By Sheryl Smolkin

If there was a money tree growing in every back yard, we wouldn’t have to worry about saving or investing for retirement. Our annual harvest of $100 bills would pay for everything.

But money doesn’t grow on trees, so once you allocate hard-earned money to retirement savings, you must decide on an investment strategy that will grow your account into the nest egg you need to retire.

Before deciding how to invest your money, you have to identify how much risk you can stomach. Your retirement goals, the number of years left to retirement and the amount of money you can tolerate losing are all factors that will influence the percentage of your portfolio allocated to various asset classes.

The Investor’s Education Fund has a simple quiz that will help you identify your risk tolerance. When I took the quiz, I found out I have a “medium” tolerance for risk which means I am most comfortable with a mix of bonds, stocks and fixed income investments.

In a Masters of Money blog on the same website, Globe and Mail financial writer Rob Carrick says one thing everyone agrees on is that you must get more conservative in your asset mix as you get older.

Carrick suggests that every five years or so you should think about ratcheting down the risk level of your portfolio. In practical terms, that would mean moving some of your stock market exposure into bonds and cash. Your evolving mix of assets in a registered retirement savings plan account might look something like this:

AGE	% IN STOCKS	% IN BONDS & CASH
25	85	15
30	80	20
35	75	25
40	70	30
45	65	35
50	60	40
55	55	45
60	45	55
65	30	70

However, financial experts do not advocate that older Canadians get out of the stock market completely. You still need some portfolio growth in the period when you are drawing down funds to pay for retirement, particularly if you live to age 90 or beyond.

Members of the Saskatchewan Pension Plan benefit from the investment expertise of independent money managers. Funds of members who have not yet retired are pooled in the Contribution Fund.

The Contribution Fund allows members to invest in a balanced portfolio or a short-term fund. The balanced fund investment strategy is to maximize earnings for members and minimize the risk, while the purpose of the short-term fund is capital preservation.

The balanced fund portfolio composition is shown below.

The average earnings of the balanced fund since inception in 1986 have been 7.86 per cent with returns of 8.45 per cent in 2012.

Accounts of members who have retired are pooled in the Annuity Fund.The Annuity Fund is invested in bonds and short-term investments. The strategy for this fund is to produce income to pay members’ pensions.

Have you checked recently to see if your investments are consistent with your risk tolerance? If so, send us an email to so*********@sa*********.com. Your name will be entered in a quarterly draw for a gift card.

And don’t forget March 1, 2013 is the deadline for contributing to the Saskatchewan Pension Plan and your RRSP for the 2012 tax year.

If you would like to send us other money saving ideas, here are the themes for the next three weeks:

28-Feb	Debt Reduction	How to eliminate debt
7-Mar	Airline points	Which kind of airline points are better?
14-Mar	Insurance	Getting a better deal on car, house insurance

By Sheryl Smolkin

You have $2,500 to contribute to retirement savings in 2012. Should you contribute to a tax-free savings account or the Saskatchewan Pension Plan?

Before answering that question, it is helpful to review some basic SPP and TFSA concepts.

SPP
You can contribute a maximum of $2,500/year to SPP providing you have RRSP contribution room. To find out how much RRSP room you have available in 2012, look at line A of the RRSP Deduction Limit Statement on your 2011 income tax notice of assessment or notice of reassessment.

Your SPP contributions are tax deductible and investment income accumulates tax sheltered. SPP contributions plus interest are also locked in. Unused contribution room is carried forward.

You may elect at anytime between age 55 and 71 to receive an SPP pension or move your SPP account balance into a locked-in RRSP. By age 71, amounts in a locked-in RRSP must be converted to income using a prescribed registered retirement income fund (pRRIF) or life annuity product. You must begin making minimum prescribed withdrawals from your pRRIF in the following year.

Both SPP annuity payments and pRRIF withdrawals are fully taxable income at your marginal tax rate. If your SPP benefits or pRRIF withdrawals push your income over specified limits, a portion of Guaranteed Income Supplement, the age credit and Old Age Security payments may be clawed back.

TFSA
You can contribute up to $5,000/year to a TFSA regardless of your age or income level. Contributions are not tax-deductible. However investment income  (including capital gains), accumulates tax free. When funds are withdrawn from a TFSA, no income tax is payable.

You can withdraw funds available in your TFSA at any time for any purpose — and the full amount of withdrawals can be put back into your TFSA in future years. Re-contributing in the same year may result in an over-contribution amount which will be subject to a penalty tax.

Neither income earned in a TFSA nor withdrawals affect your eligibility for federal income-tested benefits and credits. You can provide funds to your spouse or common-law partner to invest in their TFSA.

