This week we feature content from old friends and new dealing with a range of interesting issues.

On You and Your Money, Ed Rempel writes about Understanding the Differences Between Financial Advisors and Brokers. He says, “I do think everyday investors are much better off if they have someone in their corner who is recommending a particular investment product because it actually is the best product for them, given their circumstances and life stage. Not because there’s a commission on the sale at the end of the day.”

Doris Belland on Your Financial Launchpad tackles How to deal with multiple requests for donations and money. According to Doris, “The key is to run your financial life deliberately and consciously. Instead of barrelling through life with your nose to the grindstone, dealing with a plethora of urgent matters, spending on an ad hoc basis depending on which squeaky wheel is acting up, I suggest you make a plan and decide ahead of time which items are worthy of your valuable monthly cash.”

If you are spending a lot on Uber, should you buy a car? Desirae Odjick addresses this question on her blog half/BANKED. If you are laying out a large sum (say $1,000) every month on Uber, she agrees that a car makes sense. But if it’s a seasonal thing in really cold weather when you cannot easily walk, bike or take public transit she nixes the idea.

Mark Seed at My Own Advisor interviews Doug Runchey about the perennial question, Should you defer your Canada Pension to age 65 or 70? Runchey suggests that the main reasons for taking CPP and OAS as late as possible are:

• You don’t necessarily need the money to live on now.
• You have good reason to believe that you have a longer-than-average life expectancy.
• You don’t have a reliable defined pension with full indexing, and the CPP and OAS are integral to your inflation-protected, fixed-income financial well-being.
• You are concerned about market risk to your savings portfolio.
• You aren’t concerned about leaving a large estate – so you use up some or all personal assets before taking government benefits.

And finally, Maple Money’s Tom Drake puts the spotlight on Canada’s best no annual fee credit cards and the perks they offer. His list includes the:

• Tangerine Money-Back Credit Card
• President’s Choice Financial Mastercard
• MBNA Rewards Mastercard
• SimplyCash Card from American Express.

The features of each of these cards and a link to the relevant website are included in Drake’s blog.

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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 on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.

Written by Sheryl Smolkin
	Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.

 

Today I’m interviewing Shannon Lee Simmons for savewithspp.com. She is a Certified Financial Planner, Chartered Investment Manager, media personality, personal finance expert and founder of the online New School of Finance. Shannon has also won a whole slew of awards including being named one of Canada’s Top 30 under 30. She has a monthly column for the Globe and Mail as well as being a personal finance columnist for CBCs On The Money and Metro Morning.

So Shannon is a very busy lady!

I heard her speak at the 2017 Canadian Personal Finance Conference last November, where she debunked many financial myths that inhibit people from saving, investing and ultimately retiring successfully. And that’s what we’re going to talk about today.

Welcome Shannon.

Hi, thanks for having me Sheryl.

Q: First of all tell me what you mean by precarious work and why you think we need to revise dated financial assumptions in light of the rise of precarious work?
A: Precarious work basically means working in the gig economy, freelancing or being self-employed. You’re not entirely sure where your money’s going to come from maybe even a month from now or two months from now. And to me that’s what it means to be precariously employed from a financial planning point of view, and I think that can create stress and anxiety for a lot of people.

So if we have a whole bunch of people who don’t necessarily know where their next paycheck is going to come from, they need to have really big emergency accounts, and that may mean stepping back from investing and putting money into RRSPs until they can make sure that they’re safe and secure. That’s why the rise of precarious work has really changed the way that I give financial advice.

Q: Under normal circumstances what would the three main elements of financial advice be?
A: I think that the three things we hear a lot are:

• Don’t leave money waiting on the sidelines. Make it work for you by investing it.
• Own a property versus renting.
• You need a million dollars to retire on.

Q: Let’s start with rent versus buy. Home ownership is the Holy Grail in Canada and many people view home equity as their retirement nest egg. What percentage of income should people plan to spend on a mortgage and other housing costs?
A: I still think that buying is a wonderful way to build equity. The problem arises when you buy a home that you can’t afford. I think that the thing that you want to make sure of is that you don’t have a mortgage that’s more than five times your family’s household income. That means if you make $100,000 a year you shouldn’t be carrying a mortgage that’s more than $500,000, and you might even want to be more conservative (i.e. four times your household income) because that’s going to allow you to still make payments and have a little bit of extra money left over for life and other types of savings.

