Canadian 30 Year Olds are Screwed

I quite enjoy working with young Canadians on their finances. Often financial advisors refuse to help young people because they don’t have enough money. I don’t look at it that way – at around 30, some of the biggest financial decisions of one’s life are made:
selecting a career, marriage, having children and purchasing a home – for many, the largest financial decisions in their life happen in a pretty tight time window. With so much at stake, making the right structural decisions are vital –for it sets the stage for the rest of your life. Make the wrong decisions and there may be no recovering.

So let me describe my last five years and why I am worried about young people. I feel there are a combination of circumstances that have come together (a perfect storm, so to speak) in recent years to make it almost impossible for young Canadians to get ahead long term. These variables are as follows:

People Spend More Time on the Internet than their Finances

There has been a culture shift in the last 20 years to almost a complete disregard for being responsible with our money. We have all heard about the war and depression era elders who drive their cars for ten years, don’t use credit cards, saved regularly and paid off debt fast. Today’s young even look at these wise old folks as backward, “cheap”
and out of touch. Frankly, it is the young people who are on the road to financial ruin –
today’s attitudes are almost the complete opposite of our grandparents where “put it on
plastic and pay later”, take as much debt as we can get, pay off mortgages over 35 years,
lease cars, $20,000 vacations and $300 shoes or concert tickets is a norm. Since when
does a 16 year old need a $100/month IPhone? Part of this attitude I blame on parents
where, at any income level frankly, the parents give the kid whatever they want –
lucrative allowances with no work behind them or simply jut an attitude of you spend
and daddy & mommy will pay. Unfortunately school budgets (and perhaps priorities)
also leave our high school kids woefully lacking in basic financial knowledge ‐ there are
no courses on how to manage credit cards, how financial institutions work, what a stock
is, when to save for a house deposit, details about disability insurance and so on. After
school, our kids don’t have a clue about basic money management. As one 60 year old
recently told me: “Kurt my 26 year old daughter lives at home with us, only has a part
time job working in a mall, spends $4 every four hours on Latte’s, orders $30 pizza delivery weekly, just came back from a week in Cuba and doesn’t have two dollars in an RRSP, Tax Free Savings
Account or even a basic savings account. Worse she could care less about learning about finances – she is more
concerned about how many friends she has on Facebook”. Folks, these are our young people: you have all seen
them – without the basic common sense around personal finance they eventually turn into 30 year olds that make up
the rest of this story. And then 40 year olds who are swimming in good cash flow (often six figure family incomes)
yet can’t manage an RRSP contribution yearly but are happy to pay a lawn service company $500/year to trim the
shrubs. Education about basic finances should start at 10 years old – take your kids to the instant teller with you
‐ show them how it works and build from there.

I Wish I Had my Grandpa’s Pension – but I Don’t

No one has pensions anymore. When our 80 year old parents worked 30 years ago, most Canadians could count on a sweet defined benefit pension to be waiting for them at retirement at age 55. This guaranteed pension provided a permanent base of cash flow, often inflation indexed as well, alongside CPP and OAS until death. While our parents
didn’t have a lot of money for new cars and big vacations thirty years ago, they did have a fine quality of life and
lived within their means. Today, defined benefit pensions are almost entirely gone – unless you are a teacher, police
offer, nurse or one of the few lucky souls in a couple of big companies that still offer
them. The rest of us have been left to fend for ourselves – either with no pension
plan at all, or a basic group RRSP or defined contribution plan that offers no
guaranteed pension. What you and the company contribute is all there is. This is a
far cry from a defined benefit pension plan and will leave most employees with
shockingly little to live off at age 60 or 65. In 10 years of reviewing DC employer
pension plans I have yet to see a single plan that would provide an exceptional
quality of life in retirement. To make matters worse, most employees in big
companies get no educational planning support around these company savings
plans, and have no clue how bad off they truly are.

Add to this that the typical 30 year old may have six different employers (or careers) due to restlessness or
terminations before they retire – this means that the employee is never anywhere long enough for much pension or
other compensation to accrue. Again, reflect on the past: our parents worked for one employer their entire life,
were extremely loyal and benefited from seniority, unions and growing compensation, pensions and benefits the
longer they were there. Most of that is gone today. It is routine to see 50 year old professionals that have had three
or more employers (so far) and with retirement only ten years away, have little or nothing to show for it financially.

Debt Disaster Cause by Choking Real Estate

People have gone real estate crazy in the last decade as the low cost of mortgages has caused a frenzied market for
the purchase of detached homes, condos, cottages and spurred massive renovations to existing properties. “Starter
homes” in major Canadian cities can cost more than $500,000 today – prices that twenty years ago were considered
only available to the wealthy. Now 30 year old kids making $60,000 a year are getting mortgage approvals to carry
massive mortgages and think nothing about amortizing it over 35 years – ridiculous. Further, thirty five year olds
think nothing about dropping $50,000 on a kitchen upgrade or a bathroom because, after all, it has to be done – we can’t live like this. On top of the monster mortgage, these kids are carrying sometimes six figure lines of credit as well. All these 30 somethings are leveraged to the hilt. No wonder the papers are full of stories of how Canadians now have some of the highest debt levels in the world – I have seen this happen over the last five years – my life has been full of dealing with everyone’s 30 year old kids. The story has been the same every time: recently married or a baby on the way and they want to buy a home. I ask them what they have saved for a deposit – often no more than $10,000 between them both. Perhaps their parents are chipping in some cash. And they want to borrow from their RRSPs through the Home Buyer’s Plan – always a terrible idea – stealing from the longer term goal of retirement.

