Tag Archives: Retirement

Jennifer Jacobs – The Steady Increase in Cost for Long-Term Care Insurance

In this video, I speak to Jennifer Jacobs, President of LTCI Consulting Inc. to chat about the expectation of changes of living benefits / life insurance, in terms of what we see in the market place and what we can do to take advantage on what is available today.

IRONSHIELD Financial Planning’s “Fly On The Wall” update call.
These calls are recorded by Scott Plaskett and allow you to get a behind-the-scenes look at one of his professional update calls. Watch and listen as a “fly on the wall” and get some of the most valuable information you will find on the Internet.

Lower RRIF Withdrawal Minimums—More Flexibility for Seniors

The annual federal budget revealed in April 2015 brought along changes that have a profound impact on the financial industry. Along with the decision to raise the contribution limits of TFSAs, it was also announced that the government has proposed new rules for Registered Retirement Income Funds (RRIF) and lowered the mandatory withdrawal minimum for seniors significantly. In today’s blog post, we will take a quick look at how the new RRIF rules will affect seniors and their retirement savings.

Currently, seniors that have reached 71 years of age are required to withdraw the minimum amount from their RRIF each year. Up until the federal budget of 2015, this amount was 7.38% of an individual’s RRIF. The new changes will decrease the mandatory withdrawal significantly to 5.28%, but will continue to increase at a slightly faster rate per year. However, instead of capping off at 20% by the age of 94, the cap will now be reached at age 95.

Reasons for the Change
Living in Canada has changed dramatically since 1993, the year when the former 7.38% withdrawal rate came into effect. Since then, the average life expectancy in Canada has improved from about 77 years to 81 years by 2012; it is certainly even higher today. The proposed RRIF rules are meant to reflect the change in the Canadian way of life and “reduce the risk of people outliving their savings.”

Investment industry groups, including CALU, and seniors’ organizations, such as CARP, have been active over issues regarding an individual’s retirement savings for years. They have often voiced their concerns about eliminating or pushing back the age at which the mandatory withdrawals began. Now, seniors can accumulate their savings longer and have more flexibility when it comes to managing their money in a tax-efficient way.

Useful Tips and Advantages
The new withdrawal minimum in RRIFs allows almost 50% more capital to be preserved by the age of 90. It is estimated by the federal government that the RRIF changes will save seniors $670 million in taxes over the next five years until 2020.

For wealthier Canadians, it is best to remember not to leave too much money inside your RRIF because this will lead to a higher tax liability upon death. While withdrawing a certain amount of money will trigger some taxes, it will correspond with your marginal tax bracket at the time. Therefore, the longer you accumulate your money, the more likely it is for taxes to be triggered in an estate and pushed to a higher tax bracket.

Related Links
New TFSA Limit
https://www.ironshield.ca/articles/new-tfsa-limit-reaches-close-but-not-quite-to-proposed-11000/

Four Mistakes to Avoid When Creating a Retirement Plan
https://www.ironshield.ca/articles/four-mistakes-to-avoid-when-creating-a-retirement-income-plan/

The Canada Pension Plan—When Is the Right Time for You?

When it comes to the Canada Pension Plan (CPP), it really is a matter of deciding when to take it. While there is no rule of thumb, there is a specific answer for each person. In today’s blog post, I will give a quick overview of what the Canada Pension Plan is, and show you how to find the right time to collect this retirement pension.

What is the Canada Pension Plan and who is eligible?

The Canada Pension Plan is a retirement pension that provides a monthly taxable benefit to retired contributors.

To be eligible for the CPP, there are three qualifications:

1. You must have worked in Canada
2. You must have made at least one contribution to the CPP
3. You must be at least 60 years of age



When can you begin to receive your Canada Pension Plan?

The earliest you can begin to receive your CPP is at the age of 60. However, the standard age to start is 65, and there are definite advantages if you choose to defer collecting your pension. From 2012 to 2016, new rules in the Canadian government state that the early pension reduction will gradually be increased from 0.5% to 0.6% per month if you take it before the age of 65. This means that by 2016, if you are at the age of 60 and decide to collect your pension, you will be penalized and your pension amount would be 36% less overall than it would have been if you had taken it at the age of 65.

