Category Archives for "Retirement"

Pros and Cons of Reverse Mortgages

By Randall Orser | Budget , Personal Finances , Retirement

The number of seniors taking out a reverse mortgage is increasing year by year as retirees are finding that they do not have enough money to fund their retirement.  If you are thinking about taking out a reverse mortgage, as with any other big decision it is important to make sure that you know exactly how such a loan works and whether it is a good decision for you.  

Pros:

  • You continue to retain the title and live in your home.  You still have to pay your property taxes, insurance and maintenance.
  • You receive the proceeds of the loan as tax-free cash and you can use it however you wish such as pay off debts or travel.
  • You do not make any monthly mortgage payments until you decide to move or sell then the full loan becomes due.  You have the option to pay off the full amount of the principle and interest at any time though you may be charged a fee to pay off your loan early.
  • A reverse mortgage is a non-recourse loan.  You and your heirs are not responsible for any amount of the mortgage that exceeds the value of your home as long as you have paid all the property taxes and insurance.
  • You can usually decide how you want to receive the funds, all at once or to advances over time.

Cons:

  • Interest rates are higher than other secured lending options as there are no monthly payments required.  
  • The balance of the loan increases over time as does the interest on the loan.
  • If you default on the reverse mortgage you will have to pay back the entire amount due on the loan.  Lenders may have their own definitions of defaulting on your loan but in general ways you can default include: 
    • Using the money from the reverse mortgage for something illegal
    • Being dishonest in your mortgage application
    • Letting your house fall into a state of disrepair thereby lowering its value
    • Not following the conditions that you agreed to when you took out the mortgage.
  • When you die, your estate will have to pay back the full amount of the loan.  If both you and your spouse own your home together the loan will have to be repaid when the last one of you dies or sells your home.
  • The amount of time that you or your estate will have to pay off a reverse mortgage will vary.  If you die then usually your estate will have 180 days to pay off the loan, but I if you move into long-term care then you could have one year to pay it back.  This is important information that you need to get from the lender before taking out the loan.

Costs involved in taking out a reverse mortgage vary depending on the lender but usually include:

  • A higher interest rate than for a traditional mortgage.
  • A home appraisal fee
  • A setup fee
  • A prepayment penalty if you pay off your reverse mortgage early
  • Legal fees for closing costs or independent legal advice

Costs may be added to the balance of your loan or you may have to pay them upfront.

Taking out a reverse mortgage greatly affects the equity that you will have left in your home when you sell or die, and how much will be left for your heirs.  It is usually a good idea to speak to your family, a financial advisor and even your lawyer to make sure that you are fully understand how a reverse mortgage works and whether or not it is the best decision for you.

Your financial advisor may suggest alternatives to a reverse mortgage such as:

  • Taking out a different kind of loan such as a personal loan, line of credit or credit card
  • Selling your home and moving buying a smaller one 
  • Selling your home and renting another home or apartment
  • Moving into assisted living or other alternative housing.

Thinking About Taking out a Reverse Mortgage? Have you Done Your Homework?

By Randall Orser | Budget , Personal Finances , Personal Income Tax , Retirement

If you are retired or close to retirement and finding yourself short of money then a reverse mortgage might be the answer, but make sure you do your homework before you take out this type of loan.

What is a Reverse Mortgage?

A reverse mortgage is a loan secured against the value of your home.  In Canada you have to be a homeowner’s aged 55 or over to take out a reverse mortgage.  You can convert up to 55% of your home’s value into tax free cash to use as you wish.  With a reverse mortgage you retain ownership of your home and there are no monthly payments required.  The loan is only repaid when your home is sold when you either move out or the last borrower dies.   

Reverse Mortgages are surging in Canada at about 25% per year as older people are finding themselves without the income that they need for their retirement and this is a source of additional income for them.  Outstanding balances on reverse mortgages have more than doubled in the four years up to 2019 and now stand at $3.12billion, although this is less than 1% of the residential mortgages that have been issued, they are growing at a much faster pace.  