Q: Many of my readers or most of my readers are Saskatchewan residents, and the median price of a two-story home in Saskatoon is approximately $412,800 dollars. What would the qualifying income typically be for a person to buy a house of that value?
A: Oh that’s a really hard question to answer because I’m not a mortgage broker. From an affordability standpoint, I would say an income of anywhere from $70,000 to $100,000 couul support a home in that price range. However, some people have debt or they have massive car payments. It comes down getting a customized answer for yourself that will allow you to handle the other bills in your life.

Q: If an individual or family cannot qualify for a mortgage or they choose to rent how can they accumulate a comparable nest egg for their retirement?
A: What’s really exciting about the shift happening in financial planning is we’re seeing renting as sometimes the smarter financial decision. What you need to do as a renter, is just make sure that you are taking advantage of the fact that you don’t have to fix the furnace if it breaks, or if the roof is leaking it’s not your problem. And so if you don’t have to spend $25,000 over five years on home maintenance you can save the money instead.

I say to people who are renting, be proud that you’re renting, but just make sure that you’re also renting affordably because where renting becomes a silly throwaway piece of advice is if the rent is higher than 30% to 40% of your after tax income. So I would say you want to keep your rent in and around 30% to 40% of your after-tax income. Then you want to be making sure that you’re saving for your retirement portfolio at least 10% of your gross income if not more, because you’re not building that equity every single month paying off a mortgage. 

Q: In view of the more precarious employment environment, how much should people keep in an emergency fund?
A: Usually we hear like three months, but if you’re precariously employed I would blow that out to five or six months. If you have a large emergency account then you have less fear on a daily basis because you know that even it’s a slow season or if your contract doesn’t get renewed that there’s money in the bank that will help you survive and pay your bills and eat for at least five to six months.

When I say five to six months I mean basics like bills and groceries and toiletries, because if you don’t have any money coming in the chances are you’re probably going to pull in your spending on discretionary items like entertainment until money comes back into the household. 

Q: That’s a challenge though I guess because if you do have casual or precarious employment then the problem becomes to find the cash even to grow that emergency account.
A: One of the things that I talk about is just staying lean. If more and more of our wages are stagnating and many of us are precariously employed, we need to make sure that we don’t leverage ourselves too much or really spend outside of our comfort zone, outside of our means so to speak. That might mean kind of adjusting expectations a little bit to become more realistic.

Q: If an individual has to spend the emergency funds in a period of unemployment or other crisis, how important is it to replenish it as soon as possible?
A:  Let’s say you just had an emergency or you’ve had a period of unemployment and you just about emptied everything out. The first thing you want to do when money starts coming back into the house, is to pay off any debts that you might have racked up  during that period of time. That obviously means credit card debt first, followed by any unsecured lines of credit. Replenishing the emergency account is the next priority. Then and only then will you step into investing land, which is like RRSPs and TFSAs and building that bigger nest egg.

Q: The standard mantra is to invest cash and make it work for you. In your view does this also apply to emergency funds?
A: No you should never invest your emergency fund. It should be liquid, safe and accessible at all times. The money that should get invested is your longer-term dollars that have time to go up and down a little bit with market volatility.

Q: How crucial is it for Canadians looking for financial stability to stay out of debt or pay down debt?
A:  Paying off debt is important not only so your net worth rises and because obviously you’re spending money on interest that could be going back into your pocket. But also, I think it gives you confidence and motivation to move forward with your finances. The fact is, when we carry debt for so long, we start giving up. And that attitude and that mindset when it comes to money is detrimental because it will continue and bleed into other areas, and then you’re never going to get back on your feet and you’re never going to move forward. Imagine making that last payment on your debt. How exciting is that to finally have the use of your money to spend or to save instead of servicing your debt?

Q: TFSA or RRSP for savings? And why?
A: TFSA all the way. Both are tax shelters you can invest in for the long term. The TFSA doesn’t have that deduction that everyone gets very excited about during RRSP season. But my view is if you can only save enough to max out your TFSA, I would say TFSA first then RRSP. And if you can only save enough to max out your TFSA every year (say $5,500), then chances are your income is probably not 80 or 90 or $100,000 a year where you’re really getting a big bang for your buck with your RRSP tax refund. If you are earning that much, then you can likely save the first $5,500 in a TFSA and then even still save an additional amount to the RRSP afterwards, and take advantage of some of the tax savings.

