Thursday, February 22, 2018

Doing What’s Right Has to Be Right for You

Good or Bad

No surprise here. February is often associated with Valentines’ Day.  Financial advisors and planners generally look beyond this day to the March 1st deadline which requires clients to make their RRSP contributions.

But what if you don’t have the money for the contribution? Do people consider borrowing money for their RRSP investments?  Curiosity caught up with me. I quickly searched the Internet.    Most articles leaned towards the negative.  Headlines blurted out harsh warnings, “It’s not the smart-money thing to do” and “Why you shouldn’t borrow for your RRSPs.”  

I did. I borrowed money for my RRSP investment.  As a single mom, there wasn’t extra cash to make a lump sum investment.  When you are in your mid-thirties, reality stares at you reminding you the clock is ticking down to your retirement years.  If you don’t start saving, you might not have enough.  I can attest the tax refund certainly helped pay off my loan quicker. 

I agree for the most part on the points made in the articles. But I trust you know yourself best and can demonstrate whether a strategy is the right thing for you.  My rebuttal is, “If the shoe fits, wear it”. When applied to whether to sign up for an RRSP loan, “If the strategy works, use it.”
Sometimes doing what’s right has to be right for you.  When you can’t get into the routine of saving regularly, borrowing the money for an RRSP might be one way to get you started.  First, let’s understand one thing. I am all in favor of an “anti-loan strategy”.  I probably sound hypocritical except for this additional piece of advice: this strategy is only encouraged to eventually wean you from making  RRSP loan payments into making regular RRSP contributions.

The Battle between “If” and “But”    

Here’s the war-on-words.

If you do this, you achieve success. But when you do that, you will be defeated.

If you borrow the money to invest into an RRSP, you begin saving for your retirement. 

But when you neglect your loan obligations and are unable to make your loan payments, then you have defeated your purpose and destroyed your credit in the process.

If you invest the borrowed money into an RRSP, you save on income taxes and the investment income compounds and the savings grow.

But when you withdraw money from your RRSP savings prior to your actual retirement date, you have lost sight of your retirement goal. 

To win the battle, you have to understand the commitment and consequences before you apply for the RRSP loan.  

An Impressive Balance Sheet

Borrowing money is the very thing many people are currently doing.  They are willing and able to set money aside for loan payments to buy vehicles and pay for their vacations {among other tangible and intangible things}.  Often loan payments are seen as a form of “forced savings”.  Borrowing money rather than saving is often considered the only way to acquire an asset. If we are willing to borrow, then let’s make a play for an important need. Why not implement this forced savings strategy as a temporary measure to build your RRSP savings?

The ultimate goal is to forge ahead and pay off your loan. When you do, your Balance Sheet will look impressive.  Eventually your Net Worth increases because you will still hold your investment asset once your loan is paid.   

Balance Sheet
RRSP Investment  $1,000
RRSP Loan          $1,000

Net Worth            $       0

Balance Sheet
RRSP Investment  $1,000
RRSP Loan          $1,000

Net Worth            $1,000   

Behind the Scenes

In essence, we are trying to instill a new habit. When you create room for a loan payment in your budget, the intent is to eventually ditch the loan payment for a regular RRSP contribution.  When you also pay attention to the amount of interest paid on the borrowed money, you will ultimately be driven to avoid using a loan strategy as a means to build your retirement savings.  The overall plan is to kick start your retirement savings.  According to the 2016 Statistics, two-thirds of households are setting aside money for retirement.  The question is whether it is enough.

