Aug 12 2008

Service Canada – Canadian Retirement Income Calculator

Service Canada – Canadian Retirement Income Calculator

With RRSP season having just ended and tax season ramping up, the last thing on most people’s minds right now is planning for their retirement.

Whether you do your own investing on-line, use your local bank, broker, or a financial planner do you know your “Number”?

Experience shows that many people don’t have a good handle on the one number that will mean the difference between a quality retirement and having to struggle. Your “Number” is the amount of money necessary to give you the retirement you want.

One of the simplest tools I have come across to give you a rough estimate of your “Number” is the Human Resources and Social Development Canada website. Click on the “Canadian Retirement Income Calculator” link or type the following into your web browser.

To get the most out of this calculator, make sure that you have as much of the following information as possible:

· your most recent CPP Statement of Contributions or QPP Statement of Participation;

· financial information about your employer pension (if applicable);

· recent RRSP statement(s) (if applicable);

· your most recent statements for other savings that will provide ongoing monthly retirement income (annuities, foreign pensions; survivor pensions, etc.); and

· enough time to complete the calculator – usually about 30 minutes.

While using this calculator, please keep in mind that it is a rough estimate of your future income. Many factors may affect your retirement income and your actual income may differ from the results in this calculator.

In summary, if you were able to work through this calculator you now know have a handle on your “Number”. If you struggled and need more assistance, that’s where an investment professional can and should be helping you. Good luck in finding your “Number”.

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Aug 12 2008

The New Kid on the Block…the Variable Annuity / GMWB!

The New Kid on the Block…the Variable Annuity!

The variable annuity of commonly referred to as a GMWB is on the horizon. In June 2006, I attended the Morningstar Investment Conference, which focused on “Retirement Income Planning”. One well-known speaker, Moshe Milevsky, introduced the concept in retirement planning of not just how to generate retirement income in your portfolio by having a proper asset allocation (a mix of cash, bonds and equities according to your risk tolerance) but also the importance of product allocation. Product allocation refers to your allocation to various products such as GICs, mutual funds, annuities and a new category called the “variable annuity”. This article focuses on the variable annuity as a consideration.

While the variable annuity has existed in the US for over five years, Manulife introduced it to the Canadian market in the fall of 2006. Manulife calls it “Income Plus”.

In a nutshell, it addresses concerns retirees might have of outliving their money, inflation and the effect of poor early returns in their portfolio.  The variable annuity attempts to address this as follows.

  • It offers a guaranteed payment of 5% of your original investment each year for 20 years with the potential to increase the payments in the future, using a “reset” feature (resets are beyond the scope of this article).  For example, a $100,000 investment would have a minimum guaranteed payment of $5,000 annually for 20 years.
  • It offers a 5% “bonus” of your original investment for each year your defer taking a withdrawal (up to 10 years maximum). For example, a $66,667 investment today would get a 5% bonus of the original investment each year i.e. $3,333 and grow to a balance of $100,000 in 10 years.  The investor could then start payments and get a guaranteed minimum payment based upon 5% of the $100,000 value i.e.$5,000 annually for 20 years.

These products can be used in registered and non-registered accounts.

As there is no free lunch, a variable annuity has an added cost to get the guarantee. This cost depends on the percentage equity held in the underlying investment.

While the basics of how a variable annuity works is quite simple, the product can get complicated as you dig deeper. This article only serves to raise the awareness that “variable annuities” are the new kid on the block. As with any new investment, do your due diligence.

For further information on “variable annuities” or to learn how they might compliment your current retirement income strategy, please contact me.

Disclaimer:” “Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.”

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Aug 12 2008

Your Cash Management Plan: The Emergency Fund

Your Cash Management Plan: The Emergency Fund

As a financial planner, I often observe when I meet prospective clients for the first time is their lack of an emergency fund as part of their cash management plan. Why do we need an emergency fund? At anytime, we could experience a situation where our cash flow cannot meet the demands due to an unexpected emergency. These range from the moderately inconvenient, like a major car repair, to the potentially disastrous, like the death or disability of an income earner, or a long period of unemployment. Some of these problems can be moderated by life or disability insurance, or by unemployment insurance, but some financial impact will likely remain.

Some form of emergency fund is crucial to every cash management plan. The size of fund that is right for you will depend upon your circumstances. Some questions to consider include:

· How secure is your job?

· If you lost your job, how difficult would it be for you to find a new one?

· Are you the sole breadwinner in the family?

· What would happen to your cash flow if you or your spouse died or became disabled?

· What is the condition of your car? Your furnace? Your major appliances?

· What would happen to your cash flow if one of your parents or children suddenly became ill, and you had to take a leave of absence from work?

From the Canadian Institute of Financial Planners, Practitioner’s Guide, the recommended emergency fund should be between four and six times monthly expenses. Remember it’s based upon expenses, not income! So how is it calculated? Add up the following expenses.

· Shelter

· Household and Family

· Transportation

· Discretionary

· Other Debt Repayments

If we assume total monthly expenses of $2,000, then the emergency fund range should be between $8,000 and $12,000. While this may seem like an insurmountable challenge, it can be implemented over several years and can begin with as little as $25 per month.

You don’t have to keep emergency funds sitting in a cash account, and in fact, this is not recommended as if it’s too accessible, you might be tempted to spend it! Some of the more traditional possibilities for emergency funds include money market mutual funds, high yield savings accounts, Canada Savings Bonds, or T-bills. It may also be possible to restructure some of your existing assets so that they can be accessed in an emergency.

In a pinch, you might withdraw funds from the RRSP. This might be appropriate during a long period of unemployment when taxable income is reduced anyway. But be forewarned, the contribution room cannot be restored at a later date. While overdraft protection or a personal line of credit might be considered, I would generally warn against it. With borrowed money, principal plus interest must be repaid and what happens if you get into serious financial difficulty, such as job loss where the emergency lasts longer than expected.


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