By Sheryl Smolkin

If you are considering purchasing a life annuity using funds in your registered (RRSP, RRIF, LIRA, RPP) or unregistered accounts (Savings Accounts, GIC, TFSA, etc) you will need to consider what features to select and how your decision will impact the level of benefits you receive.

For example, a life annuity may be:

• A single life annuity based only on the age of one annuitant.
• A joint and survivor annuity that pays a portion of the benefit (i.e. 60%) until the death of the surviving spouse.
• A single or joint and survivor annuity that guarantees payments for a specific period (i.e. 10 years).
• A deferred annuity that does not start paying monthly benefits in the same year the annuity is purchased.

Other more specialized annuities include term certain or fixed term annuities, guaranteed annuities with cash back features, impaired and child inheritance annuities. You can read about them here.

To give you an idea how the nature of an annuity can impact your monthly benefits, I got a series of quotes from the RetirementAdvisor.ca Standard Annuity Calculator on October 28, 2014 which I summarized in the table below. In all cases it is assumed that a lump sum of $100,000 was used to purchase an annuity and when invested by the insurance company, the lump sum earned 4%.

While these quotes assume the primary annuitant is female and the second annuitant is male, when a male and female of the same age purchase individual life annuities, the male will receive a slightly higher periodic payment than the female because the male’s life expectancy is shorter.

Table 1: Annuity Purchase quotes

	Single life	Joint	Single Life, COLA	Joint, COLA	Single, 10 yr, COLA
Gender of primary annuitant	F	F	F	F	F
Age purchased	65	65	65	65	65
Age payouts begin	65	65	65	65	65
Gender of joint annuitant		M		M
Age when annuity purchased		65		65
Cost of living increases (COLA)			X	X	X
10 yr. guaranteed payments					X
% Payable to 2nd annuitant when 1st dies		60%		60%
MONTHLY BENEFIT	$637	$592	$522	$481	$503

	Joint, 10 yr, COLA	Single, 10 yr, COLA Age 71 start	Joint, 10 yr, COLA Age 71 start	Single, 10 yr, COLA Age 80 start	Joint, 10 yr, COLA Age 80 start
Gender of primary annuitant	F	F	F	F	F
Age purchased	65	65	65	65	65
Age payouts begin	65	71	71	80	80
Gender of joint annuitant	M		M		M
Age when annuity purchased	65		65		65
Cost of living increases (COLA)	X	X	X	X	X
10 yr. guaranteed payments	X	X	X	X	X
% Payable to 2nd annuitant when 1st dies	60%		60%		60%
MONTHLY BENEFIT	$473	$762	$719	$1,401	$1,355

Source: RetirementAdvisor.ca calculator as of October 28, 2014. Assumption: $100,000 lump sum purchase earns 4%.

It is apparent that the stripped down single life annuity pays a higher monthly amount ($637) than single or joint annuities with various combinations of guarantee periods and COLAs.

Benefit payments also increase significantly if the annuity payouts are deferred to age 71 ($762, single; $719, joint) even with a 10 year guarantee and COLAs. The payments are even higher payment if an annuity with the same features is deferred to age 80 ($1,401 single; $1,355 joint).

Furthermore, annuity payouts also vary as between insurance companies. For example, you can find current quotes from a series of insurance companies for single life annuities on a premium of $100,000 based on a guaranteed period of 5 years for both males and females on the Morningstar Canada website.

Receiving monthly annuity benefits in retirement can give you peace of mind. However, the monthly benefit you can purchase for any given lump sum varies considerable depending on the type of annuity you select, the age when you purchase the annuity, the age you begin collecting benefits and the interest rate assumptions.

Your financial advisor or an annuity broker can get quotes tailored to your situation that will help you to get the features you need for the best possible price.

You can also use your SPP balance to purchase a life annuity directly from the plan. For more information about SPP annuities, take a look at Understanding SPP annuities. Because you purchase the annuity directly from SPP, there are no commissions or referral fees and you can be sure you are getting competitive rates.

 

By Sheryl Smolkin

Receiving a regular paycheque makes it easy to budget. The amount that appears in your bank account every month is what you have available to spend on necessary and discretionary items.

But once you retire and have to figure out how to make your lump sum savings last for the rest of your life, budgeting isn’t as easy. How much can you afford to spend? What if your investments earn less than you expected when you set up a withdrawal plan?

