Retirement: Three magic numbers

by David Aston, MoneySense Magazine
Monday, January 18, 2010provided by

Nothing is more frustrating than trying to figure out how much to save for retirement. You know the amount you’ll need to save depends on what kind of retirement lifestyle you want. But how can you decide that without having some idea of how much it will cost? Is dreaming of endless vacations and a 44-ft yacht realistic? Or should you be aiming for walks in the park and the occasional meal out? Many people have no idea what they’re aiming for—and after a lot of sweating and calculating, they end up right back where they started.

We can help. While many retirement plans use complex formulas to calculate what you’ll need, we find that many Canadians just want a ballpark to aim for. If your retirement is still quite a ways off, it’s often good enough just to know what you’ll need to save to achieve each of three levels of potential retirement: a bare-bones basic retirement; a middle-class retirement with two cars, some restaurant meals and vacations every year; and finally, a deluxe retirement complete with a vacation home or regular jaunts around the world. Interested to know what kind of dent each of these three scenarios will make on your nest egg? Read on and we’ll price them out for you.

No-frills retirement

This is the worst-case scenario, but it’s good to know what you’ll need if you just want to scrape by, if only because it gives you a starting point to build from. For this scenario, the costing has already been done for us in a recent study, called Basic Living Expenses for the Canadian Elderly, by three University of Waterloo researchers. The study describes a no-frills retirement as one in which a couple rents (rather than owns), has no vehicles (so they take public transit), and it doesn’t include spare cash for even minor indulgences such as cable TV or alcohol. This is not the stuff of most people’s retirement dreams, but the study does budget for three nutritious home-prepared meals a day, a one-bedroom apartment plus utilities, along with typical health-care costs and other essentials like clothing and personal-care products.

How much do you need?

The study’s authors conclude that the annual cost of such a retirement in five major Canadian cities ranges from $20,200 to $27,400. Here’s the good news: to achieve this bare-bones scenario you don’t have to save a penny. The combination of full Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) program for low-income seniors pretty much covers all your basic needs, at least outside the highest-rent cities. If you and your spouse are at least 65, those government programs would provide you with a combined $22,750 a year if you have no other income. “We’ve kind of made sure the Canadian elderly don’t live in poverty but we’ve given them, like, 50 cents more than the poverty line,” says study co-author Robert Brown.

Canadians who have worked most of their lives can also usually count on substantial Canada Pension Plan payouts in retirement. A couple which receives the average CPP payout, plus maximum OAS, and maybe a little bit of GIS, can expect to receive almost $30,000 a year. So you can relax about the worst-case scenario: Even if you don’t save at all, you’re not going to have to live off cat food.

Middle-class retirement

Most Canadians, of course, hope to do better than bare-bones. Bill VanGorder, 66, the Nova Scotia chair of CARP, a group representing older Canadians, says he wants the same level of comfort he enjoyed while he was working—maybe even a bit better. He finds that increasingly seniors want to travel, pursue sometimes pricey hobbies like golf, eat out at restaurants, and maintain cottages or second homes in warm places. For the most part, this lifestyle is about having experiences and being active, rather than having more possessions. In fact, some seniors are downsizing to smaller homes to help finance their active lifestyle, he says. Active senior couples with different interests are more likely to want to keep two cars to allow both spouses to stay mobile. And VanGorder himself aspires to do more traveling, including an Alaska cruise, seeing the British Isles, visiting his sister in Australia, and seeing the rest of Canada. He’s also interested in woodworking and was surprised to find the hobby is much more expensive than he anticipated.

According to Statistics Canada, median spending by a couple over 65 is about $40,000 a year, and average spending is about $51,000. But VanGorder says to enjoy the type of retirement he wants, you might spend as much as $60,000 a year.

How much do you need?