Money in a TFSA is also more accessible, so if your mortgage is up for renewal four years from now and interest rates have skyrocketed, you could take money from your TFSA and put it on the mortgage, but you can’t do that with an RRSP without tax consequences. And last but not least, in retirement when you take money out of the TFSA it’s tax free. Your marginal tax rate in retirement is much lower and entitlement to government benefits like OAS will not be reduced or eliminated.

It’s never been more important for all of us in Canada to qualify for as many inflation- protected guaranteed pensions as we can at the end of our working career because hardly anyone has workplace pensions anymore.

Q: If you could give us three quick pieces of financial advice what would they be?
A: Okay the first thing would be, do not overextend yourself financially. Don’t buy a house you can’t afford. If you are going to rent, rent affordably because if you have those fixed costs under control then you have a lot more flexibility over what you can do with the rest of your money. So that’s the number one thing I would do. 

The second thing would be to pay off debt and build an emergency account before you do any other kind of savings. Doing those two things will put you back in control of your cash flow and it will motivate you to make changes going forward. It will also make you less afraid all the time.

And the third thing I would say and we just kind of went over this, would be once you get to that point where you want to start saving, max out your TFSA first then save the balance in your RRSP.

That’s great thank you so much for joining me today Shannon Thanks so much for having me, Sheryl.

*This is an edited transcript of a podcast recorded in January 2018.

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Written by Sheryl Smolkin
	Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.

Unfortunately, what goes up must come down and recent volatility illustrates that the stock market is no exception. Your head knows this is the time NOT to check your investments every day or start selling at a loss, but your heart is still going pitter patter at random hours of the day and night.

There is little doubt that unpredictable markets will likely be the norm for the near future. This week we present blogs and mainstream media articles to help you achieve the intestinal fortitude to ride out the storm, particularly if you are retired or close to retirement.

The S&P 500 and Dow Jones Industrial Average both entered correction territory in early February — closing down 10% from the all-time highs that each hit several weeks earlier. The TSX also shed hundreds of points. Fortune explained the drop this way:

“The selloff comes as investors grow worried that the stock market may have run up too much too fast in anticipation of the impact of President Trump’s tax reforms…..The Bank of England likely also fueled some concerns that central banks worldwide would boost interest rates.”

On the Financial Independence Hub, Adrian Mastracci wrote that although you may be rattled by the correction, Diversification keeps your nest egg on the rails. He explained that diversification among asset classes, economic regions, time to maturity, foreign currencies and investment quality increases the odds of you being right more often than wrong. When some selections are suffering, others can step up and help cushion the rest of your portfolio.

For example, the diversified Saskatchewan Pension Plan Balanced Fund is professionally-managed by Greystone Managed Investments and Leith Wheeler Investment Counsel. As of December 31, 2017 the balanced fund portfolio is invested as follows:

• 30.6%: Bonds and mortgages
• 19.3%: International equities
• 19.2%: Canadian equities
• 18.8%: U.S. equities
• 10.2%: Real estate
• 1.9%: Money market

SPP has rated the volatility of this fund as low to medium. Nevertheless, the fund does not have any return guarantees.

The Globe and Mail’s Rob Carrick offers reasons why you should be grateful for the market freakout. “The markets are likely to be ornery for the next while, but there’s no need for radical surgery on properly diversified portfolios of stocks, bonds and cash that you’re holding for the long term,” he says. “Think about strategically adding stocks, not subtracting. After any big market decline, put a little money into quality stocks or exchange-traded funds and mutual funds that hold them.”

On the HuffPost Ann Brenoff addresses How To Handle A Stock Market Drop When You’re Retired. She acknowledges that for retirees or those close to retirement recent market gyrations are gut-wrenching. She comments, “Even those in their 60s likely have many investment years ahead of them. And with that length of time, you will have plenty of opportunity to recover from these types of market drops, she said. The key, though, is staying invested.” Brenoff also points out that if you were invested even just a few months ago, there’s an excellent chance you’re still ahead despite two days of falling prices.