I pull out my calculator and tell them how much they can afford. Off they
go. A week later I get a call to say they bought a home. Did they stay
within my limit I ask? Well….no, there was a bidding war. I am horrified
to learn that they spent $50,000 more than planned. And that’s before
closing costs and furniture, property taxes, a new roof and a new car to
commute. The stage is set for disaster now. When a couple commits to a
huge mortgage that commits more than one third of their net cash flow to
debt servicing and fixed costs of ownership, the cracks in their life will
start to appear after a few years. Unless they have huge annual incomes,
there may be no extra money for vacations, for renovations, to buy new cars or even basic furniture. Inevitably
these costs end up on lines of credit, adding even more debt, well, because, they have to have it. I have routinely
walked through the homes of couples that are so burdened by big debt that rooms in the home have no furniture.
I know why: there is no money for it. Sometimes this can even lead to divorce.

Interest Rate Ticking Time Bomb

Next is interest rates – Canada is full now of monster levels of mortgage debt for the
average Canadian all financed at floating 1% mortgage rates as Canadians have taken
advantage of the record low rates to buy homes the last few years. So, all the kids with
the mega debt are floating in variable rates at 1%. What happens when (when, not if),
mortgages rates return to traditional levels of 5% to 8% for a five year closed
mortgage? Is this on the horizon? Are we currently the US market three years ago,
slowly heading towards real estate disaster in Canada? Will mortgage rate resets over
the next several years cause mortgage payments to balloon, young couples to declare
bankruptcy as they crumble under the weight of debt and bring our tiny real estate market crashing down to levels never seen before? Never happen right? Let’s hope not.

Not Much Changes at Age 40

Since you left high school and could enter the work force, age 40 is the half way point up the hill towards potential
retirement at age 60. You have already spent 20 years building wealth and what do you have to show for it?

If these 30 year olds do survive the first few years of mega debt levels, what about the long term? Ten years later at
age 40, with so much money going from every pay cheque into mortgage payments, car lease payments and credit
card payments, 40 year olds are often woefully behind in savings for their children (RESPs) behind in their RRSP savings and likely don’t have a dollar in Tax Free Savings Accounts yet.

The Kids Go To College Before You Retire

Let’s start with the kid’s savings – if you had kids around age 30, the kids are now heading to university in only ten
years when the parents are 50 years old. With the cost of four years of university easily approaching $100,000 per
child in 2011, failing to put gobs of money away for the full 18 years of the child’s life could see parents buried under
new debt, school debt, at age 50. You need to be mortgage free by age 50, 55 at the
latest, to create extra cash flow to help the kids through school. That’s why 25, 30
and 35 year mortgages are insane. Twenty years max – or don’t buy the place
because you can’t afford it. If you have any plans to retire around age 60, you need
that last ten years to be putting money into savings during what is supposed to be
the big income years of your life. But if you float through your 50’s paying for the
three major financial goals of paying off debt, retirement savings and kid’s education,
I fear that on a regular wage you won’t be retiring at age 60 – not even close. And, if
you had your kids later in life like many are today, don’t plan on retiring until they
are through post secondary school. That’s a good general rule to follow – not too many folks can afford $10,000 tuition fees on a retiree’s income.

What Do You Need for Retirement?

At age 40, with retirement ideally only 20 years away, you need to save a good $1.5 million dollars quickly. Had you
started at 22 and put the $4 Latte money (and more) into a new RRSP, savings at age 40 would have you well down
the road to proper retirement savings by now. But now, only starting to focus on retirement savings at age 40 is
almost certain doom unless you start to save massive amounts fast and yearly without fail. Even twenty years out
from retirement we are in the homestretch already – there is not even enough time to benefit from the compound‐
ing impact of savings. Add to this that bond yields are at record lows (around 2% for a one year GIC currently,
March 2011) and the new stock market seems to have a major correction every five years, and you need to save
even more than you thought. A lot more.

At 40, with career developing, family established and home purchased, now is the time to buckle down and save for
your financial goals – it is not the time to do a kitchen renovation or buy a second residence. You can retire on plan
but it requires disciplined savings – tying up more money in real estate that I don’t believe you will ever sell or downsize doesn’t help us with your retirement needs. And be careful: planning to work until you are 70 is not the
easy answer either – sure, you can plan to work but a stroke, heart attack or even a car accident can retire you early.
Without proper savings in place, a premature retirement due to illness may leave you with 40 years of a less than ideal quality of life. Practically, we all need to strive to have our financial savings in place by age 60 and work because we want pocket change beyond that, not because we need to work. If you don’t have your core savings levels reached by age 60 and must work to eat, then back up your income by top notch disability and/or critical illness insurance until you do retire.

Waking Up 50 One Day And Getting the Deer in the Headlights Look

Age 50 in Canada is an interesting age today. I do more financial planning for 50 year olds
than any other age. It’s like they woke up one day and a light went off – that after 20 years
of working hard, raising a family and paying off a home they pop their head up and realize
they don’t know where they are. The three major finance issues are suddenly converging
all at once: they are supposed to be mortgage free at age 50, the kids are starting university
next fall and $10,000 of tuition is due now and lastly they realize retirement is supposed to
be ten years away. Holy smoke – all at once. Welcome to age 50. Are you prepared? So in
my practice we prepare a financial plan based on their goals and show them how to achieve
all three major financial needs. Today’s 50 year old will make it – they are the last
generation to get in before the big mortgages hit and they may still get inheritances from
their financially responsible, recession era parents who will die in the next 20 years,
providing money for their retirement thankfully. It’s today’s 30 year olds who will be 50 in
twenty years that are screwed. With little hope of being debt free in 20 years, with a bad
attitude towards savings and debt elimination, with rising costs of children’s education, no
pensions coming, frequent career change, wild stock markets, record low interest rates and longer and longer life with rising health care costs, today’s 30 year olds need to win the lotto to have a hope of achieving their financial retirement as culturally expected in Canada. Working to age 70, albeit part time, may become the norm for many in the next twenty years.

