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Retirement Calculator

Retirement Calculator

How much do I need to retire?

Now that my adult kids have moved out, my husband and I have found there’s more time to do things WE want to do but also we’re saving more money. We can enjoy spending it on special vacation trips but we are also keeping in mind our retirement. We tend to be cautious in nature when it comes to money – saving rather than spending… for those emergencies or unplanned events. Did you know that only 60% of Canadians are actively saving for retirement? The question for us and that many people ask is “How much do you need to retire?”

To answer this question, you really need to ask yourself three questions:

  1. How much will you spend in retirement?
  2. How long will you live?
  3. How much have you already saved?

I think it’s easier to answer these questions in reverse order.

For question 3, look at all your statements for your various investment accounts. Track them all in a spreadsheet, keeping separate the RRSP, TFSA and general savings. For this exercise we won’t include assets like your house or cars. You need somewhere to live so leave the house out of the mix for this exercise.

The answer to question 2 is more challenging. Nobody can know how long they will live. This is very difficult to calculate, but you can make some assumptions and try to extrapolate. Look at your parents – how long did they live? If you are not sure then use average lifespan in your calculations.

The answer to question 1 requires some tracking and calculations. The amount of money you will need in retirement depends on what lifestyle you expect. If you want to maintain the big house and two cars, take several trips each year and eat out on a regular basis, then you’ll need more. If you plan to downsize, go to one car, budget for one trip per year and watch what you spend, then obviously you’ll need less. The first step is to make a budget to track your expenses. Track exactly what you spend right now and include absolutely everything – leave nothing out. Include groceries, personal care items, car expenses, gas, insurance, rent/mortgage, property insurance, utilities (heat, hydro, water, phone, internet, cable, property taxes), house repairs/furniture, clothes, medical/dental, entertainment, vacation, gifts, misc. and any other expenses you have. I use an Excel spreadsheet and have tracked our daily spending for several years. I find it helpful to budget for big expenses like travel and to help track savings from year to year. We tend not to eat out very often – I like to cook! But we do treat ourselves occasionally and it is so much easier to predict expense patterns when it’s all written down.

To calculate and estimate your goals for retirement use a retirement calculator that includes your expense budget information along with all your savings together with retirement age. A good simple retirement calculator you can try is from the Bank of Montreal (BMO). It’s simple, but takes into account current savings in RRSP, TFSA and general savings. The only thing it doesn’t account for is any increase in salary. But most people using this program are closer to retirement already, so that point becomes less relevant.

Here is a fictitious example of one couple and a retirement scenario:

John & Mary live in Eastern Ontario and are 50 and 48 years of age respectively. John earns $135,000 annually. Mary earns $60,000 annually. Neither will earn a pension but John does pay into a Defined Contribution Pension Plan (DCPP). He pays 5% of his salary and his employer matches with another 5% so he gets 10% total each pay period. John & Mary want to know if they can retire from their full-time positions as early as age 55 and 53. They estimate they will need $60,000 total per year to live in retirement. They plan to work contract or part-time to pay for extra things like vacations.

Using BMO’s Retirement Savings Calculator you can punch in some numbers and play around with retirement age, salary, monthly savings, investment risk and even additional lump sum savings.

John Mary
Annual Salary (before tax) $135,000 $60,000
RRSP Savings $410,000 $65,000
RRSP monthly contributions $1,125 $500
TFSA Savings $59,000 $52,000
TFSA monthly contributions $458 $458
Other Savings $90,000 $25,000
Joint Savings $60,000
Joint monthly contributions $3,000

 

Using the BMO Retirement Savings Calculator, and assuming a medium investment risk of 6% return, by ages 55 and 53 they will have 80% of their retirement funded. If they delay their retirement from full-time work when John will be 56 and Mary will be 54, they will be 100% funded for retirement.

Using a 4% low risk investment mix, the calculator estimates their retirement age of 58 and 56. So depending on how aggressive they are with their savings and investing, they could potentially accelerate their retirement.

