Worried about Retirement?
Posted by John Draper | Filed under Retirement Planning
How worried are you about retirement? I’ve been getting quite a few questions recently from people who are at or approaching retirement and I think there are more than a few things wrong with how people are going about this.
First there are the people who plan to go into retirement with debt. Really? You couldn’t get your consumer debt, your car loan, your mortgage paid off while you were working, so you think you’ll be able to do so when you’re not? Hmmm.
It used to be a Golden Rule to have all your debt paid off by the time you moved into retirement. That included your mortgage. Then people started saying, “Well, I have to live somewhere, so if I have a bit left on my mortgage, what’s the big deal?” I don’t have a big problem with this, assuming you have the retirement income that isn’t gobbled up by your housing costs. But many people don’t. And yet I get letters from people who, instead of trimming their housing costs for retirement, are planning to increase the debt on their homes just when their incomes are falling drastically. They write me because they’re not sure how to manage this. Well, you CAN’T! It simply makes no sense to increase your overhead when your cash flow is shrinking.
Then there are the people who plan to come to a grinding halt on the work-front at some previously chosen date, be it 65 or earlier, simply because they want to stop working. Early retirement is a huge dream for many people. And yet they’ve done very little in the way of asset accumulation or income projection.
Y’all do realize that we’re living longer, right? At the beginning of this year, the Stats Man reported that life expectancy had hit 80.4 years, with chicks eeeking out four years more than dudes. Of course, since you weren’t born in 2005, which is the birth year this report is based on, you may croak a little earlier (or later, depending on your fam’s history). The point I’m trying to make here is that if you retire at 65, you still have 15+ years to feed, clothe and house yourself. If you retire earlier, you put even more of a strain on your savings. So you better do some income projections to see just how long the money will last. And don’t forget to figure in the impact of inflation.
Next there are the people who haven’t, even for a second, considered setting aside some money for the future. They are so busy having a great time right now, that the future… well… it’ll be fine, just fine. Heads up people. While government pensions may be enough for those people in the lowest income bracket, for many others it just will NOT be enough. If you haven’t looked at how much you’ll receive from social security, then you should. And if that doesn’t scaring you into setting aside a little something for the future, I don’t know what will.
Here’s the thing: the earlier you start saving for the future, the less money you have to take out of your cashflow because the longer you put the Magic of Compounding on your side. Start in the 20’s and you can get away with saving as little as 6% of your income. Wait until your 40’s and you’re going to have to sock away 18-20% . Yah, time does make that much of a difference.
You can go into retirement with your eyes closed and your fingers crossed behind your back and hope for the best. Hey, if that’s how you’ve done life so far, you’re probably pretty good at it by now. But if you get there and find you’re subsisting, don’t whine.
Another alternative — some would say a better alternative — would be to take a realistic look at what you may need for retirement, how much you think you’ll have, and what you can do to close the gap if there is one.
And for heaven’s sake, make sure you’re debt free before you get there. Spending your limited resources paying for crap you bought on credit should be the last thing you do.
So, are YOU worried about retirement? Do you even think about it? And what do you think when the idea of coming to the end of work pops into your head? If there are things about retirement you’d like more information on, post your questions on this blog and I’ll get to work on some answers for you.
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October 29, 2008 at 9:47 am
Very timely post Gail and as always very true!
One particulor point that you made, I want to stress over and over to everyone who is in their 20’s and 30’s -
This is what Gail said in her blog – ‘Here’s the thing: the earlier you start saving for the future, the less money you have to take out of your cashflow because the longer you put the Magic of Compounding on your side. Start in the 20’s and you can get away with saving as little as 6% of your income. Wait until your 40’s and you’re going to have to sock away 18-20% . Yah, time does make that much of a difference.’
15 years ago, when hubby and I were in our 30’s we were very well off and on our way to a good retirement, no debt, but lots of investments and all – well, one fine day, we lost everything and I mean everything. No money, no house, no car, no nothing, we had put most of our savings into investments looked after by a bad financial advisor in the UK.
At 32 {me} and 35 {hubby} we had to start from scratch – literally scratch – we are having to put away 20-22% of our wages now. We are now in our 40’s, don’t belive in carrying debt and thank God never have, only have a mortgage which should be paid in a few years.
It’s tough – no eating out unless it’s your birthday or something, no going to the movies unless someone got a spectacular report card, no going to any place that is going to make us open our wallets. Lots of walks in the parks, packed picnics, home cooked food, window shopping, making lists for anything that is needed like clothes, shoes, etc, and shopping for them at discount stores and outlet malls, lots of planning and all.