By the numbers
All other things being equal, whether or not you will be able to save more in the SPP or a TFSA depends on two key factors.

1. Your marginal tax rate when contributing as compared to your marginal tax rates when you expect to withdraw the money.
2. How you use your tax refund.

Generally speaking, if you think your marginal tax rate will be significantly lower at retirement than during your working career, saving with SPP makes much more sense than in a TFSA.

But how you use your tax refund is also important. Canada Revenue Agency calculations when the TFSA was introduced assume the tax refund generated by contributing to a retirement savings vehicle is also contributed to the account.

In these circumstances, investing in either the SPP or a TFSA will result in about the same net withdrawals at retirement. However, many of us look on our tax refund as “mad money” and do not earmark it for further retirement savings. In these situations, the TFSA comes out ahead.

That money can be withdrawn from your TFSA account and contribution room is restored in the next year may be attractive in some cases. However, replacing money you withdrew requires considerable discipline. In contrast, money saved in your locked-in SPP account will be there at retirement when you need it.

Your financial plan
SPP vs TFSA. It’s not an either/or proposition. A financial advisor can review your personal situation and help you decide the best way to maximize your retirement savings.

Depending on your income level, expenses and the amount of income you need in order to retire, you can benefit from having both kinds of accounts plus an RRSP.

To paraphrase David Chilton in TheWealthy Barber Returns:

1. If you go the SPP* route, don’t spend your refund.
2. If you go the TFSA route, don’t spend your TFSA.
3. Whatever route you go, save more.

* Chilton used RRSP in this phrase.

Also read:
Understanding SPP annuities

The Wealthy Barber explains: TFSA or RRSP?

RRSP vs. TFSA: Tim Cestnick on where to put spare dollars

To TFSA or to RRSP?

TFSA vs RRSP – Clawbacks & income tax on seniors

TFSA vs. RRSP – Best Retirement Vehicle?

By Sheryl Smolkin

If both you and your spouse have individual RRSP contribution room of at least $2,500, each of you can contribute up to the annual maximum to your own Saskatchewan Pension Plan accounts. You can also each transfer $10,000 a year from individual RRSPs to your personal SPP accounts.

However, if you have sufficient RRSP room and your spouse does not, your spouse can open an SPP account to which you are the contributor. You can contribute up to $5,000/year in total ($2,500 for each of you) into the two accounts and get a tax deduction for the whole amount.

When it comes to RRSP transfers to SPP, your spouse can only make a transfer from an RRSP in his/her own name. You cannot make a $10,000 transfer from your RRSP to your partner’s spousal account.

Two major advantages of a spousal SPP account are that you can contribute double the amount each year and income split at retirement. Also, if both of you elect annuity options and one of you dies first, the surviving partner will still have a stream of income.

Also check out:

Derek Foster: Idiot Millionaire CBC Radio Saskatoon interview – August 13, 12

A pension solution for your business Saskatchewan Broker – Winter 2011

Roseman: Want to save tax? Look to SPP Moneyville.ca – March 6, 2012

By Sheryl Smolkin

In addition to maximum regular contributions of $2,500/year, SPP members can annually transfer up to $10,000 into their SPP account from existing RRSPs, RRIFs and unlocked RPPs. In 2012, over 200 members have already transferred $1.5 million into their SPP accounts.

Since these are direct transfers between plans, there are no tax implications. As part of the transfer process, members are asked for investment instructions directing money to either the balanced fund and/or the short-term fund.

Once funds are transferred into the SPP, all of the member’s assets benefit from the plan’s low investment fees (about 1.1 per cent) and competitive returns (7.8% since inception 26 years ago).

Furthermore, contributions are creditor-protected and cannot be seized, claimed or garnisheed in any way except in the event of a court order under a marital division or Enforcement of Maintenance Order.

Both regular contributions (up to $2,500/year) and additional amounts transferred into the SPP are locked-in and are used to provide you with a pension or lump sum at retirement.

If you have money in existing RRSPs or unlocked RPPs, consider transferring up to $10,000 each calendar year to your SPP account. It’s a cost-effective, stress-free way to enhance the benefit you receive when you retire from the plan.

SPP members may begin receiving benefits from the Plan any time after age 55 and must be retired from the Plan by the end of the year in which they reach 71. At SPP, “retirement” simply means you are receiving pension payments. You can still be employed and receive pension from SPP.

You can use this form to an initiate a transfer of funds to SPP.

