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Wednesday, May 25, 2011

The Pension Advice Series: Employer’s Pension Plan – What You Need to Know

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We’re starting another series this week, The Pension Advice Series.  As was the case for many readers who had questions we’ll answer with the Debt Management Solutions Series, there are almost as many who are looking at the asset side of the balance sheet. While we started off with the basics and How to Use Credit Cards Effectively when managing debts, today we shall address Employer’s Pension Plan and What You Need to Know about them.

 

Types of Employer Pension Plans: Defined Benefit

 

If you are one the fortunate folks who still has a pension plan provided by your employer, you may know something your plan, or not! In general, there are two types of plans: defined benefit and defined contribution plans.  If you know what your retirement income will be at the end of your career, chances are you have a defined benefit plan.  An example of the calculations for your annual pension upon retirement is: 2% of your annual salary, $50000 X the number of years worked, say 30 = $30000.  So as long as you know how long you will work, you’ll know what your income is during retirement.  In the good old days, many people had defined benefit plans.  Nowadays, it’s mostly limited to employees with grandfathered plans and government employees (wonder why government expenses continue to climb out of control?)!

 

Defined Contribution Plans

 

For the rest of us lucky enough to have a pension plan at all, it is likely to be a defined contribution plan.  How they work is the contribution is a percentage of your regular paycheck.  For some plans, it is only the employer who contributes, for others the employee can add to the plan as well.  As the participant in the plan you may have the ability to increase the employer’s contribution by adding some of your salary.  While the regular contributions are known, defined, the income generated at retirement are dependent on the returns generated within the plan.  Perhaps you have a say on how they are managed, maybe not ;-(.

 

Group Retirement Savings Plans

 

Another type of defined contribution plan, while not a pension plan, is a group retirement savings plan.  While sponsored and usually funded in part by the employer, the plan is administered by a financial institution and is much less expensive for the employer, has less regulation and may afford the participant (employee) more flexibility.

 

No Matter the Plan, What You Need to Know

 

You should take the time required, maybe 5-10 minutes of reading, maybe several phone calls, a few clicks on a web site to understand the details of your plan.  Do you know how to calculate your income at retirement, if so it’s a defined benefit plan.  Can you add to your employer’s contribution, if you participate, will they add more to the plan?  Are there fees in the plan?  Do you choose the investments within the plan?  Do you have access to an advisor who can help you manage the plan?  What happens to the plan if you leave your employer?  How long before you are considered vested? When can you retire and start withdrawing from the plan without penalty?

 

As you can see, there are many questions to be answered.  Feel free to consult an independent financial planner to make heads and tails of the information you received from the plan administrator.

 

Do you have a pension plan?  Has this article helped steer you in the right direction?  Let us know what questions you have, we would be glad to help.

 

Author: Robert

 

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Posted in Retirement Planning & Resources |
Tuesday, May 24, 2011

Debt Management Solutions Series

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This is the introduction to a new series that Mike asked me to start.  We have received many emails/comments about the struggle between paying off debt and saving for the future.  After having mentioned 6 Tax Strategies to Use All Year Round, those who have received or are still awaiting (55% of those surveyed this year) an income tax refund are wondering what to do with the cash.  What a perfect way to make the transition from retirement investing (while generating a tax refund) to addressing the most important debt management issue of our time; how to use credit cards effectively.

 

Use Your Credit Card to Reduce Your Risk

 

There are many folks who feel that credit cards are evil.  I believe that a credit card is a tool that can be used to your advantage.  Use a credit card to reduce your risks.  When you carry a credit card, your money is safe in the bank.  While traveling, this can be very beneficial.  Reduce the impact of being frauded.  If you use a debit card for payment and are a fraud victim, it can take days to have the cash returned to your account, hope you don’t have a mortgage payment due that week!  If the credit card is frauded, the loss is only on paper and will likely be solved before the next statement is issued.  Lastly, there are numerous insurances available on credit cards, they are all designed to reduce your risk; trip cancellation, travel insurance, extended warranty, car rental coverage, etc.  Be sure to inform yourself about the coverage on the card you have.

 

Use Your Credit Card as Cash Flow

 

In order to explain the advantages of using a credit card, here is the second big one: borrow money for free!  How can that be?  It’s easy, make sure you pay the entire balance by the due date, every last penny.  The safest way to manage this is to ask the credit card company to setup an automatic payment instruction.  In this way, you use the credit card to pay for your monthly expenses and your responsibility is to have enough cash in your account on the due date.  The money stays in your account until the last day in the cycle.  In my case, the credit card statement is issued on the 21st of each month and is due 17 days later (round the 7th of the next month).  Therefore, anything I buy with the credit card on the 22nd, I pay for on the 7th a month and a half later.