People, it takes one second, for your life to change for the worse – if you are in your 20’s and 30’s sock most of your money away safe – Tax free savings account, GICs, RRSP’s etc. If you don’t start planning now for your future, you will be very sorry.
Yes, we are concerned about our retirement, but knowing that we have 20-25 years to go, gives us some comfort especially since we are socking away as much as we can now. I cannot tell you how frighting it is to be in a position were there is no money at all, I would hate for anyone to go through that.
Thanks Gail, you rock lady.
October 29, 2008 at 10:38 am
Even as a relatively money-savvy 20-something young woman (two chartered accountants as parents, decent money literacy growing up, very little debt [all student]), retirement savings puzzle the heck out of me.
I knew the ’standard’ formula- save as early as you can, because it compounds and will make it way easier on you- and even pushed my partner (who’s 10 years older) into starting an RRSP right away, on that logic. I figured that even if I didn’t understand it completely, I knew enough to understand that if we can’t save know, before kids, it’s going to be WAY harder once they arrive.
But I’d love to see a post on here about the basics of saving for retirement. What is an RRSP? (It wasn’t until my partner put his $500 into one at the bank that I realize they’re tied to the stock market) How much should you put away? How often should you put it away? How should you choose an RRSP? What happens if the market tanks? How do the tax benefits of an RRSP work? What’s more important- paying off debt, paying off the mortgage or saving for retirement?
I’ve always been inclined to pay down the mortgage first, based on my mum’s teaching me as a kid that “at least that way, if you get sick, or hurt, or you lose your job, they can’t take the place away from you”, but I don’t want to be left retirement-fund-less either.
October 29, 2008 at 10:52 am
Hi there, I would very much like to ask an opinion about something..
My husband and I have one child, and we live in Toronto in the beaches. We have a child in daycare. Daycare is very hard to get by around here, but we live across the street from an excellent daycare which used to cost 1700$ per month as an infant and now it went down to 1365$ for toddlers. If we tried really hard, we could find a place far away, not nearly as good, for around 900$.
We can manage it, because we pull in together around 142k (mostly from my salary so staying home is not an option). We will be mortgage free in 2014 (I’m 34).
But my question is, am I being insane? I’m pregnant and I would really like to put my new little one in the same center, but that means again living very frugally for another 3 years… paying each year the same amount as the total of all my university tuition over 4 years. I feel that I’m wasting my children’s university income on daycare!! The amount I was able to put so far on resp is puny (and then the market ate it). Only in four more years I will be able to divert that crazy amount to the resp… kids will be 6 and 4.
Please vote NDP next time … uh I forgot my point.
October 29, 2008 at 10:53 am
Kate – Wow there are a whole lot of questions in there, so let me try to clear up one big misconception that you seem to have. An RRSP is simply a type of account, it allows you to avoid pay income tax now and defer it until you make the withdrawals later on life when you will presumably be in a lower tax bracket. An RSP does not need to be tied to the market, talk to your bank or visit the ING website if you are worried about market volatility. Many places offer RSP account and within those accounts you can hold cash and GICs and not worry about stocks and bonds. If you find that the options for an RSP are overwhelming at the moment, consider just putting some money aside in a seperate savings account so that you get into the habit until you have the chance to figure out what is going to work best for you – the important part is that you save not that it necessarily goes into an RSP. Use your parents as a resource, as CAs they should easily be able to give you the run down on how an RSP may (or may not) be advantageous to you.
October 29, 2008 at 10:55 am
I also have a question about RRSPs. Gail, I hear you preach about the importance of socking money away to RRSPs from an early age. But I am confused, because although it reduces the taxes I pay today, I will pay tax on them when I ultimately cash them out. And I’m in a low tax bracket now – and in fact, I have enough roll-over that I won’t be paying any tax this year so my RRSP contribution won’t make a difference. But when I am ready to retire I will quite likely be in a much higher tax bracket. In essence, will I not, in the future, pay tax on earnings that right now are nearly tax-free? Shouldn’t I just use a tax-free savings account or another way to invest my money than RRSPs? What are your thoughts on this, Gail? Thanks for all your advice!!! Love the show.
October 29, 2008 at 11:44 am
Oh, Gail,
This is THE question for me – am I able to retire – comfortably – not extravagantly??