If you choose to delay receiving your CPP, the latest you can defer taking it is at the age of 70. Under the new rules, for every month you elect to wait past the age of 65, you will receive an enhancement of 0.7% per month. This means that if you choose to collect your CPP at the age of 70, you will receive an overall enhancement of 42% enhancement to your pension.

Tips

1) Get an estimate of what your pension is going to be.

If you are approaching retirement, it is important to obtain an estimate for your pension. Try using the Canada Retirement Income Calculator to help you get started.

2) Consider all the factors before deciding to take your pension.

  1. Are you still working and contributing to the CPP? Continued contributions will enhance your CPP when you decide to collect.
  2. How long have you contributed for? The longer you contribute, the more you will receive.
  3. What are your other sources of retirement income? CPP income is taxable income. By collecting your pension early, this means that adding more income to your plan could push you into a higher tax bracket. If you don’t need the extra income, avoid this step.

3) Recognize that your health may play a role in helping you decide to collect your CPP.

If your health is poor, you may want to start collecting early to ensure you receive as much benefits throughout your lifetime as possible. Remember that the earliest you can start to receive your CPP is at the age of 60. Sometimes, this may be a better option for you.

4) Be very, very clear on what your retirement plans are.

Ask yourself: do I want to retire? Do I need to retire? Just because there is money available to you, it doesn’t mean you have to accept it. You can wait and defer it until you are 70. Knowing what your retirement plans are is very important because it will help you get a better idea of when the right time to collect is for you.

5) Find out if it is better or worse for you if you delay receiving your pension.

If you stop working at the age of 60, but defer collecting your pension until 65, you must take into account the extra five years of no income. In essence, you are lowering your average wage over the life of the plan by including these zero income years, which will likely reduce your overall CPP benefit.

As I said in the beginning, there is no rule of thumb when it comes to knowing when to apply for your Canada Pension Plan, but there is a right answer for you. You can begin by collecting your CPP only when you need to, and not before, but the most important thing to remember is to always assess your situation in conjunction with your overall financial plan. Financial planning is key because it allows you to work with a CFP and come up with a comprehensive plan that will show you how the different scenarios in life could affect your finances in the future. For example, if you are wondering what would happen if you start collecting your CPP at the age of 65, your CFP could model that out for you so that it becomes clearer.

Financial planning is so critical to your future and a key component to making good decisions. Head over to our website to check out the different tools and resources we have to offer, including your report on the 12 Key Questions You Must Ask a Financial Planner before You Hire One, and work with your financial planner today to talk about your Canada Pension Plan.

Related Links
Choosing a Financial Planner
https://www.ironshield.ca/landing/how-to-choose-and-work-with-a-financial-planner-you-can-trust/

Mistakes in Retirement Planning
https://www.ironshield.ca/articles/four-mistakes-to-avoid-when-creating-a-retirement-income-plan/

Canada Pension Plan—Changes to the Rules
http://www.servicecanada.gc.ca/eng/services/pensions/cpp/retirement/age.shtml

Four Mistakes to Avoid When Creating a Retirement Income Plan

Today, I want to talk about the four common mistakes that retirees should avoid making when creating a retirement income plan. These are:

  1. Not factoring in inflation

  2. Not factoring in income taxes

  3. Poor structure of investment management fees

  4. Believing in the myth that your fixed income exposure needs to match your age

First, let’s begin with the mistake of not factoring inflation into your proposed retirement income needs. It is extremely important to consider inflation because how long your money lasts is a direct result of how much it is going to cost you to live your life each year.

For example, you determined that life is going to cost you $5,000 each month. This amount will be used towards food, clothes, etc. But don’t be fooled into thinking that this is the same amount of money that you will need in the future. Things will get increasingly expensive, and your cost today is not going to match your cost tomorrow.

During your working years, it is much easier to anticipate inflation, and most salaries keep pace with the general increase in prices. However, inflation can become a real problem when you are on a fixed income, and your standard of living can be affected if you haven’t properly planned for it. If we factor a Canadian average inflation of 2% a year into the above example of $5,000, it will cost you $7,430 a month to live the same life in the future.

In addition to the effects of inflation, mistake number two is not factoring in income taxes. If you need $5,000 a month to cover living expenses, you will need to withdraw more than that amount in order to have enough to pay the income tax bill as well. Failing to factor income taxes into the retirement plan could exhaust your portfolio before expected.