Your “Why”

Being aware of your circumstances, limitations and weaknesses, helps you make sound financial decisions that are right for you.  One piece of financial advice, from either this blog or anyone else’s, does not necessarily trump the other.  The financial strategies and advice are designed differently because peoples’ needs are different.  
Borrowing money for an RRSP investment might not be the ideal long-term plan.  The goal is to transition regular loan payments to monthly RRSP contributions.  The underlying motive is to plant a habit of investing a consistent amount of money to replace the income you currently earn. A small sacrifice today means a secure income for the future. 
How can we make this easy for you?  Children often ask the “Why” question. “Why do I have to do this?”  “Because” might be the answer which works for them; however, it might not work for you.  Understanding your “why” will cement your conviction to save when you are tempted to do other things with your money. Definitive SMART goals, whatever they may be, allow you to maintain your focus.
·       I want to work full-time until I am 55 years and then retire.
·       I want to be able to live my retirement dream with an annual income of $60,000.

Problematic Hurdles

Even before considering a loan strategy, you have to determine whether you would qualify for a loan. Borrowing money can often be equated to jumping hurdles I believe the important question which begs an answer is, “How much of a monthly payment can your income handle?  

Pushing through temptation to strive towards your goal might require a trade off.  You may need to make room for the payment by nitpicking through the details of your spending habits. What can you possibly give up that will help you meet your goal?

The Promise

When you embark on the strategy of borrowing money for an RRSP investment, you must pinky swear to make your loan payments on time and never-ever withdraw any money from your RRSP investment until you retire.

This strategy, like any other, is a way to achieve your retirement goal.  Your attitude and commitment determines the most appropriate fit for your financial plan.    When you rationalize borrowing money as a short-lived strategy to secure your retirement, you will meet success.

The real goal is to do something.  When you begin to shift your thinking to “this-must-be-done”, you will discover there are no shortcuts and quick fixes. Remember, you are doing this for your family and you. Once you make the connection, there’ll be a willingness to follow through consistently.  “It’s just the way it has to be because it is right for me.”   

Thursday, February 8, 2018

Who Can You Trust with Your Retirement Income?

Retirement Planning in Canada for the Road Ahead Pension

You keep your commitment. You show up for work with the expectation that in return you will one day receive a comfortable retirement benefit.  You hold up your end of the deal.  But something goes wrong…figuratively (and financially) speaking. Nothing you did caused this.

Types of Pension Plans

People who are fortunate to work for a company that offers a pension plan generally have either a Defined Benefit Plan (DBP) or Defined Contribution Plan (DCP).  The Defined Benefit Plan comes with a promise to pay a retirement income for life based on a specific formula based on a percentage of your income and years of employment.  A Defined Contribution Plan, also referred to as a money purchase plan, is one in which contributions made by both an employer and employee are invested into a pension plan in a similar way investments are made to a personal RRSP (Registered Retirement Savings Plan).   What you see is what you will get at the end of your working years.
Quite often people know they have a pension plan but they are uncertain about the plan’s details. If they do open their annual pension statement, they usually glance only at the breakdown of pension benefit. 

When your pension statement is dropped on your desk or arrives in your mailbox, it’s imperative to look at your statement to understand what you are entitled to receive upon retirement.  You may get to the end of your career only to discover you are not as “rich as you think you are”.

Retirement Planning for the Road Ahead Pension

Are all pension plans equal?

One of the biggest news stories lately has been the financial welfare of defined benefit pension plans.  A Defined Benefit Pension Plan (DBP) promises retirees a lifetime benefit.  They are depending on this steady stream of income in the years when they are no longer able to work.

We don’t often talk about the solvency ratios of pension plans.  When you don’t understand something you assume that if something is wrong, “they” will fix it. 

Here’s the simplified version. The financial terminology for “solvency” is the ability for one to pay their debts.  It is not complicated. If you were to stop doing what you are today, do you have enough cash to pay all your debts?  If you were no longer in business today, would you be able to meet all your debt obligations?  The formula is straightforward:

Assets – Liabilities = Surplus or Deficit

The expectation for Defined Benefit Pension Plans is their ability or inability to fulfill their commitment to pay the promised retirement benefit.  The most overlooked section on a pension statement is the section, Plan Funding, which addresses the financial health of a pension fund.