Try out BMO’s Retirement Savings Calculator with your own numbers!

At what age will you be retiring?

Let me know which retirement calculator you prefer in the comments section below…

Read also Make a Financial Plan, Dividend Investing, Do You Pay Yourself First?

 

Money Lessons

Money Lessons

Money Lessons – start young

Nobody really teaches you about money in school – how to balance a chequebook, manage your money, pay a mortgage or how to save for retirement. We all seem to just muddle through and learn as we go. It’s true we learn from our mistakes, but why not help out the next generation and at the very least teach the big lessons?

Tell your kids! Here are 6 basic tips about how to handle your money:

  1. Start saving as soon as you start earning money. Put some money into a nest egg and don’t touch it! It’s really important to save money for retirement and it’s so much easier to start young. It’s also easy to have that 10% (or whatever you choose) set aside, automatically by your bank. Honestly, once it’s removed you don’t miss it and it’ll grow over time to a comfortable size before you know it!
  1. Be wary of credit cards. Although it’s super easy to get one, don’t rely on the credit to get you through. Only buy what you can afford in cash. Use the card for convenience and pay it off in full every month. Don’t carry a balance especially with high interest rates.
  1. Learn how much you spend. Keep a balance sheet and be aware of your spending habits. It’s easy when you first start earning money to just spend it. Being aware of your expenses allows you to budget and make informed choices with no surprises.
  1. Be open to learning about finances and investing. Nobody is going to do it for you. You work hard for your money so take the time to learn about different types of investing. You can even practice on some self-serve investing websites with real market activities. Only invest in what you know and understand.
  1. Always keep a contingency fund for emergencies. The future is unknown but we can plan ahead for unexpected surprises. If you lose your job or the furnace breaks, it’s good to know you are covered. Generally speaking we should keep enough in the emergency fund to cover at least 3 months of expenses.
  1. Don’t fear money! It can seem intimidating at first, but it is integral to daily living so you can’t ignore it! Seek advise from as many sources as possible.

How do you manage your money?

Please share your savings tips below…

Read about how to Make a Financial Plan.

Read about Dividend Investing.

Principal Residence Tax Changes

Principal Residence Tax Changes

Principal Residence Tax Changes

house-for-sale

If you own (or are considering owning) more than one property in Canada, this article is for you. Over the past several years, there has been an increase in foreigners investing in real estate in some Canadian cities: notably Vancouver and Toronto. Vancouver’s ever-increasing real estate costs have made it less likely for Canadians to buy a home in their own city. And the trend has also moved to Toronto. The new tax changes are meant to rectify this problem.

Recently Finance Minister, Bill Morneau, announced tax changes aimed primarily at foreign investors in Canadian real estate. But the changes also catch some Canadian investors who may have avoided paying tax on their principal residences.

Under the Income Tax Act, a principal residence is generally any residential property owned and occupied by you or family at any time in the year. It can be a house, condominium, cottage, mobile home, trailer or even a live-aboard boat. What the principal residence exemption does is make any gain on the sale of your principal residence a tax-free profit. But in order to qualify, you need to be aware of the tax rules that apply.

A simplified version of some of the tax rules:

  1. A family unit can only designate one property per year as a principal residence.
  2. You must ordinarily inhabit the property.
  3. The property must not be owned to produce income.
  4. The exemption is limited to a dwelling and 1.5 hectares of land.

Read CRA’s definition of principal residence.

Many Canadians have assumed that every sale of a home is always tax-free thanks to the principal-residence exemption (PRE). For example, if you own a home in the city and a cottage at the lake, your principal residence would most likely be your home in the city. When you sell your home, you wouldn’t pay any tax on any capital gains. When you sell your cottage, though, if there is an increase in the value of the property, then you would pay tax on the capital gains on that property.

The new rules require you to report every sale of a principal residence on your tax return, whether you owe tax or not starting 2016. If you fail to report the sale of a residence in 2016 or later years, you won’t be entitled to the PRE. If you forget to designate a property as your principal residence in the year of sale, you should ask CRA to amend your tax return for that year. CRA will often accept a late designation but there may be penalties that apply.