At present the big banks do not offer reverse mortgages they can only be taken out with two lenders –  the leading provider is Canadian Home Income Plan (CHIP) from HomeEquity Bank which has offered reverse mortgages since 1986, the second is the PATH Home Plan from  Equitable Bank available in BC, Alberta and Ontario.  Some Credit Unions in BC and Ontario also offer reverse mortgages. 

In order to qualify for a Reverse Mortgage in Canada, these factors are taken into consideration:

  • Both you and your spouse must be at least 55 years old.
  • The home that you are using to secure a reverse mortgage must be your primary residence, and you live there at least six months of the year.
  • The location of your home.
  • The type of home – detached, condo, townhouse etc.
  • The appraised value of your home – it must be at least $150,000.
  • The condition of your home.
  • The equity that you have in your home.
  • If you have a mortgage, loans or a line of credit secured on the home, you must pay it off before taking out a reverse mortgage.  
  • The older you are and the more equity that you have in the home the more money you could get but the amount is also impacted by current market trends. 

How to access the money

You can usually take out the money from your loan either as a one-time lump sum or by taking some up front and the remainder over time.  You need to ask your lender what options are open to you and if there are restrictions or fees.  

A reverse mortgage may sound like a great idea but is it the best option for you?

The Worst Financial Mistakes that you can Make

By Randall Orser | Budget , Investments , Personal Finances , Retirement

When people are working on their budget or long-term financial plan, they are making changes to their spending. There are some common mistakes that people make when handling their finances that can come back to bite them in the future, but there are steps that can be taken to fix these mistakes.

  1. Thinking that things will work out ok in the end – putting your head in the sand and thinking that things will magically work out means that nothing is going to change.  You have to create a solid plan to save and to follow a budget which will determine how and when you will spend your money.  It is important to know that budget and financial plan are not bad words! 
  2. Relying on your credit cards to get by -  if you do this a few times it might not be too difficult to get out of debt, but if you make it a habit then you are liable to rack up a lot of debt in a short period of time.  Emergencies can and do come up unexpectedly, so you need to be prepared by starting an emergency savings fund.   If you have that you will not need to use your credit card for emergencies.   You need to make a goal to pay off your credit card and to not use it for the next year.  If you do use it make sure to pay it off each month.  
  3. Failing to plan for retirement – you should be making regular contributions to your retirement plan even if you are in your twenties.  The earlier you start the longer you will have for your fund to grow and benefit you in the long run.  Contributing to  a Registered Retirement Savings Plan is also a good way to save on your tax bill.
  4. Giving in to pressure to take the next big step – milestones in your life will affect your financial situation, such as getting married, a career change, buying a house or starting a family.  Only you can decide when you are ready to take these big steps so do not let friends and family rush you into something that you are not ready for otherwise you might resent the step that you took.  

From an article by Miriam Caldwell

Don’t Make These Mistakes with your Retirement Savings!

By Randall Orser | Personal Finances , Retirement

As you are approaching retirement, don’t make the big mistake of gambling with your savings.  Poor investing or paying unnecessary fees and charges can take a big chunk out of your nest egg and derail your retirement plans. 

Here are some mistakes that you need to avoid in your 60’s and even in your 20’s.

