Be wary of saving in an RRSP at the expense of debt, financial experts say

Be wary of saving in an RRSP at the expense of debt, financial experts say

By Linda Nguyen

THE CANADIAN PRESS

TORONTO _ When Patrick French was about 18 years old, he got a hot tip about a gold mining stock.

The problem was he was a student with no money, but he still wanted to cash in on the “can’t miss” opportunity for his RRSP.

So, he took out a $4,000 loan.

“I broke some fundamental rules for what was promised to be a brilliant idea,” said French, director of retirement and financial planning at investment firm Edward Jones.

“Within 12 months, the stock was effectively worthless. It was one of those things where at the time, it was a very expensive lesson invaluable really.”

Not only did French lose his investment, he lost his RRSP contribution room. He also now had more debt.

Today, French tells clients more often than not, it’s a bad idea to incur debt, or ignore debt, to invest in an RRSP.

“You have to believe that you can consistently earn a higher rate of return than you can by paying down the debt,” he said.

“That’s why regardless of your age, paying down your debt is always a good financial strategy.”

As the March 1 deadline looms for RRSP contributions this year, many Canadians will be thinking about how much they want or are able to contribute to their retirement savings.

French says there’s bad debt and good debt.

An example of bad debt is credit card debt, which often carries an interest rate of 20 per cent. Mortgage debt, on the other hand, could be considered good debt, if interest rates continue to stay at current historic lows.

As a general rule, it’s a good idea to tackle bad debt first because any tax savings you may receive from an RRSP contribution will likely not exceed the interest costs a credit card company charges.

Financial adviser Sara Zollo believes in a slightly different school of thought. She encourages her clients not to neglect their retirement savings just because they have debt.

“One of the biggest mistakes you can do is ignore your savings and just pay down the debt,” said Zollo, who works at Sun Life Financial Canada.

“It is a good idea to do a combination of both and to look at each individual situation and decide what ratio goes to debt repayment and what ratio goes to savings.”

Even putting aside as little as $20 a month is enough to help kick-start an RRSP.

“I can’t tell you how many times clients are surprised with how much money they have put away by the end of the year,” she said.

Zollo says putting money away in an RRSP may also be advantageous for those in a high income tax bracket because it creates a deduction on the amount of taxes that are owed.

“If you can minimize taxes paid down today, you have more money today,” she said. “With the refund, you can put that towards your debt, and then you’ve done both saved in your RRSP and paid down some of your debt.”

But like with any major financial decision, Zollo says it’s best to consult with a professional first.

“A written annual financial plan can look at budgeting, tax planning, retirement planning, kid’s education planning, protecting your savings and proper insurance,” she said.

Retirement planning? Couples, mind the age gap

By Arielle O’Shea

An age difference in your relationship doesn’t just mean your favourite bands are from different decades.

As you approach retirement together, that age gap becomes a factor in decisions about when you retire and when you take Social Security, and in planning how much money you need to save and how it should be invested.

A GAP CAN STRETCH YOUR RETIREMENT YEARS

Especially if the younger partner is a woman, an age difference can mean you need your money to last longer. Women outlive men on average, which adds additional years to retirement.

As a couple, your retirement time horizon should be computed from the longest life expectancy of the two of you, says Kathleen Hastings, a certified financial planner with FBB Capital Partners in Bethesda, Maryland.

According to Social Security’s life expectancy calculator , a woman who is 45 years old today and reaches full retirement age at 67, can expect to live an additional 21 years, to age 88. A man who is 50 today and lives to 67 is expected to live an additional 18 years, to age 85.

But as a couple, they may need to draw on their retirement savings from the time he turns 67 to the time she turns 88, a significantly longer span of 26 years _ and many financial planners would add a few years to that projection as extra insurance.

PLAN FOR THE YOUNGER PARTNER

To plan for those extra years in retirement, mixed-age couples should save more, work longer and invest with an eye toward the longer life expectancy in the relationship, says David Hunter, a certified financial planner with Horizons Wealth Management in Asheville, North Carolina.

“The older someone gets, the more conservative they tend to be,” Hunter says. “But when you’re coming at it from two different ages, if the older person can stomach the volatility, you should probably invest with the younger person’s time horizon in mind. You’re trying to prepare your assets to be around for that second individual.”

