Advice That Never Grows Old

“The truth is that most of our current wealth is the result of diligent savings, not high returns.”

These words came from Lana Wong in an interview for MoneySense’ Guide to Retiring Wealthy.  “Save diligently” is advice which never grows old. 

Some things stick like glue.  Things you read or things people say become embedded in your memory.  Once in a while they mystically reappear.     

I remembered snippets from this publication, “How I planned my way to financial freedom”. When I found the book, June 19th, 2011, was scribbled at the bottom of the article’s last page.  At the top, I had written “very good, recommend”. 

The reason this article came to mind now is directly related to a financial plan I am currently creating for a couple. Everything Lana said in her interview applies to my couple’s situation.    My clients didn’t chase high returns.  They were following the same route directed by Lana.

Lana said, “All I did was make sure to take advantage of any pension plans or savings plans that my employers offered. I also maxed out my RRSP contributions every year.”   This works!  Lana said it did. I have seen the same results in my clients’ financial projections who diligently saved and minimized their debt over the years.  Now they are able to comfortably retire in their late fifties.   

There are many smart people, like Lana and her husband, Randy, who apply what they know they should do at a young age.  They follow through with their own advice.

Lana’s wisdom is profound. “My biggest motivation wasn’t becoming rich.  No, I started saving money because I was lazy.” 

When we recognize our weaknesses, we can take control of getting the ball rolling in the right direction.  Lana knew she had a war to fight against her weakness.  She developed a battle plan.  That was to simply start saving. 

She goes on to say, “I realized that if I saved just $50 a week when I was in my 20’s, then I’d never have to worry about money later on.  I figured I might even be able to retire early.”

Lana wasn’t sure she could retire early…she only thought she “might” be able to.   “Might” has a way of deterring many people.  When we are not entirely certain, reluctance fights against our best intentions.  We simply give up. “What’s the use! I can’t save… I just blow it.”  

We do ourselves a favor when we heed Lana and Randy’s advice.  They learned three important lessons which they willingly shared in the interview.

• Set goals.
• Always live below our means.
• Train ourselves to be happy with what we have instead of always wanting more. 

I feel a personal connection to Lana.   She grew up in Moose Jaw, attended the University of Saskatchewan, and worked for a consulting company in Regina before moving to Vancouver when she was 31 years old.   You are not reading “How I planned my way to financial freedom” from a textbook on personal finances.  This story is personal. And personal stories are relatable.   By sharing Lana and Randy’s never-grow-old advice, I hope you will be motivated to create your own happily ever after retirement story. {To read the full article, click here.}

Anything Can Happen – Be Prepared

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

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

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

Where am I going with this?

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

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

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

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

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

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

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

The All Important Question

 

Most people want to know: “Do I have enough to retire?”  The answer is always the same, “It depends…”

It depends on how much you have saved; what your sources of retirement income are, and when you will stop working. Yet the most important question is not, “Do I have enough to retire?” The most important question is “How much do you spend now and what will you spend in retirement?”  Believe it or not, most people do not know the answer.

 

This piece of information is vital to the development and success of your financial plan.   I relate your lifestyle needs to a heartbeat.  Life stops when a person’s heart stops beating.  You can imagine that if you don’t have enough money to support yourself in retirement, your life will feel as though it has stopped. You will feel doomed and be limited in the things you can truly afford. You certainly don’t want that. 

One thing is certain; you can’t borrow money to retire.  “I’d like $250,000 for my retirement, please.”  This may sound like a grim reality. The truth is you could be living on less in retirement if you don’t take the time to calculate what you spend today.  

In the summer of 2013, David Aston’s column, How Much Money will You Need to Retire, appeared in MoneySense.  In my client meetings, the chart below is used to quiz people when they don’t know how much they spend.   I ask if they can pick themselves from the different classes:  Basic, Average Middle, Upper Middle, or Deluxe.



 

 

The truth is until anyone actually tracks their expenses, they feel clueless.  A couple said they thought they spent only $2,000 each month until they tracked their expenses.  Can you imagine the shock when the total was closer to $5,000?  For most people, the shock comes when they realize how much money is going out in comparison to money coming in from their earnings.  

Hang in here as I prepare to swing totally off topic for a few minutes.  

Kevin Hall talks about the origin and significance of the word “Coach” in his book, Aspire.   Here’s a little history lesson.