 

Also see:

Backgrounder – Saskatchewan Pension Plan and Income Tax Act Changes

Roseman: Want to save tax? Look to Saskatchewan

MoneyTalk interview with Derek Foster : February 13, 2012

Canada’s “Idiot Millionaire”, Derek Foster, is coming to Saskatchewan!

Derek writes about SPP in “The Worried Boomer”

At age 34 Derek Foster left the workplace and has become Canada’s youngest retiree. Investing in simple stocks he has become know as an “idiot” millionaire. In is book “The Worried Boomer” Derek dedicated an entire chapter about Saskatchewan Pension Plan.

Join Derek, the Idiot Millionaire, at one of the following events to learn about his simple investment approach and how it can be a part of your journey into retirement.

Regina: August 13 – 11:30 am

Hosted by: Regina Chamber of Commerce
Lunch at Conexus Arts Centre Theatre lobby
200A Lakeshore Drive

Register: online at reginachamber.com or 1-306-757-4658
Costs:
Members: $35 pre-registered/Door: $40
Non-members: $50 pre-registered/Door: $55

Saskatoon: August 17 – 7:30 am

Hosted by: North Sask Business Assoc & Saskatoon Chamber of Commerce Breakfast at Saskatoon Club
417 21st St E

Register: by email in**@ns******.com or 1-306-242-3060 register by 10 am August 16
Costs: All attendees $18

Bestselling Books:

• Stop Working
• The Lazy Investor
• Money For Nothing
• The Idiot Millionaire
• Stop Working Too: You Still Can

Each attendee will receive a $10.00 coupon towards the purchase of one of Derek’s book available at the event.

Canada’s “Idiot Millionaire”, Derek Foster, is coming to Saskatchewan!

Join Derek, the Idiot Millionaire, at one of the following events to learn about his simple investment approach and how it can be a part of your journey into retirement.

Regina: August 13 – 11:30 am

Hosted by: Regina Chamber of Commerce
Lunch at Conexus Arts Centre Theatre lobby
200A Lakeshore Drive

Register: online at reginachamber.com or 1-306-757-4658
Costs:
Members: $35 pre-registered/Door: $40
Non-members: $50 pre-registered/Door: $55

Saskatoon: August 17 – 7:30 am

Hosted by: North Sask Business Assoc & Saskatoon Chamber of Commerce Breakfast at Saskatoon Club
417 21st St E

Register: by email in**@ns******.com or 1-306-242-3060 register by 10 am August 16
Costs: All attendees $18

Bestselling Books:

• Stop Working
• The Lazy Investor
• Money For Nothing
• The Idiot Millionaire
• Stop Working Too: You Still Can

Each attendee will receive a $10.00 coupon towards the purchase of one of Derek’s book available at the event.

By Sheryl Smolkin

If you’re age 18 to 71 years of age, you can join the Saskatchewan Pension Plan. Participation is not restricted by where you live or membership in other plans. However, you must have available Registered Retirement Savings Plan (RRSP) room to contribute to SPP.

As a result, you can continue to contribute to SPP even if you leave the province. As long as you live in Canada, your SPP contributions will be tax deductible and grow tax free within the plan. Any payments out of the plan after age 55 will be taxable income.

Because SPP participation is not restricted to provincial residents, it is a particularly good retirement savings vehicle for organizations with employees in more than one province. Whether you are transferred from one end of the country to another or move to take a new job, you can continue contributing to the plan.

If you move outside of Canada before or after retirement, the tax treatment of SPP contributions and withdrawals may differ. You should seek tax advice from a lawyer or an accountant in the jurisdiction where you plan to move, either when you are still working or you retire.

Also read:
Who can join SPP
SPP member guide

By Sheryl Smolkin

For many years you have been focused on saving and investing for retirement by maximizing contributions to the Saskatchewan Pension Plan (SPP) and other retirement savings vehicles.  As you plan for retirement, you need to consider the best way to shift from accumulation mode to the decumulation phase of retirement savings.

You may choose an annuity from SPP and receive a pension for the rest of your life, transfer the funds to a locked-in account with a financial institution, or choose a combination of the annuity and transfer options. If your account balance is small you may be able to have your account paid to you in a lump sum instead of receiving monthly payments.

SPP members may begin receiving benefits from the Plan any time after age 55 and must be retired from the Plan by the end of the year in which they reach 71. At SPP, “retirement” simply means you are receiving pension payments. You can still be employed and receive a pension from SPP.

SPP annuity options

All SPP annuities pay you a monthly pension for your lifetime. The amount of your monthly pension is based on your account balance, your age at retirement, interest and annuity rates in effect and the age of your joint survivor (where applicable).  SPP annuity income qualifies for the pension income credit and for pension income splitting. Each annuity option treats death benefits differently.