  1. Investing in things that you don’t know anything about.  Keep clear of all new investment schemes that you are unfamiliar with.  This includes seminars with free dinners thrown in.  Don’t allow high pressure salesmen to talk you into parting with your hard-earned money.  Take your time learning about new potential investments then invest in small steps.
  2. Don’t be persuaded to invest a large portion of your retirement fund in a stock that is supposed to be “the next big thing”, it is too easy for you to lose everything.  Investing is a skill that you need to learn to be successful and a process called asset allocation. If you want to play the stock market do it with small amounts of money.
  3. If you are lucky enough to have the choice make sure that you participate fully in your employer’s savings plan.  Don’t ignore the “free” money that your employer is contributing towards your retirement savings when they match your investment, it is the equivalent of extra earnings.
  4. Making risky loans with your money.  Private loans can pay you large interest, but they also come with a serious risk.  The borrower may go bankrupt or be unable to repay the loan and you could lose everything.  If you want to go into this type of investment it should only be a part of your overall investment strategy and you should only use a small amount of your retirement money.  On the other hand, you should not put too much money into “safe” investments which typically don’t earn very much, as your earnings could be eaten away by inflation.
  5. Don’t put too much money into real estate deals.  Some deals promise high returns but if property values don’t rise but actually fall, you might have to ride it out until prices rise again or sell the property at a loss.  Real estate can be a good addition to your retirement fund portfolio but again don’t put all your eggs in one basket.
  6. Don’t overlook all the costs and fees associated with maintaining your investments.  Though they might not appear to be much when you are younger, over the years they can really add up.  Compare fees when you start investing and keep checking them over the years, as your investments grow that !% will translate into more money than it did originally.  It might make sense to change your plans if your fees get high or if you realize that they are higher than you thought.

 The bottom line is that your retirement money is not for gambling, it must provide you with a reliable income as you get older.  If you don’t do your homework and lay out a careful investment plan early in life you can only blame yourself if you suffer losses. 

From an article by Dana Anspach

How to Calculate Your Retirement Budget

By Randall Orser | Budget , Personal Finances , Retirement

Making a budget for your retirement will help to alleviate stress in your golden years and will help you to avoid spending your nest egg too soon.  Things that will affect your retirement income include inflation, rate of return on your investments, your retirement date, taxes, spending, part-time earnings and pension payments.  With a budget you will be able to make smart choices about your life in retirement that might allow you to retire earlier if you want to. 

Before starting to create your budget, you need to have your last 6-12 months of bank statements, 6-12 months of credit card statements, your last two pay stubs and those of your spouse if you are both still employed, and last year’s tax return.  Review the transactions on your bank and credit card statements and track where you have spent your money over that time.  

Group your expenses into these five categories:

1. Fixed Expenses - list all your recurring monthly, quarterly or annual payments.  These can be broken down into three parts;

  • Essentials such as food, clothing, housing, transportation and health care. 
  • Non-essential monthly payments such as tv cable and streaming, gym memberships, subscriptions and any other items that you are billed for.
  • Required monthly or non-monthly expenses such as property taxes, insurance premiums, auto insurance, and cell phone bill.

2. Health Insurance - If your employer has been paying for your health insurance  you might have to pay it yourself when you retire.  It's a good idea to shop around for the best plan for you before you retire so that you can add an estimated monthly charge to your budget.

3. Optional Items - this includes all the fun things such as travel, outings, entertainment and hobbies.

4. Plan how you will spend your time - if you have expensive hobbies, you need to budget for them.  Consider ways in which you can reallocate money from things that are less important to items that are more important, such as downsizing your house to pay for travel.

5. Calculate fixed vs variable costs - by totalling all your fixed expenses and non-fixed expenses separately then dividing your fixed expenses into the total expenses.  You will then know how much of your retirement fund will need to go towards fixed expenses and how much you will have left for other things.  If it doesn't look like enough for travel and other fun things you might have to consider a lifestyle change such a not paying huge house and car payments.  

The bottom line is that if you want to have more fun in your retirement, you have to find ways to lower your fixed expenses so that you have more to spend on the interests that you enjoy.

 

How to Determine How Much Retirement Savings is Enough

By Randall Orser | Personal Finances , Retirement

The question of how much retirement savings you will need is personal to everyone.  However, there are some key questions that you need to ask yourself as you are planning for retirement.

What are your retirement plans?

Are you planning to have a similar life to the one that you have now, or are you thinking about retiring early? travelling more? Starting your own business?  Do you want to retain your current living standards or are you prepared to accept a lower standard?  All these things and others have to be an important part of budgeting for your retirement.

How much money are you making today?

Your current salary is a good starting point for calculating what your retirement savings should be.  It’s a good guess that the more money that you make today, the higher your retirement savings should be because like most people you want to retain your current lifestyle.

How much can you expect to receive from Old Age Security, Canada Pension Plan and other private pension plans.