There Is Hope

It doesn’t have to end up this way. Having your cake and eating it too is possible with a bit of fiscal responsibility
starting now – and keeping it in check forever:

Massively limit what you invest in your home. You cannot afford to pay big mortgages for decades. You need to get
debt free fast (by age 50) and move onto the other goals of saving for kids and your retirement. Do not buy bigger
homes. Do not do big renovations. Do not purchase second recreational properties. I am ok with a rental property
as it will contribute to your finances long term. The average Canadian family without pensions cannot afford big
real estate investments and hope to achieve their other goals ‐ plain and simple.

Select employers and careers that offer defined benefit pensions. Ok, this is far fetched, but having the employer
taking care of your retirement savings is a huge weight off your back and allows you to focus on children’s savings
and debt elimination. You may be more likely to achieve all your goals if the most expensive one of all, retirement, is
taken care of by your employer.

Save more – what is remarkable is the number of people I see that have six figure
annual incomes and little or no savings. We all have the ability to save and pay down
debt faster, but we have to want to do it. This all can end up well, if you want it to. I
see families of four living successfully in expensive Toronto off $50,000 a year. I see
folks earning $150,000 a year who cannot save $10,000. Set some rules for savings
and stick to them. No matter what.

Plan to live off less in retirement. I don’t recommend this but it is an option. It is
hard to do because people are living longer and it is getting more and more expensive
to live. Look at how gas prices change day to day – who knows what it may cost to
live forty years from now –plan on living to age 100 ‐ likely one spouse might – it just
may happen and you don’t want to be broke. It bugs me when I read the news and see
so‐called experts telling readers that you don’t need to have a lot of money to retire.
I agree, you don’t. We can move you up to northern Ontario where you can buy a home for $50,000, play cards all
winter, never buy new clothes, a new car or take an out of province vacation. Sure, we can all do that. But in today’s modern age of “me, me, me, buy, buy, buy, want more, want more, want more, who wants to live like that? And there’s the rub: people today want to take big vacations, they want the latest IPad, they want HD cable and a smart phone – all of this costs money. No one wants to live like his or her parents did 30 years ago. Today we all want nice things, always. Well, nice things cost a lot of money – money you don’t have if you don’t follow the rules in this article.

Work longer. Ok, here’s a happy spin on working past the traditional retirement ages of 60 or 65. Plan to work to age 70. But work part time. Do something you love. Limit the commute. Take summers off. You will never regret the freedom you will have – freedom to spend at will, freedom to travel, freedom to help the kids out and freedom to join the country club. But work by your rules and do it longer. If you don’t do this, you’ll have to work by my rules in retirement: a strict budget, where I review your costs and have to approve what you spend. You don’t want this. You don’t want to have to tell your spouse at age 72 there isn’t enough money to winter in Florida this year. You don’t want to have to look at your investment portfolio everyday and wonder if there will be enough. Plan ahead.

Don’t let this be you.

Final Thoughts

In closing, I saw an ad recently that showed that Canadians spend ten times (more actually) more time watching videos on line than they do looking at their finances in a year. In many ways, that really sums up this article and my concerns for today’s 25, 30 and 35 year olds. The solutions are at hand – it comes down to how you play your cards. Look at yourself right now: today, in your career, while the money is flowing, life is good, and it seems like it always will be. You really deserve that week in Barbados and retirement savings can start next year. One more thing on the credit card Kurt, and then I promise I’ll be good.

Living for the short term and then you wake up one day and you are 40 and still living this way with little savings and a lot of debt is showing the signs of problems raised in this article and sadly, possibly creating the potential to not reach your financial goals and dreams long term. Get a financial plan. Establish short term, medium term and long term goals. Write it all down. Implement strategies. Follow up. Measure progress. Adjust the plan. Repeat year after year. Use a financial planner to keep the plan objective and non‐emotional. Good luck Canada.

Source: Kurt Rosentreter, CA, CFP is a Senior Financial Advisor with Manulife Securities Incorporated in Toronto, a Chartered Accountant and national best selling author on personal finance in Canada.

It’s different in two ways: First, there is no tax deduction for putting money into a TFSA, as there is in an RRSP. “With a TFSA, the money invested is after-tax money,” says the advisory. “With an RRSP it’s pre-tax money that you are investing.”

The other big difference is that money taken out of a TFSA will not be taxed at all, no matter how much the funds have grown. With an RRSP, every cent you withdraw is taxed as ordinary income, even if it came from dividends or capital gains.

Now let’s see exactly what you are getting with the new TFSA.

Spelling it out

The advisory spells out this new savings plan, detail by detail:

• As of 2009, any Canadian of age 18 or older will be able to invest up to $5,000 per year in a TFSA.

• No taxes will be payable on any investment gains, including capital gains.

• The money in the TFSA can be withdrawn at any time.

• Any funds that are withdrawn can always be put back into the account at a later date without reducing contribution room.

• Any unused contribution room for any year can be carried forward to a future year.

• There is no lifetime contribution limit.

• A person may also contribute to a spouse’s TFSA.

• Assets from a spouse’s TFSA account will be transferable upon death to the other spouse without tax implications.

The advisory sees two big positives in this plan. “First of all, Canada’s savings rate is both dismal and declining, so anything that reverses this trend is welcome in the sense of general economic health.

“Second, knowing that you will never be taxed has a certain appeal.”

But there are three drawbacks that must be noted, in this advisory’s opinion.

Fees, deductions and tax brackets

The first drawback is the contribution limit of $5,000 and how much of that will be eaten away in fees. “It remains to be seen how much the banks and other financial institutions will charge to administer one of these accounts (RRSP fees generally run from $60 to $120 a year),” says the advisory, “but in the first year especially that fee will cut significantly into your return.”