If you decide to purchase an annuity, your individual account balance is transferred from the SPP contribution fund to the SPP annuity fund and a pension contract is established. The annuity fund holds investments in high quality long-term bonds.

Here are the kinds of annuities offered by SPP:

Life only annuity
This annuity provides you with the largest possible monthly pension for your life. When you die all payments stop.

Refund life annuity
This annuity pays you a monthly pension for the rest of your life. When you die any balance remaining in your account is paid to your beneficiary in a lump sum. If you name your spouse as beneficiary of your account, CRA allows death benefits to be transferred, tax-deferred, directly to his or her SPP account or to an RRSP, RRIF or guaranteed Life Annuity. Tax-deferred transfer options are also available if the beneficiary is a financially dependent child or grandchild.

Joint survivor annuity
The joint survivor annuity also pays you a monthly pension for the rest of your life. If you choose this option you must name your spouse as survivor. When you die, monthly payments continue to your spouse. If your spouse predeceases you, the payments stop with your death. Benefits are based on your age and the age of your joint survivor.

Pros and cons of SPP annuities

When you opt for an annuity which pays a fixed monthly benefit, you are buying peace of mind. You know how much you will receive and you can budget accordingly.  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.

Essentially, SPP assumes the risk associated with the investment and you receive pension payments for your life time.

With interest rates at historic lows, you may be reluctant to opt for an annuity. However, it is important to keep in mind that your benefit reflects an integrated blend of cash flows:

• Interest on your money.
• A portion of your contributions back.

Example: August 2012/Joint survivor is the same age as retiree/lump sum of $100,000*

	Age 55	Age 60	Age 65	Age 70
Life only annuity	$451	$494	$554	$637
Refund annuity	$433	$464	$505	$561
Joint survivor annuity 100%	$406	$434	$473	$529

* Your annuity benefits will reflect your own age, interest rates and the balance in your contribution account.

If you are considering retiring from SPP, call the toll-free line
(1-800-667-7153) for an estimate of your monthly pension based on the various annuity options available and your personal information.

Ellen Roseman podcast

Hi, my name is Sheryl Smolkin. I’m a lawyer and a journalist. Today I’m pleased to be kicking off the Saskatchewan Pension Plan’s new series of interviews with financial experts. My first guest is Ellen Roseman.

Ellen is a journalist and author of five books who has been advocating for the consumer rights of Canadians for the past 35 years. She is a Toronto Star columnist, a fellow blogger on moneyville.ca and she has her own blog “On Your Side.” In January, she was featured on an episode of CBC Marketplaces called “Canada’s Worst Customer Service: Store Edition.”

But Ellen is also passionate about financial literacy and she has been teaching courses in investing and personal finance in the University of Toronto’s Continuing Studies Department since 2004. She also does Financial Basics workshops at Ryerson University. Financial literacy is what we are going to talk about today.

Q. Ellen, why do you think Canadians are so uneasy about their money skills?

A. We don’t learn much about money in school. In the past we used to learn from our parents but today many parents are uneasy about their money management skills and they’re not sure how to bring up their kids with good habits. It has also become a lot more complex and intimidating. For example, look at the number of retirement plans and many of the tax rules are getting more complicated

Q. How important is it to educate our children about money? When should parents start?

A. It’s probably good to start at a young age – like when children are younger, they tend to think that using the ATM is like the lottery and it’s free. You can also go to the grocery store and explain how much different items cost. It’s a delicate balance, but I think it’s a good idea to get your children used to using money and open a bank account at around 6, 7 or 8 years old.

Q. What resources are available to parents to help them educate their children about money?

A. The Canadian Banker’s Association put together a whole network of websites including their own and those of other financial institutions called “There’s something about money.” There are also a lot of financial institutions that have children’s resources on their own websites like Canada Saving’s Bonds. In addition, all the big banks are pretty good about having places where kids can read up and play money games. The approach is almost as entertainment rather than true education, because they learn through being interactive and playing

Q. The Federal Task Force on Financial Literacy recommended over a year ago that provincial and territorial governments put financial literacy into the formal education system. To what extent, if any has progress been made in the implementation of this recommendation?

A. British Columbia led the way even before the Financial Literacy Task Force because they have a compulsory course in Grade 10 and they make great use of the Financial Consumer Agency of Canada’s resource called “The City.” It’s interactive and it lasts for about 18 or 20 hours. Teachers use it in their classes

Manitoba and Ontario decided rather than one course in high school, they wanted to integrate financial education throughout the school system. So starting at about Grade 3 or 4 and going all the way to the end of high school, they introduce it it into things like math, economics and other courses. This process is harder and takes longer.

