It's Your Money  

Start the new year right when it comes to your finances

Financial resolutions

The start of a new year is a perfect time to set financial goals and create a plan to achieve them.

Whether you want to save for a down payment on a house, pay off credit card debt or start investing for retirement, a little planning can go a long way in helping you reach your goals.

Here are a few steps you can take to get your finances in order and start the new year off right:

1. Assess your current financial situation. Take a look at your income, expenses, and debts. Make a list of all of your fixed expenses, such as rent or mortgage payments, car payments, and insurance, as well as your variable expenses, such as groceries and entertainment. Look for areas where you can cut back, such as dining out or subscription services.

2. Set specific, measurable goals. Instead of simply saying you want to save more money, set a specific goal, such as saving $10,000 for a down payment on a house. Be sure to set a deadline for achieving your goal and break it down into smaller, more manageable steps.

3. Create a budget. Once you have a good understanding of your income and expenses, create a budget that will help you reach your financial goals. Be sure to include both fixed and variable expenses, as well as a "miscellaneous" category for unexpected expenses. Make sure your budget is realistic and that you are able to stick to it.

4. Make a plan to pay off debt. If you have credit card debt or other outstanding loans, make a plan to pay them off as quickly as possible. Consider consolidating your debt into one low-interest loan or transferring your balance to a credit card with a lower interest rate. Be sure to pay down the debt with the highest interest rates first.

5. Start saving for retirement. Even if you're not yet ready to retire, it's never too early to start saving for your golden years. Consider opening an RRSP account and make regular contributions. But be sure to take advantage of any employer matching contributions first.

6. Review your insurance coverage. Make sure you have the right insurance coverage for your needs. Review your health, homeowners, and auto insurance policies to make sure you have enough coverage and that you're not paying for unnecessary coverage.

7. Seek professional advice. If you're not sure where to start or need help creating a financial plan, consider seeking professional advice from a certified financial planner. He or she can help you create a plan tailored to your specific needs and guide you through the process of achieving your financial goals.

Starting the new year off right with financial planning can help you achieve your financial goals and give you peace of mind. You can take control of your finances and set yourself up for financial success in the coming year.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.


Five myths about retirement

Preparing for retirement

Getting your retirement plan right is crucial. You need to be confident your money will last throughout your retirement, while giving you the standard of living you need.
There have been a number of myths about retirement planning circulating for years that can have a negative impact on your retirement plans.

Let’s take a look at some of the more common ones and the reality that lies behind them:

The cost of living will be lower in retirement

A very common retirement myth among Canadians is that their income needs will be much lower once they stop working. After all, they won’t have those commuting costs or need to make mortgage payments. But is this realistic?

You may actually need more instead of less if you plan on an active retirement involving travel. There are also other factors at play that can make retirement more expensive than you might have expected.

For starters, plenty of Canadians have debt in retirement (14 per cent still have a mortgage and 42 per cent have some kind of debt). Managing debt in retirement will have an impact on your disposable income.

Many retired (or soon-to-be retired) Canadians are still supporting their adult children financially as well, for example with their education costs or to help them make a down payment on a new home.

Higher life expectancy also brings challenges. The longer we live, the more likely we are to have health issues.

You could also have considerable costs to pay for in-home care, a care home or renovations to make your home more accessible if you develop mobility issues. All of these will add to your cost of living in retirement.

RRSPs are a complete retirement plan

This is a potentially harmful retirement myth, given that many people will need more than their RRSP income to bring them a comfortable retirement. While RRSPs undoubtedly provide a very tax-efficient way of investing for retirement, they are only one piece of the puzzle. A comprehensive retirement plan will also take into account numerous income sources, such as:

• Canada Pension Plan (CPP)

• Old Age Security (OAS)

• Company pensions

• Tax-Free Savings Accounts (TFSAs)

• Dividends and other income from non-registered investments

• Rental income from investment properties

Most Canadians will rely on several of these income sources, not only to give them a comfortable retirement but also to provide the kind of flexibility that will allow their retirement income to be as tax efficient as possible.

Also, an investment plan is not a retirement plan. RRSPs are one part of an investment plan, but a real retirement plan also includes estate planning, life insurance and tax efficiencies.

One million dollars is enough for retirement

This has been a long-running myth about retirement, with that magic million-dollar figure a common target to ensure a secure retirement. However, the amount that any investor will need when they retire will depend on a whole array of variables, with the target amount being unique to each person.

If you withdraw four per cent of that million per year in retirement (a commonly used percentage to ensure you don’t run out of money) you’ll have $40,000 annually. When you combine this with other retirement income, as detailed above, this figure could be too much or too little for some people.

Here are some of the key issues you need to consider when working out how much you’ll need to save for your retirement:

• When do you intend to retire? An income of $40,000 may be enough if you retired today, but how much would that buy if you retire in 2047 or 2062?

