and making yourself stronger financially. All these tasks are achievable, provided that you have proper guidance and will power.

To end up with a lot of savings at the end of the year is no easy feat. Anyone faced with loans, taxes, and insurance payments would want to save some money at the end of the year. There are a few steps that can be taken to maximize your savings and lead you to a better retirement plan than now.

Car Insurance

If you have purchased a new car, it is worth having insurance against theft and accidents. But if your car has been in your possession for more than a 7-year period, it is better that you let go of that insurance. As the price of your car has already declined precipitously, it is no use insuring something that costs so much less. Your insurance will only add to the unwanted expenses since you could have most parts of it repaired for a lot less.

Food

Food is the basic necessity of every human. Studies have found that people in America spend at least an average of $151 on food in a week. Eating at home is far more economical and healthier than eating out. To contain your food budget, allot yourself a fixed amount for every week and see if you can manage within the budget. If you are still left with enough money, indulge yourself in eating out. Moreover, to save on your grocery purchases, you can buy in bulk from a supermarket, which can save you money. Be sure to buy only those items that you use excessively and have a long shelf life. Plan your shopping on the days the store is known to give discounts.

Energy Bills

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