Couples tend to want to retire together, which can tempt a younger partner to take early retirement in order to align with the older partner’s retirement plans.

But doing so could result in several financial drags on the couple, Hastings says. The early retiree could end up with a shortened timeline of Social Security contributions, and miss out on years of contributions to a 401(k) or other workplace retirement plan.

“Someone has to make sacrifices to make up for that loss of income, and you either do that by working longer or saving more,” Hastings says.

If retiring at the same time is important to you, consider whether the older partner can work longer to meet the younger one at his or her full retirement age, or use a retirement calculator to figure out how much more you’ll need to save to accommodate those extra years of distributions rather than contributions.

STRETCH YOUR RESOURCES

Allocating your investments with the younger partner in mind means you’ll take a more aggressive approach, which should allow your money to continue to grow and last longer. But distributions are required from tax-deferred retirement accounts _ like traditional 401(k)s and IRAs _ beginning at age 70 1/2.

If you’re married, your age difference spans more than 10 years and the younger spouse is the sole beneficiary, the amount of that required minimum distribution will be calculated using the IRS’ Joint Life and Last Survivor Expectancy Table . This allows the account holder to draw less than he or she would if using the table for the standard RMD calculation. That can leave more of your money to grow tax-deferred, assuming you want or need to draw only the minimum required.

You should also consider how to make the most of other sources of income. If the older spouse can put off claiming Social Security until age 70, for example, that person will maximize his or her monthly benefit, as well as survivor benefits for the younger spouse. Pension elections can be set to joint and survivor benefits, which will allow a surviving spouse to continue to receive benefits once the pension owner dies.

All of this requires planning, so as with all things retirement, the earlier you get a road map in place, the better, Hastings says. “People often don’t think about this until it’s too late.”

 

Nearly half of Canadians lack a financial plan, putting their goals at risk

A new CIBC (TSX:CM) (NYSE: CM) poll finds that nearly half (46 per cent) of Canadians do not have a financial plan in place to reach their goals, despite many feeling concerned about their retirement years.

“While most of us have a fairly good sense of our financial goals, so many Canadians do not have a clear road map in place to achieve what they want today – and tomorrow,” says Sarah Widmeyer, Managing Director and Head of Wealth Strategies, CIBC. “Whether the goal is to eliminate debt, save more, or retire early, you can achieve success with a financial plan.”

Key poll findings include:

  • 54 per cent of Canadians surveyed have a financial plan, with
    • 64 per cent of them having a long-term plan that identifies their savings goals and the steps to achieve them;
    • And 36 per cent who describe it as only a budget they review regularly, a short-term plan or ‘other’.
  • 46 per cent of Canadians surveyed do not have a financial plan
    • with 42 per cent of them saying they ‘have a pretty good idea’ and don’t need to write it down.
  • When thinking about retirement, just over half (51 per cent) are most worried about increasing health care costs, 45 per cent are concerned about how to manage unexpected expenses, and 43 per cent worry that they won’t have enough money to live the life they want.

‘Life gets in the way’

According to previous CIBC polls, ‘paying down debt’ has been the top financial priority for Canadians for seven straight years, indicating few people are making headway on their goals.

“We all aim to have a sufficient nest egg for retirement and money to handle the unexpected, but everyday life has a tendency of getting in the way,” says Ms. Widmeyer. “By setting out a clear path to your goals, a financial plan can help you stay on track. It also gives you the confidence to manage surprises, so that setbacks don’t put your retirement dreams and other goals at risk.”

The poll finds that having a financial plan in place makes Canadians feel more confident in their ability to manage unexpected changes in their finances. Additionally, those who have a financial advisor (61 per cent) also feel better able to manage setbacks. The poll surveyed Canadians with household incomes above $100,000.

A financial plan and a budget are not the same: But both are important

The poll findings show that even among those who do have a financial plan, more than a third (36 per cent) appear to be confused about how it differs from a budget, pointing to a limited understanding of the full value and purpose of a financial plan.

“While budgeting and financial planning go hand-in-hand, a budget alone is insufficient in crafting the life you want in the future,” says Ms. Widmeyer. She adds that confusing a budget with a financial plan may leave Canadians ill-prepared.

