Retirement Plan:
First things first: Pay off your high interest debt, obvious I know, but totally correct. The reason behind this is pretty simple. Most (current) investment portfolios can make you anywhere from 3%-8% total which just can’t compete with high interest CC’s or lines of credit.
1) If you’re carrying anything in the 15%-29%: Talk to your bank about a line of credit, which should have an interest rate of anywhere from 5%-10% (or much less depending on your credit history). Get one for about $5K and use it to pay off your CC’s, if you have any.
2) DO NOT GET RID OF YOUR CARD(1), keep it to pay for groceries then transfer the amount from your bank account to your credit card as soon as you get home, same with gas for the car. Pay the balance every month, the reason for doing this is to avoid card usage & interest fees as well as continue racking up good credit.
3) Get an Air miles or reward credit card without fee’s annual or otherwise. We use our Air miles to help pay for gas. Not a bad idea to see if your bank will offer you a better rate than other cards, always shop around and once a year call your lending agency for a better rate.
The first step to a successful investment strategy is to be aware of where your money goes and controlling the amount of debt you carry. I recommend this site to work on a budget: http://www.gailvazoxlade.com/ she’s a Canadian financial consultant that really seems to care about helping people. She’s got a lot of free resources to use in order to identify and control spending & debt. The budget worksheet, holiday spending plan & most of the other resources are all really helpful.
Things to keep in mind:
1) Canada’s retirement income system link: http://www.servicecanada.gc.ca/eng/isp/cpp/soc/50-70/today.shtml
a) Government pensions: CPP, OAS & GIS.
b) Employer pensions.
c) Personal Savings.
2) Government pension, if they still exist when you retire, is less than people think.
a) CPP: Canada Pension Plan. You have to be 60(They are thinking of raising it to 65) in order to collect. You must apply for it when the time comes. You can still work & receive the pension, so no worries there. You get penalized for taking it before 65. You can visit the services Canada website in order to estimate what you’ll get, but as you’re still a wee lass I’m not sure what it’ll show you. Don’t count on more that $500/month. This is fully taxable.
b) OAS: Old Age security. You get this at the age of 65, again, you have to apply. This is almost guaranteed to every Citizen of Canada. Don’t count on more than a few hundred dollars (currently the average is roughly $508.35), all of which is fully taxable.
c) GIS: Guaranteed Income Supplement: A supplement, hopefully you won’t qualify for this as it’ll generally mean you’re below the poverty line.
d) Total income from the Government per month: $1K give or take. Think about how far this will go in a month, and figure out the difference. That difference, percentage wise, is you rough estimate for retirement savings.
3) Employer Pensions: These are few & far between nowadays, but if you can score one, all the better. My work offers an RRSP matching program, which is one of the only reasons to get an RRSP account. The government offers a Pension, as do a few other public sector jobs. The private sector has basically cut them, unless it a massive multinational and it makes tax sense.
4) Personal savings is where the majority of your retirement will come from. There are a number of way to accomplish this:
i)Pro’s: a) Can give you a cash windfall in the form of a Tax refund, this can be used to pay off high ratio Credit Cards.
b) Companies & Government are hinting at lowering/dropping pension plans in place, and since we’re living longer, an RRSP is a good way to force saving for retirement.
c) Allows you to borrow in order to buy a house and pay back within 15years. (This is a double edged sword, so beware)
ii) Con’s: a) Re-invest the Tax refund into the RRSP, or it loses most of the point in having one. Example: A $3K contribution to an RRSP can net a refund of $1,200. If this refund is spent elsewhere, the contribution will only be worth $1,800 when you retire(Not including gains/losses within the plan) because you will have to pay tax on the $3K when you start withdrawing for retirement (The tax may even be more in the future, so the $1,200 you get now, may be $1,500 paid back later). May as well re-invest the $1,200 and have it make you money inside of the RRSP.
b) After the age of 71, you have to either empty your RRSP completely and pay all of the tax at once, this is also known as a tax bomb, or set up a fixed withdrawal schedule with the government that cannot be altered. Both of these severely limit your retirement flexibility.
i) Pro’s: a) Everything that is earned in the account is 100% tax free. If you invest $1K and at withdrawal it’s worth $2K, you don’t owe anything in Tax.
ii) Con’s: a) Contribution confusion. You can only contribute up to your allotment per year. This means that if you withdraw everything, lets say to buy a home, and you re-contribute all of it back, you win a lottery(I’m using extremes to make it more obvious, as the penalties are much too subtle). EG: 2012 you have $20K total in TFSA room, $15K of which is filled, $5 of which was contributed this year. You withdraw the whole amount to put a down payment on a house in June. Come July you win a million dollars in the lotto. When it comes time to preserving your winnings, most people assume that they have $20K in a TFSA to contribute to, and they would be right, except for the fact that you have already invested $5 K in 2012. So, in order to save yourself paying penalty, the proper way of re-contributing to you TFSA would be to invest the $15K in 2012 ($5K already contributed prior to withdrawl, and $15K to round out your $20K allowable contribution for the year 2012. In 2013, you would then be allowed to contribute $10K, $5K for the 2013 increase, and $5K to refill the space from prior. Clear as mud)
Something to remember: It is never a good idea to use a High interest savings account as your TFSA. The ‘High interest’ is governed by the BOC and based on the Canadian Interest rate, which is .5% or something ridiculous, so at most it’ll make you 1%. But if you use a Mutual fund, you can see a return of 5%-8% depending on the market, anything less and you need to take a close look at the way the fund is set up, which I’ll get further into later.
c) Mutual Funds: These are a good idea as long as the fee’s are low, and you spend the time building a ’balanced’ mix. When one market, bonds/money/natural resources/tech ect, suffers, another is building. Building a balanced portfolio/mutual fund attempts to mitigate losses by providing an upside, and in the long run, as theory stands, will grow.
d) Direct Investment: Risky, but potentially rewarding. Very stressful without proper investigation/research/time investment. This can be a full time job.
e) Other: I may come back to this. I added it in case something came to mind that I may have missed.
