JIM Yih

New credit card measures coming in Canada

According to an article by CTV.ca, new credit card measures will be coming to place on September 1, 2010. Back in May of 2009, Flaherty announced nine new proposed regulations designed to make the industry more transparent and fairer to consumers. The changes to the cost-of-borrowing regulations would have to be approved in Parliament to become law.

The time has come for implementation and one of the biggest changes is banks will be required to include information on your credit card statements about the true cost of borrowing. It is not clear yet exactly what needs to be shown but here are some examples of the type of information that needs to be on your statement as of September 1, 2010.

If you have a $500 balance on your credit card, they will have to shown you the impact of only paying the minimum income. Based on a minimum payment of 3% at a 19.5% interest rate, the new statements will need to show that only paying the minimum income will meant that it will take 78 months to pay off that $500 and the total cost will be $847.63. Essentially that means that $500 purchase will create $347.63 of interest by only paying the minimum.

In another scenario, if we assume the same $500 balance and the same 19.5% interest rate but now a $15 per month fixed payment instead of 3% on an declining balance, that balance will be paid off in only 49 months and the total cost would drop to $776.

The point to these changes is simply to make people aware that only paying the minimum on credit cards is a very expensive way to buy things. Statistics show that about 30% of Canadians keep a balance on their credit cards. According to Equifax Canada as of September 2009, the total outstanding credit card debt in Canada hit an eye-popping $78 billion. If you are part of this group that keeps a balance on your credit cards, make sure you have a plan to pay off these cards by either consolidating to a lower interest card or line of credit or at least make payments greater than the minimum.

If for example, you make fixed payments of $20 instead of the $15 per month, the total cost of that $500 balance is only $647 and the balance will be paid off in 33 months. A payment of $5 more would save $79 in interest and pay off the card 1 year, 4 months sooner.

All of these calculations we done using online calculators. My two favorite calculators were from Financial Consumer Agency of Canada
and CreditCanada.ca.

Will putting this information on statements make a difference?

I guess only time will tell. Cynically, I'm not sure this will have a big impact. It you don't know that it is important to make more than minimum payments on credit cards, then chances are you have been living under a rock.

That being said I guess I should not be so surprised. My friend Ray Turchansky, financial journalist said it reminded him of the days when cigarette companies were required to put pictures of rotting teeth and smoke impacted lungs on every package. We all knew smoking was bad for you but maybe we needed some visual reminders.

Jim Yih is a Fee Only Advisor, Best Selling Author, Financial Expert and a syndicated columnist. He is a sought after financial speaker on wealth, retirement and personal finance. For more information you can visit his any of his other websites www.jimyih.com and www.retirehappy.ca. Inquiries can be emailed to feedback@WealthWebGurus.com

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Take control of your portfolio before you retire

I've always said, there is a difference between pre-retirement investing and post retirement investing. As a result, retirees need to re-evaluate their investment portfolios the closer they get to retirement. I suggest that people who are three to 5 years from retirement need to get serious about it and start making sure their portfolios are positioned so there are in control over their retirement date.

If you don't agree, here are some stories about real people that might get you thinking:

As reported in the Globe an Mail, Ron, age 74, in BC saw his life take a turn to the dark side when the stock market collapsed in 2008. With no pension, this former chartered accountant and high-level finance executive relied on his retirement savings. Not only did he feel he was 'losing control of his money' but he also felt he was losing control of his life. Although well respected in social circles, Ron started to feel anxiety and depression to the point where he could not leave the house. Do you know people who retirees who were really impacted by market corrections in the past 10 years? Not only does it affect their finances but it affects their life and happiness and health.

Sharon, from Edmonton, was a nurse for 28 years. At 61, she was getting ready for retirement when the stock market took 35% of her RRSPs. Although she had a pension through work, the psychological affects of losing $40,000 overnight crippled her enthusiasm for what was supposed to be the Golden years. She decided to delay retirement for a couple of years despite having very little enjoyment with her job. Delaying retirement was not good for her, nor her employee. Do you know people who delayed retirement because of the stock market or mutual funds?