It can get more complicated for people who have a rental property or business operation. You may want to start tracking more closely the cost of all capital improvements that you make going forward. Keep all receipts and invoices. These will increase the adjusted cost base of your property and could save tax later if you can’t fully shelter the gains on your property. Keep in mind that just because you live in a house you own doesn’t mean it automatically qualifies as a principal residence. For example, building contractors or house renovators who follow a pattern of living for a short period of time in a home they have built or renovated, and then selling it at a profit, may be required to pay ordinary business tax on the sale of that house, rather than capital gains tax (which is usually applied to the sale of property) or an exemption under the principal residence rules. For some of these more complex situations, it would be best to get the advice of a tax lawyer or accountant.

Even if your situation is more simple and you own one property, it is still advisable to track any capital investments you make to that property, not only for tax purposes, but to also better understand the cost of owning your home and it’s current value.

Do you own more than one property in Canada?

Read about Owning versus Renting.

Dividend Investing

Dividend Investing

Dividend Investing

canadian-bills-money

Dividends are the stocks that pay you back. It’s like getting a paycheque every few months. You can’t afford NOT to invest in dividends!

Dividend payments are usually paid out by large, mature companies that don’t need all their cash to fund growth and instead of re-investing it all, they pay some of it to their shareholders. They tend to be slow and steady companies with moderate investment rates, so to attract investors, they pay dividends. This increases the overall return of the stock and makes them more attractive to investors. Dividend investing is not thrilling, it’s more of a long-term plan. Some companies pay dividends each month and others every quarter.

While you’re still working, it’s a good idea to have a dividend re-investment plan (DRIP). This means that the dividend payment (whether it’s paid monthly or quarterly) is rolled back into the investment. This is a great way to grow the investment and harnesses the power of compounding interest. This principle works while you are young or still saving for retirement. Once you reach your retirement years, you won’t need the DRIP because you will use the payments to create a modest income stream for daily living expenses.

Advice: Invest in high-quality businesses that have a proven long-term record of stability, growth and long-term stability. Invest in stocks that have a minimum of 10 years of rising dividend payments. The value of the stock may hold, but you want the dividend payments to be consistent or rise. Look for stocks that people would invest in during times of recession – these will have less long-term volatility and be more stable. You want to hold them for along time. If you notice the dividend payments are reduced or eliminated, then it’s time to sell. There is no one stock that is the best all the time. Diversify your investment to reduce the impact of being wrong at any one stock.

Dividend paying stocks have a record of holding up quite well in bear markets. If you’re focussed on following a dividend investment strategy, but not quite ready for individual stocks, then consider low-fee dividend ETF’s (exchange traded funds) or index funds. Do your research before jumping in. Take into account the rate of return, the dividend return and watch carefully any fees associated with the fund.

What is your experience with dividend investing?

Do you pay yourself first?

Read about owning versus renting.

Owning versus Renting

Owning versus Renting

Is it better to rent or to own?

house-with-picket-fence

You’ve worked hard to pay your mortgage payment each month and you got to the point of paying it off – congratulations! You are mortgage-free and own 100% of your home! It feels good because it takes most people 20+ years to get to this point. After working so hard to get to this point why would you go back to renting you may ask? Some young people today may even question whether they should continue renting or take the plunge and buy a home. Is it cheaper to rent or buy? Does buying a home create more wealth over the long term?

There may not be a definitive answer to this question because it depends on a few factors: where you live, how big a property you need, how you want to use the property and who will do any required maintenance? However, after some research, I can say that renting is not financial idiocy. I remember as a young adult, everyone expected me to follow the traditional pattern: to finish school, get married, buy a house, have children and live my life the same as everyone else.