Assuming you receive about $30,000 a year from CPP and OAS and have no employer pension, you’ll need a nest egg that can support an additional $10,000 to $30,000 a year in extra spending, plus inflation adjustments. Financial planning research suggests that you need retirement savings that amount to 25 times your annual retirement spend (not including CPP and OAS) if you want to keep spending that much for the rest of your life. So for a typical middle-class retirement, you need a nest egg of $250,000 if you just want to spend the median amount, but if you want a higher-end retirement of the kind VanGorder describes, you’ll need to save up $750,000.

Retirement deluxe

Once you get beyond the typical middle-class retirement, costs tend to skyrocket. Norbert Schlenker, a fee-only financial planner with Libra Investment Management on Salt Spring Island, B.C., says that at this level the fundamentals don’t change—people still typically have a house, two cars, restaurant meals and vacations—it’s just that the house is bigger, the cars are fancier, the restaurants are more exclusive, and the vacations more exotic. Here you are more likely to find the trophy kitchen, memberships in a golf or boating club, professionally designed and maintained gardens, and, says Schlenker, perhaps “the boat their brother-in-law saw.” Such retirees are more likely to own a vacation home, and there is more money available for spoiling the kids and grandkids. There’s no hard and fast cutoff for the deluxe life, but if you’re spending $100,000 or more each year per couple, you’re well into the realm of truly disposable income.

How much do you need?

If you don’t have an employer pension, you’ll need to be a millionaire to afford it. Assuming you get $30,000 a year from CPP and OAS, you’ll need retirement savings that can provide you with an additional $70,000 a year, which means a $1.75-million nest egg. If that sounds outrageously high, welcome to the club. Schlenker says that when he does similar calculations for his clients, invariably they’re “just shocked.”

There’s an interesting exception here though. If you and your spouse both had long careers as public employees, your public sector indexed pensions might be the ticket to the high life. For instance if you and your spouse earned an annual salary of $63,000 each working in the public sector, and you both retired at age 65 after working for 35 years, you can expect to live like royalty when you retire. Your combined pensions plus OAS will typically pay about $100,000 a year plus inflation adjustments—the equivalent to saving up a $1.75 million nest egg. That’s why many public sector workers discover that they actually have a much higher standard of living in retirement than they did when they were working.

Keep the dream alive

In the end you have to match wants to means. If you’re no millionaire, there’s no need to give up on your retirement dreams, says Schlenker. Instead try to find a lower-cost version of what you’re looking for that fits your budget. For example, if you planned on owning a luxury beach front condo in a swanky part of Florida, but you’re worried you won’t be able to afford it, you could try renting a condo away from the beach in a less sought-after locale. Or you could do what VanGorder is doing. After retiring he decided to go back to work for three days a week as business development manager for HiringSmart, a systems software and services provider. The extra cash is helping him live the good life, and he loves the work too. “I’m meeting a financial need in a way that, fortunately, turns out to be very enjoyable for me.”

More consumers turning to brokers for their next mortgage

| Tuesday, 19 January 2010

A growing number of Canadians are opting to use mortgage brokers instead of going to the bank branch, a recent study said.

According to Maritz Research, which conducted the study on behalf of CAAMP, the mortgage broker channel handled 23 per cent of all mortgage activity in 2008. This number was higher in Western Canada, (34 per cent in Alberta and 27 per cent in British Columbia), as well as amongst females (26 per cent), who were more likely than men (20 per cent) to deal with brokers.

"In the past, the first or only place a person would go when looking for a mortgage was to their local bank, however more and more Canadians are now seeking out the services of Mortgage Brokers to help them navigate the biggest purchase of their lives," said study author Rob Daniel, managing director, Maritz Research Canada, to the Financial Post.

Another strong demographic for mortgage brokers was with young Canadians. In the 18 to 34 demographic brokers represented a 28 per cent share. With 53 to 54 year olds this decreased to 24 per cent, and with the 55 and older crowd it was even lower, at just 17 per cent.

One oversight in the Financial Post article in which the results were published was the author's statement that "mortgage brokers will charge fees. In one case, a low risk $240,000 mortgage on a $320,000 home in Toronto brought $3,200 in fees."

