Tag Archives: Financial Independence

Retirement planning software and the 70% Rule

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By Ian Moyer

(Sponsor Content)

Individuals who are following conventional retirement-planning may be in disbelief as they approach retirement and discover that they cannot afford to retire just yet or are likely to outlive their retirement funds.

The 70% Rule

Common practice is to save enough so that your annual retirement income equals about 70% or more of your current income. Of course, many Canadians are not aware of such information entirely and have saved little or not enough for their retirement.

With this being said, there are still some fundamental issues with this understanding. One, few people have a complete understanding of their retirement resources or a realistic view of their retirement funds. In some cases, 70% retirement pay usually isn’t enough to sustain them in retirement.

Example

We’ll use the fictitious name Tom for this example. Tom is making $60,000 annually living a modest lifestyle. Tom will qualify for CPP and OAS. Tom only contributes through his employer-directed contribution program, which is $2500 a year.

Tom also saves $13,000 in a regular checking account, an additional $3,000 in non-registered savings and $12,000. Tom is a conservative investor and he thought he was doing pretty well saving what he can and living a modest lifestyle.

Using Cascades to do retirement planning at the age of 54 using the above figures. Tom discovers his annual income will only be approximately $38,250. After taxes per year. Going back to the common practice of 70% Tom needed minimum $42,000 per year as retirement income. This leaves Tom needing to find a way to make an additional $3750 a year. Tom would need a part-time job, choose not to retire or drastically change his lifestyle in retirement.

For a lot of individuals, they will have to work longer than they planned or seek part-time employment during retirement. This could be a problem for retirees and employers. In order to navigate this issue before it starts employers need to assist their employees with retirement planning.

Sample Cascades recommendations for maximizing an estate

How can we change this?

The first step would be for employers to become more effective at helping employees realistically prepare for and manage their retirement. For example, this could include a process or program to build up wealth accumulation prior to retirement, which could be a mix of LIRA, Capital Gains or RRSP just to name a few.

A second step would be for employees to change their behaviours and thoughts around retirement savings. Employees can make changes by becoming more proactive when it comes to saving. When some individuals think about saving for retirement after they attend school, buy a home, raise children and send them to college sometimes it can be too late. Continue Reading…

 How to improve the financial wellness of the Canadian workforce 

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By Jean-Philippe Provost, Mercer Canada 

Special to the Financial Independence Hub

For Canadians, wealth management and financial decisions can represent an endless source of stress: whether putting money aside for an important purchase, paying off debt, or saving for retirement. Increasingly, this stress is interfering with workplace health and productivity. 

A company’s most productive asset is their people: when employees are unhealthy, financially or physically, the organization as a whole suffers. Helping employees feel confident about wealth management matters and guiding them towards financial wellness is not just a nice to have: it is a need to have. A healthy workforce means a healthy company: and a healthy bottom line. 

The impacts of financial stress on the workforce 

At Mercer, we have spent years studying the workplace trends, the evolving realities and the challenges faced by workers in Canada. Our most recent research into Canadians’ financial wellness found that if employers help employees achieve financial wellness, they too will reap the rewards, in terms of increased productivity, reduced absenteeism and improved morale. 

For example, our study showed that financial and physical health are tightly intertwined. With only 39% of employees with a low level of financial wellness reporting being in excellent or very good health (compared to 81% at the highest level), it is easy to see how this impacts entire organizations. 

Additionally, employees who don’t feel financially confident also often spend much of their time worrying, including while at work and are also less likely to pay attention to the features of their workplace benefits and the importance of their employee compensation package. 

Employers can and should help their employees successfully manage the steps towards achieving financial confidence. Providing easy-to-access resources to help to their workforce secure retirement savings and manage investments can lead to greater employee satisfaction. It can also strengthen their employee value proposition and help to attract and retain talents. 

Reducing employees’ financial stresses 

The most effective resources should be flexible enough to help all levels of employees meet their financial goals and milestones throughout their careers. Continue Reading…

Retirement Planning in your 20s

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By Jenn Hamann

Special to the Financial Independence Hub

Young people are notoriously focused on the here and now. With their entire lives ahead of them, it’s easy for them to lose sight of how important it can be to plan for the future. This is especially true when it comes to retirement planning. The subject is far from exciting, but it can have a tremendous impact on your life as you get older. Failing to have enough retirement savings when you leave the workforce could make it much more difficult for you to enjoy your golden years.

At least you wouldn’t be alone. More than 40 per cent of millennials say they have not yet started saving for the future. The good news is that the sooner you start, the better off you’ll be when the day finally comes.

One of the most significant obstacles when it comes to millennial retirement savings is simply waiting too long to get started. Many younger workers don’t take full advantage of their employers’ 401(k) matching contributions, for example (in the U.S.; the Canadian equivalent are group RRSPs or Defined Contribution pension contributions). The simple math says that the earlier you begin, the more you potentially could have when you cash out your savings.

If you’re one of those who are convinced you still have time to ignore your future, think again. The adjacent infographic shares some sobering facts about the importance of financial planning, as well as some tips you can use to be more prepared.

Jenn Hamann is Executive Vice President of ToInsure.Me, a leading provider of auto, life and home insurance. She has more than 12 years of experience in the industry, and currently focuses on sales, managing, planning, coaching and retaining business. 