The Pitfalls Associated with Pension Plans

I read a recent pension statement that didn’t provide the specific details about its solvency ratio.  However, the statement clearly indicated that the plan’s assets would not have been sufficient to cover its liabilities if the plan had been wound up on the last valuation date.

This particular pension plan is a Public Defined Pension Plan. Any shortfall in these types of pension plans has the backing of the government and will be picked up by the taxpayers.  On the other hand, Private Defined Pension Plans do not have this kind of luxury.  If there is a deficiency in their pension plan, no one picks up the pieces to replenish the plan to fund 100% of the promised benefits.  When a business goes bankrupt, the assets are liquidated and are distributed firstly to secured creditors.    Unfortunately, retirees are like an unsecured creditor; they come at the end of the line.  Whatever amount of cash is held in the pension pool is theirs to be divvied up.

The deficiencies (shortfalls) in pension plans have analysts scrutinizing the demise of Sears Canada.  Because their case is recent and unexpected, many want to know what went wrong. The greatest discovery was the extravagant amount of money doled out to the shareholders rather than directed to the pension plan’s deficit. Where do the obligations reside?  Who has a greater entitlement to the company’s retained earnings:  the shareholders who made a sizable investment into the company or the employees who worked for the company to create the profits?

An insightful observation into the status of Defined Benefit Plans is outlined in the report, The Lions Share, Pension Deficient and shareholder payments among Canada’s largest companies. Cole Eisen, David Macdonald, and Chris Roberts identify the need for policy reform to protect the beneficiaries of defined benefit pension plans.   

Their research included this alarming observation:

The recent news that Sears Canada will shutter all remaining stores as a result of its insolvency leaves its DB pension plan with a $267 million funding shortfall on a wind-up basis.  Since 2010, Sears Canada paid back $1.5 billion to shareholders in dividends and share buybacks.  In other words, Sears Canada paid back five-and-a-half times more to its shareholders than it would have cost to entirely erase the deficit in its DB pension plan. As Sears proceeds to liquidate its entire Canadian operations, it will be Canadian retirees who are left to deal with that decision.  Regulators, policymakers, and Canadians will quite rightly ask whether this disaster could have been avoided.  

Equally alarming are comments made by Sears retiree, Ken Eady.   In the Money Sense’s article, What Sears retirees can do about the reduced DB pension, employees were aware of the events that were transpiring in the company.  

Mr. Eady shared, “They sold the assets, took the capital and did not make any meaningful investment in the business, including the pension plan. They let the company drift into a very bad spot and stripped it of many revenue-generating assets. If they had invested in the company, built a new online sales platform or other revenue-generating enterprises, Sears would still be operating and we wouldn’t be talking about this.”

My hearts goes out to these retirees or near-retirees. For many, the clock has run out on their working years.  These veteran employees trusted their employer. They trusted the pension regulators, The Office of the Superintendent of Financial Institutions (OSFI), to watch over their pension funds.  Who failed them?  Knowing there is a deficiency in the pension plan and providing too much leeway to make up the difference are the makings of a disaster. Someone made an incorrect assumption, claiming the company needed time to restructure and then they would rebound. 

I also questioned the role and responsibility of the actuaries.  They advise trustees and companies on the management of their pension schemes. Pension actuaries are on the scene to purposely check the financial health of the Defined Benefit Plan and ensure its viability to withstand the test of time to meet its obligations to plan members.  Their valuation is reported annually or triennially to the Office of the Superintendent of Financial Institutions (OSFI) who supervises federally regulated pension plans.   

With so many checks and balances in place, one would expect an alarm to be sounded during this rigorous process. But obviously, the rules around best practices haven’t been firmly established. The potential problem has been compounded with lower-than-ever-expected interest rates and the longevity of retired employees. The pension fund may have been depleting more rapidly than anticipated.

Looking After Your Retirement Income

The take-away from this unfortunate circumstance is that promises can be broken.  Things can and do go wrong with the financial operations of any business.  If the business has a pension plan, like Sears Canada and others did, there can be detrimental effects to people’s retirement income.  There is minimal comfort in knowing a benefit, even if it is 19% less than originally anticipated, will be forthcoming.  Any reduction will be a severe blow to a retiree living on a fixed income while inflation affects the cost of living expenses. 