In old Hungary, along the Danube River between Budapest and Vienna, there was a village by the name of Kocs that produced the world’s finest horse-drawn vehicles.  Skilled wheelwrights fashioned these conveyances with spring suspension to comfortably carry royalty over the bumpy river road that connect the two great cites. These carriages borrowed their name from the small township where they were skillfully designed and came to be known as “coaches”.

Originally crafted for aristocracy, coaches carried important people to their desired destination in luxury and ease.  Their compact, sturdy, and elegant design far surpassed any mode of transportation that had come before, and coaches soon became the rage of fifteenth-century Europe.

Over time, other forms of transportation adopted the term “coach.” Passengers traveled far reaches of the western frontier of America by stagecoach and railway coach.  In Europe a motor coach became synonymous with a luxury car or travel bus. 

But however far-reaching and prevalent the word has become since the first coach rolled out of production in Kocs, the meaning has not changed.  A “coach” remains something, or someone, who carries a valued person from where they are to where they want to be.

The reason I shared the meaning behind the word, “Coach”, is for you to think of a CERTIFIED FINANCIAL PLANNER^® professional as a coach - - your coach.  When your coach says it’s important to track your daily spending, it’s not because you have nothing better to do. You need to be aware that this is where the answer lies to the important question, “Do you have enough for retirement?”  You are a valued person. As your coach, I want your retirement to be enjoyable for you.

The different titles for coach (i.e. guru, mentor, guide) all describe the same role as Kevin Hall points out.

One who goes before and shows the way.  Coaches point out the sharp turns, potholes, perils, and pitfalls of the road being traveled.  They steer clear of dead-end streets and unnecessary detours as they safely navigate us to our desired destinations.  Whether they are leading or teaching or showing or guiding or mentoring, they are coaches.  And they are indispensable in helping us find our path and purpose. 

I love the parallel of a CERTIFIED FINANCIAL PLANNER^® professional and a coach.  Juggling your finances to accomplish your goals and dreams can be challenging.  That’s why having a financial coach makes your life journey successful. Together we will find the answer to determine whether you have to: work longer, save more, or spend less in order to have a successful retirement. OR maybe simply discover that “Yes, you do have enough.”    

Retirement Planning: It’s About Income and Lifestyle

Retirement comes with its own set of challenges.  Sometimes these challenges are not solely related to money.   Misconceptions may cloud your perception of the ideal retirement.  Trying to fit into a mold designed for someone else will not help you live the retirement you were designed to enjoy.  The books below highlight either specific chapters or focus entirely on the softer side of retirement.  Conversations should involve more than determining your sources of retirement income.  Your lifestyle deserves attention too.  

If someone is approaching retirement or has already retired, you may consider giving one of these books which will help them transition from a working lifestyle to their ultimate retirement.  If you are considering retirement yourself, you may see another side of retirement. Every person’s retirement will be different.  Some may choose to work part-time while others will do volunteer work; some may choose to travel while others will stay close to home.  Some may relocate to another city while others will simply downsize to a smaller home.  Certain decisions will be easy while others will be complicated.  Finding what works now will be as important as making changes as the years pass. To create the life you dream of having, perhaps one of the following books can help.

10 Things I Wish Someone Had Told Me about Retirement

In the book, 10 Things I Wish Someone had told me about Retirement, one enjoyable activity which Rein Selles recommends is to design a “retirement card”.   Business cards identify people by their name, title, and contact information.  Your retirement card, the same size, has one notable change.  It answers the usual question people ask, “What are you going to do when you retire?”  On the card, you will state your name, one thing you would like to do “retired” and where you hope to do this.  You may be interested in knowing if retirement isn’t in your plans, the chapter, You Cannot Retire from Yourself, gives you permission to keep working if you love your present job and want to work beyond 65.  Pressure from others is not a good reason to retire.

Retire to the Life You Love  

 

The design on the cover of Retire to the Life You Love shows the Six Circles of Life.  At the heart of these interlinking circles is you.  You are the inner circle.  Nell Smith takes the approach to help you be who you are. Inside this book, you will discover personalized tools to create a lifestyle which brings you joy, happiness and contentment.  Her holistic approach will help you think about certain aspects related to retirement you may have never considered.

 

 

Your Retirement Income Blueprint

In Daryl Diamond’s book, Your Retirement Income Blueprint, he emphasizes that retirement is driven by two hubs.  The most obvious one is the “Money Hub” and the other, not so obvious, is the “Time Hub”.  During retirement, knowing what you will do with your time and what you want to do, are vitally important.  Your activities may be related to following your passion or may be solely recreational such as golf, gardening, travel, volunteer work, or helping the children.  You will need to consider whether health issues might impede your retirement activities and where you wish to reside.The benefit of having enough time to plan ensures you will make the correct decision.   Having a list of questions to kick start the planning process is useful.