Several months ago Ian McGugan’s column in the Globe and Mail suggests Five things to do if you’re nearing or in retirement and fearing a market pullback. He cites several takeaways from Wade Pfau, an economist at American College in Philadelphia:

1. If you’ve won, stop gambling.
2. Plan for lower returns.
3. Think safety, not wealth.
4. Consider alternatives such as annuities.

Pfau also recommends you ask yourself two questions if you are in doubt whether to stay heavily invested in the stock market: “How would you feel if your wealth doubled? How would you feel if your wealth fell in half? “Most people find the prospect of losing a substantial part of their portfolio far outweighs the possible pleasure of having substantially more,” he said.

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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 on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.

Written by Sheryl Smolkin
	Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.

The “holy trinity” of tax-assisted savings plans available to Canadians are TFSAs, RRSPs and RESPs. RESPs (Registered Educational Savings Plans) are primarily designed to help families to save for post-secondary education.

Each year, on every dollar up to $2,500 (to a life time maximum of $50,000) that you contributed to an RESP for a child’s education after high school, a basic amount of the Canada Education Savings Grant of 20% may be provided. Depending on the child’s family income, he/she could also qualify for an additional amount of CESG on the first $500 deposited, which means $100 more if the 2017 net family income was $45,916 or less and up to $50 if the 2017 net family income was between $45,916 and $91,831.

In total, the CESG could add up to $600 on $2,500 saved in a year. However, there is a lifetime CESG limit of $7,200. This includes both the basic and additional CESG. Lower income families may also be eligible for the Canada Learning Bond (CLB) that could amount to an additional $2,000 over the life of the plan.

Contributions to RESPs are not tax deductible, but the money in the account accumulates tax-free. Contributions can be withdrawn without tax consequences and when your child enrolls in a university or college program, educational assistance payments made up of the investment earnings and government grant money in the RESP are taxable in the hands of the student, generally at a very low rate.

When our children were young, we purchased Group RESPs for them and their grandparents also purchased additional units. I was so impressed with the program that I even took a year before transitioning from family law to pension law and sold RESPs.

Each child collected about $8,000 from the plan over four years of university, which helped them to graduate debt free. Fortunately, both my daughter and my son took four straight years of university education so there was no problem collecting the maximum amounts available to them minus administrative fees.

However, I’ve come to realize the potential downside of Group RESPs so we started contributing $200/month to a self-administered plan with CIBC Investor’s Edge for our granddaughter soon after she was born. She is now 5 ½ and as I write this, there is already $22,000 in the account.

Our decision to self-administer Daphne’s RESP was influenced in part by what I learned from other personal finance bloggers about the potential downside of group plans.

Robb Engen notes that group plans tend to have strict contribution and withdrawal schedules, meaning that if your plans change – a big possibility over 18 plus years – you could forfeit your enrollment fee or affect how much money your child can withdraw when he/she needs it for school.

With a Group RESP, contributions, government grants and investment earning for children the same age as yours are pooled and the amount minus fees is divided among the total number of students who are in school that year. Typically the pool is invested in very low risk GICs and bonds.

In contrast, there are no fees in our self-administered plan other than $6.95 when we make a trade. The funds are invested in a balanced portfolio of three low fee ETFs. We can easily monitor online how the portfolio is growing and as Daphne gets closer to university age we can shift to a more cautious approach.

Macleans recently reported that the total annual average cost of post-secondary education in Canada for a student living off-campus at a Canadian university is $19,498.75 and it will be much higher by the time your child or grandchild is ready to go off to college. So learn as much as you can about RESPs, get your child a social insurance number, set up a program and start saving.

However, as Engen suggests before you choose a group or individual RESP provider make sure you read the fine print and ask about:

• Fees for opening an RESP;
• Fees for withdrawing money from a RESP;
• Fees for managing the RESP;
• Fees for services and commissions;
• What happens if you can’t make regular payments;
• What happens if your child doesn’t continue his or her education; and
• If you have to close the account early, do you have to pay fees and penalties; do you get back the money you contributed; do you lose interest and can you transfer the money to another RESP or different account type.

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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 on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.

Written by Sheryl Smolkin
	Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.

One of the perennial questions that comes up in the first two months of every year is whether individuals should first contribute to a tax-free savings account (TFSA) or a registered retirement savings plan (RRSP), particularly if they cannot afford to max out contributions to both types of plans. And since 2009 when TFSAs first became available, every top personal finance writer has offered their opinion on the subject.