When the account balance gets to $10,000 or $15,000, the fee will constitute a lesser percentage, of course, but it still erodes your return. This also happens with RRSPs, of course, but in most well stocked accounts, the fee takes a much smaller bite.

Next, capital losses won’t be deductible against capital gains. If you lose money in a TFSA, there is no tax cushion to offset it.

Finally, there is this to consider. It’s quite possible that you could be in a significantly higher tax bracket when you put the money into a TFSA than you are when you take the money out. “While contributing to an RRSP under these circumstances would result in a net tax reduction, doing so with a TFSA would actually result in higher net taxes being paid.”

When you consider how the value of your investment compounds, it makes this scenario even less palatable, adds the advisory.

“Don’t get us wrong,” concludes the advisory. “We like the concept of a TFSA. Just know that there are some caveats to it as well.”

So if you’re looking for ways to accelerate your retirement, here’s how you can move the date of your retirement party up a few years:

1. Add cash.
Yes, it takes money to make money. So the first step in starting and growing your retirement nest egg is finding ways to get more cash into your retirement accounts.

When times are tight, saving more can be a tall order. But you may get some help. If your employer offers a matching contribution to your 401(k) plan, you might double those extra savings. Similarly, Uncle Sam offers benefits in the form of deductions for contributions to 401(k) plans and traditional IRAs, as well as tax credits for low- and middle-income taxpayers who contribute to IRAs.

It takes a little more than $550 per month in savings, earning a 7% return, to get to $1 million over the course of a 35-year career. But if you can add just $100 per month to that — including what your employer puts in and your tax savings — you can cut more than two years off your wait.

2. Embrace stocks.
Saving more is great, but there’s only so much you’ll be able to put aside. You have to make the most of what you have.

People are often too conservative in their retirement investments. Despite the sometimes violent ups and downs of the stock market, the long-term return on stocks far exceeds that of less risky investments like bonds and bank savings accounts. If you have all your money in cash, you won’t lose a penny — but you’re lucky to make 1%-2% right now. Even target funds and other balanced retirement options have sizable portions of their assets in bonds.

A 7% return is a reasonable average for a portfolio that has slightly more in bonds than in stocks. But throughout most of your career, you can afford to take more risk. Owning more stock could raise that return to 9%, lopping off almost five more years from your target.

3. Hit for the fences.
If you only want to match the S&P 500, buying index funds is easy. To get higher returns, however, you’ll have to find stocks that will outperform the index. Here are some examples from the past 20 years:

Those stocks have done particularly well, especially given how badly stocks have done since 2000. But you don’t have to belt all your picks out of the park to retire sooner. If you can eke out just another couple of percentage points on your average return — boosting it to 11% — then that’ll cut another 3 1/2 years off your target.

4. Become a cheapskate.
So far, we’ve only looked at half of the story. How much you spend plays just as important a role in retirement as how much you save. And while many expenses go away when you stop working, new ones quickly take their place — things like travel, entertainment, hobbies, and medical care.

But you have a lot of control over many of these expenses. If it’s worth it to you to spend less in retirement, you won’t have to save as much before you retire. Cutting 10% off your spending means you’ll get to your smaller goal a year earlier.

All in all, combining these four simple tips can let you retire as much as a decade or more sooner than you otherwise would. That thought just might be enough to make even a bad day at work seem brighter.

Source: Fool.com

Proven ways to make money

1. Pay yourself first
This is the single best money tip of them all and it’s easy. Just set up an automatic payroll deduction that will whisk away 5% to 10% of your paycheque before you ever see it, and deposit that amount in a good, low-cost mutual fund. Soon, with no effort on your part, you’ll have a healthy nest egg. Why does this trick work so well? Because most people find it hard to save money by sticking to a budget — it’s just too tempting to spend what’s left over. But if you make saving an automatic first priority, you quickly adjust to living on the cash that remains.

2. Mark it down
Use the calendar to your advantage, says Barb Garbens, a fee-only financial planner at BL Garbens Associates Inc. in Toronto. By contributing to your RRSPs at the beginning of the year rather than at the end, you can enjoy an extra year of tax-free compounding. And by paying your mortgage weekly or bi-weekly instead of monthly, you can pay off your mortgage years faster than someone who sticks to a monthly schedule.

3. Get real
About your expectations, that is. Advertisements depict a world in which everyone makes a six-figure salary, retires at 55 and earns 15% a year on their investments. The reality is different. Most Canadians make under $50,000 a year. The typical man retires at 63, the typical woman at 60. The median return of balanced mutual funds over the past five years has been a meagre 5%. What do all these numbers mean? That you shouldn’t stress if you’re not on track to retire in your mid-fifties — and that you should be very suspicious of fast-talking brokers who promise you 20% annual returns.

4. Think twice
Before hiring someone to take care of a job you could do yourself. Why? Because you earn money in pre-tax dollars, but you pay bills in after-tax dollars. Thus, many middle-class earners will discover that paying an $800 landscaper’s bill (in after-tax dollars) really costs them nearly $1,500 in before-tax salary. Think about it: if you do the landscaping yourself, you’re giving yourself the equivalent of a $1,500 raise.

5. Pick a date
New Year’s Day, for instance, or Canada Day — and draw up a net worth statement on that day every year. Begin by listing your assets at their current value. This includes your house, your car, your RRSPs, and anything else you own. Then subtract your liabilities — the amount you have left owing on your mortgage, your credit card and other loans. What remains is your net worth. If it’s going up every year, that’s great. If not, start asking questions.

6. Repeat after us: time is money
Literally. Every dollar that you invest now will double in 12 years, assuming a 6% annual return. So even if you don’t feel particularly wealthy in your 20s and 30s, try to put away what you can, either by investing or by paying down your mortgage and other debts. You’ll be pleased you did when you look at your net worth in your 40s and 50s.