Owning a home has some advantages. You can do what ever you want to renovate it and make it your own. But you also have to pay mortgage payments and re-negotiate them at least every 5 years. There are also annual property taxes and on-going maintenance fees. You are responsible for buying a new roof and replacing the furnace if it fails. When the plumbing stops working, you have to fix it or hire someone to do it for you. If you sell your home and move, there are transfer taxes, lawyer’s fees and moving fees.

If you rent, you pay a monthly rental fee and utilities, although some may be included. You don’t have to fix anything if it breaks and there are no property taxes. If you move, there are no transfer taxes or lawyer’s fees but of course there would be moving expenses. On the other hand, if the owner sells the property, you may have to move. Also you can’t always put your personal stamp on the rental property – the owner will have rules. Some may allow you to paint but you likely need to return it back to it’s original condition when you leave. If something breaks, someone else will fix it for you on their schedule.

The basic argument for owning is based on the idea that paying a mortgage is a forced savings plan. As a renter, you may not be disciplined enough to invest the money you’re saving as a result of not owning a home. But some homeowners are less disciplined than renters. Think of all the people using home equity lines of credit to support their lifestyle. They also may be in trouble if interest rates go up and not be able to afford their mortgage payments. I find that some people try to “out do the Jones” and get the big house, 2 cars etc. Not only do they not own their home, but they also lease their cars. So really they don’t own anything!

Most people believe that owning a home is better than renting. Buying or renting is not necessarily better. It is better too think like a finance person and make an informed decision for your own situation. Whether renting or buying, you still need a contingency fund for emergencies. You still need to save for retirement. You still need extra money for things other than your home. Know, understand and track your money and how you might spend it – then make a decision to buy or rent. Also think about how you want to spend your time. Do you want to do your own home maintenance? Do you like mowing the lawn? Do you want a large property with land?

It is important to make informed decisions based on fact and not with emotion. I am at a stage now where my adult children are moving out and after having owned a home with my husband for most of our married life, we are thinking about downsizing. For many years, I enjoyed puttering in the garden and being able to grow veggies in the backyard. But now I think I’d prefer to spend my time doing something else! My husband also prefers to do his own work on our vehicle in our garage, like oil changes and changing winter tires. We are thinking of one day selling and perhaps going back to renting as we did in our first year of marriage. I now don’t think of it as taking a step backward, rather simplifying our assets and lifestyle so we can spend our time, money and efforts on something new.

Do you rent or own? And why does it work better for you?

Read Do You Pay Yourself First?

Read how to Make a Financial Plan.

Make a Financial Plan

Make a Financial Plan

Make a financial plan to simplify and succeed

 Financial Plan

Write down your financial plan – Put into words your timeline for investing, your risk tolerance (high, moderate, low) and financial goals. Financial goals may include saving for a house, car and or vacation, paying off a loan, or saving for retirement, etc. During a time of market volatility, the financial plan will allow you to stay on track and keep it simple. Create a portfolio based on historical returns rather than recent performance. Stick to a plan that allows you to achieve reasonable return expectations.

Define your investment mix. This will depend on your comfort level as well as how close you are to retirement. The closer you get to retirement, the less risk you’ll want. The following is an example of how your investment mix may vary as retirement approaches:

Investment mix 20 years away from retirement:

  • 70 % equity
  • 20% fixed income
  • 10% cash or equivalent

 

Investment mix 5 years away from retirement:

  • 40 % equity
  • 40% fixed income
  • 20% cash or equivalent

 

Investment mix in retirement:

  • 10 % equity
  • 70% fixed income
  • 20% cash or equivalent

Focus on big capital dividend-bearing companies that have been around a long time. Stick with the tried and true and hold on to them. Stock markets can be volatile but the large cap companies hold steady. If you look at any 10-year period in the history of that stock, you should see an overall increase. Take into account capital gains and dividends.

Diversify your portfolio in different sectors. Choose companies that you are familiar with and that you understand. Stick to your financial plan of a defined percentage within each sector. Sectors may include telecom, energy, finance, consumer staples, health care, materials, information technology, utilities, and real estate. Diversify some of these investments globally.