Chris Nicola on WealthBar created  WealthBar’s ultimate TFSA vs RRSP calculator. He says saving for your retirement income using your RRSP will beat saving in a TFSA for most people as long as your marginal tax rate when you are saving is higher than your average tax rate when you withdraw the funds, since the RRSP lets you defer paying tax until retirement.

The Holy Potato TFSA vs RRSP Decision Guide allows you to work through the steps to see which savings plan is best for you. This infographic illustrates that RRSPs can only beat TFSAs if you are making RRSP contributions pre-tax (i.e. contributing your refund so more goes in the RRSP). If you fritter away your refund, go straight to the TFSA.

Maple Money’s Tom Drake also presents an RRSP vs. TFSA Comparison Chart. Drake cites the recently released C.D. Howe Institute study entitled Saver’s Choice: Comparing the Marginal Effective Tax Burdens on RRSPs and TFSAs. The report notes:

“Especially for lower income Canadians, the Marginal Effective Tax Rate (METR) in retirement may actually exceed the METR during an individual’s working years because of the effects of clawbacks on income-tested programs like the Old Age Supplement (OAS) and the Guaranteed Income Supplement (GIS). At various income levels, these benefits are reduced. If most of your retirement income is from fully taxable sources like CPP, RRSPs, company pensions, and OAS, your METR will be higher than if you mix in some tax-prepaid investments like TFSAs.”

The Wealthy Barber David Chilton sees the fact that you can take money out of a TFSA in one year and replace it in a future year as both a positive and a negative. Thus Chilton says:

“I’m worried that many Canadians who are using TFSAs as retirement-savings vehicles are going to have trouble avoiding the temptation to raid their plans. Many will rationalize, “I’ll just dip in now to help pay for our trip, but I’ll replace it next year.” Will they? It’s tough enough to save the new contributions each year. Also setting aside the replacement money? Colour me skeptical. After decades of studying financial plans, I am always distrustful of people’s fiscal discipline. And even if I’m proven wrong and the money is recontributed, what about the sacrificed growth while the money was out of the TFSA? Gone forever.”

Young and Thrifty’ Kyle Prevost’s TFSA vs RRSP: Head to Head Comparison (updated to 2018) has lots of colourful pictures. He believes the RRSP and the TFSA are like siblings. Not twins mind you – but siblings with different personalities. In some ways he says they are almost mirror opposites and the inverse of each other.  Both options share the trait that let you shelter your investments from taxation – allowing your money to grow tax free using a wide variety of investment options.  Each have their time and place, and are fantastic tools in their own way, but depending on your age and stage of life, one probably deserves more of your attention than the other.

His take when it comes to the TFSA vs RRSP debate is: “Yes… DO IT.”  Prevost believes the real danger here is paralysis by analysis.  Picking the “wrong” one (the better term might be “slightly less efficient one”) is still much better than not saving at all!

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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 on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.

Written by Sheryl Smolkin
	Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.

Wedding Bells reports that 20% of engagements take place in December, but Valentine’s Day is also a popular time to pop the question. Historically people have used other types of jewelry and gems to propose, but in 2013,  the Jewelry Industry Research Institute reported that 75% of brides wear a diamond ring.

If you propose with a diamond ring, it is largely as a result of a hugely successful advertising campaign from De Beers, one of the largest diamond companies in the world. In 1947 De Beers launched its promotion for diamond engagement rings with the slogan “a diamond is forever.”

Between 1939 and 1979, the company’s marketing budget soared from $200,000 to $10 million per year, according to The Atlantic. Over the same period, its wholesale diamond sales in the United States grew from $23 million to $2.1 billion. Also over the 40 year interval, De Beers went from recommending spending one month’s salary on an engagement ring to two month’s pay.

I was not able to find Canadian data, but according to the Knot’s 2015 Real Weddings Study, Americans spent an average of $5,871 on engagement rings, up from $5,855 in 2014. Wedding bands for the bride and engagement rings combined cost between $5,968 and $6,258.

Each individual must decide how much to budget for an engagement ring, but regardless of the amount you plan to spend, you need to understand what to look for when you are shopping for rings. First of all, the price and value of diamond jewelry is influence by the 4Cs: color, cut, clarity and carat weight.