I can still put the date off but here is the question. I’ve been told that since I’ve already exceeded the number of years at work required for a full pension, that there is a time when it’s not reasonable to continue working. I’m really losing money by being at work. Can you explain this issue to me?? Do you need more info?
I will turn 60 next June. I have a defined pension with indexing included and I have an access to cheaper extended health care coverage til 65. I can get dental as well but people don’t usually take the dental because it doesn’t always remain cheaper. I can go for early CPP and if you believe the experts – it’s better to go for it instead of waiting til your older. I have a mortgage and this is my worry. I have very little on my credit cards and try to pay them off each month. Just big ticket items which may take 2 or 3 months to clear away. I am trying to save for the future. I have some RSPs – maybe $70,000.00 in all – if the market co-operates.
My future housing costs frighten me because of the mortgage which is substantial and yet to move is expensive and to look for something in an economic downturn is foolish – your house won’t sell so how would you be able to find something comparable at a reasonable cost? Maybe, you have to rent but that will be hard for us.
I’ve looked at the gap between my reduced pension and my present needs and this scares me but I’ve been told not to worry because your expenses will drop, as will my tax rate. Well, yes, some of the costs will drop but what about the gap really being closed? So, CPP at a reduced amount is the gap filler – and this is what I’ve been told. I’ve heard of others who are better off in retirement – and I’d love to believe it – but my housing costs are my problem. So, maybe I need a part time job which will keep me active but won’t tie me to the work world totally. I may have to settle with this.
I’ve been told in preparing for retirement that if you get ill and require medicine in excess of 4% of your income that the Ontario government has a Trillium plan – I think that is the name. I’m not sure if it ends when you hit 65. So until age 65, I will have very good extended health care with prescriptions being covered completely. After 65, you have the government plan with a $100. deductible yearly paying for your drugs in addition to a service charge for each prescription, so, that’s good. I’m not too worried about these costs, but there may be other costs which might be important to consider. All I can think of is the unexpected and you need to have a nest egg for that uncertainty.
Will the old age security be there in 5 more years? I hope so.
I have had an insurance retirement planner come and discuss when I could retire – years ago now. It wasn’t really feasible to retire when I could have gone so I stayed on til now. I guess I need more expert advice even yet.
Thank you, Gail, for asking about this subject – it’s number one concern for me. I’m the real breadwinner in this house. I’ve almost decided to think about retiring in another year from now but I really need to know if my question – am I losing money by working – is a valid one.
October 29, 2008 at 11:55 am
Wonderful post Gail, thank you. I’m a huge believer in RRSP’s, and other retirement planning. One thing I’d like to comment on is the misconception about how much money you’ll need when you retire.
You have so much more time on your hands when you retire. It’s easier to spend money on things like travel, activities, etc. Don’t listen when people tell you your spending goes down after retirement. It may, but not by much, unless you want to spend all your time at home.
Saver Queen: You won’t be drawing on your RRSP’s until you’re retired. Therefore, theoretically, your income would be zero until you do your first draw. Your RRSP’s ARE your income in the future, so you will be taxed on what you draw out, usually an amount less than what you were bringing in the previous year, therefore, lower tax rate.
I know what you’re saying about your current situation (I didn’t contribute to RRSP’s while I was a student, because I didn’t pay taxes). Perhaps you can put some money away somewhere else until you DO need the tax savings (I think you can carry forward 8 years now?) But then, the compounding is less efficient.
October 29, 2008 at 12:02 pm
Mountains of Worry, I don’t think you’ll lose money by working (this sounds to me like the logic of thinking you’re saving money by buying something you don’t need and can’t afford because it’s on sale). If you’ve maxed out your contributions you might not be able to increase the amount of pension you’ll receive on retiring, but you’ll still be earning a paycheque rather than drawing on that pension. I think that whole concept of “saving money by not working” and “I can’t afford to continue working” applies to people who don’t want to keep working, and if you do, or need to, why should you stop? Then there’s the fact that the money is running out of portions (inflation protection, health coverage) of some pension plans as people live longer than was expected when the plans were set up….
October 29, 2008 at 12:09 pm
“An RSP does not need to be tied to the market, talk to your bank or visit the ING website if you are worried about market volatility.”