 

Pay Off Your Credit Card Debt

 

So you can reduce your risk and borrow money for free, what’s the catch?  Most people own the credit card company money!  Whoa, this is not a great idea, I’ll tell you why.  If you use a credit card properly,  you have the benefits.  If not, you pay for using the card without the advantage of borrowing for free.  Actually, if you have an outstanding balance, even one penny, you pay interest on all purchases from the date you bought them until the due date on the statement.  It’s like taking a cash advance!  So make sure you start by paying off the entire balance.  If you can’t afford it, stop using the card.  Use a different card (Make ABSOLUTELY sure you pay this one in full every month) while paying as much as possible on the one carrying a debt.

 

Next time around, I’ll discuss using a personal line of credit in order to manage short-term debt.  Please note: I do not advocate using a credit card for holding debt, unless under exceptional circumstances that I’ll discuss next week.

 

So do use your credit card effectively?  Do you have a balance that is not paid off monthly?  Let us know what you think.

 

Author: Robert

 

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Posted in Debts & Mortgages |
Friday, May 20, 2011

Yakezie Roundup

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A few days ago we shared 6 tax strategies to use year round. These are ways you can use all of the time and not just when tax season comes rolling fast. It makes sense to make strategic moves with your savings and your investments.

Time for the links:

1. Ten Ways to Save Money on Car Insurance @ Canadian Finance Blog.

2. TIPS: Inflation Protection For Your Portfolio @ Smart on Money.

3. 100 Words On: Why Luck Is So Overrated @ Len Penzo.

4. How To Trick An Employer Into Hiring You @ Financial Samurai.

5. Should You Give Your Kids An Allowance? @ KNS Financial.

6. Say Goodbye To Wachovia @ Buy Like Buffet.

7. Great Credit Scores Are Helpful with Small Business Ventures @ BITFS.

8. How to Protect Yourself from Predatory Lenders @ PF By The Book.

9. Is Anything Really Unexpected? @ The College Investor.

10. 25 Ways to Save Money on Gas @ Life and My Finances.

11. Myths about Retirement @ Squirrelers.

12. What is a Family Trust? @ Wealth Pilgrim.

13. How Depressed are Interest Rates? @ Sweating The Big Stuff.

14. Extreme Couponing is Not for Me @ Retire by 40.

15. It’s Expensive Being Social @ Well Heeled Blog.

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Posted in Blog Roundup |
Wednesday, May 18, 2011

6 Tax Strategies to Use All Year Round

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The results of a recent poll published last week stated that 55% of those surveyed have received or are expecting to receive a income tax refund.  You can look at this many different ways.  Some people feel like they have found lost money or gotten a bonus cheque.  The truth of the matter you should realize is that you are getting your own money back, interest-free, over a year later.  Apparently, nearly three quarters of respondents know they may be overpaying taxes on their regular pay cheques if they are getting a refund this time of year.  So while it’s clear from the refunds being issued that few actually do anything about it, let’s take a look at six tax strategies we can learn from the affluent.  Rather than focus on getting as much back as possible during refund season, try to minimizing the taxes you pay at source.  This will keep the cash in your pocket in the first place.

 

1. Develop a written tax plan

 

Develop a written tax plan or strategy to put in place to help minimize the taxes they pay.  Sounds simple enough yet lessons learned during income tax preparation and filing are often lost while awaiting a refund.  The point here is to document what works for your situation, perhaps it is income-splitting, deducting child-care or healthcare costs, etc.  The most obvious planning relates to tax planning for retirement.  If you write down lessons learned, you will be more likely to put them into place throughout the year.

 

 

2. Take a longer view

 

Look at your financial circumstances over the next five to ten years, including any significant life events on the horizon and how these might affect your finances in general and ultimately your tax liability. When you take a longer view of your entire financial picture you can identify where you can take advantage of financial opportunities.  Examples of looking ahead at other life stage strategies include transferring your estate and giving to charity in a tax efficient manner.  You are better off looking at reducing taxes over the long term.  Don’t just think about your taxes at tax time – plan from the beginning of the year and look ahead. Life events, such as having children, buying a house, paying for education or caring for elderly parents can trigger significant tax opportunities.

 

3. Invest in a tax-wise way

 

When it comes to tax planning, it’s important to be aware of what’s in your portfolio and the tax implications. When you first start out saving for retirement, the asset allocation exercise is simple as all your savings tend be in one account.  Yet over time, by continually looking at your short, medium, and long term goals you’ll be able to make tax-wise decisions. This usually means taking less risk in tax-sheltered accounts with income generating investments, while trying to generate capital gains in non-registered accounts.  Which strategies work to maximize your after-tax investing returns: review your investment portfolios to maximize after-tax dollars or for tax-loss selling opportunities and allocate investment income to registered versus non-registered accounts.