It is of primary importance when you select stone(s) and a setting that you are dealing with a reputable jeweller. It may also be advisable before you finalize the transaction to have an independent gemologist appraise the stone(s) to ensure you are getting good value.

In addition you should receive a certificate from your jeweler (sometimes called a grading report). This is a complete evaluation of your diamond that has been performed by a qualified professional with the help of special gemological instruments. Each stone bears its own recognizable, individual characteristics, which is listed on the certificate.

Here are some other important things to consider when selecting stones and a setting for an engagement ring.

1. Understand your partner’s taste in jewelry
   White or yellow gold? Old fashioned or modern? Chunky or delicate? Diamonds only or embellishment with coloured stones?
2. Ring size
   Borrow a ring he/she already owns and trace the size. You can always have the ring re-sized after you propose but there may be additional cost. Also, who wants to take the ring off and part with it for days or weeks while adjustments are made?
3. Favourite shape and cut
   Diamonds come in a myriad of cuts ranging from square, round and oval to pear shaped. A diamond’s cutting style refers to its facet arrangement, rather than its shape. The fewer the facets, the more visible any inclusions will be, so a cutting style such as a step cut (a.k.a. emerald cut), for example, requires higher clarity in the diamond.
4. Setting
   The setting can vary from a solitaire or single stone, to a large stone with small stones on each side to three stones of the same side. A halo stone is where a center stone is surrounded by tiny gemstones  (usually diamonds), to add sparkle and give the appearance of a larger center stone. The setting you select will depend on a combination of preferred style and your budget.

No matter how much you pay for your ring, speak to your home insurance company and decide whether you should have it specifically listed on your policy so it is insured in case of loss or theft.

I lost the pear shaped diamond from my ring at the gym several years ago. In spite of the fact that paying a premium to insure the ring was no fun, I was quite relieved when my policy reimbursed me for the considerable value of the lost stone.

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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 on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.

Written by Sheryl Smolkin
	Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.

 

Today, I’m very pleased to be talking to Katherine Strutt, general manager of the Saskatchewan Pension Plan. She has some exciting news to share with us about enhancements to the program, including an increase to the SPP maximum annual contribution level effective immediately for the 2017 tax year.

SPP is the only plan of its kind in Canada — a retirement savings plan, which does not require an employee/employer relationship. As a result, it can be of particular benefit to individuals with little or no access to a pension plan.

Welcome, Katherine.

Thank you, Sheryl.

Q: For the last seven years the maximum annual contribution SPP members with RRSP contribution room could make was $2,500. How has that changed?
A: As you indicated, the maximum annual contribution limit was increased to $6,000 effective January 29, 2018, and it can be used for the 2017 tax year. However, members must still have available RRSP room in order to contribute the full $6,000 but the limit is now indexed as well, starting in 2019.

Q: If a member contributes $6,000 until age 65 how much will his or her pension be?
A: We estimated that someone contributing for 25 years and retiring at age 65 can end up with a pension of about $2,446 a monthbased on an 8% return over the period. However, we encourage people to use the wealth calculator on our website because they can insert their own assumptions. And if they want a more detailed estimate they can call our office.

Q: Can a spouse contribute for his or her partner if that person doesn’t have earned income and how much can the contribution be?
A: The SPP is a unique pension plan in that spousal contributions are acceptable. So, for instance, my spouse has to be a member. But I can contribute to his account and my account up to $6,000 each if I have the available RRSP room. If I’m making a spousal contribution, the money goes into his account, but I get the tax receipt. Other pension plans don’t offer that option. You could have a spousal RRSP, but with SPP you can actually have a spousal pension plan.

Q: Oh, that’s really fantastic. So actually, in effect, in a one-income family, the wage earner would get $12,000 contribution room for the year.
A: Yes, as long as they have available RRSP room, that’s for sure.

Q: That’s a really neat feature. And to confirm, members can contribute the full $6,000 for the 2017 tax year?
A: Yes, they can. Because we’re in the stub period right now, any contribution made between now and March 1st can qualify for the 2017 tax year.

Q: Have you had any feedback on the increased contribution level? If members are just finding out about the increase now, how much of an uptake do you expect given that, you know, maybe they haven’t saved the money or they haven’t allowed for it?