See, NOW I’m confused. That’s what I thought was the case, but when we went to the bank (we’re with Royal) to talk about RRSPs, we were offered the option of investing in RRSP GICs or RRSP mutual funds. My partner went with mutual funds, I went with ‘I don’t quite understand this so I’m not going to invest in it quite yet’. I suddenly understood how people got themselves in subprime mortgages…
(Unfortunately, one parent is longer with us, and the other’s not the best explainer)
October 29, 2008 at 12:27 pm
THanks Debbie – I appreciate that information! Just one more question: if I don’t contribute to RRSPs and put my money elsewhere, why would the compounding be less efficient??? Is it because we’re assuming it would get a better return with RRSPs? THanks again
October 29, 2008 at 12:35 pm
Kate, that’s weird that you were offered an either/or option with mutual funds or GICs. An RRSP is just a container for whatever RRSP eligible investments you want to stick into it.
Thanks for the advice, Gail. I’ve got a self-directed RRSP account set up, and I’ve got the money socked away in savings to put into it, but I haven’t made the final step of putting the money into my RRSP yet. I’ve been a lazy bum about filling out the remaining forms I need to send in. And it doesn’t help that I’ve got to manually transfer the money from my bank account to my self-directed retirement account instead of my preferred point-and-click method – what a pain! I’m thinking of switching banks because of it.
October 29, 2008 at 1:26 pm
Kate, Here is my go at explaining why RSP are attractive to so many folks:
Assume you are 30 currently working ,earning a decent income and as such are in a high tax bracket (lets call it 50%). When you retire you will theoretically have a lower income and be in a lower tax bracket.
Based on this information if you contribute 10k to your RSP today you have saved yourself 5k in tax this year, and that 10k then grows tax free till you decide it is time to retire or start withdrawing funds. That 10k, thanks to the miracle of compounding would then be worth almost $30,000.00 when you are 65 (based on 35 years compounding at 3% a year), and since you would then be in a lower income bracket, you would only pay 30% tax which would leave you with $21,000 – not too shabby for that initial 10k you put in…..of course you have to factor in for inflation….but imagine if you had been able to return a 6% return over those 35 years or had started when you were 25 and had used your tax refund to pay down your mortgage or start towards the next year’s RSP contribution.
October 29, 2008 at 1:42 pm
I am in my 30’s and am blessed to work for the Federal Government, which has an excellent pension plan of 70% of the average of your 5 highest salaried years of work. And I like Mountains of Worry have heard that if I chose to work beyond my retirement date (which will be my birthday when I am 55) that I will be working full time for only 30% of my salary. This is because my pension would pay be 70% for doing nothing at all. I think this might be what Mountains of Worry is referring to. Is it worth it to work full time for 30% of your salary?
I wonder is it possible for you to retire, collection your pension and then seek other part-time or full time employment else where? Then you would be making the amount from your pension, plus another full salary for a few years which would help to elimate the debt? I know that there are also tax implications to this approach, but it might be worth looking into.
I currently save a minimal amount of additional funds into RRSPs (about 2% per year), because I have been advised that having too much $$ of my own plus the generous pension could leave me paying more tax than I do now!!!
Regardless, I feel blessed that I don’t have to worry too much about the big Retirement day! I can just look forward too it…I am already counting down…only 19 years to go!
October 29, 2008 at 2:28 pm
Re Kelly – working full time after 55 you would still be earning your whole salary (not just 30% of it), but you’d be eligible to retire from your job and get your pension. After factoring in taxes/CPP/EI/retirement contributions, you are likely getting less than 70% in take home money today while you’re working full time.
I pay into the OMERS pension plan, and the OMERS site has a great calculator on their website that you can plug in various pieces of info and get a reasonable guesstimate of your pension payable (you can put in retirement at any age on the OMERS site). It wouldn’t hurt to check to see if there is some type of similar calculator for the federal gov’t pension plan, then you can suppose lots of things and get lots of info.
October 29, 2008 at 2:53 pm
Well this post and the comments have been a real thought provoker for me. First off I envy all you people with a funded pension, working for junior oil & gas companies you don’t see pensions. C’est la vie!
I am curious about making retirement contributions that exceed the amount available for deduction. ie your tax return states you can contribute up to $15,000 in the following year and you find you have funds in excess of the $15000. Do you just place it in any investment vehicle of your choice??? Or do you overcontibute to your RSP? is there a penalty?
Another question is with regard to CPP. During the time you are a stay at home parent can you withdraw those years from your CPP benefit calculation?
October 29, 2008 at 2:57 pm
Craig & I are approaching his retirement date – and I actually only worry a little.
(I’m kind of a worrier by nature).