Nowhere does it mention that brokers take their fees from lenders.

Bank of Canada stands pat at 0.25%

Last Updated: Tuesday, January 19, 2010 | 9:12 AM ET Comments2Recommend9

CBC News

Governor of the Bank of Canada Mark Carney held the bank's benchmark lending rate steady at 0.25 per cent on Tuesday. (Richard Lam/Canadian Press)

The Bank of Canada kept its benchmark lending rate at 0.25 per cent Tuesday, reiterating its conditional commitment to hold rates steady until the middle of 2010.

Although it held the overnight lending rate steady, the bank did acknowledge that the recovery appears to be proceeding at a better pace than it was anticipating.

"While the outlook for global growth through 2010 and 2011 is somewhat stronger than the bank had projected in its October monetary policy report, the recovery continues to depend on exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems," the bank said in announcing the rate decision.

The Canadian economy grew by a tepid 0.1 per cent in the third quarter, Statistics Canada reported last month. But that "is expected to have picked up further in the fourth quarter," the bank said.

The Bank projects that the economy will grow by 2.9 per cent in 2010 and 3.5 per cent in 2011, after contracting by 2.5 per cent in 2009.

In its statement, the bank repeated its mild concern over the risk that the elevated Canadian dollar presents to the recovery.

"The persistent strength of the Canadian dollar … continues to act as a significant drag on economic activity in Canada," the bank said.

The bank is set to release its next decision on interest rates on March 2.

CMHC December Housing Stats

CMHC December Housing Stats

New home construction in Canada fell to eight-year low in 2009

By Derek Abma, Financial PostJanuary 11, 2010

The pace of Canadian home construction for 2009 peaked as the year was coming to an end, closing out the first year in what is expected to be a markedly different era for the sector than the period that preceded it.

Canada Mortgage and Housing Corp. said Monday that housing starts were up 5.9 per cent in December from the month before, to an annual rate of 174,500 units, the most since October 2008. Most economists expected between 160,000 and 165,000 units in December, following an upwardly revised 164,800 starts for November.

CMHC is scheduled to officially report totals for 2009 next month. However, based on what the federal agency has already reported, calculations by Canwest News Service indicate the yearly tally will come in at about 145,000, marking the first time in eight years the figure has been less than 200,000.

CMHC chief economist Bob Dugan noted that the normal rate of household formation in Canada is about 175,000 a year, meaning the rate of housing starts for most of the last decade was out of whack with demographic trends.

He said it will likely be a while before 200,000 or more housing starts are seen in one year. Dugan said it will take another extended period of home building that falls well short of household formation -- as happened in the 1990s -- to create ideal conditions for another home-building boom.

"Somewhere in the 170,000-to-175,000-unit range is probably where we're going to see starts for most of the year in 2010," Dugan said. "We're getting back to equilibrium, where housing starts are back in line with that level of household formation."

Urban housing starts were up 6.6 per cent to 157,100 units in December, CMHC said. Within this category, multiple-unit starts totalled 77,700, up 6.7 per cent from November, while single-unit starts totalled 79,400, up 6.4 per cent from the previous month.

Rural starts were unchanged at 17,400 units.

Ian Pollick, economics strategist at TD Securities, said in a report: "It is increasingly looking like the 'fever' in the existing-home sales market is starting to catch in the new residential housing market."

Marco Lettieri, economist with National Bank Financial, noted that December housing starts were up almost 50 per cent from their April lows. He attributed this to low interest rates, strength in the Canadian job market, and a "wealth effect" created from rising property values and stock-market gains.

"This said, we are currently concerned over the elevated levels of inventory of new unoccupied multiple-family dwellings," Lettieri said in a research note. "This points to a current oversupply of inventories and could be an indication of a coming slowdown in multiple starts down the road."