A: We’ve already had some members that have done it. I can’t tell you how many, but I was checking some deposits yesterday, and I saw that some people have already topped up their contributions. We anticipate that people who contribute on a monthly basis will start increasing their monthly contributions because they have an opportunity to do so. But it will be really hard to know until after March 1st how many people actually topped up their 2017 contributions.

The response has been very, very positive from members. They have wanted this for a long time. The new indexing feature is also very attractive as the $6,000 contribution will increase along with changes to the YMPE (yearly maximum pensionable earnings) every year.

Q: How much can a member transfer into the plan from another RRSP? Has that amount changed?
A: No, that amount has not changed. That remains at $10,000. But the board is continuing to lobby to get that limit raised.

Q: Another change announced at the same time is that work is beginning immediately on a variable pension option at retirement. Can you explain to me what that means and why it will be attractive to many members?
A: We have a lot of members who want to stay with us when they retire, but they’re not particularly interested in an annuity because annuity rates are low, and they do not want to lock their money in. They prefer a variable benefit type of option, but until now their only way of getting one has been to transfer their balance out of the SPP to another financial institution.

The new variable benefit payable directly out of our fund will be similar to  prescribed registered retirement income funds, to which people currently can transfer their account balances.

It will provide members with flexibility and control over when and how much retirement income to withdraw, and investment earnings will continue to grow on a tax-sheltered basis. Those members who want to stay and get the benefit of the low MER and the good, solid returns I think will be attracted to this new option.

Some members may wish to annuitize a portion of their account and retain the balance as a variable benefit. This will ensure they have some fixed income, but also the flexibility to withdraw additional amounts for a major expense like a trip, for instance.

Q: Now, what’s the difference between contributing to an RRSP and SPP?
A: In some respects, they’re very similar in that contributions to the SPP are part of your total RRSP contribution limit. One of the biggest advantages I think that SPP has is it is a pure pension plan. It’s not a temporary savings account. It’s meant to provide you income in your retirement.

All of the funds of the members, are pooled for investment purposes, and you get access to top money managers no matter what your account balance is or how much you contribute. Typically those services are only available to higher net worth individuals, but members of SPP get that opportunity regardless of their income level.

And the low MER (management expense ratio) that in 2017 was 83 basis points, or 0.83 is a significant feature of SPP. Solid returns, and the pure pension plan, I think those are things that make us different from an RRSP. We are like a company pension plan, if you are lucky enough to have access to a company pension plan. That’s what we provide to people regardless of whether or not their employer is involved.

Q: If a member still has RRSP contribution room after maxing out SPP contributions, can he or she make additional RRSP contributions in the same year?
A: You bet. Your limit is what CRA gives you, and how you invest that is up to you. So for instance, people that are part of a pension plan might have some additional available RRSP room left over. They can also then contribute to the SPP and get a benefit from their own personal account, in addition to what they are getting from their workplace pension.

Q: MySPP also went live in late January. Can you tell me some of the features of MySPP, and what member reaction has been to gaining online access to SPP data?
A: The reaction from members has been very positive. They’ve been asking for this for a while, and we did a bit of a soft roll out the end of January with a great response. Then members are going to be getting information with their statements, and we expect an even bigger uptake.

Once they’ve set up an account, they can go in and see the personal information we have on file for them, who they’ve named as their beneficiary, when the last time was that they made a contribution and what their account balance is. Furthermore, if they’ve misplaced a tax receipt or can’t find their statement, they can see those things online.

Retired members can get T4A information and see when their pension payments went into their accounts. So it’s a first step, and we think it’s a really positive one, and we’re getting some really good feedback from our members.

Q: Finally, to summarize in your own words, why do you think the annual increase in the SPP contribution level, introduction of a variable benefit and MySPP makes Saskatchewan Pension Plan a better pension plan than ever for Canadians aged 18 to 71?
A: Well, I think that by having an increased contribution limit that is indexed, the program might be more relevant to people. It certainly will be a bonus I think to employers who wanted to match their employee contributions but were running up against the old limit. This will give them more opportunity to do so.

It will also improve the sustainability of SPP over the long term as people are investing more. The variable benefit we’ve introduced will give retiring members more options, and it will allow them to keep going with this tried and true organization well into their retirement.