7. Learn the virtues of standing still
The biggest single mistake that people make in trying to build their wealth is being too active — they flip in and out of investments and chase yesterday’s hot mutual funds or stocks. Problem is, yesterday’s winners are often tomorrow’s losers. What’s more, the transaction costs of jumping in and out of investments can eat up profits. So avoid frequent trading. Never buy an investment — whether it’s a house,a stock or a fund — if you’re not prepared to hold it for the next 10 years.

8. Spend less than you make
This is still the only way to build wealth — and it’s easier than you may think. Just promise yourself not to increase your spending when you get a raise at work or a windfall of some other type. Instead, bump up your automatic payroll deductions by the after-tax amount of the raise, and soon you’ll be soaking away barrels of cash, without having to give up anything you currently enjoy.

9. Distinguish between bad debt and good debt
Bad debt is money you borrow to purchase something that quickly declines in value — a vacation, clothes, restaurant meals. Good debt is money you borrow to buy things that can go up in value or increase your earnings potential: an education, stocks, bonds, mutual funds, a house.

10. Pay it off
Pay off your credit cards and mortgage before beginning to invest. Chances are you’ll earn a higher rate of return from erasing loans than from playing the stock market. Paying down your credit card, for instance, guarantees you a risk-free after-tax return of about 18%. To achieve a similar return through investing, you would have to earn more than 25% before tax and you would have to take on risk.

11. Attack debt
Attack debt systematically rather than trying to pay the same amount to everyone. Start by paying off your highest-interest debt — credit card debt is usually the worst.Then move on to car loans and your mortgage. If you’re carrying a lot of high interest rate debt, talk to your bank about the possibility of taking out a lower cost consolidation loan, backed by your home, and use that money to pay off your most expensive debt.

12. Forget the fees
No one should pay a fee to use a credit card when there are better cards out there for free. For instance, the TD Gold Select Visa offers purchase protection, extended warranties, travel accident and car rental insurance, emergency travel assistance and preferred rates at Budget — all for an annual fee of zippo. If you want rewards, the Citi Enrich MasterCard and Capital One 1% Cash Rebate Platinum MasterCard give you 1% of your money back, the TD GM Visa card gives you up to 3% back towards a GM vehicle, and the President’s Choice Financial MasterCard hands you a break on groceries. Best of all, none charge an annual fee.

13. Don’t lease cars
When you lease, you’re paying a premium to drive a new vehicle, plus you’re essentially financing almost the entire cost of your new car. That’s fine if you absolutely must have a new car every three years, but not a great strategy otherwise. You’ll almost always save money by buying a car and driving it for five to 10 years.

14. Hire a fee-only financial adviser
For a truly unbiased look at your finances, hire a fee-only financial adviser that you pay by the hour. These folks don’t have a conflict of interest. In contrast, most conventional advisers earn their incomes from selling you mutual funds and other products and have a built-in bias as a result. While fee-only advisers charge $200 to $300 an hour, they can be cheaper in the long run than conventional advisers. And they’re certainly more objective.

15. Negotiate
Never accept your bank’s first offer without asking if a better deal is available. Whether you’re buying a GIC or negotiating a mortgage, bank reps usually have a bit of room to negotiate. If you’re a good customer, point out that fact — and suggest you’ll look elsewhere if you can’t get a slightly higher interest rate on your GIC or a lower rate on your mortgage.

16. Use professionals
Use mortgage brokers and insurance brokers to help you shop for the best deal in their respective areas. Unlike salespeople who represent just a single bank or insurance company, brokers can show you products from several firms and steer you to the best deal. An insurance broker can compare features of policies from competing companies; similarly, a mortgage broker can offer you deals from dozens of small lenders that you would otherwise have missed.

17. Open a president’s choice or ING account
Both these banks operate primarily through websites and over the phone with only a limited number of ATMs and physical locations. The benefit is that they offer higher interest rates on your savings and lower fees than the Big Five banks. What’s not to like about that?

18. Know when to renew
Pass up your adviser’s pitch for expensive whole-life and universal-life policies and buy a renewable term-life policy instead. Such a policy typically covers you for either 10 or 20 years and is far cheaper than the alternatives. When the policy expires, you’re guaranteed to be able to renew it, so you can extend your coverage if you wish.

19. Compare policies
Term-life policies can vary hugely in cost, so check out quotes from rival firms at Term.ca or Term4sale.com before you buy. An insurance broker can help steer you through the competing choices.

20. Increase deductibles
Raise the deductible on your car or home insurance and your premiums will plunge by as much as 40%. For instance, simply raising the deductible on your home insurance from $500 to $5,000 could cut the insurance bill for a three-bedroom Toronto home to $420 from $700. While you’re at it, find out how much you could save by insuring both your car and your house with the same company. Most insurers offer a discount to people who give them all their business.

21. Don’t buy life insurance you don’t need
The only good reason to purchase a policy is if someone will suffer financial distress from your death. So if you’re single, you probably don’t need insurance. And if you’re married with kids, you don’t need policies on your kids’ lives. (If — heaven forbid — anything were to happen to your children, you would be grief-stricken, but you wouldn’t suffer a financial loss, would you?)

22. Put extra money toward your mortgage
Your return will beat anything you could get on a GIC or mutual fund. For instance, if you have a $250,000 25-year mortgage at 5% and you pay $200 a month on top of your regular payments, you’ll save $40,000 in interest and pay off your home five years sooner, says Andy MacDonald, president of MortgageBroker Inc. in Mississauga, Ont.

23. Consider Manulife One
A product which merges your mortgage with a line of credit and a chequing account. Any cash you deposit immediately reduces your mortgage total; any cheque you write adds to your total owing. Result? You never have idle cash lying around.