Tim from Grande Prairie, was excited to retire. Begin financially responsible he retired with a significant nest-egg of $750,000 at the age of 57. When he retired, he was excited to hear that a financial advisor could invest his money and pay him 8% per year using a combination of income trusts, dividends and income paying mutual funds. The distributions would pay him just under $60,000 per year and although it was not promised, the goal would also be to preserve the $750,000. Unfortunately for Tim, the markets took a turn for the worse, new tax rules hurt the income trust market and not only was Tim's income cut back from $60,000 per year to $40,000 per year but his $750,000 took a massive hit of $150,000 and now was only worth $600,000. Tim, not only went back to work but also made major changes to his lifestyle. He still has a bad taste in his mouth and wonders how retirement can be called the "GOLDEN" years. Do you know people who retired but went back to work because of the stock markets or mutual funds?

Todd and Lenore, happily retired at the age of 60 in early 1999 at the height of the markets. For the first years, they enjoyed what was supposed to be the best years of their life with a couple of holidays financed through Lenore's RRSPs. Todd had a pension which was sufficient to cover their basic monthly expenses. They each had CPP which gave them a bit of a financial cushion and their plan was to use the RRSPs to enjoy the golden years with some travelling and to cover some of their hobbies like Golf and Tennis. Unfortunately, for Todd and Lenore, the bursting of the stock market bubble in 2000 cut their RRSP savings by 25%. Their instinct was simply to cut their travel until the stock market recovered. The problem was over the course of the next 10 years, the stock market recovered but then took another major hit. In 2009, Todd was diagnosed with Cancer and would lose the future opportunity to make up the time lost to travel. Do you know people who cut back on their lifestyle in the Golden years because of the stock market and the fear of running out of money too quickly?

The bottom line is there is a difference between investing for retirement and investing in retirement. Retirees who recognize this fact and make adjustments prior to retirement need have the opportunity to take control of their portfolios and their retirement.

Other related investing

Investing in retirement is different than investing for retirement (Canadian Finance Blog)

Be aware of the retirement risk zone

Surviving the retirement risk zone with guaranteed income products

Conservative investing is an abused term

Markets hit retirees the hardest

Retirees should be more conservative with their portfolios

Jim Yih is a Fee Only Advisor, Best Selling Author, Financial Expert and a syndicated columnist. He is a sought after financial speaker on wealth, retirement and personal finance. For more information you can visit his any of his other websites www.retirehappy.ca or WealthWebGurs.com.

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Unlocking pension money: Getting money out of a LIRAs

If you left a company with a pension before retirement, chances are you had to move the money into a Locked in Retirement Account (LIRA). That's because both the federal and provincial governments do not permit you to convert your pension into cash.

LIRAs are designed for accumulation of money that originated from a pension plan. People who leave employers with either Defined Benefit Plans (DB) or Defined Contribution Plans (DC) can move their pension funds into LIRA where they can self manage their asset (with or without the help of a financial advisor).

LIRAs do not allow for lump sum withdrawals and there are no options to create income. If you want income from your LIRA, you will have to either transfer to a Life Income Fund (LIF) or a Life Annuity. Typically the need for income from happens when your retire.

http://www.wealthwebgurus.com/article/384/pension-plans-are-the-foundation-of.aspx

How can you get money out of a LIRA?

This is one of the most common questions I get. So many people, especially in tough times are trying to access these funds for use.

Back in 2008, Finance Minister Jim Flaherty introduced changes to allow Canadians easier access to their Locked-in retirement accounts (LIRA). Prior to 2008, it was very difficult for Canadians to access their own pension money because the rules were designed with the intent of trying to ensure lifetime income. As a result, there were restrictions in place preventing people from spending their pension funds too quickly.