Ms. Widmeyer describes a financial plan as a clear, written report detailing an individual’s personal goals, financial needs and priorities in areas such as income and expenses, taxes, mortgage planning, education needs, retirement, estate planning, and insurance. A financial plan also incorporates assumptions like inflation, the time to a goal and expected rates of return, which many may miss on their own, she adds.

“There are many things to consider depending on your life stage, income and lifestyle expectations,” says Ms. Widmeyer. “Is it better to pay down debt or save? Are you saving enough? Could you possibly retire earlier than you thought? These are some of the questions a financial plan can help you answer and where the real value of a plan lies.”

Tips to get started

For those who are unsure of where to start, Ms. Widmeyer offers these tips:

  1. Identify your short-term and long-term goals
  2. Take a detailed look at your budget
  3. Create a plan setting measurable and time-based goals
  4. Review your progress annually

“Now is the perfect time to speak to a financial advisor who can help you identify and prioritize your goals and set a plan to achieve them,” adds Widmeyer. “The keys to success are to have a plan in place, review your progress annually, and then make any changes as needed. This will keep you on track to achieve what’s important to you.”

A plan for ages

  • In your 20’s and 30’s – When you’re starting out, it’s important to manage debt effectively and keep an eye on savings. Taking advantage of the Home Buyer’s Plan can help you build a down payment for your first home, while saving through a TFSA could save your RRSP contribution room for years when you’re likely to earn a higher income. Read Paul and Andrea’s story.
  • In your 40’s and 50’s – For the sandwich generation, it’s all about balance. Competing priorities pull you in different directions, and can make it difficult to stay on track. Look for ways to maximize savings through Registered Education Savings Plans, and be sure to balance your portfolio to fit the right time horizon, risk tolerance and accurately forecast future cash flow. Read Xue and Mei-Lien’s story.
  • In your 60’s and beyond – For those at or nearing retirement, it’s important to understand your new income needs, lifestyle and plan for any unexpected health costs in order to set a clear course for the years ahead. Knowing the right time and amount to withdraw from Registered Retirement Income Funds to reduce tax liabilities and continue saving for later years, while discussing your estate can help protect your wealth and minimize taxes. Read Andrew and Jennifer’s story.

KEY POLL FINDINGS:

Percentage of Canadians surveyed with a financial plan detailing out financial decisions and activities for their household:

Yes,    

54%

No

46%

Top reasons Canadians surveyed without a financial plan feel they do not need one:

I have a pretty good idea of what I need to do and don’t need to write it down

42%

My situation is pretty simple and I don’t see the need for one

26%

Canadians’ surveyed top three most important goals for having a financial plan:

Saving for retirement

53%

Eliminating credit card or line of credit debt

38%

Paying off  their mortgage sooner

38%

Top retirement concerns among Canadians surveyed:

Increased health care costs

51%

Managing unexpected costs (e.g. health-related expenses, long-term care)

45%

Not having enough money to live the life I want

43%

Confidence of those with or without a financial plan in their ability to manage an unexpected life event or scenario:

Have a
financial
plan

Do not
have a financial
plan

Have a
financial
advisor

Do not
have a
financial
advisor

Someone in the household losing their job suddenly

70%

58%

69%

57%

A family illness or disability that left me or a family member unable to work for a few months

77%

72%

78%

68%

Medical expenses not covered by my insurance provider

77%

71%

78%

67%

A sudden, unexpected financial emergency (e.g. urgent home renovation, car repairs)

88%

80%

87%

80%

Divorce

51%

48%

52%

46%

Growing family

57%

59%

60%

55%

Financial Plan Poll Disclaimer:
From January 5 to 9, 2017, an online survey was conducted among 1,007 Canadian adults with a household income greater than $100,000 who are Angus Reid Forum panelists. For comparison purposes, a probability sample of this size has a margin of error of +/- 3%, 19 times out of 20.

About CIBC
CIBC is a leading Canadian-based global financial institution with 11 million personal banking and business clients. Through our three major business units – Retail and Business Banking, Wealth Management and Capital Markets – CIBC offers a full range of products and services through its comprehensive electronic banking network, branches and offices across Canada with offices in the United States and around the world. Ongoing news releases and more information about CIBC can be found at www.cibc.com/ca/media-centre/ or by following on Twitter @CIBC, Facebook (www.facebook.com/CIBC) and Instagram @CIBCNow.