CMHC's Dugan said he is not overly concerned about inventories of multiple-housing units, though he did acknowledge they are at "relatively high levels." He said builders, for the most part, have been responding to shrinking demand.

Ice Proof Your Attic and Keep Winter Out of Your Home

If you’re like most people, you probably don’t spend much time in the attic.
In fact, the vast majority of Canadians go up to their attics only when
dealing with a leaky roof or “animal intruders” like bats or squirrels.
During the winter however, attics are vulnerable to an even greater and
potentially more damaging problem: ice damming. Ice dams are large
accumulations of ice that collect on the lip of your roof or in the gutters.
Once they’ve set in, ice dams can cause melting snow or rain to accumulate
under your shingles and seep into the attic and your home.
Houses more prone to ice dams often have inadequate insulation or major
leakage of warm air from the home into the attic. They also have
complicated roof shapes that concentrate water drainage into small areas
and a “patchy” melt pattern when covered with frost or snow. Therefore, one
way to avoid ice damming is to ensure that attics are well sealed and
insulated.
However, should ice damming occur, quick fixes range from attaching
electric cables to attacking the ice with an axe. But each of these “home
remedies” also comes with its own drawbacks, ranging from creating an
eyesore or damaging your shingles, to creating the possibility you will slip
and fall off a ladder.
Fortunately, there are more effective solutions to help you protect your
house, your health – and potentially save thousands of dollars in roof
repairs. The Canada Mortgage and Housing Corporation (CMHC) has the
following tips on how to spot, prevent and remove ice dams from your roof.
Depending on your roof and the age of your home, these solutions include:
 Waterproofing your roof by placing a self-sealing membrane under
the shingles.
 Air sealing the attic floor between your house and the attic space.
 Insulating thoroughly with the best insulation possible, where
necessary.
By spending the time to fix the problem properly the first time, you’ll help
prevent ice damming from occurring.
For more information on Attic Venting, Attic Moisture and Ice Dams and
other fact sheets on owning, maintaining or renovating your home, visit
Canada Mortgage Housing Corporation’s website at www.cmhc.ca or call
CMHC at 1-800-668-2642.
(Source: cmhc.ca)

Ice Proof Your Attic and Keep Winter Out of Your Home

Personal finance

The top 10 financial resolutions for 2010

Manulife's Kurt Rosentreter says Canadians are spending far too much money on real estate debt and not concentrating enough on building portfolio wealth. When prioritizing between putting money into an RRSP, RESP or TSFA, families need to consider the emotional and financial aspects of that decision. iStockphoto

Get on top of that debt. Save. Set out a plan. And stick to it.

Roma Luciw

From Monday's Globe and Mail Published on Sunday, Jan. 03, 2010 6:26PM EST Last updated on Monday, Jan. 04, 2010 7:35AM EST

With 2009 slated to go down as a tumultuous time for your money, 2010 could prove to be the year when Canadians put their financial house in order – provided they can get their balance sheets under control.

Heading into the new year, debt is the biggest financial hurdle for many families, says certified financial planner Bradley Roulston, a manager of the Nelson & District Credit Union in British Columbia.

“Household debt – mostly mortgages and consumer debt – has increased to record levels. And with interest rates bound to go up, people need to make sure they have enough cash flow to sustain a few percentage [point] increases on their payments.”

The debt-to-income ratio among households hit a record this year. The latest Statscan

report showed that for every $100 of personal disposable income, Canadians are carrying $145 in debt, up sharply from $88.60 in 1990. The ballooning debt comes at a time when the Bank of Canada is warning of higher interest rates.

Citing potential interest rate increases, Manulife Securities senior financial adviser Kurt Rosentreter is advising clients shopping for real estate in 2010 to take defensive measures. “Resist overpaying for a home, delay the purchase of secondary or recreational real estate, save for larger initial deposits and focus on debt repayment more than new, optional portfolio savings.”

Given the massive Canadian stock market decline and ensuing rebound, investors also had a rocky 2009.