The third mistake to avoid when creating a retirement income plan is to make sure you are not poorly structuring the investment management fees that are paid to your investment management team. Chances are you’re investing in mutual funds, and will need to pay a fee to the mutual fund company for their services. On average, you would pay 2.5% for this fee. What this means is that if your portfolio generates an 8% gross return, you would only see 5.5% instead.

There is a little trick that I would recommend to reduce the impact of the management fee without changing your portfolio. Instead of having the MER paid before you see your distributions, you can ask your advisor to have the fee unbundled. This means that they will first pay the full 8% gross return generated, and then subsequently charge the management fee. By separating the two, you will be able to earn a tax deduction for the amount that you paid for investment counselling as dictated by the CRA.

Lastly, the final mistake to avoid is thinking that you need to match the percentage of your portfolio allocated to fixed income to your age. For example, it might seem logical to have the majority of your portfolio in bonds at an elder age. However, you will be setting yourself up for a major drop in income due to the low return expectations on fixed income, making it more difficult to counter the combined effects of fees, inflation and taxes that I mentioned earlier.

No matter your age, a sound asset allocation program starts with one’s net worth, expected income needs and risk tolerance. Everyone’s circumstances are different and believing in the myth could lead to underperformance and interfere with you achieving your financial goals.

I strongly invite you all to make sure that you account for these four variables when creating a retirement income plan. Contact your investment advisor to adjust the way you pay your portfolio’s management fee. Make smart choices when planning for your future.

The Richest Person In The Nursing Home

Featured in the July 2014 Newsletter of HAHN Investment Stewards. Republished with permission.

By: Scott E. Plaskett, CFP
Senior Financial Planner & CEO, IRONSHIELD Financial Planning, www.ironshield.ca

Is your financial planning putting you on track to be the richest person in the nursing home?

I bet it IS.

How do I know?  For the majority of Canadians, financial planning is based upon the principle of saving as much as possible on an annual basis and trying to earn the best rate of return in the process.

If this sounds like the underpinnings of your financial plan, you’ll want to read on.

First, let me provide you with a little background about how traditional financial planning is causing you to deny yourself today for the hope of wealth tomorrow.

Let’s look at the questions that are typically asked, during the creation of a traditional financial plan.  The questions may look like this:

  1. When do you want to retire?
  2. How much money do you want to live on during retirement?
  3. What level of risk are you comfortable accepting to earn the return on your portfolio?

And these questions, although they sound like intelligent questions to ask, are the wrong questions.

Let’s look at the first question.  It revolves around the word “retire” or “retirement”, which is a really bad word.

Don’t believe me?  Just take a look at this list of synonyms for the word retire (Synonym: a word or phrase that means exactly or nearly the same thing):

  • withdraw
  • retreat
  • expire
  • terminate
  • disengage
  • death

If you ask me, I don’t want to experience any of these things, yet most financial planning is based upon the concept of choosing a date in the future for your “retirement”.  And the focus becomes, what can/should you deny yourself today, so that you can save as much as possible for tomorrow?

Now for the second question.  If you asked me how much money I’d want to live on during retirement, my answer would be, “As much as possible…”  In other words, most people really have no idea of what their cash flow requirements are going to be when they cease to generate employment income, so putting an actual dollar amount on that today, is next to impossible.

As for the question about your comfort level with investment risk.  This is such a loaded question I don’t even know where to begin.  The concept of risk makes me think of gambling and believe me, I don’t want to gamble with my money.  Why would I want to accept ANY “risk”?  The reality is, we should be focusing on our ability to create the highest probability of success.  Projections alone – as in a traditional financial plan – won’t do that.  Finding the minimum rate of return that will allow your financial plan to succeed is where the focus should be.

So, being asked and answering these questions really doesn’t accomplish much – other than fill an hour of time with a conversation that feels important but really doesn’t get any closer to what’s truly important.

So, how should the financial planning conversation go?

I have found, that the better financial planning questions are the ones you should be asking, but just don’t know it.

  • What after-tax income am I on track for?
  • What is my financial independence day, or let’s call it “freedom age”?
  • What is my required rate of return?

Once answered, these questions will provide you with a tremendous amount of insight into what you need to do to be successful with your financial planning.  This type of clarity is what will allow you to make better decisions, knowing that your subsequent decisions will either enhance or detract from your ability to accomplish your goals.