It’s been a process for us to get to this point, though …
*We’ve learned to simplify and set achievable goals
*Recognizing needs vs. wants.
*Budgeting accordingly.
*Prioritizing debt elimination (not reduction – but elimination).
*Building a healthy emergency fund.
*Making saving money for retirement mandatory.
Thankfully we are doing well … because I know we are going to have our hands full helping my dad … who still owes more on his house than we do.
He’s retired – but lives way beyond his means & don’t seem to think about tomorrow’s expenses – let alone yesterdays debt!!!
I’ll tell you … retirement ain’t easy if you don’t have your personal financial act together … my dad’s living proof!!!
October 29, 2008 at 3:01 pm
Investments within an RRSP can be in the form of a savings account, GICs, mutual funds, stocks, bonds, and there is something about mortgages. You can invest in a variety of these things within your RRSP. I have a mix of most of those, including GICs linked to market indices (to make things more confusing). The different options are good to match your investment profile (very conservative: GICs only; very agressive: stocks). GICs could be insured by the CDIC up to $100000, but stocks are not, so you pick your gamble!
Investing within an RRSP can be more efficient because you do not pay taxes (on a yearly basis) on the gains that you make, so the gains can grow bigger faster. Outside an RRSP (and TFSA), you must pay taxes on interest earned, capital gains etc, so it can eat up your profits.
October 29, 2008 at 3:16 pm
nkm, how did that happen!?!?!
megwilson, I too envy anyone with a job-based pension– neither me nor my spouse have such security available.
I have been saving since my 20s but is seems to be growing SO SLOWLY! The market taking a big crapper looks terrible on the balance sheet, and even though I am almost 30 years away from a 65 year birthday, I am still worried that at this rate I won’t be retiring ever, and neither will the hubby.
Good news is we only have about 11 years left on the mortgage and at least one of the kids SHOULD be out of the house by then. So our cost of living should go down significantly in a little more than a decade (knock on wood) staying on this track. At that point I guess we can choose to do MEGA contributions towards retirement by applying our old mortgage amount to a saving plan….
I have used those retirement calculators, and we are falling short right now, very very scary!
October 29, 2008 at 3:52 pm
MegWilson asked Or do you overcontibute to your RSP? is there a penalty? -
Yes, there is a penalty (although you are given a maximum over contribution allowance) so best practice is not to over contribute. Here is the link to the CRA website section on over contributions:
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/cntrbtng/xcss-eng.html
October 29, 2008 at 5:02 pm
Kate, great questions. Definitely a mouth full, and it would take a bit of time to explain it all right now, but what I do recommend is reading a book called “The Wealthy Barber”.
http://www.amazon.ca/Wealthy-Barber-Successful-Financial-Planning/dp/0773762167/ref=sr_1_1?ie=UTF8&s=books&qid=1225313979&sr=1-1
I’ve read it a dozen times over. It’s such an easy-to-understand read, and a quick one too. A bit witty and humourous too. It does a great job of simplifying long-term financial management (with Gail on short-term financial management, you’ll be in great shape). Although a bit dated (from early 90’s) as some things have changed from that time period, the information is still relevent. Again, highly recommended!
October 29, 2008 at 5:05 pm
Thank you, Kelly, for understanding my problem.
That is exactly what I meant. I am no math student – so when at retirement workshops I’ve heard that it’s to my advantage to get out and live my life – post retirement, I’ve thought how can I live without a salary – even if it’s only worth whatever they say it is worth?? Is there a time when you really are working for nothing??
I know why I’m still working – I had kids late in my career. I have bills which don’t go away easily (mortgage) and I’m not sure yet if I can maintain my lifestyle on my pension even with CPP added.
This year, is the first year that I’ve thought well, let’s check out the financial side of retirement thoroughly but now, with the economic situation as it is, I’m even more worried about giving up a perfectly good salary and a job I love. My pension would also increase by 2% but would I be working for nothing or is it just a math game?? Gail – what’s the answer?
When I started to write this post I knew that what Gail had written hit me head on. There is just so much to understood about retirement planning and how life will be – post pay cheque!! Preparation takes years for a good retirement plan.
Kelly, as far as I know you can receive your pension, your CPP and then get a new job and it won’t affect your CPP. I can’t think how having other work could affect a federal pension either. Nineteen years goes fast – get prepared now.
As well, check out the ING website for their new Tax Free Savings Plan – there is some nice interest if you get in now. Especially, if you can’t contribute too much to RSPs anymore.