 

4. Work with an advisor on an overall financial plan which includes tax planning

 

Realizing that it’s not everyone’s hobby to put these strategies in place, ask your advisor to help.  This having been said, the elements of financial planning are best considered together; investments, taxes, insurance, should all be looked at in one cohesive strategy so decisions are not made in isolation.

 

5. Work Together

 

It’s important to make planning your taxes a family affair. Whether it be revenues or expenses, leverage opportunities like income or pension splitting, family or school credits to maximize your tax benefits.

 

6. Reduce Your Income Taxes at Source

 

After having put the previous five steps into place, take credit for your work.  Your employer can help you complete the right forms for the federal, state/provincial governments to reduce taxes withheld at source.  In this way, the taxes taken off each pay will reflect an accurate picture of taxable income and not your gross income.  More money in your pocket on a weekly/monthly basis should help you manage your personal finances.

 

So do something about the amount of tax you pay.  Put these six tax strategies into place and minimizing the taxes you pay at source.

 

What other tax strategies do you use?  Let us know what works for you.

 

Author: Robert

 

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Posted in Concerns and Priorities |
Monday, May 16, 2011

How to Generate Income From Your Retirement Investments

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It appears that this is a tremendous lack of knowledge when it comes time to transform your accumulated retirement nest egg into vehicles that generate a steady income.  So today, I’ll take the opportunity to look at the benefits of income-generating investments.  A recent survey commissioned by the investment arm of a Canadian bank found that many investors are unaware of the ways they can generate income from their investments.  Let’s review the different options.

 

Mutual Funds


It seems that only 55% of people surveyed were aware that mutual funds could help provide them with additional cash flow.  In the old days, you worked for the same company from the time you finished school until the age of 65.  In return, the company provided you with a pension that allowed you to retire.  These days, this scenario is quite rare.  So it can be both a challenge to save enough for your golden years.  For many, mutual funds are considered risky investments and therefore disassociate themselves with them as a solution to their retirement income dilemma.  There are numerous mutual funds that are designed to payout monthly income.  The advantage of this for the retiree is that you receive a regular income and if you need access to emergency cash, you can still sell additional units.  While you give up the security of having your capital guaranteed, you have flexibility that is not available with a pension plan or annuity.

 

Fixed Income Securities and Savings

 

It is hard to believe, but only half of those surveyed said they were aware that bonds could provide income, and 57% understood that guaranteed investment certificates could create income. So while the oldest baby boomers began turning 65 this year, for the next twenty years an estimated 7,000 to 10,000 Americans a day are expected to reach that milestone annually.  It is important to know what your options to create a retirement income.  Given the low savings rate, the volatility of market returns over the past decade and the record low-interest-rate environment and a host of other factors,investors will have to figure out how to manage their retirement.  Traditionally, pension funds loaded up on government and quality corporate bonds to generate income.  Individuals did the same with term deposits, certificates of deposit, guaranteed investment certificates, etc.  The problem these days is that a 5 year maturity is yielding around 3%.  With reports these days of inflation predicted to approach 2.7% in the next couple of years, there is not much room to manoeuvre.

 

Exchange Traded Funds (ETFs)


Only one-third of the respondents realized that exchange traded funds could generate income.  This is not surprising as it is only over the past few years that ETFs have exploded in popularity.  I believe that folks who go this route will have lots of experience investing or will use advisers to manage the assets in their IRAs, RRSPs and 401(k) plans.  It makes sense to find yourself a retirement specialist who can propose income strategies and ways to hedge market risk.

 

Dividend Stocks

 

In addition, only half of those surveyed were aware of the benefits provided by income-generating investments, such as cash flow and tax efficiencies.  While many of these types of investments have changed due to legislation, good old dividend stocks have returned to the forefront as a viable solution to generating retirement income.  Think about it: you invest your money in companies that generate profits and have proven track records of paying out dividends in the neighborhood of 3-4%.  If the markets do well, there is the potential for additional capital gains.  And much like what we mentioned earlier about mutual funds, you have the flexibility to sell if you need access to cash.

 

Investment income is becoming increasingly important for many investors, particularly as boomers begin to retire and seek out additional sources of cash flow. Indeed, the survey results showed that three-quarters of respondents were interested in learning more about income-generating investments.  In order to ensure you have a steady income from your investments, stay tuned as we expand on this introduction to help you realize your ideal retirement lifestyle.

 

Send us your questions and comments, we’ll be sure to address them in the articles to come.

 

Author: Robert

 

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Posted in Ìnvest to retire, Retirement Planning & Resources |
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