24. Become a landlord
If you’re sending junior off to university, consider buying him a house. That’s right — if you buy a home at the right price, and your teenager acts as the property manager and rents out rooms to other students, you can often turn a profit when you sell the house upon your child’s graduation. Even if home prices don’t go up, you can usually count on housing your offspring for free for four years.

25. Negotiate fees with your agent
Insist on a better deal from your real estate agent when it comes time to sell your home. Especially if you’re listing a pricey property in a hot market, ask your agent to discount the standard 6% commission. Alan Silverstein, a Toronto real estate lawyer, says you can often get an agent down to 4% or lower if he or she thinks your house will sell quickly. Saving a couple of percentage points will mean $6,000 more in your pocket on the sale of a $300,000 home.

26. Keep receipts
Take advantage of the small stuff, says Lee Bernstein, a tax accountant in Toronto. You can write off the cost of a safety deposit box, for instance. Two-income families can also deduct the cost of kids’ after-school lessons and summer camp if those expenses allow the parents to work and earn money. Moving expenses incurred to take a job elsewhere in Canada are deductible; as are tax preparation fees in some cases. And don’t forget medical and dental expenses — you can miss out if you don’t keep receipts.

27. Invest right to avoid taxes
The key is to remember that capital gains and stock dividends enjoy tax breaks, while interest payments from bonds and GICs don’t. So keep any bonds or GICs you own in your RRSP. If you run out of contribution room, your stocks and stock-based mutual funds can remain outside your RRSP without inflicting too much tax damage.

28. Contribute to your RRSP
The biggest, best tax loophole is contributing to an RRSP. Yep, we know it sounds mundane — but it’s also true. So stop whining and make that contribution.

29. Beat the taxman by re-arranging debt
In general, interest on money you borrow to invest is tax deductible, but interest on money you borrow to spend isn’t. So rather than using your savings to buy stocks and borrowing to buy furniture, switch it around: by borrowing cash to buy stocks and using savings for the sofa, you turn the interest into a tax deduction.

30. Get help
If you find a tax accountant you like, stick with her — she can suggest ways to minimize your taxes. Software can also make your return a snap. QuickTax, TaxWiz and UFile each cost less than $50, but save you hours of tedium.

31. Split income with your spouse, both now and in retirement
By making your incomes as equal as possible, you’ll minimize the overall tax that both of you will pay. One strategy is for a high-earning spouse to contribute to a spousal RRSP for his or her stay-at-home partner. If you run your own business, you can cut your family’s overall tax bill by employing your lower earning spouse — or kids — to perform some tasks you would otherwise have to do yourself.

32. Diversify
You’ll be glad you did. Holding a varied portfolio ensures that no single disaster can blow a hole in your nest egg; it also guarantees you’ll have a part of any good news going. To ensure you’re diversified, make sure that your holdings include both stocks and bonds. Your stocks should span several industries, rather than being concentrated in a single sector. They should also be geographically diversified, with Canadian, U.S. and international firms in the mix.

33. Think in terms of your portfolio, not individual stocks or funds
About 90% of the difference between the returns of different portfolios comes down to broad decisions about which types of assets to buy, rather than narrow decisions about which specific stocks, bonds or mutual funds to hold. The classic blend is to put 60% of your holdings in stocks and 40% in bonds. Conservative investors may want to reverse those proportions, while aggressive investors may want to drop the bond component to 20%.

34. Steal other people’s ideas
Unlike students writing a university essay, investors get rewarded in their portfolios for copying the work of the smartest people they know. One of our favorite sites is Gurufocus.com, which tracks the commentary and holdings of more than 25 great investors, including Warren Buffett.

35. Follow our couch potato strategy
It beats 80% of the money managed by professionals over the long term and requires only 15 minutes of your time each year. For step-by-step instructions on how to become a Couch Potato, click here.

36. Cut your costs
This is the single best way to juice your returns. Despite what you may think, paying more for money management doesn’t improve results. So look at low-cost index funds or exchange-traded funds (ETFs). If you truly want an active manager, pick a fund with a below-median management expense ratio to ensure profits stay in your pocket.

37. Be realistic
About how much you can withdraw from your retirement portfolio each year. Many new retirees assume they can spend 7% to 10% of their nest egg every year.That’s fine in a rising stock market, but if the market slumps and you keep taking out that much, you’ll quickly run down your savings. Studies agree that to make your money last you should count on withdrawing only about 4% a year.

38. Count on a government pension
Most of us will get more from Ottawa than we think. A married couple with no savings or company pension can expect $24,000 a year from all government sources when they retire; the average combined payout from just the Canada Pension Plan and Old Age Security is now almost $11,000 per retired person a year.

39. Protect yourself
Protect yourself from stock market slumps in retirement by keeping five years’ worth of living expenses invested in a “ladder” of safe bonds, with one fifth of your holdings maturing each year. That way you can live off the money from your maturing bonds during a market downturn, and you won’t end up decimating your portfolio by cashing in stocks when they’re down.

40. Make a will
Making a will doesn’t take a lot of time, it doesn’t cost much, and it can save your heirs thousands in taxes and legal fees as well as legal squabbles. If you can avoid all that by hiring a lawyer to draft a will for $200 to $300,why wouldn’t you?

41. Talking about wills
Our advice is to talk about wills. Most feuds over wills come about because parents don’t communicate their decisions to their kids while they’re alive. When the will is read, heirs are surprised, feelings are bruised, and nastiness ensues as sibling turns on sibling. So, before you make a will, talk it over with everyone involved. Then, after you have the will, keep on talking — the best will is one that surprises no one when it comes time to use it.