October 29, 2008 at 6:25 pm
Mountains of worry – my understanding is that in order to qualify for CPP you must retire for a month. After that you may begin again at a new job and still continue to collect your pension.
As for other work affecting your pension…well as a teacher there are certain jobs that I can’t work at post-retirement without having to stop my pension (they are all education related). MAYBE you might not be allowed to go back to work for the government if you are in receipt of a government pension. That would be something important to look into.
October 29, 2008 at 7:33 pm
I’m 24 and have been saving 10% of my income for 2 years now. I’m terrified it won’t be enough. I can’t find any online calculators/resources of how much you should save if you start early. There are sooo many unknowns too – inflation, return (my return over the past two years has been -14% with this fabulous economy, and yet all calculators seem to default to 8%!), future income requirements (I fully expect to hit six figures plus by the time I retire, but I don’t think I’ll need six figures in retirement?!), etc etc…
Not to mention my fiance and I just bought a house. How do I factor in paying off the mortgage as early as possible? Ugh! So frustrating
October 29, 2008 at 8:20 pm
Yes, Christy, you are absolutely right.
CPP – I had forgotten the one month period.
Depending on the career (teaching, maybe government) and whether you return to that same type job (full time) – it would/could make a difference in a pension.
I did hear once that teachers who took their retirement money out – years ago – and then returned to teaching, that they started paying into a new second pension.
October 29, 2008 at 10:04 pm
Yes Mountains, some teachers who withdrew from the pension plan had to start new plans when they went back to teaching. I have worked with a few who honestly thought they would never return to teaching. Incidentally my father, who is a minister, had to do the same thing. He withdrew his money, thinking he wouldn’t be working in a church any longer, and then when he did he had to start a “new” pension.
My MIL has a full ONTARIO government pension, yet she works full time for another agency. I’m not sure if she would be able to work for the government again or not. It seems as though she mentioned this once but I don’t remember the answer!
October 29, 2008 at 10:53 pm
I am very grateful that I have a few different lines of work and that I am passionate about them all. I really love what I do and I don’t really know if I could retire – I have trouble saying no to projects that excite me, even now that I’m 8 weeks away from having a baby!
I do recognize that as I age I may have less energy, and I may not have my health, so we are socking away cash in a balanced “target date” type of mutual fund. I’m trying to figure out how else to diversify. The current market is shaking a lot of the old tried-and-true formulas.
Pam, I’m with you on the retirement calculators – they don’t seem to factor in market crashes and negative returns, do they? But GICs won’t even cover inflation over 35 years, so you lose there, too.
I also feel like the 30-somethings are probably going to have to work until they’re dead. It’s pessimistic, but chances are that our parents didn’t save enough for retirement (or if they did, it just went up in flames in the last few weeks!), our kids will be facing tuition costs that will make our student debtload look piddly (one calculator told me my unborn child will need $136k just for tuition in 18 years – if this is true, baby will need a summer job starting at age 5!), and I think our poor old planet might play a role in the market as we face some really scary resource shortages in the not-so-distant future. We’ll be the workforce trying to support all those factors.
So yeah, I’m trying to plan for retirement, but I’ll be pretty surprised if retirement is really a choice for people my age. I’m just thankful that I love working at what I do and don’t want to stop for a long long time!
October 30, 2008 at 9:36 am
Ioana — my wife and are in the almost EXACTLY the same boat you are, right down to the price point of daycare. I calculated that for one child, we spend 22% of our income on daycare. It’s tough, no doubt about it.
What you should do, if you haven’t already, is get yourself listed on the daycare subsidy wait list. (Toronto.com/childcare I think, if not google it). For one child you won’t get much money assuming your household earns $80,000+ but for two you will, and at the prices your paying I’m sure its a licensed daycare and will qualify. You can apply for it right now, before birth.
P.S. Don’t vote NDP if you want your taxes to stay down though…
Kate — First, go visit canadiancapitalist.com everyday, he does a great job of explaining things. But I’ll give it a shot – think of an RRSP as an investment ‘container’. Everything you put in this container gets to grow tax free until you take it out, and every dollar you put in this container (contribution) you get to deduct off your tax return. In exchange, when you retire, the government will tax you on all the money you pull out of the RRSP container. You can also pull it out before then tax free for your first home and for higher education, if proper forms are filled out of course. (which is treated like selling your rrsp at current market value)
What goes in your container is up to you — mutual funds, gics, bonds — its up to you. If the market tanks, your rrsp value goes down. Ours is down about 20%. BUT and here’s a big but, you only lose it if you choose to sell it. In fact, this market slowdown is the best, I repeat the best, thing that could happen to someone in their 20s and 30s like me. I’m getting to buy stocks at a discount, which in turn pay dividends in the form of additional stock shares bought at same low prices) and don’t plan on selling for at least 30 years when I’m confident that the share value will far exceed any earnings from GIC or bonds which barely keep even with inflation. As I get older, I will move from stocks to bonds or gics and more stable investments but lower returning investments.