SOURCE CIBC – Consumer Research and Advice

What women want from financial advisors

What women want from financial advisors

By Paul Lucus | WP

Sometimes statistics speak for themselves – 73 per cent of women are ‘unhappy’ with the financial service industry, while 87 per cent of females looking for a financial advisor say they can’t find one they can connect with.

These are the damning results of a survey by StrategyMarketing.ca pointing to a significant disconnect between what women want and what they are actually being offered from the financial services industry. Even though the industry has earmarked women as a valuable demographic, its efforts to actually retain them seem to be falling short.

So what mistakes are they making and what can they do to put them right? Wealth Professional spoke to Paulette Filion and Judy Paradi, the authors of the report and partners at StrategyMarketing.ca, to find out.

One of the biggest issues, it seems, is that financial advisors see women as a niche market and don’t develop a strong female friendly brand. Even though they may design marketing campaigns to appeal to women they aren’t actually doing the things needed to make them happy. Indeed when part of a couple, men are almost two times as likely to be approached by a financial advisor and the male partner is 58 per cent more likely to be seen as the primary contact.

“Male advisors still seem to have the deep down gut feeling that women are a secondary market – not really interested in finances,” commented Paradi.

“Financial advisors consider couples as one client, not two and that’s not true – they are two distinct people,” continued Filion. “With single female clients, advisors think how they’ve approached other clients in the past is the same for these female clients. It may not be. Women face challenges that male clients don’t face and have different communication styles that may appear to indicate hesitation, risk aversion or lack of trust when, actually, nothing could be further from the truth.”

READ MORE HERE:

Canada: Financial Services Regulatory: Seven Developments To Watch In 2017

Article by Sharissa Ellyn

New draft OSFI guideline: enterprise-wide model risk management

OSFI released a new draft Guideline E-23 – Enterprise-Wide Model Risk Management on December 21, 2016. Once finalized, Guideline E-23 will apply to banks, foreign bank branches, bank holding companies, and federally regulated trust and loan companies.

The draft guideline sets out OSFI’s expectations for a governance structure in connection with the development, review, approval, use and modification of internal risk management models. OSFI recognizes that smaller and less complex institutions might apply the controls set out in the guideline only in materially relevant areas.

Once the guideline is in effect, federally regulated financial institutions (FRFIs) will be expected to develop and operationalize enterprise-wide model risk management policies and to create and maintain inventories of risk management models they currently use and have recently decommissioned. OSFI has asked for comments on the draft guideline by February 28, 2017.

New FinTRAC guidance: PEPs and HIOs

On December 20, 2016, FinTRAC released new guidance for financial entities regarding politically exposed persons (PEPs) and heads of international organizations (HIOs). This guidance addresses the new requirements under Canada’s anti-money laundering (AML) regulations in connection with domestic PEPs and HIOs, which will be in force on June 17, 2017, (described in our post) as well as the existing requirements in connection with foreign PEPs.

In this guidance, FinTRAC states that regulated entities are not expected to assess all existing account holders immediately upon the coming into force date (June 17) of the new PEP and HIO obligations, but rather, a process must be established to assess existing account holders over time. One issue with the new requirements relates to the requirement (which arises in various circumstances) to take reasonable measures to determine whether a person is closely associated with a PEP or HIO. The government had indicated FinTRAC would provide guidance regarding the meaning of “close associate.” This new guidance is apparently intended to do that, however, institutions may find it is not particularly helpful in this regard. The guidance provides that the term “close associate” is not intended to capture every person who has been associated with a PEP or HIO. The guidance provides some examples of close associations – including business partners, romantic relationship partners, those involved in financial transactions, those who serve on the same boards, and those who closely carry out charitable works with a PEP or HIO.

According to the guidance, institutions must have a means to determine if a person associated with a PEP or HIO is or is not a close associate; it is unclear what this will entail. In line with previous guidance, this guidance provides (somewhat unhelpfully) that reasonable measures to determine whether a person is a PEP, HIO or a close associate of one of them include, but are not limited to (1) asking the client; (2) conducting an open source search; and (3) consulting a source of commercially available information.

Review of OSFI expectations for boards of FRFIs

OSFI recently advised all federally regulated financial institutions (FRFIs) that it plans a comprehensive review of its expectations for boards of directors of FRFIs. This review aims to ensure that boards can continue to be effective in their role.

