Tag Archives: retirement savings

The Rule of 30

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By Michael J. Wiener

Special to the Findependence Hub

Frederick Vettese has written good books for Canadians who are retired or near retirement.  His latest, The Rule of 30, is for Canadians still more than a decade from retirement.

He observes that your ability to save for retirement varies over time, so it doesn’t make sense to try to save some fixed percentage of your income throughout your working life.  He lays out a set of rules for how much you should save using what he calls “The Rule of 30.”

Vettese’s Rule of 30 is that Canadians should save 30% of their income toward retirement minus mortgage payments or rent and “extraordinary, short-term, necessary expenses, like daycare.”  The idea is for young people to save less when they’re under the pressure of child care costs and housing payments.  The author goes through a number of simulations to test how his rule would perform in different circumstances.  He is careful to base these simulations on reasonable assumptions.

My approach is to count anything as savings if it increases net worth.  So, student loan and mortgage payments would count to the extent that they reduce the inflation-adjusted loan balances.  I count contributions into employer pensions and savings plans.  I like to count CPP contributions and an estimate of OAS contributions made on my behalf as well.  The main purpose of counting CPP and OAS is to take into account the fact that lower income people don’t need to save as high a percentage of their income as those with higher incomes because CPP and OAS will cover a higher percentage of their retirement needs. Continue Reading…

Boosting Retirement Savings during your final Working years

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BoomerandEcho.com

Whether you’re a late starter or seasoned saver, the five years or so leading up to retirement might be the most crucial time to get your finances in order. Here’s how to take advantage of your final working years.

Most retirement readiness checklists suggest your final working years is a time to double-down on retirement savings. The idea being that major financial burdens, such as paying down the mortgage and raising children, should be behind you and those savings can be parlayed into big contributions to your retirement nest egg.

High-income earners should look to their unused RRSP contribution room and contribute as much as possible in their final working years. This has the added benefit of generating big tax returns, which can be reinvested into your RRSP or used to pay down any outstanding debts.

Procrastinators have a final chance to break any bad spending habits and set their finances straight. The first step is to draw up a financial plan. Make it a top priority to pay down any remaining debt and get spending under control. You should then have a rough idea when debt-freedom is in sight and from there decide how long to continue working to meet your retirement savings goals.

Retirement income target

The often-used retirement income target is 70% of your final pay, meaning if you earned a $100,000 salary in your final working years then you should aim for a retirement income goal of $70,000 per year. But a more realistic retirement income target may be closer to 50%.

Regardless, you’ll need to find YOUR retirement number and determine whether you can reach your income goals through some combination of workplace pension, personal savings (RRSP, TFSA, non-registered investments), CPP, OAS, and/or GIS.

Piecing that puzzle together takes a lot of planning (and still plenty of guess work). No wonder choosing a retirement date can seem like such a daunting challenge!

Taking advantage of your final working years

According to a Tangerine survey, one-quarter of Canadians nearing retirement age don’t understand how their personal finances will work in retirement. I think that number may be understated.

With that worrying statistic in mind, here’s a retirement planning checklist for your final working years:

1. Determine where you stand – Take stock of your current financial situation by listing your assets and liabilities and analyzing your current income and expenses. Identify any opportunities to save more.

2. Define future needs – How will your expenses vary in retirement? Remember, you’ll no longer be paying into programs like CPP and EI, but your retirement bucket list might need to include money for travel and new hobbies. Add up your expected CPP payments and OAS benefits, plus any workplace pension plans, and determine the gap between your income and expenses. That gap will need to be filled from your personal savings.

3. Ramp up savings – Take advantage of unused RRSP or TFSA contribution room and boost your retirement savings into overdrive. Your final working years are a chance to make up for lost time; make sure to maximize your full employment income to have the most impact on your retirement savings. Continue Reading…

Should you roll the dice with your retirement savings?

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By Dale Roberts, Cutthecrapinvesting

Special to the Financial Independence Hub

You’ve worked for decades to build your retirement nest egg. You have invested smartly. The investment portfolio is required to fund a significant portion of your retirement years. In fact, you need those monies to last for many decades. Should you invest in an all-stock portfolio? That approach might deliver greater income than the traditional stock and bond portfolio.