I’d also caution you to look at what kind of MER (Management Expense Ratio) you’re paying for your RRSP setup. What this is, is the ‘off the top’ cut the bank or manager takes. So if your RRSP returns 9% and the MER is 3%, you get a 6% return. The tricky part is that all your statements will say is “Return of 6%”. You can find TD efunds that are relatively easy to buy with a MER of half a percent (see canadiancapitalist.com for details).
My advice to you is find a low MER RRSP account and just start contributing whatever you can. Most have a minimum initial contribution of around $100 with min monthly after that of $50. Very doable. And good for you for investigating this.
October 30, 2008 at 10:00 am
Pam — you’re asking a lot of questions but basically you’re wondering if (a) you’re saving enough for retirment and (b) how to do so while paying down your mortgage quicker. First, you’re really young, I’d say don’t try to do so much. Personally I’d suggest you not accelerate your mortgage since interest rates are so low, and instead concentrate on building up a reserve fund if you haven’t and then investing the rest.
Also MG – I’m in my 30s and do not plan on working until I’m dead and have a plan to do so. In fact, I think our generation has the greatest potential in a long time to do quite well. Low interest rates for mortgages, falling house prices (though I bought last year), cheap stock prices for great companies, a resource laden country in world that will be desparate for commodites (India, China), etc its all looking up.
Also – Retirement calculators (Gail don’t shoot me) are often based on the idea of having enough funds to replace 70% of your income. However, according to moneysense magazine and others, that 70% figure is too high and unsupported. Some may need 70%, but others may only need 50% which makes a huge difference in the amount needed to save. If when you work you are paying 25% of your income in mortgage, and paying for kids and their education, and then suddenly you’re not, well that should make it easier unless your planning on travelling the world. In short, my advice is to get started young, not get too scared, read and get self-educated, and most of all… plan the work and work the plan as soon as possible. Start small but think big.
October 30, 2008 at 1:27 pm
Geoff – thank you for responding! We (you and us) will get through it!
I will definitely look into subsidy, for the 2nd child, thank you for that.
October 30, 2008 at 2:49 pm
i would love to see a blog/discussion or any information on lowering your income using charitable donations or other tax programs. also perhaps balancing the RRSP with un registered investments as it reflects how you will qualify for old age pension. sometimes all i here is RRSP RRSP RRSP like there aren’t other options. i don’t like the idea of dumping all my everything in anything.
my income is also rather low, and i think i would almost prefer to pay the tax now, so at least i know my money will be MY money when i need it, with no ones hands in my pocket. how do i know the rules or tax brackets or the amount of income tax won’t change by the time i retire? rrsp is only a tax deferral program, not tax savings.
not to worry wart or get all conspiracy, but i don’t trust anyone else, including the government, when it comes to taking care of myself.
October 30, 2008 at 4:49 pm
I’m not worried about retirement. I’m 30, and I started my RRSP when I was 22 (I remember the woman at the bank who set it up with me was astounded when I told her my age). I second whoever recommended The Wealthy Barber, reading that book was what got me to do it.
A few months ago I had $32,000 in my RRSP but with the craziness now I haven’t checked the balance because I don’t want to panic and do something stupid. Right now the losses are on paper, I don’t actually lose anything until I sell and I have no plans to do that right now. I use “the stock market is on sale!” mentality. Heck, I started my RRSP only a few months before 9/11 and right when the tech boom went bust, the first few years didn’t show a lot of growth but the good years did come.
Right now I contribute about 11% of my gross salary into my RRSP and get a company match of 4%. Free money!
October 30, 2008 at 10:24 pm
Geoff, thank you
Ok, I won’t try to do too much. It’s hard because both my fiance and I hate debt. We have the mortgage now and have about $15k on our lines of credit from the new windows, furnace & roof we had to put in before we moved. And when you look at how much interest vs principal you pay over the first five year term….eeesh. It hurts!