Figuring out a good estimate of your monthly income from pensions and benefits that you will receive during your retirement will subtract substantially from the amount that you need to have saved.  

When do you want to retire?

The younger you are when you retire, the longer you can expect to live in retirement and the more money you will need to have saved.  If you retire when you are older you will be retired for a shorter time and will also have worked more years, enabling you to save more.  In addition, postponing receiving your Canada Pension Plan benefits means that you will get 0.7% more for each month after age 65 that you delay, up to a maximum of 42% more at age 70 than at age 65.  If you defer your Old Age Security pension your monthly payment will increase by 0.6% for each month up to a maximum of 36% at age 70.

How many years will you spend in retirement?

This is really asking the question how long do you expect to live?  If you are in good health, you could expect to live 30 years more in retirement.  Your life expectation will help you to calculate how much money you will need to withdraw from your savings each year.

How are you going to invest your money?

If you invest aggressively you should expect a higher rate of return on your investments compared to someone who keeps all their investments in a savings account.

How much have you saved already and how old are you now?

The younger you start saving and the more that you have saved means that you will have to save less in the future to achieve the same standard of living in retirement.  For early retirement savers, most financial planners suggest saving between 10 and 15% of your income.  If you start saving later then 20% of your income might be a more realistic figure.  One rule of thumb is to determine how much you will need to live on during retirement and multiply it by 25.  For example, if you need $40,000 per year then you will need to save $1,000,000 to retire comfortably.  However, if you will receive $20,000 a year from pensions and benefits and will only withdraw $20,000 a year out of your savings then you will need to have saved $500,000 by the time that you retire. 

Overall, the amount you will need really depends on your personal circumstances, but it is always a good idea to save more than you think you will need rather than less.

Best Business Opportunities for Retirees

By Randall Orser | Freelancing , Home Based Business , Personal Finances , Retirement , Small Business

Are you getting ready to retire but don’t see yourself filling your days with tv reruns, golf or playing cards?  Already retired but you could use some extra income? These are good reasons to start your own business when you retire.  Here some businesses to consider that can offer you part-time work and can be operated from home.

  1.  Chauffeur – If you are still fit and have an outgoing personality then working as a chauffeur helping other seniors with transportation to medical appointments, shopping and more can be a good option.  You will need to check Provincial licensing requirements, upgrade your driver’s license and maybe do CPR training and have a criminal record check done.
  2. Travel Tour Guide – If you love to travel, being a tour guide and getting paid to travel can be a dream job for you.  All your travel expenses will be paid for and in addition to wages you will also get tips. Contact the International Tour Management Institute for more information.
  3. Hauling – If you have a truck or a van hauling can be a good business for you.  There is always a demand for people to take away garden waste, trash and discarded household items.
  4. Painting and Interior Decorating – If you have a good eye for colour and are creative, why not share your skills?
  5. Translation Services – Good at languages? then being a translator could be ideal for you. You will need excellent writing skills, and knowledge of a particular industry can allow you to specialize.
  6. Arts and Crafts – If you are skilled at making pots, painting or creating wooden items you can sell your creations at local craft fairs or create an on-line store to sell your products.
  7. Tutoring – If you have teaching skills then becoming a tutor could be ideal for you. In addition to in-home tutoring, on-line tutoring is now becoming very popular.  One area particularly in demand is teaching second languages, or teaching English as a second language at home or even as a teacher in another country.
  8. Pet Services – There is always a demand for reliable people for dog walking and pet sitting.  Many people prefer to keep their pets at home rather than put them in a kennel and are willing to pay for a pet sitter who will also keep an eye on their home while they are away.
  9. Security services – Trained security personnel are always in high demand especially those who are retired police officers or members of the armed forces. 

These ideas are not likely to make you lots of money but they are inexpensive to start and will keep you active and give you purpose in your retirement.

From an article by Susan Ward

Should you Start a Home-based Business After Retirement?

