Tuesday, July 31, 2012

Is debt-freedom a part of your vision for retirement?

What comes to mind when you think about a “successful retirement”?  Travel? Golf? Time with family? If you’re like most Canadians, at least part of that vision involves being debt-free.  A recent survey by Manulife Bank (1) found that nearly nine in 10 homeowners list being debt-free as very important to their vision for a successful retirement.  This was second only to “good health” and about the same as “having sufficient retirement income”. 

Unfortunately, the same survey indicates that many are struggling to get out of debt.  For example, just over half of survey respondents had less debt than a year ago.  Even among homeowners in their 50’s, just 15% have successfully paid off all of their debt.  For many, this can be an increasing source of stress as retirement approaches.  The survey found that half of homeowners considered the idea of retiring with debt to be extremely stressful.
As most of you already know, getting out of debt can be a challenge.  The good news is, it’s not impossible and you’re not alone.  I can help you take stock of your debt, provide you with some strategies, options and tools, and help you develop a plan for becoming debt-free – hopefully well before you’re ready to retire.  If you’d like to set up a plan for becoming debt-free, please contact me at tim@retireonyourterms.ca or visit www.timweichel.ca

(1) The Manulife Bank of Canada poll surveyed 2,003 Canadian homeowners between ages 30 to 59 with household income of more than $50,000. It was conducted online by Research House between March 5 and March 16, 2012.  Full survey results are available at manulifebank.ca/debtresearch.

Friday, July 20, 2012

How long will you live?

Want to know how long you’ll live? A new online longevity calculator may have the answer.  The calculator, created by Ontario scientists, asks questions about a person’s smoking, drinking, eating, physical activity and other factors to predict his or her lifespan.  Although there are many similar tools online, this calculator is based on real data on factors contributing to deaths in Ontario.

The calculator is available online.  Click here > Life Expectancy Calculator.

It was created as part of a report that found 60 per cent of deaths in Ontario are linked to five controllable lifestyle factors: smoking, alcohol, diet, physical activity and stress.

If people change even one bad habit, they could gain several years of life.  Researchers examined responses from Ontario health surveys, which question people about habits, such as diet. Using a database at ICES, they were able to see what happened to survey respondents over time and the age at which they died, helping them determine the relationship between health risk factors and longevity.

The calculator doesn’t guarantee accuracy and can’t account for people with pre-existing medical conditions. But, in general, it reveals how behaviour, such as the amount of exercise you get, can affect life expectancy. The results also show how your risk factors compare to others and tells you which ones need the most improvement.

For expert advice on preparing for a long retirement, please send us an e-mail or visit us at www.retireonyourterms.ca

Wednesday, July 18, 2012

Heading for Retirement with a mortgage?

Paying off the mortgage is something most homeowners hope and expect to do by mid-life. But those who started late, refinanced or traded up find themselves with mortgages to pay, just as they should be looking ahead to retirement.  Continuing to make house payments may not be everyone’s fantasy heading into the golden years. But there are options to consider for those in their fifties and sixties with sizable mortgages:
  • Accelerate your mortgage payments now and try to pay the mortgage down or off.
  • Keep the house and continue making payments into retirement if you think your retirement income will be sufficient to allow you a comfortable lifestyle.
  • Set up a line of credit instead of a mortgage, that will allow you the flexibility to increase your debt (currently up to 80% of the value of your home) or decrease it according to your needs in retirement.
  • Sell the house and buy something smaller with little or no mortgage
  • Sell the house and rent, investing any money left over to generate income

Staying in your home may offer security, knowing that you will have a significant retirement asset down the road. It also has intangible value, allowing you to maintain your lifestyle in a comfortable space and familiar neighbourhood.  And with today’s low returns on investments, you will never lose if you pay down your mortgage.

Putting money into your RRSP makes sense when you have significant income, and your tax rate is higher than it will be in retirement.  Then you can apply your tax refunds in a lump sum to the mortgage.

There are new products that combine a line of credit with your bank account and may give you the flexibility to increase your debt if your funds are tight in retirement.  The risk of this option or of keeping a large mortgage is that interest rates could rise in the future.

If you’re looking to move or actually have little equity in the home, it makes sense to sell and either buy something more affordable or rent accommodation. One benefit of selling now is that real estate prices across Canada are still relatively healthy.  We do not know what the future holds.

Renting especially makes sense approaching retirement, because if you’re in a more modest place it frees up money to invest for income and to apply to lifestyle. It’s also possible to live wherever you want and transition to accommodations that are near hospitals or more appropriate for those with limited mobility and where it’s possible to eventually receive care.  You will also avoid the additional costs of ownership, such as property tax and maintenance. 

Home ownership, mortgages, cash flow and other issues are important to consider in terms of your retirement readiness.  A comfortable retirement is one where you are not scraping and clawing to make ends meet.

For help and advice, please e-mail us or visit us at www.retireonyourterms.ca.

Monday, July 16, 2012

Take the Quiz: How much income will you need when you retire?

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Take the "What's my retirement lifestyle" quiz to find out what kind of lifestyle you may lead after you retire and how much money you might need to sustain it.  