• Do you expect to inherit money? A large inheritance could considerably reduce the amount you need to save for retirement.

• What kind of retirement do you want? If you intend to be very active and travel a lot, you’ll need more savings than someone who wants to stay home and spend more time with the grandkids.

• What other retirement income can you rely on? CPP and OAS? Company pension? If you have little in other retirement income, you may need to save more.

• When do you plan on retiring? Early retirement typically requires more in savings. Conversely, the later you wait to draw CPP and OAS, the more they’ll be worth to you.

• How much will you owe in retirement? Will you be debt-free or will you be carrying a mortgage or other long-term debts? The more you owe, the more savings you’ll need.

As you can see, knowing how much you’ll need for a comfortable retirement is complex. To get a more precise figure than $1 million, you should consider working with a financial planner and setting up a comprehensive plan.

Retirement plan portfolios should be conservative

This retirement myth may have had some truth to it several decades ago, when people had much shorter retirements. Now, Canadians could realistically expect their retirement to last 25 years or longer. Retirement portfolios that need to support you for this many years aren’t going to experience significant growth if they’re made up exclusively of fixed income. A conservative retirement portfolio runs the risk of running out of money.

Never carry debt into retirement

While this might seem like common sense (with no debts, you’d need less retirement income), this is another one of those myths about retirement because it’s not realistic or practical. As we’ve seen, close to half of retired Canadians carry some sort of debt.

It’s important to differentiate between good and bad debt. You certainly don’t want to be carrying tens of thousands of dollars’ worth of high-interest credit card debt when you’re retired. Payments and high interest will eat away at your income.

A home equity line of credit (HELOC), on the other hand, can be a useful financial tool in retirement. It typically has lower interest than other forms of loans (apart from mortgages) and is extremely flexible. You can pay it off over a long period of time, and payments can be as little as the interest accrued that month. HELOCs can be really useful for paying for big-ticket items, such as home renovations or foreign travel.

Financial planning should ignore myths about retirement – A Certified Financial Planner (CFP) profession understands the complexities of retirement planning and has heard all of the retirement myths. They can work out exactly how much you’ll need to save (and know it probably won’t be $1 million) and the kind of portfolio you need at your stage in life to get there.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

Five steps to retire in five years time

Ready for retirement

Congratulations! You’re five short years away from retirement.

For the last couple of decades, you’ve been saving diligently, but now that you’re so close to the big day, does your financial plan need to change?

Here are five steps for plotting a financially smart retirement that you can start in advance of your last workday.

Tidy your finances

You want to enter retirement with your finances in top shape, so rerun the numbers to make sure you have enough to support your ideal lifestyle.

That may mean ensuring you have money for travel and hobbies in the first few years of retirement, but factor in your older senior years, too, when the high cost of care could come into play.

Be sure to stress test your retirement projections with “what if” scenarios, such as an inflation spike, market crash or other major event.

Itemize your income

The timing of your retirement could impact some of your income sources and that should be looked into now, before you stop working. Add up your company pensions based on your retirement date and your RRSPs and TFSAs.

Then, understand the nuances of government programs. For the Canada Pension Plan (CPP), you can receive benefits any time between the ages of 60 and 70, but they are reduced by 0.6 of 1 per cent for each month prior to age 65. Old Age Security (OAS) is available as of age 65, but it is clawed back when your net income exceeds certain levels. Maybe you don’t feel you need these government income sources, but best to know what you qualify for, in advance, so you can choose.

Consider taxes

You should also be thinking about how to minimize tax in retirement. By age 71, you must convert RRSPs into Registered Retirement Income Funds (RRIF), and withdrawals are fully taxable. Start crunching the numbers so you’re ready to withdraw the ideal amount to keep taxes low while still funding your lifestyle.

Some ideas to consider include income splitting with your spouse on your pensions and assets. You may want to use a spousal RRSP, so your money can get taxed in the lower income spouse’s hands come withdrawal time.

If you are likely to have a high income in retirement, but have more money to save now, think about putting as much as possible into a TFSA to avoid a tax burden later. Your financial planner may have other smart tax strategies that can be set up now.

Review your portfolio

When it comes to investments, now is the time to make any changes based on your close-to-retirement horizon. Consider the possibility of a(nother) market correction. Should some of your investments be moved into safer fixed-income securities? Inflation over the next decades can erode the buying power of your savings, so be sure you are still growing your portfolio before retirement and even into your earlier retirement years.

Plan to enjoy life

Your retirement should be years of the adventures you dreamed about – now, and not when you’ve reached your retirement date, is the time to plan them.

A certified financial planner, with advanced financial planning software, can help you synchronize all the dimensions of your financial plan. They’ll be able to make suggestions that will make the most sense for your unique set of circumstances.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.