By Randall Orser | Consulting , Freelancing , Home Based Business , Personal Income Tax , Retirement , Small Business

With more seniors working later into their lives, either for monetary reasons or because they basically appreciate working, there is a requirement for new occupations for these people. With such huge numbers of people searching for few occupations it is becoming increasingly hard for them to find work. This is why starting a home business may very well be the best choice for them. 

There are a wide range of advantages and favorable circumstances related with a home business. It also it opens the way for retirees to keep working, without competing with candidates in the general workforce. 

Boundless Potential 

There is no lack of locally situated organizations where help or volunteers needed but it is important to build a solid website and network to find clients for their business. Retirees can do be pretty much anything from using the special abilities that they had in their working lives, to to taking a shot at new project or even giving help to people who are not able to look after themselves. Regardless of the type  of work, these sorts of positions are ideal for the gen X-ers age and it helps to open the door and to remain as a merger between conventional work and retirement. 

Work When You Want 

Setting your own hours is one of the best parts of a home business. In the event that you like to awaken early and get a good start on the day then you can begin work at 5 or 6 am and work until early evening. Additionally, if the you have an appointment or need to run an errand, or simply needs to sleep during the day, you can modify your work schedule to suit your needs. This keeps you feeling relaxed and stress free while you can still enjoy working.  In addition having your home business is a source of additional income. 

Odds are, most retired people have more enthusiasm and energy for something that they never used in their profession. They may love carpentry or making candles or cooking for people who can't cook for themselves. Retirement is an ideal time to start a home based business and to maybe begin a new vocation and enjoy it more what they did in their work life.

 

Should I Teach my Kids About Taxes?

By Randall Orser | Budget , Investments , Personal Finances , Personal Income Tax , Retirement

I think that one of the inevitabilities of life, taxes, is something that we should learn about early in life. From why we need to levy taxes, how they affect your life, from your job, business, to what you buy, it’s a good thing to know about taxes. Sadly, school doesn’t do this as well as it should, or at all, so it’s up to you parents to teach your kids about taxes. 

Working Teens

Do you have a teen with a part-time job? This is a good time to show them how taxes work and helping them prepare their tax return come the following tax season. With online resources, it would be easy for them, let’s face it their more tech savvy than their parents, to file online. Better yet, get them to find a tax preparer on their own, so they can see what it’s like when they’re an adult and have to deal with their taxes.

The younger we teach them to do something, the better they can handle it as an adult. You’d be surprised how many young adults (early to mid-twenties) come to us, and have absolutely no clue what to do, or even what they need to provide to us.

The good thing about filing a tax return each year the teen has a T4 is that this accumulates his RRSP contribution room, so when they turn 19, they can start to contribute to an RRSP. Or, for later in life the monies they earned as a teen are contributing to that future contribution limit.

Of course, when they turn 19, it’s time to register for the GST/HST tax credit too. If your child has the confidence to figure that on their own, then the better. Get them reading about taxes, and what they need to do for filing their taxes.

Purchases

When your kid, no matter the age, wishes to buy something this is a good time to teach them about consumption taxes (GST/HST and PST). It’s fun to save for something they want, they know how much that toy will cost; however, they go to buy it and now don’t have enough money as they didn’t know about the taxes (from 5% to 15% depending on the Province). They’re now sadly disappointed and have to save more for the taxes.

If you teach that whatever they want to buy they need to think about the consumption taxes, then they know they need to add more to their savings to cover such taxes. Here in British Columbia you need to add 12% onto most purchases, food is mostly an exception except for pets. For example, if your kid wants to buy a toy that’s $39.99 then they need to add $4.80 for GST/HST ($2.00) and PST ($2.80). The kid needs to save $44.79. 

As a parent, you should think about teaching your kids about taxes as early as they would be able to understand. This way the kids won’t be disappointed when buying something, nor, later in life, will they get in trouble with Canada Revenue Agency because they didn’t file their taxes for five years. Ideally, the schools would teach such things too, maybe parents need to start demanding that schools start teaching kids about real life. As Crosby, Stills & Nash sang, “Teach Your Children Well”. 