One way to add financial certainty is to buy a life annuity with all or a part of your retirement savings. A life annuity is purchased from an insurance company for a lump sum amount and it guarantees that you will receive a set monthly amount for life (unless the annuity is indexed).

While payments from a basic life annuity typically end when you die, at an additional cost you can add provisions like a guarantee period (i.e. payments will be made for a minimum of 10 years even if you die) or a joint and survivor feature that will continue to pay out until the death of the last spouse.

Annuities are purchased from licensed life insurance agents representing insurance companies. Life insurance agents are compensated by commissions that are factored into the cost of the annuity.

Life annuities have got a bad rap in recent years because with lower interest rates they are more expensive to purchase. Also, many people do not like the idea that they lose control of their money and that upon the death of the last annuitant or the expiry of the guaranteed payment period, the principal will not revert to their estate.

However, the upside of an annuity purchase is that if you live beyond the age that it is assumed you will live to when the original annuity purchase is made, your return on investment could be much higher than if you invested the money yourself.

If you purchase an annuity with funds from a registered plan (i.e. SPP, RRSP, DC pension plan) you must begin receiving payments by the end of the year you turn 71. Because all of the money in your account has been tax-sheltered, the full amount you receive monthly will be taxed at your incremental rate.

In contrast, you can purchase an immediate or deferred annuity from a non-registered account. For example, at age 65 you could opt to manage a portion of your money for the next 15 years, but use a lump sum to purchase a life annuity beginning at age 80. Your monthly payments will be higher than if the annuity started at age 65. Furthermore, only a portion of the benefit representing investment earnings after the purchase will be taxed.

You can use the RetirementAdvisor.ca Standard Annuity Calculator (or other similar online calculators) to model either the size of the lump sum it will take to generate a specific monthly benefit or the amount of the monthly benefit a specific lump sum will generate.

Monthly benefits you receive from the Canada Pension Plan, Old Age Security or a defined benefit pension plan are in effect, life annuities. Depending on your expected expenses and the amount of savings you have available, you may decide you do not need additional annuity income.

In the conclusion to his 2013 book “Life Annuities: An Optimal Product for Retirement Income”[1], Moshe Milevsky, Associate Professor of Finance at York University’s Schulich School of Business notes the following:

“Behavioural evidence is growing that retirees (and seniors) who are receiving a life annuity income are happier and more content with their financial condition in retirement than those receiving equivalent levels of income from other (fully liquid) sources, such as dividends, interest, and systematic withdrawal plans. Indeed, with growing concerns about dementia and Alzheimer’s disease in an aging population, automating the retiree’s income stream at the highest possible level—which is partly what a pension life annuity is all about—will become exceedingly important and valuable.”

If you have rejected an annuity purchase in the past or if you have never seriously considered investing in a retirement annuity, it may be time to take another look.

You can also use your SPP balance to purchase a life annuity directly from the plan. For more information about SPP annuities, take a look at Understanding SPP annuities. Because you purchase the annuity directly from SPP, there are no commissions or referral fees and you can be sure you are getting competitive rates.

[1] This book can be downloaded in pdf and ebook format at no cost.

By Sheryl Smolkin

Whether you plan to spend Christmas holidays in the snow or on the beach, looking for the best deals can lighten the load on your budget, and observing some basic safety rules can minimize the risk of theft of both your property and your identity.

RewardsCardsCanada and RewardsCanada are two sites to bookmark if you want to stay abreast of the latest travel card deals.

For competitive prices on hotel rooms, take a look at Trivago and Priceline. Trivago’s hotel search allows you to compare hotel prices in just a few clicks from more than 200 booking sites for over 700,000 hotels throughout the world. On Priceline you can search for express deals or for deeper discounts by naming your own price and bidding on hotel rooms.

If you are planning a road trip, the pamphlet “How to Go on Ice and Snow” from Car Care Tips | CAA Saskatchewan presents well-illustrated, easy-to-read information that will aid you in becoming a safer and more efficient driver despite winter’s adverse weather conditions.

Independenttraveller.com offers 10 trips for holiday travel including flying in and out of smaller airports if possible to minimize wait time and have a more hassle-free arrival and departure. 

And last but not least, the Canada Safety Council offers The 12 Travel Tips of Christmas. Two of my favourites are:

• Check to make sure your passports, visas and vaccinations are all up-to-date.  Leave copies of your passports, driver’s licence, credit cards and other important documents with family members in case of theft).
• Inform your bank and credit card companies where you are going and for how long. This way your account won’t be flagged for suspicious activity when you make purchases in a foreign destination.

Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.

By Sheryl Smolkin

Everyone has their own system for handling the family finances, but if you are carrying expensive debt and always borrowing from Peter to pay Paul, you definitely need to do some serious budgeting. If you think you can’t afford to save for your children’s education or your own retirement, closely scrutinizing how you spend your money will help you to uncover ways to free up the funds you need to plan for the future.

Budgeting isn’t rocket science but it requires time and commitment. On her television show Til Debt Do Us Part personal finance maven Gail Vaz-Oxlade helps floundering families by putting them on a cash-only budget and dividing up into jars the amounts they can spend each week for each category, including debt-repayment and savings.

All nine seasons are available to watch online and there is more information and there are budgeting tools on her website.

Almost every personal finance blogger has done a series on budgeting and created budgeting spreadsheets you can download. For example, take a look at the Squawkfox budget series and tools. Retire Happy’s Jim Yih has also posted templates from his Take Control of Your Money workshop.

When my husband and I were first married, money was scarce and we budgeted quite carefully. Although we kept separate bank accounts, we did have a joint account for paying house expenses.

Once we had children our expenses increased but we also earned more. We still kept separate bank accounts, but each of us was responsible for specific expenses.

This ad hoc arrangement has worked well for us and for many years we have not had a formal budget. However, as we get closer to retirement, I realize that we will have only about 50% of our pre-retirement income. Therefore, it’s time to take a serious look at how we are spending our money now and how we will spend it once we are on a fixed income.

I can write off a portion of our house costs because I work from home, so I have a pretty good handle on these expenses. Most other expenditures like food, clothing, gas, car repairs, insurance, entertainment, travel, pet care, gifts etc. are charged to credit cards so we can accumulate airline points. It will take some time but it shouldn’t be too difficult categorize and analyze these expenses.

Finally, both of us withdraw cash at irregular intervals to pay for personal grooming plus lunches out and other miscellaneous expenses. These amounts are more difficult to track and we will have to make lists in our smartphones or find the right smartphone app to organize the information.

Once I get a handle on what we are spending now as compared to what we will have available to live on in future, I will track our monthly expenses as against income and projected income on a spreadsheet.

Some of our expenses will go down after retirement because we won’t have to pay professional fees and my husband won’t be commuting to work. We will also pay lower taxes and no longer have to save for retirement. Going down to one car or moving to a less expensive home are longer-term possibilities. But there is no doubt we will have to make compromises.

Whether you are just starting out or close to retirement, you may need help to create and stick to a budget. On the Canadian Finance Blog, Tom Drake discusses How to Choose a Fee-Only Financial Planner. If you are deeply in debt, the Saskatchewan Credit Counselling Society can help you consolidate your debts, develop a budget and get back on track.

If we had budgeted more carefully over the last 15-20 years we would have more to spend in retirement. But you can start right now. If you have used budgeting tools or resources that you recommend to others, let us know and we will share them in a future post.

By Sheryl Smolkin

Continuing with a Christmas theme this week, we bring you blogs with ideas about how to decorate, eat and shop frugally during the run up to the big day.

On Free Home Decorating Ideas, check out Cheap Christmas Decorations including paper cut-outs of snowflakes that create a visually striking Christmas curtain, novel inexpensive ways to wrap your gifts and a budget centrepiece.

WooHome.com features Top 46 Outdoor Christmas Lighting Ideas to Illuminate the Holiday Spirit. Some of these are pretty elaborate and could run up major hydro bills, but it’s fun to look at the pictures.

In a guest post on DaveRamsey.com, Jenny Martin explains how you can plan a frugal Christmas dinner. Last year her family managed to feed 10 people Christmas dinner for only $20! That included a turkey and everything else, down to the paper plates and plastic cups. She says it all starts with a plan.

Well-know chef Jamie Oliver’s blog has a whole bunch of great holiday recipes that could easily become part of your family’s Christmas tradition . A yummy vegan mushroom, chestnut & cranberry tart looks a bit complicated but it might be just what you are looking for if your daughter informs you at the last minute that her vegan friend is joining you for the holidays.

And when it comes to those last minute Christmas gift, you may get some ideas from Christmas gifts: 288 brilliant Christmas gift ideas from Stuff. Twelve Christmas gift ideas for animal lovers includes a self-flushing, self-cleaning litter ‘toilet’ that comes with everything needed to keep it running for nine months. At $299 it may be hard to justify the expense, but think of all the money you will save on kitty litter with the self-cleaning granules!

Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.

By Sheryl Smolkin

 

Hi,

As part of the SaveWithSPP.com continuing series of podcasts with personal finance bloggers, today I’m talking to Mark Seed, author of the popular blog My Own Advisor.

Mark’s day job is Senior Designer of Quality Management Processes at Canadian Blood Services in Ottawa, but he is passionate about personal finance and investing. He started investing in his early twenties after reading David Chilton’s, The Wealthy Barber.

For the last five years, Mark has blogged about a broad range of topics ranging from asset allocation, to investor behavior, to retirement, to travel.

Welcome Mark!

Thanks for the opportunity, Sheryl. It’s great to talk to you.

Q: You have a demanding day job. You enjoy golfing, biking, hiking, and travel. When do you have the time? Why did you start a personal finance blog?
A: Good question. I try to find the time. I started off blogging because I wanted to share my story about saving and investing towards financial freedom. I figure running my own blog and sharing my own story could help people that are both new to investing and saving and those who are more experienced. 

Q: How frequently do you post?
A: Probably two to three articles a week. I have a demanding but also very exciting day job, so in the evenings I write and then I post the next day. 

Q: Do you have kids?
A: No, we don’t.

Q: So, how do you decide what you’re going to write about from week to week?
A: I get inspiration from quite a few sources, Sheryl. Sometimes it may be a workplace conversation, or it could be a chat with family and friends outside work. Often there’s a news headline I can play off and add my own perspective.

Q: That feeds well into the next question which is: what subjects do you like writing about the most?
A: Fixed and dividend investing — I practice that approach as you know. Taxation and insurance are also subjects I like to write about. And of course the travel stuff and investor behavior are fun subjects.

Q: There’s probably over a dozen well-known personal finance bloggers in Canada. What’s different about your blog and why do you think it’s a must-read?
A: I think it’s a must-read because I believe I am taking a holistic, DIY approach to investing and saving. I think people can relate to that quite well. I certainly don’t pretend to be an expert in every single field but I’m learning as I go.

Q: How many hits do you typically get for each blog?
A: I’m getting about 1,000 to 2,000 hits per article, which is great. So in some months that translates to maybe 50,000 hits a month.

Q: That’s fantastic! How long did it take for it to build?
A: Early on – I would say the first couple of years – it was really slow. There has been an upward trend in the third, fourth and fifth year and now there is an income stream from the site.

Q: You have to be patient though
A: You have to be patient, absolutely. It takes time.

Q: Tell me about some of the more popular blogs you’ve posted.
A: I think my article earlier this year about driving a fourteen year old car got a lot of hits and comments. The essence of the story was I don’t need a new car so why should I buy one? It works fine and it’s not costing me money. Why spend money on a nicer ride when I can put it in my RRSP or TFSA?

I also got a lot of attention when I wrote about why I’m no longer investing in costly mutual funds and paying fees I don’t understand for underperformance. There have also been well-received blogs about my passive investment strategy and some mistakes I’ve made, like when I paid the wrong bill.

It happens, right? And I think if you publicize those things people go, “Everyone is fallible, nobody’s perfect” and it’s funny to read these things.

Q: Right. So you’ve focused on dividend investing – why do you embrace this strategy and how does it work?
A: I’ll try to keep it fairly short and sweet. One reason is I like having an income stream is because as a shareholder of an established company with a track record of paying dividends, I basically get paid to be an owner of that business. And that dividend payment is very real, because I see the cash coming into my brokerage account every month or every quarter.

The second main reason is that some of these established companies have paid dividends for many years – decades upon decades, in fact, maybe even a generation or more – so they tend to increase their dividends every year as their net earnings go up. So the amount I receive tends to grow over time which is a pretty good inflation-fighting strategy.

The global financial crisis from 2008-2009 was very bad for many people. But most of the companies I owned or started owning and buying at that time paid their dividends even when their stock prices went down 30, 40 or 50%. So there’s value sticking with those companies through thick and thin.

And even though I’ve adopted both indexing and dividend investing, I think it’s the blend that’s important. I’m getting the best of both worlds.

Q: What’s a DRIP account and what are some of the pros and cons?
A: A DRIP account stands for a dividend reinvestment plan, and really it’s an approach to reinvesting dividends paid by the companies that you own free of charge. Not paying transaction fees is huge in my opinion.