MountainGirl – that’s exactly why we don’t plan on having kids
Too expensive! We’d never be able to retire!
October 30, 2008 at 11:02 pm
Geoff – I’ve probably been reading Automatic Earth and Greater Fool blogs too much, but I don’t share your optimism regarding our demographic’s retirement prospects. Fortunately, it doesn’t depress me. Like I said, I am pretty sure I’m going to be one of those happy workaholics well into my 80s! It helps to love what you do.
But, I do think it would be nice to have a choice about retirement. I’m planning for it, too, but I don’t think it will be easy.
The market volatility of the past year has made the usual formulas for saving a lot less certain. Sure stocks are on sale, but they don’t always recover. And they don’t always pump out a healthy 8% return a year. I hate to be the financial doom-and-gloomer on here, but in reality, many economists have been sounding the alarm about how unsustainable our pension plans are and how imprudent it would be to rely on them for retirement. Concern has also been raised about how to support the huge wave of aging baby boomers, many of whom planned to retire on the equity in their houses. Sure hope they had a Plan B.
The only constant thing I can glean from the many and diverse sources of financial self-education (internet, books, documentaries, etc) that I have delved into is that you cannot go wrong getting rid of debt. So Pam’s aggressive approach to her mortgage, while she doesn’t have any kids (yet!:)) and while the market is in a state of enormous unpredictability, is certainly not going to hurt her. Particularly if interest rates do end up spiking to deal with runaway inflation. That spectre hasn’t gone away, by any means, even if the central banks and governments are choosing deflation as the economic horror du jour.
We may be seeing the proverbial glass from two different perspectives?
October 30, 2008 at 11:43 pm
agree with you on the mortgage (while not going too crazy).
it’s really the only sure investment out there at this point! you pay into it and you know how much is left and it isn’t likely to double all on it’s own in under a week (like how most of our investments lost that).
October 31, 2008 at 9:22 am
Pam – as a new father, please know that if you wait until you can afford kids you’ll be 90 and still waiting. If you don’t want kids for other reasons great, but don’t let money be the reason. Life is too short. Instead I make lots of other choices (no playstation or games, a 12 year old tv, a 10 year old car, etc) to make it work.
MG — please, take what you get from the greaterfool blogs / garth turner blogs with some salt. I find them full of negative sentiments from monday morning quarterbacks who are not actually in either the real estate or stock markets. Read CanadianCapitalist or milliondollarjourney instead for a more balanced approach from people who actually put their money where their mouth is (for the most part, I mean there are also good posters on those other blogs but not nearly as frequently).
The Canadian governments pension plan is well funded. Unless its mad max style world apocalypse time in which case money won’t matter anyway, it will be there in our lifetime. Don’t take my word for it, here’s an interview the fund manager. Sounds like a sharp guy. http://www.canada.com/topics/news/national/story.html?id=59a6c1f2-09de-4bc3-802f-c5ad81cce18d
I never advised Pam to not pay off her mortgage quicker if she can, but it seemed to me between the lines that she was trying to do too much. Instead, I recomended at least building up a reserve fund instead to avoid further debt (ie $15K on a line of credit) and invest the rest. But complete step 1 first, don’t try to do too much.
The typical advice given in paying off the mortgage first is so that you can then take that extra money and invest it fully. A good approach if you’re very disciplined but I wonder how many people actually can do that, I don’t know if I could control my spending knowing that I didn’t have a mortgage to pay. Instead I pay my mortgage biweekly as my extra payment program, and invest regularly with time on my side.
Stock Markets do not return 8% returns every year. They return between 5% – 10% *on average* over a longer period of time with some years high returns and some years negative returns. Some stocks will tank (CIBC), some companies will go bankrupt (Nortel), some will come out of nowhere to be huge (Google), but overall its quite predictable. See canadiancapitalist postings lately where a prominent economist predicts that the lowered stock prices now actually mean higher returns in future because the cost to buy is lower.
Kristin – I agree with you that if you’re concerned about a sure thing, then paying off your mortgage is a really good way to go. However, the problem is one of liquidity. If you have a no investments and a $300,000 house paid off, the only way to unlock it the value is to sell it and move, which can be very disruptive. If you have a $300,000 stock and $200,000 left on your mortgage, you can sell your stocks and still live where you are. You might lose money on the stocks sure, but you can also lose money on your house.
Please note that I am recommending paying off all other forms of debt (line of credit, credit card, family loans, etc) its just mortgage that I’m flexible on options with.