 

 

Don't Retire, Rewire! 

 “Flunking” retirement is a possibility.  Many people have failed because they felt they were missing something.  Their solution may be to return to work.  The premise of this book, Don’t Retire, Rewire was written with the understanding that you are not retiring from something but rather to something.  To find the turn key to that “something” you may need to rewire.  A chapter in this book helps you understand your drivers.  What motivates you to work today? The reason this is so important, as the authors share, is that these drivers will create your new future.  Their motto: use your today to build your tomorrow.   

 

Benefit of Reading

Christopher Morley once said, “When you give someone a book, you don’t give him just paper, ink, and glue.  You give him the possibility of a whole new life.”  I sincerely believe these authors are motivated to share ways to create a whole new life in the last phase of life’s journey. Taking every opportunity to learn how you can accomplish this will ensure you are not disappointed.  Whether you re-discover your talents, re-ignite a passion, or re-design your life, you want to ensure you are happy and content.  Life is too short to be lived any other way.  Take the challenge today and dream what your retirement might look like in the future.   Jeri Sedlar and Rick Miners shared, “if you know who you are today, you can build on who you want to be tomorrow.”

The Fork in the Pension Road

Most Canadians will encounter an all-too-familiar fork in the retirement planning road.  The big question is, “Do I start my Canada Pension Plan benefits at age 60 or wait until 65?”  The dilemma is that when you elect to receive benefits at 60 you face a reduction of 36% (0.6% for each month prior to age 65).  Once you do the math, this is 64% of the amount you would have received at 65 if you’d waited.  Again, the question for which everyone begs an answer, “Do I start early and receive less (or) do I wait and receive more?” To make matters more complicated, you are given a third choice.  If you wait beyond 65 to start the Canada Pension Plan, the retirement benefit increases by 0.7% each month.  At age 70, you would receive 42% more than at age 65.

The Canada Pension Plan provides all three values to help with your decision. For example, a typical retirement plan statement indicates:

If you were 65 today,

·         you could receive a monthly retirement pension of:  $917.17

If you apply at the age of 60,

·         You could receive a monthly retirement pension of: $587.00

If you apply at the age of 70,

·         You could receive a monthly retirement pension of $1,302.38

The best way to quantify these values into dollars and cents is using a side-by-side comparison. Just as pictures are known to “say a thousand words”, so do the numbers. Whether you elect to receive your benefits as early as 60 or later at age 65, eventually, the amounts will cross-over as shown below in Year 14.   Obviously, the longer you live, if you choose to wait “to get more”, you will “get more”.  However, the unknown “X” in the algebraic equation is how many years will you live?   Since there is “no sure” answer, you have to do what’s best for you.

Using the retirement benefits from the example, the calculations below show only the present values. Indexing Canada Pension Plan benefits or accounting for any earnings was not applied. If you would like more detail, financial planning software can create these values.

Year	Age	CPP Commence @ 60	Cumulative Total	CPP Commence@ 65	Cumulative Total	CPP Commence@ 70	Cumulative Total
1	60	7,044		0		0
2	61	7,044		0		0
3	62	7,044		0		0
4	63	7,044		0		0
5	64	7,044		0		0
6	65	7,044	42,264	11,006	11,006	0	0
7	66	7,044		11,006		0
8	67	7,044		11,006		0
9	68	7,044		11,006		0
10	69	7,044		11,006		0
11	70	7,044	77,484	11,006	66,036	15,629	15,629
12	71	7,044		11,006		15,629
13	72	7,044		11,006		15,629
14	73	7,044	98,616	11,006	99,054	15,629	62,515
15	74	7,044	105,660	11,006	110,060	15,629	78,143
16	75	7,044		11,006		15,629
17	76	7,044		11,006		15,629
18	77	7,044		11,006		15,629
19	78	7,044		11,006		15,629
20	79	7,044		11,006		15,629
21	80	7,044		11,006		15,629
22	81	7,044		11,006		15,629
23	82	7,044		11,006		15,629
24	83	7,044		11,006		15,629
25	84	7,044		11,006		15,629
26	85	7,044		11,006		15,629
27	86	7,044		11,006		15,629
28	87	7,044		11,006		15,629
29	88	7,044		11,006		15,629
30	89	7,044		11,006		15,629
31	90	7,044	218,364	11,006	286,157	15,629	328,200

Are You Confused?