There are really two types of those dividend reinvestment plans. One is called “a full DRIP” and the other is called “a synthetic drip.” You can read about how they work in more detail on my blog.

Q: Many investors have multiple accounts: RRSPs, TFSAs, unregistered investment accounts. As a rule of thumb, what kind of securities should they hold in each account and why?
A: Very good question, actually. I do follow some of those rules of thumb. In the RRSP accounts we hold both Canadian and U.S. ETFs but we also own a few U.S. stocks.

The reason why is that we escape withholding taxes applied to some U.S. listed securities. So putting U.S. stocks or U.S. ETFs in an RRSP, a locked-in retirement account or a RRIF is tax effective.

Because there is a 15% withholding tax if U.S. stocks are held in TFSAs (and also RESPs), in our TFSAs we hold basically Canadian content, including Real Estate Investment Trusts, ETFs and some blue chip stocks.

And in our non-registered account we only hold Canadian dividend-paying stocks because those stocks are eligible for a Canadian dividend tax credit if they’re not in registered accounts.

Q: Do you have a favorite personal finance blogger that you read religiously?
A: I have a few, actually. Million Dollar Journey is one guy that really inspired me to create my own blog. I’m a big fan of Dan Bortolotti’s site, Canadian Couch Potato. I think he’s a very gifted writer and certainly one of the strongest advocates I’ve met in terms of the interests of the retail investor. And I also like a Canadian living in the U.S., Mr. Money Moustache.

Q: What, if any, money-making opportunities or spinoffs have there been as a result of your blogging career?
A: You know, there have been a few, which has been great. I think the blog has certainly opened doors to meet some great people, folks I would probably have normally not met. In recent years I’ve managed to develop excellent partnerships with folks in the insurance industry and the mortgage industry as well.

Rob Carrick at the Globe and Mail has very kindly referenced me in a number of articles. I’ve also been interviewed on the radio and I’ve been quoted in MoneySense Magazine,

What does the future hold? Who knows? I’ll keep writing. I’ll keep sharing my stories. I’m certainly passionate about personal finance and investing and I enjoy interacting with others who feel the same.

Q: If you had only one piece of advice to readers about getting their finances in order what would it be?
A: Spend less than you make. It may sound utterly boring. But I think when it comes to finance and investing, boring works because you can’t invest what you don’t save and if you’re not saving then you’re obviously spending every dime you make. So spending less than you make and having money for your future is a pretty good plan.

Q: Thank you very much Mark, it was a pleasure to talk to you.
A: Thanks again, Sheryl, this was a lot of fun. I appreciate it.

—

This is an edited transcript of a podcast you can listen to by clicking on the link above. You can find the blog My Own Advisor here.

By Sheryl Smolkin

Black Friday (imported from the U.S.) will have come and gone when you read this, but if you haven’t already started your holiday shopping, the beginning of December means the pressure is on to get it done without breaking the bank.

Kerry K. Taylor says on Squawkfox that using the Flipp app on your Android, BlackBerry or IPhone is the easiest way to browse flyers/weekly ads and save money. With more than 80 of your favorite Canadian stores at your fingertips, you can quickly search for the items you need, highlight the best deals and clip items straight to your shopping list.  Some retail stores found on Flipp include: Target, Walmart, Best Buy, IKEA, Macy’s, Sports Authority, Big Lots, Kroger, Sears and many more.

In Easy ways to save money this holiday season Jill Buchner from Canadian Living suggests creating a photo book through a site like picaboo.com, where albums start at about $10. Or, enlarge a special photograph for just a few dollars and frame it to make a personal piece of art.

Mike Collins on Debtroundup also discusses several  Simple Holiday Shopping Tips to Save You Money. Agreeing to a spending cap with friends and family and setting a gift budget and sticking to it are two valuable pieces of advice.

The Christmas break is prime time for Canadians to travel near and far, particularly if you have teachers or students in the family. On Moneyning, David Ning offers 50 Budget Travel Tips and Ways to Save Money on Vacations. For example, taking a train at night can save you the cost of accommodation and tons of prime daytime hours when you would rather be doing anything else except traveling from A to B.

And finally, Christmas is not just a time to give gifts but to give the gift of your time to those who are less fortunate. Brighter Life blogger Joanna Marie Nicholson writes about Giving back: How to find time to be a volunteer.

Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.