42. Make use of registered education savings plans (RESPs)
After you open one of these plans at your local bank, you can contribute up to $4,000 a year per child to a lifetime limit of $42,000. The money grows tax-free until it’s withdrawn for your child’s education. But here’s the even niftier part: the federal government gives you an immediate top up for each contribution. The amount of the grant varies according to your family income, but it’s worth a minimum of 20% of the first $2,000 per child you contribute — in other words, $400 a year for free. Sounds like a deal to us.

43. Live closer to work
Many of us underestimate the true cost of commuting, both in terms of stress and in terms of dollars. Case in point: The Canadian Automobile Association calculates a husband and wife can spend $140,000 over five years making the one-hour commute from Hamilton, Ont., to Toronto in separate Chevy Cavaliers.

44. Money isn’t everything
Switching to a new job where you have more trust in management brings you as much happiness as a 36% pay raise, according to a recent study by economists John Helliwell and Haifang Huang at the University of British Columbia. Switching to a job that offers more variety is like getting a 21% pay raise, and getting a position that requires a high level of skill is worth a 19% raise.

45. Give your kids part of their inheritance while you’re still alive
A bit of cash when your kids are in their 30s could save them a fortune in mortgage interest — and you’ll enjoy being around to see the difference your money makes.

Source: canadianbusiness.ca

We feel your pain. So let us reassure you. Despite what you may think, there is a lot of good news about retirement. We’ve talked to a wide-ranging selection of financial experts and we’ve come away with one conclusion — you’re doing far better than you think you are. Join us as we reveal 10 things that most people don’t know about retirement, but should.

1. You’re not behind at all
The ads make it sound as if 55 is a reasonable retirement age. In fact, for most of us it’s not. The median retirement age in Canada is 62 for men and 61 for women, according to Statistics Canada. Who does retire early? By and large, federal government employees, who ditch work at a median age of 58. You can credit their early departures to generous pensions that are indexed for inflation. But even public-sector employees aren’t hanging up their work clothes at 55.

If you look at the math behind retirement, you can see why most of us stick around the office a bit longer than we might like. For every year early that you retire, you pay three penalties: you lose a year of potential savings, you lose a year of growth for your retirement savings, and you gain one more year of retirement expenses.

Consider a woman who hits 55 in good financial shape, with a paid-off condo and $100,000 in savings. She can count on her savings to produce $4,000 or $5,000 a year in returns, but she’s too young to start collecting Old Age Security or Canada Pension Plan. Unless she resorts to desperate measures, such as selling her condo or burning through her savings, retirement is impractical.

But look at what a difference five years can make. If she buckles down and contributes $10,000 a year to her retirement fund during that period, and achieves a 7% annual average return, her savings double to $200,000. That bankroll can generate $8,000 to $10,000 a year in income as long as she lives. At 60, she can also start collecting Canada Pension Plan. If she combines those sources of income with part-time work, a phased-in retirement becomes quite practical.

2. You’ll live longer than you expect
When we’re doing our retirement planning, many of us figure that we’ll live to 80, the average lifespan in Canada. But that average is misleading. It reflects what a newborn baby can expect in the way of lifespan and is dragged down by all the unfortunate people who die relatively young.

If you’ve managed to reach 65 without suffering a terminal illness, you’ll probably live considerably beyond 80. According to StatsCan, a 65-year-old man can expect to live to 83; a 65-year-old woman can look forward to blowing out the candles on her 86th birthday.

And remember — those are averages. Half of retirees live longer, some much longer. Moshe Milevsky, an associate professor of finance at Toronto’s Schulich School of Business at York University, says there is a 41% chance that at least one member of a 65-year-old couple will live to 90. So even if you don’t quit work until 65, there’s a good chance that your retirement could still wind up spanning a quarter or more of your life.

3. You’ll see more of your partner — a lot more
Sure, you love your spouse, but let’s do a little math here. Chances are, for most of your married life at least one of you has worked outside the home. Subtract sleep, travel time and other away time and you’ve seen your beloved for — at most — six hours a day.

In retirement, that figure can easily double. And continued exposure can cause even happy couples to bicker. Fred and Janet Barnes (not their real names) retired to Dickey Lake, Ont., to renovate a cottage after living in and around Toronto for most of their lives. “His perfectionism drove me a little crazy,” says Janet. “My slapdash methods were hard for Fred to take.” The Barneses eventually figured out ways to divide the work so they wouldn’t get on each other’s nerves.

Other retired couples strike different bargains — maybe the kitchen becomes her territory, while the garage becomes his — but whatever the specifics of the deal may be, the important point is to realize that retirement is not just a financial journey. It’s also an emotional odyssey and you should plan ahead to make the most of it.

Beginning in your 50s, you should start thinking about the activities that will fill your day in retirement. “You’re going to need to stay connected,” says Dr. Randy Swedburg, chair of the applied human sciences department at Concordia University in Montreal. Your many options include going back to school, giving your time to charity, or starting your own business.

4. A part-time job is worth $400,000 in the bank
If your retirement savings are a bit smaller than you had hoped, take heart — a part-time job in retirement can go a long way toward making up for an undersized portfolio.

Let’s say that you can make $20,000 a year from your part-time job. That is about what you could reasonably expect a $400,000 investment portfolio to generate in retirement, says Terry Greene, a fee-only planner with MSC Financial Services Ltd. in North Vancouver. So your part-time job is the financial equal of a $400,000 portfolio. Especially if your part-time job consists of doing work you enjoy, you may find that you never want to fully retire.

5. Your employer really does love you
The first wave of baby boomers has already hit 60. Millions more will soon hit retirement age. And there are not that many people coming up behind them. “The demographic trends are suggesting that over the next 10 to 15 years, we’re not going to replace the workforce that currently exists,” says Ted Emond, a senior consultant with Hewitt Associates, a human resources consulting firm in Toronto.