Following this financial planning approach yields your Financial Minimum Effective Dose (MED), thus allowing you to spend on your lifestyle today, without guilt.

The concept of minimum effective dose comes from the world of science.  For example, in science class I learned that water boils at 100⁰C at standard air pressure.  Water is not “more boiled” if you add more heat.  Adding more heat is simply wasteful.

So, your Financial Minimum Effective Dose is the minimum amount of savings required for you to accomplish your financial goals.  Saving more money can be considered just as “wasteful” and may not support your lifestyle goals for today – just as important as tomorrow.

You see, in today’s world, retirement is an outdated concept.  People don’t want to “retire”, they want to be engaged in life, for life.  The problem is, that without a financial plan that assists you in figuring out what your Financial MED is, life is full of denying yourself today – out of fear – in the hopes of having more in the future.  The problem is, what happens if you don’t make it to tomorrow?  Will you have enjoyed your experience along the way?

Determining what your Financial MED is, will not only provide you with the confidence that you are on track to be financially free on your terms, it will also provide you with the permission to enjoy what’s important to your lifestyle today, without feeling like you are spending tomorrow’s money too soon.

You may still be the richest person in the nursing home, but it won’t be measured by your bank balance alone, but by the richness of the life you’ve lived.

9 Things You Need To Know Before You Can Retire Comfortably

For many people, long gone are the days when you can retire from your job with the pension that your employer provides. Today it is important to have your own plan. It is all about taking control of your financial future and there a few steps you should take to help you achieve your retirement goals.

Here are nine things I think you need to know before you can retire comfortably.

1. What is your net worth today?
This is really the foundation of all financial planning. You need to understand your net worth in order to move forward. I suggest you make a list on one page everything you own; houses, cars, investment accounts, retirement accounts and education plans. Then take a look at your expenses or your liabilities; what do you owe? Now take your assets and subtract your liabilities and that gives you your net worth.

2. Where is all your money going to come from?
I want you to make another list here of where your retirement income is going to come from; retirement accounts, pension plans, government pensions and inheritances. We don’t need to know what the income is going to be only what the sources are.

3. What are your retirement expenses going to be?
You want to get very clear about what your expenses are now and what they are going to be moving forward.

4. What is your debt management plan?
So if you’re going into retirement and you’re going to be carrying debts, you really want to get a clear plan in place to get rid of those debts.

5. What does your base plan look like?
A base plan is a plan that lays out all of your information (your assets, your liabilities, your retirement income, your retirement expenses) and puts it into a system so you can get a clear picture of where you are today. This step helps answer the most important question can I retire with the lifestyle I’ve become used to?

6. What if scenarios.
I want you to think about and prepare for all eventualities in this step. For example, what if I really don’t like my job and I really want to retire five years earlier? Or what if we decide to downsize and maybe buy a summer home somewhere? All of these variables need to be worked into the plan.

7. What kind of planning are you doing?
There are two types of planning to consider here; goals based planning or cash flow based planning. Goals based planning provide you a clear idea of what you need to do to retire at a certain age within a certain level of income. Cash flow based plans do a much better job of mimicking your actual retirement income and the taxes associated the cash from your plan.

8. What about risk management?
This is important because when you are talking about financial planning there are three eventualities to consider. The first is you’re going to live a long healthy life. The second eventuality is you are going to live a long, unhealthy life. The third is you are going to die prematurely. We want to make sure all of our plans can sustain the level of income we will need to deal with all the eventualities.

9. Estate Planning
So what is going to happen to your family’s wealth when you die? What happens if both spouses die? Are you planning on leaving your wealth and assets to your children? We really want to be focusing on the efficient transfer of wealth from one generation to the next. If you want more information on estate planning, check out my recent post Keeping Your Cottage In The Family – Mistakes To Avoid.

Being able to retire comfortably takes planning. There is no doubt there is a lot to think about. A good financial planner can help you go through the steps so you can get clear on what you need to do to retire the way you want to. For more information on planning your retirement, check out my post Make Retirement The Time of Your Life: Ask Yourself Three Questions

If you are not sure where to turn, the team at IRONSHIELD Financial Planning can help. And of course take a look at this comprehensive and free Consumer Awareness Guide I wrote How to Choose and Work With a Financial Planner You Can Trust.

Do you know your CUF:CAC ratio?