Make sure you DRIP (dividend re-investment plan) all your dividend investments, so that all interest paid is re-invested. This may change once you enter retirement, but while you are building your portfolio, keep the DRIPS going. Later in your retirement years, you will want to maintain your capital but draw on the dividend payments for your day-to-day living expenses.

Save as much as you can. How much you save during your accumulation years will have a larger impact on your retirement lifestyle than your portfolio’s performance. We should err on the side of excessive savings and moderate return expectations. Better to have a contingency fund than to find yourself short on money. During your working years, take advantage of your employer’s Defined Contribution Pension Plan (DCPP). Many companies will match your own contributions and this is free money. Don’t throw away this valuable resource. Over a period of time, it adds up to a lot!

Stay in for the long haul. The more you focus on the market, the less you’ll make. Monitoring your portfolio on a daily basis is dangerous, time consuming and stressful. This leads to emotional investment decisions that we may regret. Long-term significance doesn’t happen in a day.

Become your own financial advisor. Many professional financial advisors (at banks and other financial institutions) are paid based on which investments they sell. Their opinions are biased and they may not be choosing investments that are the best for you. Do your own research and consider online trading with banks such as Scotia iTrade, RBC Direct Investing, TD Direct Investing, BMO InvestorLine

Track your progress. Don’t become obsessed with watching the market – rather track your monthly/annual statements to see if your money is growing at the expected rate. To make sure you are staying on track, enter your numbers in a spreadsheet. This will help you determine if you need to tweak any of your investments and will ultimately help you aim for a particular retirement age.

This requires some work and research but it’s worth the effort to protect and grow your earnings. You work hard for your money, so don’t delay: draw up a financial plan to help you reach your goals and save for retirement. What are your financial goals?

Read about paying yourself first.

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Do you pay yourself first?

Do you pay yourself first?

piggybankSaving for retirement can feel daunting. How will I save enough to retire? Or how will I save to purchase that vacation or big purchase?

The secret to saving money and accumulating wealth is to “pay yourself first”. Regular contributions to savings go a long way toward building a long-term nest-egg and also allow you the freedom to realize short-term goals.

Paying yourself first simply means putting money into your savings account first, as soon as you get paid, and before you spend it on anything else. It means setting aside a portion of your pay even before paying your mortgage or utility bills.  When you pay yourself first, you are setting yourself as a priority and establishing the importance of saving for your future.

There will always be a reason not to save first – your kids need hockey equipment, the roof needs replacing or you might be waiting for a raise. The longer you put it off, the harder it is to form good habits to reach your goals and save for the future.

Don’t put it off. Start small by setting aside $50 or even 1% off your salary. Once you feel more comfortable with the concept, increase to 3% and then 5% and so on. The Wealthy Barber suggests setting aside ten percent (10%) of your pay. The best way to do this is to make it an automatic transfer on each payday. Most banks allow this as an option for online banking or you can call your bank to help you set it up.

The ideal situation is to start this in your 20s, but it is never too late to start! Starting early means you won’t need to save as much each payday. Starting later means you need to save more each payday.

Once you have this set up, you can implement the same concept for short term goals as well – for things like that vacation to Europe or that boat you’ve being eyeing.

What are YOU saving for? 

Do you have any different methods to save for retirement?

Read How to Make a Financial Plan

Welcome to YPOL blog

Welcome to YPOL blog

Welcome

RachelHi! My name is Rachel and I’m a mother of 2 adult daughters, wife, sister, daughter, aunt and friend who works full-time and tries to live a healthy lifestyle. I decided to start a blog to share various day-to-day activities, many lifestyle choices and travel adventures. I think that many of us (at any age) face similar problems or questions throughout our lives and I feel we are really all looking for the same answers. I am privileged to live in Canada where I’ve grown up and also raised my own children. I am also lucky enough to have travelled to different parts of the world. One of the best things about travelling is returning home at the end! I am at a time in my life where my adult children are thinking of moving out and so a new chapter begins.

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