Resources

Where Your Tax Dollars Go (Department of Finance Canada)

https://www.fin.gc.ca/taxdollar/text/fanfold/pamphlete.pdf

CBC News report, Feb 2018

https://www.cbc.ca/news/business/tax-dollars-1.4545415

Doing Your Taxes (Canada Revenue Agency)

https://www.canada.ca/en/services/taxes/income-tax/personal-income-tax/doing-your-taxes.html

Get ready to do your 2017 income tax and benefit return (Canada Revenue Agency)

https://www.canada.ca/en/revenue-agency/campaigns/taxes-get-ready.html

What Is the Disability Tax Credit (DTC)?

By Randall Orser | Budget , Personal Finances , Personal Income Tax , Retirement

The disability amount is a non-refundable tax credit used to reduce income tax payable on your income tax and benefit return. This amount includes a supplement for persons under18 years of age at the end of the year. All or part of this amount may be transferred to your spouse or common-law partner, or another supporting person.

The disability amount is for those individuals who have a severe and prolonged impairment in physical or mental functions. You do have to file a form, of course, it is government and they thrive on paperwork. You file a T2201 Disability Tax Credit Certificate with Canada Revenue Agency (CRA); a qualified practitioner must fill out the medical portion of the form.

You are eligible for the DTC only if CRA approves the T2201 form. A qualified practitioner has to complete and certify that you have a severe and prolonged impairment and its effects. To find out if you may be eligible for the DTC, check out the self-assessment questionnaire which is on the T2201 form.

Do you receive Canada Pension Plan disability benefits, workers’ compensation benefits, or other types of disability or insurance? If so, this does not necessarily mean you will qualify for the DTC. These other programs have other purposes and different criteria for qualifying, such as your inability to work. You may not be able to work; however, your daily living may not be severely affected.

The DTC starts from the day the physical or mental impairment began. You can apply at any time and re-file any tax returns for years that the DTC would apply. For example, you apply for the DTC in 2013 for an impairment that began in 2010; CRA approves the DTC for 2010 and future years. You can now apply for an adjustment for tax years 2010, 2011 & 2012.

Some Definitions

Inordinate amount of time – is a clinical judgment made by a qualified practitioner who observes a recognizable difference in the time required for an activity to be performed by a patient. Usually, this equals three times the normal time required to complete the activity.

Life-sustaining therapy – You must meet both the following conditions: the therapy is required to support a vital function, even if it alleviates the symptoms; and, the therapy is needed at least 3 times per week, for an average of at least 14 hours per week.

Markedly restricted – You are markedly restricted if, all or substantially all of the time (at least 90% of the time), you are unable, or it takes you an inordinate amount of time (defined above) to perform one or more of the basic activities of daily living, even with therapy (other than therapy to support a vital function) and the use of appropriate devices and medication.

Prolonged – An impairment is prolonged if it has lasted, or is expected to last, for a continuous period of at least 12 months.

Qualified practitioner – Qualified practitioners are medical doctors, optometrists, audiologists, occupational therapists, physiotherapists, psychologists, and speech-language pathologists. The table below lists which sections of the form each can certify.

Significantly restricted – means that although you do not quite meet the criteria for markedly restricted, your vision or ability to perform a basic activity of daily living is still substantially restricted all or substantially all of the time (at least 90% of the time).

Type of impairment each qualified practitioner can certify:

Qualified practitioner:

Can certify:

Medical doctor

All impairments

Optometrist

Vision

Audiologist

Hearing

Occupational therapist

Walking, feeding, dressing, and the cumulative effect for these activities

Physiotherapist

Walking

Psychologist

Mental functions necessary for everyday life

Speech-language pathologist

Speaking

If you find yourself with any kind of a severe impairment, you need to look at the DTC. Currently (2017), the disability amount is $ 8113, which can be significant. Also, with the number of children being diagnosed with autism, you can have your child file a T2201 and will more than likely qualify for the DTC, which can then be transferred to one of the parents. Look at other potential disability credits that you may qualify for tax purposes too.