When changes to Canada Pension Plan were being introduced, the Government of Canada devised the chart below outlining that choices depend on an individual’s wants and needs. Like I have always said, everyone’s retirement plan is unique to match their unique circumstances. Below are possible scenarios which can help in the decision process. {For your information CPP RTR refers to “Canada Pension Plan Retirement.”}

 

Choices depend on individual wants and needs – maximize retirement benefits?
Consider taking CPP RTR benefits early if	Consider taking CPP RTR benefits at normal retirement age if	Consider taking CPP RTR benefits later if
Sick and  can’t qualify for CPP disability	Average health	Healthy
Life expectancy is below average	Average life expectancy	Life expectancy is above average
Low income, no other sources of income	Medium income with some other sources of income	High or medium income, some other sources of income
Laid-off and unable to find another employment	Unable or unwilling to work beyond 65	Continue working with your average or above average earnings
Continuous employment history	Continue working with lower than your average earnings	Employment history with considerable gaps
No divorce and no credit split	Continuous employment history with some gaps	Divorced and lost some pension credits upon credit split

These options are presented for your consideration by the Government of Canada.   However, we also learn from the best of the best.  Experts like Daryl Diamond, who has the knowledge, experience and “who has seen it all” from working with clients, has his reasons why you may consider taking Canada Pension Plan benefits early. In his book, Your Retirement Income Blueprint, several pages are devoted to this topic. Some reasons are:

(1) The Canada Pension Plan does not have any significant estate value.  The death benefit is equal to six months’ worth of the monthly pension amount to the maximum of $2,500. This clearly indicates there is no advantage to starting later.  

(2) Your spouse will receive a survivor pension derived from a share of your Canada Pension Plan retirement benefit. However, the danger is when you both wait until age 65 to receive the higher CPP benefit, then the survivor’s entitlement may only be a portion which tops up to the maximum amount. A CPP recipient is allowed to receive a retirement and survivor benefit, but the sum of these two payments cannot exceed the maximum retirement benefit at age 65. In 2015 the maximum benefit amount is $1,065.00.

Hide the Money

If you continue working and are concerned about being taxed on the Canada Pension Plan benefits, the easiest solution is to hide these benefits inside an RRSP, providing you have available contribution room. The only way to know your RRSP deduction limit is to check your Notice of Assessment.  If you have maximized RRSP contributions, then hide CPP benefits inside a TFSA to shelter the earnings from taxation. If you tell me that you have maximized contributions to both, an RRSP and a TFSA, then “Congratulations!”  Since you do not have any place to hide your CPP benefits, then you may choose to wait especially when the CPP benefit pushes income into the next tax bracket.    

Canada Pension Plan Perks

The greatest advantage for CPP recipients is the removal of the years when the contributions to the Canada Pension Plan may have been low or contributions were not made. By removing these values from the calculations, the overall retirement benefit is bolstered in favor of providing a higher income.   With the General Drop-out Provision, up to eight years of your lowest earnings will automatically be dropped from the calculations.  With the Child-Rearing Provision, an eligible parent is allowed to have additional years excluded when they stopped working or received lower earnings to raise your children.  Both of these perks ensure the highest possible payment is granted.  

Don’t be Fooled

Although the General Drop-out Provision may certainly be a benefit to increase your retirement benefit, you need to be aware of how this process may work against you. Let’s assume you stop working at 60 with the intention of waiting until 65 to start drawing Canada Pension Plan.  You believe you should be rewarded for waiting; however, you might be surprised to learn the retirement benefit is not as significant as you thought.  When a person does not work between 60 and 65, these additional 5 or 6 years are automatically included in the General Drop-out Provision for the purpose of disqualifying the years when earnings were low or zero.  Guess what? These years between 60 and 65 match the criteria.  To receive specific details of monthly retirement benefits, contact the Canada Pension Plan office for projections and explain your intentions.

Your Turn

When your turn comes and you are faced with the fork in the road that millions of others faced before you, you will need to decide which path is appropriate for you.    When you pull all the above information together, you may draw your own conclusion with help from a Certified Financial Planner.  Weighing your options carefully is the only way you can make an informed decision.  Once you choose to start your retirement benefits at age 60, the decision is irreversible and the benefits remains the same for your lifetime. Certainly the disadvantage of receiving retirement benefits early is if you became disabled between the ages of 60 and 65.  The Canada Pension Plan Disability Benefit is higher than a retirement benefit.  You will not have an option to switch.  Regardless which path, you take, be sure it’s right for you.