If you are relying too heavily on your pension plan to provide income in your retirement, the simple answer is “Don’t”.  In CBC’s news article, Sears Case Shows the Risk of DBP for Employees, personal financial experts say there is a risk with this kind of dependency.  I couldn’t agree more. 

Retirement Planning for the Road Ahead Pension

The outcome is your lack of control over your future.  You are allowing someone else to drive your destiny. When your pension statement appears, make the time to understand your pension plan and its projections. If necessary, speak to a CERTIFIED FINANCIAL PLANNER® professional to make sense of your retirement plans.  What you see on paper today might not be what you get in a pension benefit tomorrow. 

Thursday, January 25, 2018

Can You Do This?

I am not sure I could do it unless I was locked in my house.  The temptation to shop would be even greater when you live near a shopping centre.   To spend no money for a period of thirty days is a bold challenge to undertake.    

Watching the CTV News, I was intrigued by Donna Lee Criss and her 30-Day Apocalypse Challenge Her challenge is to spend absolutely no money other than pay the monthly bills and purchase gas for her vehicle.  She plans to make do with the ingredients she has in her home and, if necessary, barter and accept goodwill from others. The challenge is an opportunity to reflect on her spending habits. 

The challenge would provide the opportunity for us to focus on what we all have rather than what we don’t have.  Most would agree our cupboards, fridges, and freezers do not portray Mother Hubbard’s in the favorite nurse rhyme. Recall Mother Hubbard’s cupboards were bare.    Ours certainly are not. Yet how often has have our spouses or children said, “There’s nothing to eat in the house”?   An Apocalypse 30-Day Challenge might change everyone’s perspective and create an epiphany for us.

Donna Lee Criss’ Apocalypse Challenge resembles a similar yet different challenge related to food. I tried to curb my uncontrollable eating habits with the Sacred Heart Diet-Soup Base 7 Day Plan. You could eat all the soup you wanted for the week. On specific days, you were allowed to eat fruit and raw vegetables along with the occasional teasers, a baked potato and steak.  You were never hungry on the Sacred Heart Diet but you eventually became tired of eating the soup.  If I was given the option, I would rename this diet, “The Gratitude Diet”.  After a week with limited food options,  I was grateful for even a morsel of chocolate cake rather than none.  The elimination of having anything and everything I wanted gave me a new perspective on“having some is better than none”.   
The theory is we all have a tendency to feel deprived when we are told, You can’t do something, can’t buy something, or can’t eat something.”  An impulsive urge or craving automatically triggers us to want to do the exact opposite.  We naturally want to do that, to buy that, to eat thatthe very thing they said, “you couldn’t, you shouldn’t, you mustn’t!” 

Here’s the revelation:  Deprivation leads to gratification.

Anytime we are deprived of something even for a test period, we develop a deeper sense of gratitude for it.  If you have watched a child receive a toy after it has been taken away for a stretch of time, they have a new sense of gratitude for the old toy.  As adults, we are no different than children.   The realization that you can resume your normal activity, like shopping or eating, means doing so in moderation and with a keen awareness. We want to foster sound control measures.  The challenge was a “discovery process” to uncover our soft spots.   This process also allows us to set or reset our motives. Gauging our spending habits is critical before they get out of control and cause serious harm.  Imagine barely recovering from our Christmas purchases then jumping all over “January Blowout Sales” .

I would tread cautiously about a test period lasting for thirty days. This is a long time to be banned from spending money on anything.  My concern is that the experiment might trigger a reverse effect, an overspending frenzy to make up for “lost time”.  You might  sway yourself to believe you deserve to be pampered for your month of good behavior.      