Balanced Portfolio: There is always debate on this, but I really believe that the theory is sound, the markets are organic and as predictable as weather. So, instead of trying to guess the direction of the markets, you build a portfolio that can roll with the punches thrown. Better to bend with the wind then try to stand firm in a tornado. Anyway, there are numerous models out there to guide you to making a balanced portfolio, I personally use, and am happy with the following:
8% guaranteed. This means that 8% of my total investment into my mutual fund never exceeds 8%. This allocation is invested into a daily & compounded interest account (Interest fluctuates with the overall rate set out by the BOC). Once rates in Canada rise to a ‘normalized’ level, I’ll bump it up to 10% of my investments.
40% Balanced/Diversified: Canadian & Foreign equities that pay stable dividends. Dividends are great, but keep an eye on where the company takes them from. If it’s strictly based on earnings, and is generally comparative to the dividend history, all is usually well. If they are drawn from reserves or sales/debt, this could be a sign that a company is attempting to manipulate stock price and general worth of the company. For the most part, this is the homework of a mutual fund, so you don’t need to worry too much about this level of attention; it’s what you pay the Mutual fund fees for.
37% Equity: Stock market direct investments. This is where a little time needs to be invested. Look through the available choices the mutual fund has available, and choose something you are comfortable with. Right now Markets in Singapore, Malaysia & Thailand all look stable, in an unstable market, so I have mine allocated in that direction. Once interest rates ‘normalize’ I’ll take 2% off of the allotment and apply it to the guaranteed portion.
15% Fixed income: Money markets(forex), Bonds and index bonds. Forex means the foreign exchange, investing in currency. Bonds are, at a basic lvl, investing in the future of Countries by lending money in exchange for a higher than normal interest rate. The higher the risk of losing your money, the higher the rate & vice versa. Index bonds are similar to bonds except that you’d be investing in overall markets; “A bond in which payment of income on the principal is related to a specific price index - often the Consumer Price Index. This feature provides protection to investors by shielding them from changes in the underlying index. The bond's cash flows are adjusted to ensure that the holder of the bond receives a known real rate of return.”
Every year, usually in November, I take a look at the total %’s in my portfolio, & depending the fee’s involved, I’ll make movements within my build to ensure that the overall percentages remain fairly intact. For example, if my Balanced/diversified shoots out to over 50% of my total invested amount (I like it to stay close to 40%) I’ll take the 10% difference (This can be thought of as harvesting return) and investing it into a portion that is lagging (this can be thought of buying low).
Feel free to research other models, but this one should fill your need in the short term, or potentially long term. The key to successful retirement saving is research and evolution. Keep on top of the big picture and leave the immediate up’s & down’s in the newspapers as a good balanced build should weather them.
Now the fun stuff. Open up a TFSA as opposed to an RRSP. The reason for this is that an RRSP is a Tax Deferral program, meaning that you may not pay any tax on this money now and will sometimes generate a tax refund, read: TAXBOMBAGEDDON. A TFSA is ideal because you will have already paid tax on the money invested in the first place and everything that the account gains will be tax free.
If you have no credit card debt, or even if you have credit card debt, open a line of credit with your bank at $5K (Anything more and it could get out of control) and invest it, using the percentages I’ve stated above, in a mutual fund. If you have debt, pay off the debt and work on getting your balance back to 0 in order to invest in your portfolio.
When looking into Mutual funds, pay attention to fees, most specifically, wihtdrawl fee’s, inner portfolio type adjustments/moves and anything else that will leach from your gains. Weigh this against gain percentage targets. 2ndly, take a look at the history of the fund, keeping in mind that 2009-current has become the new ‘normal’ and lower forecasts are not necessarily a bad sign (5%-8% is reasonable, below and above is riskier & requires more research into why/how they got that way).
In closing, a warning, take EVERYTHING you hear & all advice given(paid for or not) with a grain of salt. Do your own research and you’ll avoid the BreX’s, Nortel’s, .Com’s & Real Estate trappings behind. The real estate one is blowing up all around us, Calgary is going to fall a bit later then Van & Toronto, but don’t believe the Hype that all is well. So do not invest any of your portfolio anyplace there for a while. The government has killed the 30 year, the CHRA has scaled back support to lenders as well as made the requirements to the insurance much stricter, and the interest rate can go nowhere but up, all three of these examples are Canada wide, so Calgary is in as much trouble as anyone else. Get a bag of popcorn, sit back & watch the fireworks of a country that has over extended in a higher percentile than our southern neighbors.
If you have any questions, drop me a line and I’ll see if I can help.
Good luck!!
J
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