The likely result of Canada’s aging society is a potential labor shortage that will make skilled help more and more valuable with each passing year. HSBC Bank Canada, is already attempting to keep older employees in the workforce by letting them work part-time while collecting pensions. Wal-Mart Canada allows its retirees to come back as consultants or to mentor current employees. Count on more employers to do the same as demographics makes skilled employees tougher to find.

6. Government is more generous than you think
The financial planning industry likes to cast doubt on the future of Canada Pension Plan. In fact, CPP is on solid financial ground after the reforms of a decade ago, according to the federal government’s chief actuary. CPP (or Quebec Pension Plan in the case of Quebecers), combined with Old Age Security, will provide you with an average of $11,500 a year if you’ve worked in Canada your entire life and retire at 65. The maximum you could qualify for is about $16,600 a year.

Don’t forget, too, that you’re eligible for a Guaranteed Income Supplement if you’re a low-income retiree. “For low-income [earners], government programs are going to provide you withthe standard of living you’ve always been used to,” says Malcolm Hamilton, a consulting actuary with Mercer, a benefits consulting firm in Toronto.

7. You may be missing free money
A Sun Life Financial survey found nearly 40% of us have access to savings programs in which our employer kicks in money to supplement what we contribute. But one in five of us who are eligible for such plans doesn’t participate. As a result, we lose guaranteed returns of 25% or more.

You should inquire with your human resources department to make sure you’re not missing out. Many publicly traded companies offer employee stock ownership plans with an employer match. If you buy $80 of your company’s stock each month through such a plan, your employer kicks in an additional $20 a month — an instant investment return of 25%. Other companies offer retirement plans in which the company matches your contribution dollar for dollar — a guaranteed return of 100%. In either case, the money is free and you should grab it.

8. You don’t need a million bucks
Financial planners like to say you’ll need 70% of your current income in retirement. To hit that goal, a middle-class couple will need to amass a million dollars or more in savings. But is the 70% figure truly a good estimate of what you need in retirement?

Probably not. Brian FitzGerald, co-author of The Pension Puzzle and chief executive officer of Capital G Consulting in Toronto, says you have many more costs while you’re working than while you’re retired, so your need for cash in retirement is considerably less than the 70% figure suggests. “There’s a bunch of expenses you don’t have to incur in retirement,” he says. For instance, most retirees no longer have to worry about paying off a house, funding their kids’ education, making RRSP contributions or commuting to work. And they pay substantially less in income tax because they’re earning less.

So how much of your current income do you really need to maintain your standard of living in retirement? “I’m pretty confident that 50% will do the job for most people,” says Hamilton, the actuary. Of course, if you want to live lavishly and travel constantly, you will need more, but if you’re happy to go on living much as you always have, replacing half of your working income should do the job.

9. RRSPs aren’t always the answer
Canada has five seasons: winter, spring, summer, fall, and RRSP time. But while we’re annually bombarded with ads telling us to stuff money into our RRSPs, don’t think of those four-letter contraptions as your only option in retirement planning.

RRSPs are not your best strategy if you have high-interest debt, such as a credit card balance. Given the 18% or more you’re probably paying on your credit card debt, you should first devote every available dollar to paying down that costly debt. RRSPs may also not be your best option if you’re a low-income earner, since the tax savings that result from making an RRSP contribution aren’t worth much if you don’t pay much tax to start with.

If the federal government goes ahead with its proposal to introduce tax-free savings accounts next year, RRSPs will have an additional competitor for your attention. Ottawa’s proposal, as it now stands, would allow each of us to put up to $5,000 a year into a tax-free savings account, or TFSA. You won’t get any tax deduction for doing so, but your money will grow tax-free. And you will be able to withdraw the TFSA money without paying any taxes. While the math gets complicated, “I would think people with below-average incomes are better with TFSAs,” says Hamilton, the actuary.

10. There’s a world of possibilities
One option that can instantly multiply your retirement spending power is to leave Canada behind. Mexico, Costa Rica, Malaysia and Panama all enjoy far better weather than we do, and much lower costs of living. “Overall, there is no question you can live here on one-half to one-third what you could in any Canadian city and have a good lifestyle,” says Tom Dawson, 54, who with his wife, Donna, moved to Panama City nearly two years ago from St. Albert, Alta. The 1,800-sq.-ft. condominium they bought overlooks the Pacific Ocean and the Panama Canal, and cost them less than $200,000. Medical care is excellent, locally grown produce is cheap and foreigners who retire to Panama with a pension can qualify for several tempting tax breaks, including an exemption from property taxes.

The federal government offers primers on retiring abroad (click on www.voyage.gc.ca and search “Retirement Abroad”). Another useful source of information is The Canadian Snowbird Guide by Douglas Gray. But no book or website can fully convey the day-to-day reality of a foreign country. Try out a destination before making any permanent decisions. Rent a home for a year and see what daily life is like. If it matches or exceeds your expectations, you may be able to afford the retirement of your dreams on far less money than you expected.

Source: CanadianBusiness.com

One way to jump-start your investing is to avoid the procrastination to which many investors fall victim. Especially with long-term goals like retirement, it’s tempting to let saving slide when times are tough. But if you make an effort to catch up on your retirement saving now, the dividends it’ll pay over time will be enormous.

Don’t wait for deadlines
Waiting until the last possible moment to contribute to a retirement account is obviously better than never contributing at all. So if you haven’t had a chance to make a contribution for 2008 yet, knowing that you have until mid-April to find money that’ll qualify for the previous year and open an IRA or make a deposit to an existing account can make you feel more confident that you’ll get it done.

But ideally, you should think instead about your first opportunity to make a contribution. Today, for instance, is the first day you can make contributions for 2009. By getting your money in quickly, you can enjoy the benefits of tax-deferred growth that much sooner.