The true reward comes when you focus on what’s really important in terms of your wants and needs.   The reality is one day you may not have the choice to cut back on your spending. You may find that your retirement income simply cannot sustain a costly lifestyle and changes will be inevitable.  The reality is we need to be good custodians of our money. There is nothing quite like a challenge, even for seven days,  to align your spending priorities with your current income.     

Thursday, January 11, 2018

Anything Can Happen – Be Prepared

The news reports we hear of peoples’ stories are real.  They shock us. They surprise us.  They cause us to be sympathetic but do they ever move us to make changes in our own lives? Maybe. Maybe not. 

The latest news is the unexpected demise of Sears Canada.  No one saw this coming.  A reputable Canadian company with a solid financial track becomes a victim of retail bankruptcy.  Ron Husk’s story paints a grim reality that you can never be prepared enough for this kind of situation.  At age 72, Ron is returning to work part-time at Home Depot.  It's the last thing he expected in his retirement years.  Retired employees like Mr. Husk had their life insurance, health and dental benefits cancelled in September.  Soon, Sears' retirees are expecting their pension to be reduced by 20 per cent.  The point is these kinds of situations can happen to anyone.  Financial mishaps occur in different ways, sending our financial situations spiraling out of control.  

You have witnessed your share of stories like I have.  I have seen a man lose his home and everything he owned because of a house fire.   I heard from a young husband and father of two who was fighting pancreatic cancer by travelling to Austria for medical treatment.  I have seen a woman struggle with pain as a result of a vehicle accident which broke multiple bones and caused severe brain injury. These incidents are traumatic.  We are na├»ve if we believe nothing can happen to us. This dismal reality causes us to be aware of our priorities.

Where am I going with this?

Most people have never heard of Abraham Harold Maslow or his creation of the Hierarchy of Needs.  His study reveals that we have a five-tier model of basic needs. Once our basic survival needs are met then our desire is to move up the pyramid to the next level.  

Many articles and blog posts have connected Maslow’s Hierarchy of Needs to our financial needs at each of these levels.  One quick Google search will link you to many explanations about applying this theory to managing your finances accordingly.

For me, the one thing that stands out is how we have a tendency to mix up our priorities.  Literally, this breaks my heart. I see a picture of a two-year old daughter going for her first manicure and pedicure.  I see a two-year old son getting a remote-operated toy monster truck for a Christmas gift.  I see people trading vehicles less than a year old “just because”.  Spending money on your children and yourself goes beyond meeting the first two needs:  physiological and safety/security.  They are fulfilling the need for love (spoiling your children) and esteem (displaying what you drive as important).

I don’t like using the term “wasting money” per se.  However, the truth is you may not have built a strong solid foundation of security before you jumped ahead to impressing your children with gifts.  If they were old enough to choose, they may have chosen security over gifts of love.  They would have preferred knowing that if you lost your job or had to deal with a serious illness, they would feel loved knowing they had a home and you.

Setting boundaries on our spending habits is one way to love our families.  Other ways are ensuring we have put in place the security of insurance, contributing regularly to an emergency savings account, and paying down our debt to free up cash to save for our retirement years.

You might not fully appreciate hearing from a financial planner “what is important in life”.  However, you may appreciate hearing from someone young with her whole life in front of her who didn’t have the chance to grow old and wrinkled. A heart-breaking news story comes from a letter written by Holly Butcher. Holly passed away at the age of 27 from cancer.  Before she died, she shared her thoughts about the true meaning in life. Click here to read Holly’s story.

Here’s the challenge. I believe you can write your own story.  You can learn from others as well as Abraham Maslow about your basic needs.  Life teaches us lessons.  What have you appreciated learning from others and your own experiences? You may share your news. 

Thursday, December 28, 2017

A Time for Reflection and Planning

Have you ever had a song’s lyrics, playing over and over again, stuck in your head?  During the holidays, I kept hearing these words to “So It is Christmas” so much so that I felt compelled to share its message with you.