Keep your retirement portfolio ahead of inflation

Protect retirement savings

Rising inflation — particularly the kind of record inflation seen recently — will always make the headlines.

While many people worry about how they’ll be able to afford increasingly expensive products, retirees tend to worry more about how much it will cause their savings to lose value. When “safer” investment options, such as corporate and government bonds, are delivering returns considerably lower than the rate of inflation, this is an understandable concern.

Let’s take a closer look at the impact high inflation can have on your portfolio, why keeping money in cash can be a mistake and how to help your retirement portfolio become inflation proof.

How inflation can impact your retirement savings

Many retirees wonder if they’re going to be OK in retirement. Will they have enough to spend and will their savings last? Inflation can certainly make your investments less valuable unless your retirement income is able to keep up with it.

That’s why it’s important to know the details of all of your sources of retirement income. Some of them, such as the Canada Pension Plan and Old Age Security are adjusted regularly for inflation.

Other income may not be inflation adjusted however, such as some company pensions and retirement savings (for example, investments in your Registered Retirement Savings Plan and Tax-Free Savings Accounts). These investments’ ability to outgrow inflation will depend on their performance.

During a situation like we experienced in 2022, with high inflation and a financial market downturn, some retirees could find part of their retirement savings drop in value, at least over the short-term.

If inflation does bring about a considerable shortfall in retirement income, there are a number of options available. You could delay retirement, work part-time in retirement, lower your retirement spending or downsize your home and use the cashed-in equity to cover the shortfall. None of these are ideal, but there are ways to help avoid them from happening.

Converting investments into cash isn’t the solution

A common reaction when financial markets start to lose value is to sell stocks, bonds and mutual funds, and convert them into cash accounts. From a purely investing perspective, this can be an unwise move, in that you will lock in your losses and could miss out when the market bounces back. Your portfolio could take a long time to recover.

From an inflation-proofing point of view, this is even more of a losing strategy. Most savings accounts offer interest at two to three per cent, which would be considerably less than inflation in 2022 (it peaked at 8.1% in June). At 8% inflation, cash savings that grow by 3% interest will effectively lose their value by 5% per year.

Thankfully, there are several strategies that can help protect your retirement savings from the ups and downs of inflation.

How a long-term financial plan can overcome inflation

A solid, long-term financial plan will take into account a number of potential variables, such as longevity (how long you’ll live), market dips and inflation.

It is very important to stress test financial plans for several possible scenarios, such as what would happen if investments performed worse than expected, or if inflation were to shoot up? You should also revisit your plan every year - a living plan should adjust and adapt to changes in the markets and your personal circumstances.

The earlier you start saving, the longer you have for your investments to grow and enjoy the benefits of compound returns. The larger your savings, the bigger your safety net against inflation.

How a well-diversified portfolio protects against inflation

It’s worth remembering that inflation in Canada has rarely exceeded three per cent for most of the last 30 years. When planning for the long term, FP Canada recommends using an annual inflation rate of 2.1 per cent for retirement plans.

Portfolios that contain a healthy percentage of equities (stocks or mutual funds containing stocks) have historically always outpaced inflation considerably, over the long term. You would also need your portfolio to be well diversified — it should contain a good spread of industries and geographical locations.

Also, investing in companies that are able to pass on increased costs to customers, such as grocery stores and other retail outlets, will also help to protect your investments from inflation.

Other strategies to protect retirement savings from inflation

Certain investment assets can perform better than others during times of high inflation.

Commodities, such as oil, gas, wheat, etc., tend to have a fairly consistent demand, so price increases usually have little effect on their consumption levels.

Inflation-protected assets, such as real return bonds and Treasury Inflation Protected Securities (TIPS) are designed to deliver cash flow that keeps up with the cost of living. Both are available in mutual funds.

Real estate investment trusts (REITs) provide an easy way to invest in real estate without becoming a landlord. Pooled money means that your risks of unpaid rents should be lower. The value of Canadian real estate has, on average, grown considerably above the rate of inflation over the last 15 years.

Make sure your retirement portfolio is inflation-proofed

Your certified financial planner can discuss your retirement needs with you and develop a robust financial plan that will help you understand the steps you need to take to provide the income you need, when you need it.

These plans can be stress-tested for inflation, as well as other variables, such as market volatility and increased lifespan.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

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About the Author

Brett has worked in the financial advice industry for over 15 years and is designated as a chartered investment manager(CIM) and certified financial planner (CFP).

In 2014, Brett was appointed to the board of directors of FP Canada (the national professional body for financial planning) and spent seven years on the board, including his final two as board chair. More recently, he was appointed to the Financial Planning Standards Board (FPSB), which is the international professional body for this industry with a three-year term beginning in April 2023.

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy-to-understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the national and global boards focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns or if you’d like a referral to a qualified CFP professional in your area by emailing him at [email protected].


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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