Yup. More stocks might deliver more growth. No one can deny that stocks are the growth engine of a portfolio. When we own stocks we become business owners and we share in the success (or failure) of those companies. In the past, owning a big basket of market-leading companies has worked out more than well.

When stocks earn 8% we can spend 8%?

Retirement funding is tricky business. It’s much more complicated than the accumulation stage. The sequence of returns does not matter that much at all when we are building our portfolios, and we have decades until that retirement start date. We might see several good years that are followed by two or three bad years. Those bad years will not affect your retirement readiness when you have decades to recover. A savvy investor will even enjoy those bad years as the stocks go ‘on sale’.

But in retirement the order of stock market and portfolio returns do matter. That’s called sequence-of-returns risk. A bad year or a few bad years early in retirement can permanently impair your portfolio and your retirement. Even before that retirement start date we are already in the retirement risk zone.

But stocks beat the crap out of bonds

Most retirees and most financial planners will add some bonds to the portfolios of retirees. Those bonds work like shock absorbers. While there is no guarantee, good bonds have a habit of going up in price when stocks get hit hard. This is typical retirement planning ‘thinking’. And yes, there are other weapons besides bonds.

On Twitter we had a very robust discussion on retirement funding and risk. Financial Planner Ed Rempel defended the all-stock portfolio for retirees. And he provided some support with this chart:

According to Mr. Rempel, the success rate for an all equity portfolio is 97% for a period that spans over 100 years. Success is defined as the retiree being able to spend at 4% of the portfolio value, every year, with an adjustment equal to inflation. Of course that’s called the 4% rule. That’s a retirement planning benchmark that is useful, but is then usually disposed of for dozens of reasons. For Boomer and Echo I had asked if there was a new normal for Canadian retirees . Continue Reading…

Ontario Retirement Pension Plan to roll out from 2017 to 2020

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Minister Robb with Ontario Premier Kathleen Wynne, Northern Development and Mines Minister Michael Gravelle, HOM Tony Negus and Consul General/Senior Trade and Investment Commissioner Portia Maier.
Ontario premier Kathleen Wynne (Wikipedia)

The National Post today reports the Ontario Government has revealed more detail today about its oft-criticized Ontario Retirement Pension Plan or ORPP. As it reported in a later update, staff at the province’s bigger employers will have to start paying into the plan by 2017, with a full rollout by 2020.

Employers will be exempt only if they already offer a mandatory Registered Pension Plan that Ontario deems comparable to the ORPP.

In 2022, Ontario residents who are 65 or older can start drawing benefits from the ORPP. Full-time or part-time workers  can  start contributing at 18 and continue until they turn 70.

While Premier Wynne has not released cost estimates of the program, the Post reported the plan will collect 1.9% of a workers’ income up to $90,000 from both employers and employees to a total of 3.8%, or a combined total of $3,420 a year

Meanwhile, proponents and critics of the plan got a little more ammunition from two different retirement reports produced by the Fraser Institute and the Mowat Centre.

Released Tuesday, the Fraser Institute report is titled Lessons for Ontario and Canada from Forced Retirement Savings Mandates in Australia. It suggests that if Canada really needs more “forced” retirement savings, Ontario should look for global examples that could be alternatives to its current plans for the ORPP. For example, it should look at Australia’s “superannuation” program, a contribution-based scheme to which both employers and employees must contribute. Australia’s system of “individual accounts” provide more flexibility and choice than, for example, the Canada Pension Plan (CPP.)

Like the CPP, the ORPP is a “collective” pension plan that pay out defined benefits over a lifetime. The paper by the Mowat Centre (titled Lower Risk, Higher Reward: Renewing Canada’s Retirement Income System) says the Australian plan has had “mixed” success because as a Defined Contribution plan it doesn’t guarantee a set income for life, as does the CPP and DB pensions in general.

Middle-to-upper income earners may need more help

Continue Reading…