 

Mental Accounting and how we spend money

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We all have quirky behaviours when it comes to managing money. One trick we fall victim to is called mental accounting. We separate our money into different types of mental accounts, with different rules, depending upon how we get it, how we spend it, and how it makes us feel.

An easy example is when you have a fund set aside for something like a vacation or house down payment while at the same time carrying high-interest credit-card debt. Or how you decide to spend a $1,200 tax refund versus what you’d do with $100 per month if you had the right amount of tax coming off your paycheque in the first place.

I’m guilty of mental accounting every month when I budget $1,000 for groceries, $200 for dining out, $125 for clothing, and $75 for alcohol. I manipulate those mental accounts all the time, like when I overspend in one category and just take it out of another (shifting a meal from ‘dining’ to ‘entertainment’ for example).

The Mental Accounting challenge

Why do we assign money to these mental categories? One answer is to control how we think about it. If we were perfectly rational and could figure out the opportunity costs and complex trade-offs of every single financial transaction then it wouldn’t matter how we label our money: it would just come from a big pool called ‘our money.’ It’s just money, after all; totally fungible and interchangeable.

But because we’re human with cognitive limitations and emotions we need help with our money decisions. That’s where mental accounting comes in and acts as a useful shortcut for what decisions to make.

Another interesting way we classify our financial decisions has to do with the length of time between when we bought an item and when we consumed it.

Nobel Prize winner Richard Thaler studied wine purchases and consumption and found that advance purchases of wine are often thought of as investments. Months or years later, when the bottle is opened and consumed, the consumption feels free, as if no money was spent on wine that evening. Continue Reading…

CPP Payments: How much will you receive from Canada Pension Plan?

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Canada Pension Plan (CPP) benefits can make up a key portion of your income in retirement. Individuals receiving the maximum CPP payments at age 65 can expect to collect nearly $14,000 per year in benefits.

The amount of your CPP payments depends on two factors: how much you contributed, and how long you made contributions. Most don’t receive the maximum benefit. In fact, the average amount for new beneficiaries is just over $8,000 per year (as of March 2019).

CPP Payments 2019

The table below shows the monthly maximum CPP payment amounts for 2019, along with the average amount for new beneficiaries:

Type of pension or benefit Average amount for new beneficiaries (March 2019) Maximum payment amount (2019)
Retirement pension (at age 65) $679.16 $1,154.58
Disability benefit $980.24 $1,362.30
Survivor’s pension – younger than 65 $439.37 $626.63
Survivor’s pension – 65 and older $311.99 $692.75
Death benefit (one-time payment) $2,394.67 $2,500.00
Combined benefits
Combined survivor’s and retirement pension (at age 65) $869.86 $1,154.58
Combined survivor’s pension and disability benefit $1,096.12 $1,362.30

Now, you may not have a hot clue how much CPP you will receive in retirement, and that’s okay.

The good news is that the government does this calculation for you on an ongoing basis. This means that you can find out how much money the government would give you today, if you were already eligible to receive CPP. This information is available on your Canada Pension Plan Statement of Contribution. You can get your Statement of Contribution by logging into your My Service Canada Account, which – if you bank online with any of the major banks – is immediate.

Related: CRA My Account – How to check your tax information online

If you’d prefer to send your personal information by mail you can request a paper copy of your Statement of Contribution sent to you by calling 1.877.454.4051, or by printing out an Application for a Statement of Contributions from the Service Canada Website.

Note that the information available to you on your CPP Statement of Contribution may not reflect your actual CPP payments. That’s because it doesn’t factor in several variables that might affect the amount you’re entitled to receive (such as the child-rearing drop-out provision). The statement also assumes that you’re 65 today, which means that later years of higher or lower income that will affect the average lifetime earnings upon which your pension is based aren’t taken into consideration.

CPP is indexed to Inflation

Canada Pension Plan (CPP) rate increases are calculated once a year using the Consumer Price Index (CPI). The increases come into effect each January, and are legislated so that benefits keep up with the cost of living. The rate increase is the percentage change from one 12-month period to the previous 12-month period.

CPP payments were increased by 2.3 per cent in 2019, based on the average CPI from November 2017 to October 2018, divided by the average CPI from November 2016 to October 2017.

Note that if cost of living decreased over the 12-month period, the CPP payment amounts would not decrease, they’d stay at the same level as the previous year.

CPP Payment Dates

CPP payment dates are scheduled on a recurring basis a few days before the end of the month. This includes the CPP retirement pension and disability, children’s and survivor benefits. If you have signed up for direct deposit, payments will be automatically deposited in your bank account on these dates:

All CPP payment dates 2019

  • December 20, 2018
  • January 29, 2019
  • February 26, 2019
  • March 27, 2019
  • April 26, 2019
  • May 29, 2019
  • June 26, 2019
  • July 29, 2019
  • August 28, 2019
  • September 26, 2019
  • October 29, 2019
  • November 27, 2019
  • December 20, 2019

Why Don’t I Receive The CPP Maximum?

Only 6 per cent of CPP recipients receive the maximum payment amount, according to Employment and Social Development Canada. The average recipient receives just 59 per cent of the CPP maximum. With that in mind, it’s best to lower your CPP expectations when calculating your potential retirement income. Continue Reading…