“So this is Christmas and what have you done
Another year over, a new one just begun…”

“A very merry Christmas and a happy new year
Let's hope it's a good one without any fears…”

This time between Christmas and the New Year can be an excellent time for reflection, to think about what we have done, both good and bad.  Since Santa keeps a list of all the children who are naughty and nice, we could copy Santa’s practise by keeping a list to see if we are naughty or nice with our finances.  

During the holidays, my brother-in-law toasted to a year of “having enough”. In all seriousness isn’t that all we need, “enough”?  Diane McCurdy, a CERTIFIED FINANCIAL PLANNER® professional, wrote the book, How Much is Enough, and created a list of twenty key strategies for making enough.  We could all take a lesson from her.

Here’s your assignment.  

Read through the list below.
Reflect on what you have done.
Plan to make enough.
And have a great 2018!  

Twenty Key Strategies for Making Enough

  1. If you know what you want, you can get it.
  2. It's never too late—or too early—to start financial planning.
  3. A little is better than nothing.
  4. Any interest you pay is money you can't spend on yourself.
  5. Clearing up debt is short-term pain for long-term gain.
  6. Make compound interest work for you, not against you.
  7. Pay yourself first: take at least 10% off the top to save and invest.
  8. Registered retirement plans put more money in your hands and registered education plans put more money in your children's hands.
  9. Revisit your wish list to refocus on what you're aiming for.
  10. If you didn't want something in the first place, it's not a deal no matter how cheap it is.
  11. Never hand over financial control—no one else cares about your future the way you do.
  12. Get rich slowly—put your money regularly into solid investments.
  13. Markets go up and down. Don't panic.
  14. Invest only in things you understand and feel comfortable with.
  15. If you miss an opportunity, there will always be others.
  16. Borrow only for things that appreciate in value (except for your first car).
  17. A financial advisor can make sure you're making the most from your money.
  18. By taking care of yourself, you're helping other people.
  19. Reward yourself in big and little ways for staying on track.
  20. Know where you are on the road to where you're going. 

Thursday, December 14, 2017

The Ultimate Checklist

If you have your vehicle serviced on a regular basis, you are generally given a Vehicle Inspection Report.  The report has three separate categories highlighted in distinct colours. When the vehicle’s systems and components are checked, the appropriate colour receives either a “thumbs-up” or “thumbs-down”.  

Checked and Okay at this time
May require future attention
Requires immediate attention

We would never drive a vehicle that was not road-worthy for two reasons.

          1. We might never reach any of our destinations because the vehicle would simply quit working.

          2. We could potentially be injured or killed if we chose to ignore any maintenance required to our tires and brakes.

Here’s the dilemma.

Without regular check-ups and the proper maintenance, our vehicles can create frustration and grief for us. So what happens when we don’t regularly review our financial goals and check our current financial status? How do we know whether our systems are running up to speed? In other words, how do we know whether we are efficiently meeting our financial goals?

Financial Planning Standards Council created a publication called “Get More Out of Life”.     To begin my client conversations, I refer to FPSC’s checklist to gain a better understanding of my clients’ feelings. 

Scrutinizing the nine questions below allows us to conduct an inspection test.  Each question can be assigned a distinct colour to determine whether everything is okay at this time or requires future or immediate attention. If you are far away from having many “Green” thumbs-up, you might consider a service package, a comprehensive financial plan, to gain peace of mind and confidence about achieving your life goals.    

Do you feel…

q    In control of your finances?
q    Prepared for a financial emergency?
q    That you have sufficient discretionary income to lead the life you want?
q    The people you care about would be financially looked after if something were to happen to you?
q    Able to retire in your desired lifestyle?
q    You will be able to pass along your wealth in a tax effective way?
q    There is enough money to pay for post-secondary education for your children?
q    Your goals and aspirations are achievable?
q    You have peace of mind?

Since we are in the Christmas season of creating lists, this list is worth putting in our stockings as we approach the New Year.  If we wish to begin the New Year on the right foot, then we could use some help identifying where we need help.  Reviewing our list is a great start.  

Merry Christmas!