Patricia Lovett-Reid, a certified financial planner and senior vice-president at TD Waterhouse Canada Inc., says that while investors “climbed a huge wall of worry” in 2009, Canadians are still stashing money in “safe” places, like cash and savings accounts.

“Even though the stock market turned in March, people are still terrified to move up the yield curve,” she said.

Patricia Lovett-Reid

Ms. Lovett-Reid expects that will start to change in 2010, when people re-evaluate not only their investment portfolios but also increase their savings rates, tackle debt loads and develop a financial plan – some for the first time.

“This will be the year when people feel they really need to take back control of their money,” she said. “It is empowering to be in the driver's seat and I think 2010 will let us do that.”

1) Take control of your finances
Take the time to get a professionally developed financial plan that meets your personal goals. Take a course or a seminar to brush up on your financial know-how. It does not matter how much money you do or don't have, this is the time to get in the driver's seat. “Your financial plan is going to be the GPS to control your emotions and make rational decisions this year,” says Ms. Lovett-Reid.

2) Pay down debt
As a rule of thumb, pay off your high-interest and non-tax deductible debt first. Consider consolidating your debt, cutting up secondary credit cards and, if possible, make more than your minimum monthly payments. “When the holiday spending hangover comes, tackle those January and February balances hard. Try avoiding any new credit card debt for the first few months,” Mr. Roulston says.

3) Spend less
With only so much money coming in, decide what really matters to you. Set a family threshold with specific goals, one that curbs the urge to impulse buy. “Frugality is our reality now and living within your means has taken a new meaning. A budget allows you to take corrective action, it gives you a road-map,” says Ms. Lovett-Reid, adding that she and her husband review their family budget each week.

4) Save more
Canadians are saving about 4.8 per cent of their personal income, down sharply from roughly 10 per cent back in the 1980s. The trick to saving is simple: don't spend everything you earn. Mr. Roulston suggests having one spend nothing day each month. Another option is to automatically divert a small portion of each paycheque into a separate bank account designated for saving.

5) Develop a personal investment policy statement
Aside from your investing plan, articulate – and stick with – a personal philosophy for your portfolio. Ms. Lovett-Reid advises her clients to sit down and write out their investment goals, risk tolerance, and required rate of return. Once you have it in writing, review it at least once a year.

6) Rebalance
Aim for 2010 to be a year of balance. Are you sitting on too much in cash? Move up the yield curve incrementally. Are you too heavily invested in equities? Try to get a good mix of bonds, stocks and other investments. “This is the year to find a required rate of return for achieving your goals. Go back to your asset allocation and stay true to that,” says Ms. Lovett-Reid.

7) Get tax efficient
For many Canadians, paying the taxman is their single biggest expense. Even in the midst of an economic recovery, people can still take steps to deduct, defer and divide their way to a lower tax bill. Consider splitting income with family members, using the home renovation and child fitness tax credits, or juggling asset allocation and life insurance to ensure the most tax-friendly transfer of wealth.

8) Get insured
Not every Canadian absolutely needs insurance, but everyone should at least think about what would happen to their family if they suddenly passed away or became critically ill. Would your family be able to maintain the lifestyle they are accustomed to? “Depending on how you answer that will dictate whether you need to incorporate life insurance into your overall plan,” says Ms. Lovett-Reid.

9) Don't give up
Watching the value of your portfolio drop by 25 per cent is as difficult as losing that extra 25 pounds. Developing and living according to a financial plan takes time and patience. “Make sure the investment plan reflects your goals and risk levels,” says Mr. Rosentreter. Rebalance yearly to capture gains and remember that “staying on plan presents the greatest likelihood of achieving desired results long term.”

10) Review, adjust and enjoy
The recent economic and stock market downturns have taught people the need to spend responsibly, within the context of a financial plan and their lifestyle. Having a solid financial foundation in place frees you up to do all those things that give your life more meaning. “That alone will reduce your financial anxiety,” says Ms. Lovett-Reid.