It’s going quite well in Manitoba, but Ontario is having some problems. A lot of teachers don’t feel very comfortable about teaching about financial issues.

Q. In one column you suggested that financial literacy means saying no to business interests in the schools. Can you tell me a little bit about why this is a concern and what the alternatives might be?

A. We already have a lot of business interests targeting schools. For example, Visa Canada wants to introduce a course about responsible spending. The course is totally sensible but the sponsor is aiming to get kids indebted by the age of 18, continuing for the rest of their lives

The Canadian Banker’s Association has a program where they send banker’s into schools to talk to students about money just as a one-time thing. But there is a little too much emphasis on RRSPs which really isn’t relevant to 16 or 18 year olds. There should be more about basic budgeting skills, deciding between a want and a need, and making sure not to overspend.

Q. Even if financial literacy programs become standard fare in high schools, how can we ensure the programs are engaging and interesting for young people so they don’t just tune out?

A. Make it relevant to people’s lives and the issues they’re experiencing at the moment.

Children in high school have some immediate needs. They need to know about the cost of post secondary education and how much that will be in dollars and cents. Who is going to pay for it? How do you manage a student loan? How do you pay for transportation? What’s the cost of all the gadgets they buy? Why it doesn’t make sense to buy with a credit card if you’re still paying it off a few years later and yet you’re ready to move onto the next device.

Q. You have been teaching basic investment concepts to adults for many years. What do you tell them about the role of a financial advisor, and the questions they should ask before signing on with one?

A. It’s very important for people to have a good financial advisor. Five to 10% of Canadians can actually be their own financial advisor but the rest need some financial advice.

Many of the people out there dispensing financial advice are working for big banks and other financial institutions. They are basically sales people who get incentives to accumulate as many assets under management and they encourage them to borrow to invest. Their whole expertise is about the accumulation phase, which is building up assets towards retirement but there’s a big gap once people retire or are about to retire. Many financial advisors are not skilled in how to keep more after-tax income in your pocket.

Check their references to make sure they’re registered. Do online research

Make sure they listen. If they’re diagnosing and recommending before they get to know you that usually means it’s some kind of off the shelf solution instead of a custom approach.

Finally, don’t get too friendly with them. Once your lives get too intertwined it’s pretty hard to fire them. Friendship should never interfere with a business relationship.

Thanks Ellen. It was a pleasure to chat with you. I know Saskatchewan Pension Plan members will be eagerly awaiting the release of your new book 99 Ways to Fight Back and they will also want to check out your Toronto Star articles and your blogs on moneyville.ca and ellenroseman.com.

By Sheryl Smolkin

To contribute to the Saskatchewan Pension Plan you must have Registered Retirement Savings Plan (RRSP) contribution room.  Therefore it is important to understand what “RRSP contribution room” means and how is it calculated.

Your RRSP contribution room is the amount of RRSP contributions you can deduct for income tax purposes in a particular year. For 2012, RRSP contribution room will be the 2012 RRSP deduction limit appearing on the notice of assessment (or reassessment) you receive once you have filed your 2011 income tax return and it has been processed.

The RRSP deduction limit for each year is the lesser of:

• 18 per cent of your previous year’s earned income,* and
• The RRSP dollar limit for the year ($22,970 for 2012).

*Earned income is the annual total of:  employment income, net rental income, net income from self-employment, royalties, research grants, alimony or maintenance payments, disability payments from CPP or QPP and supplementary UIC payments.

However, if you belong to a workplace registered pension plan (RPP), your annual RRSP contribution room will be reduced by a Pension Adjustment (PA) representing the value of both employer and employee RPP contributions.

If you do not use up your RRSP contribution room in any year, it is added to the next year’s RRSP contribution room and carried forward indefinitely. When certain kinds of income are transferred to your RRSP such as a retiring allowance or an amount received from a deceased spouse’s RRSP, contribution room is not required.

If you want to calculate your 2012 RRSP deduction limit, use Chart 3 on the Canada Revenue Agency’s website.

The maximum annual contribution you can make to the Saskatchewan Pension Plan is $2,500, even if you have additional RRSP contribution room. You can also transfer an additional $10,000/year from another RRSP to the Saskatchewan Pension Plan.

Since you have already used up RRSP room when you made the original RRSP contribution, you will not need additional RRSP contribution room to make an RRSP/SPP transfer of up to $10,000 each year.

Also read:

RRSPs and other registered plans for retirement

RRSP contribution limits

Frequently asked questions: RSPs