MySPP  allows members access to their account information whenever they wish, 24/7 on all their devices. That will be attractive to younger prospective members.

Exciting times. Thank you, Katherine. It’s been a pleasure to chat with you again.

Thanks so much, Sheryl.

*This is an edited transcript of an interview recorded 1/31/2018.

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Written by Sheryl Smolkin
	Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.

For Canadian Xennials^* (34-40), day-to-day life is getting in the way of saving for retirement. According to a recent survey from TD, three-quarters (74%) of this micro generation say they would like to contribute more than they currently do, but everyday financial obligations take precedence.

Seven in ten Canadian Xennials say they feel overwhelmed due to juggling other financial obligations with saving for retirement. These include common expenses such as monthly bills (cited by 60 %), paying off credit cards and personal loans (44%), mortgage payments (33%), childcare costs (24 %), home maintenance costs (22%), and repaying school loans (13%).

“We can all have the best of intentions when it comes to preparing for retirement, but then life gets in the way and we start to feel the retirement savings squeeze,” says Jennifer Diplock, associate vice president, personal savings and investing, TD Canada Trust. “Monthly bills fall due or we are faced with a loan repayment, and that can mean we end up contributing less than we should towards our retirement.”

When asked whether they agree they are too young to think about saving for retirement, there’s a notable shift between those 18 -34 (42%) and those 34 -40 (16%).

In fact, Statistics Canada identified that 72.2% of households with a major income earner aged 35 to 44 have a registered retirement savings plan (RRSP), registered pension plan or tax-free savings account (TFSA) but many are not contributing as much as they would like, with more than three-quarters of Xennials surveyed by TD (77 per cent) saying they plan to start contributing or to contribute more to retirement savings in the next five years.

As a result, half of Xennials describe themselves as feeling uncertain (52%) or unprepared (49%) for their retirement. The survey also indicates that the stresses felt by Xennials are reflective of the experience of other Canadians. For instance, while three in five Xennials point to the savings barrier of monthly bills, 62% of Canadians share this concern.

“The reality is that we all have to juggle our financial commitments to find the right balance when it comes to preparing for retirement,” said Diplock. “There are simple steps we can take to ease the retirement savings squeeze.”

For those looking to get on with their busy lives no matter which life stage they are at, while also setting aside enough funds for retirement, here are some suggestions.

Work towards the retirement you want
It may seem a long way off, but it isn’t too soon to start by thinking about what you want to do in retirement. You might want to travel the world, spend time volunteering or begin a new career. Because everyone wants a different retirement, there is no one financial template to follow. Once you’ve set out your vision, the next step is to establish a retirement savings goal. A useful and detailed online tool is the Canada Retirement Income Calculator which can show you how much you may need to put into savings in order to live the life you want in your retirement years.

Save your way
While juggling financial obligations, many people find making smaller weekly, bi-weekly or monthly Saskatchewan Pension Plan, RRSP or TFSA contributions easier than paying a large lump sum at once. Setting up a pre-authorized payment plan means finding the right schedule and plan for you. Peace of mind comes from knowing that you are steadily moving towards your retirement savings goal. For example, if you receive a pay raise at work or start a new job, you can increase the amount you are saving.

Examine your expenses   
Whether it’s paying back your loans or scrutinizing your monthly bills to determine essential expenses, determine how much you should pay yourself too. These are small steps we can all take to maximize the amount we spend doing the things we like most, while still saving for retirement.

The earlier, the better
Whether or not you are a Xennial, there is no time like the present to start saving for your future. Keep in mind that the earlier you start, the more you can benefit from compound interest.  With compound interest, the interest you earn is added to your principal investment, so that the balance doesn’t merely grow, it grows at an increasing rate. Whether your retirement feels like a lifetime away or is just around the corner, it’s important to factor in your retirement savings when planning your monthly budget. Receiving financial advice early on can help you put a sustainable saving structure in place to help keep your financial priorities and goals in check.

*Defined as the generation born between 1982 and 2004, millennials are aged between 13 and 35. The generation before, Gen X, spanned another 20 years, beginning in 1961 and ending in 1981. With such a large cohort, it’s hard to imagine everyone in these demographics identifies with the perceived persona of these generations. Enter Xennials, the new term being used to describe people born between 1977 and 1983.

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Written by Sheryl Smolkin
	Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.