Generally speaking the only way to get money out of your locked in accounts is to retire, in most cases after the age of 55 (Some situations allow for access to funds before the age of 55 – see below). When you need income, you have 2 or three options depending on the province you live in. You can Transfer to Life Income Fund (LIF), a Life Annuity and where applicable a Life Retirement Income Fund (LRIF).

Exceptions to every rule.

You cannot access pension funds prior to 55 years of age except for a few exceptions:

Different provinces mean different rules. Pension rules can be pretty complicated and confusing because every province has it's own set of laws. For example, Alberta allows for access to locked in accounts at the age of 50. Taxtips.ca does a pretty good job giving information on each of the different provinces.
Access to small amounts. Amounts held in a locked-in contract are considered to be too small to provide a useful pension if the dollar value of that account falls below a set level (20% of the YMPE). For the year 2010, the set level is less than $9,440 in any single locked in account at any age on the day you request the withdrawal. If you are over the age of 65, the amount is $18,880. For individuals 55 or older with total holdings in federally regulated locked-in funds of up to $22,450 will be able to wind up their accounts or convert to a tax-deferred savings vehicle with no maximum withdrawal limit, such as a Registered Retirement Income Fund or a Registered Retirement Savings Plan (RRSP). The threshold for small holdings will increase with the average industrial wage.
Shortened Life expectancy. If you have a terminal illness or a disability that is expected, in the opinion of your doctor, to shorten your life considerably, then your LIRA or LIF may be unlocked. Your doctor must provide the shortened life opinion in writing. Also, you may not withdraw the funds unless your pension partner consents to giving up his or her entitlement to a joint and survivor pension.
Becoming non-resident of Canada. If the Canada Revenue Agency (CRA) determines that you are a non-resident of Canada for tax purposes, and confirms this in writing, then you may unlock your LIRA or LIF. Once unlocked, the funds may be transferred into a regular bank account or transferred into an investment account that is not subject to the Act. You do not have to wait until age 50 to access those funds, nor do the funds have to be paid out in a set manner. Taxation still applies on withdrawal.
Financial Hardship. If you are facing a situation of financial hardship, you may apply to the Superintendent of Pensions, no more than twice in a twelve-month period, for a release of some or all of the funds in your LIRA or LIF. There are a number of situations of financial hardship. Federally, all individuals facing financial hardship (e.g. low income, high disability or medical-related costs) will be entitled to withdraw up to $22,450 a year. This maximum will also increase with the average industrial wage.
50% Unlocking. The 50% unlocking does not apply in all jurisdictions. If you live in Alberta or you have a Federally regulated locked in account, you may qualify to unlock up to 50% of your holdings and transfer them to an RRSP where there is no restrictions on withdrawal. This can only occur at the time when you are moving money from a LIRA to a LIF or Annuity.

Learning about Locked-in Retirement Accounts

Every industry uses a set of acronyms and the financial industry is no different. When is comes to Locked in accounts, there are LIRAs and LIFs.

What are locked-in accounts?

Locked in accounts are simply money that originates from a pension plan. As long as you are employed by a company or organization with a pension, you money stays in that pension. There are two kinds of pension plans – defined benefit plans and defined contribution plans.

But when you leave that company, you may have the choice to move the money into a personal plan. Many people assume you can move pension money into a RRSP but that can only happen if it is a relatively small amount of money.

To read more about LIRAs and LIFs, read the whole article at Canadian Finance Blog.

Other Realted Articles

Pensions are the foundation of retirement planning

Issues to ponder before you transfer out your pension

Think Twice before you move out your pension money

Considerations for pension choices

Changes to Alberta Pension Rules

Pensions provide safe, guaranteed income in retirement

Jim Yih is a Fee Only Advisor, Best Selling Author, Financial Expert and a syndicated columnist. He is a sought after financial speaker on wealth, retirement and personal finance. For more information you can visit his any of his other websites www.WealthWebGurus.com and www.retirehappy.ca.