People choose different ways to spend their time and money when they retire. Your costs will depend on things like:

Where you live

Will you stay where you are now, or move to a smaller house, or an apartment? Will you stay in the same area or choose a new one? If you move, the costs to run your home (gas, hydro, phone, mortgage, insurance, taxes) can go up or down.

Your lifestyle

What hobbies do you want to enjoy? Will you travel? Will you have a second home or property somewhere? Will you entertain a lot? All these things add to your costs.

Your health

Your health can really affect your costs. You can’t predict how healthy you will be, of course, but your family health history may be a factor. Keep that in mind as you plan for your senior years.

Other costs

Your medical and dental costs could go up if you no longer have a plan at work that will pay for your care. The cost of your car insurance may go down. Your food costs may also go down when your children leave home. And if you were helping to pay for your children’s education, those costs will go down if they finish school around the time you retire.

As you plan your spending, keep in mind how much of your wealth you would like to pass on to others. Some people spend less so they have more to pass on. Others don’t have a choice: they need to use most of their savings to live on.

Remember: Your costs may change after you retire.

Some costs you can’t change, like healthcare costs. Other costs are in your control. Think about how the choices you make will affect how much income you need to retire.

For expert retirement and estate planning advice, send us an e-mail or visit www.timweichel.ca

Saturday, July 14, 2012

Reducing your Estate Costs

Advance planning can help cover or minimize estate costs you may not have considered.  

When you die, your debts must be paid first – before any money or property you leave behind is passed on to your loved ones. There may also be funeral costs, legal fees and other administrative expenses in settling your estate. And there may be other estate costs, such as probate fees and taxes on investments, that you may not have considered.

1. Probate fees

When you die, your executor often needs proof (requested by financial institutions, government agencies and others) that they are the person authorized to represent your estate. Probate is the process that provides court certification of this fact. There can be a cost to this – and probate fees to settle your estate can be high depending on the province you live in. In Ontario, the fees (officially called an estate administration tax) equal almost 1.5% of your estate’s value.

2. Tax on capital gains

You’re deemed to dispose of all capital property at death. Your estate must cover the tax on any capital gains. 

3. Tax on tax-sheltered savings plans

Registered plans such as Registered Retirement Savings Plans (RRSPs) can be transferred tax-free to your spouse’s plan. If you don’t have a spouse, these savings are fully taxable at your death.

5 ways to reduce or cover estate costs

1. Leave a valid will

If you die without a valid will, your estate gets settled according to the laws of your province, rather than according to your personal wishes. This can be a more complicated process, with higher legal fees and the potential for costly disputes.

2. Name beneficiaries for insurance and savings plans

When you buy life insurance or open an RRSP or other registered plan account, you can name a beneficiary to receive the money when you die. This means the money bypasses the estate process and is paid directly to that person. So there are no probate fees relating to these amounts and no delay in your beneficiaries receiving the money.

3. Jointly own property

Holding assets – such as a home or cottage – with another person is another strategy for reducing probate fees. Joint assets pass automatically to the surviving joint owner – and are generally not considered part of your estate and subject to probate fees.

However, there can be complications to joint ownership, especially if you co-own an asset with someone other than your spouse. For example:

  • If you transfer half-ownership of an asset to an adult child – and they have a spouse who they later separate from – the spouse could have a claim on your child’s half of the asset.
  • If your child has financial problems or declares bankruptcy, their ownership in the asset could be subject to claims by creditors.
  • If the asset has increased in value, you may have to pay tax on any capital gains when you transfer your half ownership. This is because a transfer is considered a sale for tax purposes.
  • You can no longer deal freely with the asset and must make joint decisions in managing or selling it.

Professional advice is essential
Joint ownership arrangements can be complicated. Get expert legal and tax advice before entering into one of these arrangements.

4. Preplan and prepay your funeral

Preplanning and prepaying your funeral doesn’t necessarily save you money, but it does remove a key expense that your family or estate must cover upon your death. When you prepay, the money goes into a trust account or insurance fund until your funeral.

You gain certainty over costs because you choose the type of funeral you want in advance. And your family is saved the difficult job of making decisions during a time of grief.

5. Buy permanent life insurance

Life insurance proceeds can be paid to your estate to cover estate costs or left directly to a beneficiary to provide additional amounts to a particular person. The proceeds are always paid tax-free.

Consider a permanent insurance
policy for estate planning purposes. Permanent insurance covers you for life, no matter how long you might live.  Term insurance does not.

Probate fees and Life Insurance

When you name a beneficiary for your insurance proceeds, the money is paid directly to your beneficiary. It does not form part of your estate and is not subject to probate fees.
You can also use insurance to cover estate costs. To do this, name your estate as the beneficiary. Your estate will pay probate fees on the insurance proceeds, but it gives your estate the cash to pay debts, taxes or other obligations. This can avoid the sale of estate assets – such as a home or cottage – that beneficiaries may want to keep in the family.

Life insurance can help cover estate costs
Taking out a life insurance policy can help cover the cost of capital gains taxes.
Need help with a Retirement or Estate Plan?  Visit www.timweichel.ca