Republished with permission from Built to Sell Inc.

The most powerful metrics in any business are ratios that express your performance on metric A as it relates to metric B. For example, knowing what your revenue was last year is interesting; but knowing what your revenue per employee was will give you a sense of how efficient your business is at leveraging your investment in people.

If you’re a retailer, knowing what your sales were last year is far less useful than knowing what your sales per square foot were, as this measures your effectiveness at leveraging your investment in retail space.

One of the most important ratios to keep an eye on is your ratio of CUF:CAC. CUF stands for Cash Up Front, and it is the amount of money you get from a customer when they decide to buy. CAC stands for Customer Acquisition Cost, and it is the amount of money you need to invest in sales and marketing to win a new customer.

Improving your CUF:CAC ratio can ensure that you have the cash to grow your business without having to rely heavily on outside sources of capital.

HubSpot

To understand the CUF:CAC ratio, let’s first look at HubSpot.com. HubSpot is a software business that provides a platform for businesses to manage all of their marketing. HubSpot allows businesses to build a website, set up a blog, manage their social media accounts, create email marketing campaigns, and analyze it all through a single dashboard. It’s an all-in-one marketing platform for businesses, and HubSpot’s typical customer is a small to mid-sized company that needs to present a professional online image but doesn’t have the necessary internal resources or the budget to hire a team of designers.

According to a recent article in Forbes, HubSpot invested an average of $6,793 to win a new customer in Q2 2012. Their average customer paid $577 per month for access to the software, so if HubSpot had charged its customer just the monthly subscription fee, their CUF:CAC ratio would have been an abysmal .084:1.

But obviously HubSpot is in the subscription business, so they get $577 per month, and their average customer stays with HubSpot for more than three years, so they clearly recover the cost of acquisition over the lifetime of the customer. However, if they hadn’t had a strategy to improve their initial CUF:CAC, they would have required a boatload of money from outside investors.

To improve their CUF:CAC, HubSpot sells an “Inbound Marketing Success Training” package and charges new customers $2,000 to recover some of the costs of getting them set up. By charging $2000 upfront for the training package, their CUF:CAC ratio goes up to a much more respectable .37:1.

Forrester Research

To understand a company with an excellent CUF:CAC ratio, take a look at Cambridge, Massachusetts-based Forrester Research. Forrester’s primary business is selling syndicated market research on a subscription basis to billion-dollar companies. Founded in 1983, today Forrester generates roughly $300 million dollars in revenue from 2,451 customers, including 38 percent of the Fortune 1000.

Their core product is called “RoleView,” and for around $30,000 per year, Chief Information Officers (CIOs) and Chief Marketing Officers (CMOs) can get research insights delivered to them based on their functional role within their company. Each RoleView subscription typically includes access to research, membership in a Forrester leadership board where peers discuss issues they have in common, phone and email access to the analysts who perform the research, unlimited participation in Forrester Webinars, and the right to attend one live event.

Unlike HubSpot that primarily charges by the month, Forrester RoleView subscriptions are mostly charged annually, upfront. Subscribers get an entire year’s worth of their customer’s money in advance, giving them a positive CUF:CAC ratio. George F. Colony, CEO and Chairman of Forrester, revealed the benefit of charging upfront for subscriptions in his letter to shareholders in early 2013. He concluded: “Forrester’s business model yields healthy levels of free cash flow. We typically carry between 50 and 100 million dollars in cash.”

Your CUF:CAC ratio is all about improving the cash flow in your business, which is one of the eight key drivers of Sellability.

Why not find out now if your business is sellable?

This free online tool is the only no-risk step you can take to determine if your business is ready to get full value. Fast-track your analysis by taking advantage of this free, no-obligation free online tool.

This Sellability Score you instantly receive is a critical component to any business owner’s complete financial plan and is something that, until now, we have only made available to existing clients.

However, we recognized that there is value in knowing in advance of working with a financial planner whether or not your largest asset is ready to be exchanged for your retirement nest egg. Our view is that you are better to learn more about your businesses sellability today and find out how your business scores on the eight key attributes so that you can ensure you obtain full value.

If your business part of your retirement plan, finding out your sellability score will be the best 10 min. you could ever spend working “on” your business.

Take the Quiz here: The Business Sellability Audit

Sellability ScoreFor more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.