The notice suggests that as part of this review, OSFI may consolidate expectations of boards and directors that are currently set out in its Corporate Governance Guideline as well as in many other specific guidelines and supervisory letters. Feedback, especially from smaller institutions, had indicated that the total of the expectations of boards and directors can be difficult to navigate. OSFI will begin its consultation by speaking directly to certain boards that represent a cross-section of the industry. These targeted discussions will be followed by a broader consultation. Anyone who wishes to participate in this consultation may contact OSFI at the phone number indicated in the notice.

Bank Act financial consumer protection framework

As described in our post, Bill C-29 would have amended the Bank Act to include a new consumer protection framework (which was promised for many years by successive federal governments). The amendments would have consolidated many current consumer protection provisions and added certain new requirements. However, following objections from Quebec, the proposed amendments to introduce the new framework were withdrawn before the bill was passed on December 15, 2016.

The controversial aspects of the proposed amendments provide that the new framework is intended to be a comprehensive and exclusive regime that is paramount to any province’s consumer protection laws. We understand that the proposed amendments will be reviewed by the Financial Consumer Agency of Canada to ensure they provide consumer protections that are at least as strong as those available under Quebec law. Following this review (and possible revision), it is expected the proposed amendments will be reintroduced as a new bill in the House of Commons.

FCAC to update supervision framework and principles for publishing decisions

On September 29, 2016, the Financial Consumer Agency of Canada (FCAC) released for public comment a proposed new Supervision Framework and proposed new Publishing Principles for FCAC Decisions. It appears the Supervision Framework, once finalized, will replace FCAC’s existing Compliance Framework. The Compliance Framework outlines how FCAC supervises and monitors regulated entities for compliance with regulatory requirements. Of note is FCAC’s new classification of regulated entities as Tier 1 or Tier 2 on the basis of their relative inherent risks of breaching their market conduct obligations. Tier 1 entities are those that present higher inherent risks as a result of their business models and service offerings. Tier 2 entities will be monitored less intensively than Tier 1 entities.

The new Supervision Framework will be supported by additional guidance documents and redesigned internal processes that will be developed and phased in over time. In the proposed new Publishing Principles, FCAC indicates that it makes public information about all violations and breaches of voluntary codes and public commitments. For violations, the commissioner of FCAC will decide on a case-by-case basis whether or not to publish the name of the regulated entity that committed the violation. For breaches of voluntary codes and public commitments, FCAC will publish anonymous information about the non-adherence. The consultation period has closed, but these documents have not yet been published in final form.

Further amendments to proceeds of crime regulations expected

As described in our post, various amendments to regulations under Canada’s AML legislation were published in final form in 2016. Certain of these amendments came into force on June 30, 2016, while the remaining amendments will be in force on June 17, 2017. A second package of amendments to Canada’s AML regulations to address prepaid payment products, virtual currencies and money services businesses without a physical presence in Canada was expected to be published in draft in fall 2016, but has not yet been released.

Review of the federal financial sector framework

On August 26, 2016, the federal government’s Department of Finance launched a consultation to review the federal financial sector framework. Each of the federal financial institutions statutes includes sunset clauses that require the government to review these statutes every five years. The current sunset dates were extended in 2016 by two years to 2019. The stated purpose of this review is to allow the government to consider whether the current framework effectively supports growth and positions the sector to meet the government’s stated policy objectives of stability, efficiency and utility.

The consultation paper provides useful background information about Canada’s financial services sector and information about the policy context and trends that influence the financial sector. Some of the trends discussed are the macroeconomic conditions in Canada (such as low interest rates and high household debt), increased concentration in the financial sector, the changing competitive landscape, the internationalization of financial institutions, financial innovation, and the emergence of fintech. The consultation paper concludes by setting out broad questions, which ask for comments on the trends and challenges that influence the financial sector, whether the current framework effectively balances the policy objectives, and what actions could be taken to strengthen the sector, promote economic growth and ensure the legislative framework remains modern and technically sound. The consultation period closed on November 15, 2016.

The consultation document indicates that the Department of Finance may make public some or all of the responses or may provide summaries of responses in public documents and that responses will be used in developing a policy paper for further consultation in 2017. This further consultation may lead to proposed amendments to the federal financial institutions statutes and regulations.

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