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Use caution before you cancel life insurance policies

In many cases, the best way to determine if you need life insurance in retirement is to apply the golden rule "Only buy insurance if you need it." If you don't need it, then get rid of it.

But use caution before you cancel your life insurance policies

Before you cancel life insurance make sure you've covered all the angles because you have one chance to make the right decision. Once you cancel, it's really tough to get it back and in many cases, you won't be able to get it back. Here are some important things to think about before you cancel your life insurance policy:

Talk to your beneficiaries. Before cancelling insurance, maybe it makes sense to have a discussion with your beneficiaries about why they may want to keep the policy in place and pay for the premiums. Insurance can be one of the best investments your beneficiaries ever make. Open up the lines of communication about two tough topics – death and money.
Talk to your spouse. If you have a spouse, they are likely to be the key beneficiary of your life insurance policy. Have a good realistic discussion about whether they need money when you pass away.
Get a medical. One piece of advice before cancelling insurance is to get a complete medical examination. The feasibility and cost of life insurance all depends on life expectancy. If you go and get a complete check-up and discover your life expectancy might be shorter than you think, you may want to think twice about cancelling your insurance. Life insurance is one of those things that is easy to get while you are healthy and really tough to get when you are not.
Converting Group insurance. A complete check-up will also help you in the decision to convert group insurance into a personal policy or whether you don't maintain coverage after retirement. If you are not healthy, then you may want to consider converting the group insurance into a personal policy because it provides coverage without underwriting. If you are healthy, they you may be able to get insurance on your own for a more cost effective price.
Keeping wholelife and universal life might not be a bad thing. It is tough to replace permanent policies because they become more valuable, the longer you own them. Much of the costs happen up front in the early years. Later in life, it is difficult to replace these policies because you can never buy the insurance cheaper. Some people get lured into cashing out the policies because of the cash value of these policies but cashing out means you will lose the death benefit. Before you cancel, consider talking to your beneficiaries about taking over the payments on the policy, as it may be the best investment they ever make.
Don't wait until costs are too high. Remember, insurance costs more the older you get. Waiting to make decisions till you retire might mean choices will be more limited due to costs.

The information in this article was taken from Jim's book 10 Things I Wish Someone Had Told Me About Retirement. For more information on this book, visit Jim's website www.JimYih.com.

Problems with over contributing to the Tax Free Savings Account

Because the Tax Free Savings Accounts are relatively new (introduced in 2009), some Canadians are facing problems with the over-contribution penalties. The rules state that you are allowed to invest $5000 per year into a TFSA. Putting in more, will create penalties.

For many Canadians, the intent is not to over-contribute but some have discovered they have over contributed by accident. For example, Jake invested $5000 into a TFSA in February of 2009. In April, Jake takes out $3000 from his TFSA to pay some extra bills that month. In May, Jake gets a tax refund and then decides to put back the $3000 into his TFSA because he read that you can take money out of your TFSA and then put it back.

The problem here is Jake must wait till the next calendar year to replace the $3000. By putting the $3000 back into the TFSA in the same year, he has actually over-contributed to the TFSA by $3000 and will incur a 1% penalty per month. Jake received a statement from CRA that he was has over-contributed to the TFSA by $24,000 (8 months times $3000) and must pay $240 in penalties.

It's an honest mistake but the rules from the government clearly state you cannot do this.

Do you need life insurance in retirement?

It may sound like an easy question to tackle but it may be more complicated than you think. The biggest problem with life insurance is that it involves emotion which is not always the best way to make important decisions. It's not easy to look into the future and envision a life that has not been lived. For most there is no context for the circumstances that may arise when you die. In other words, how do you know what life will look like when you die if you have never (and will never) live that life?

When you think of life insurance, you probably think of something you need when you are younger -- when you have dependents and more debts. Many experts have argued that you should only buy life insurance when you need it and as a result, they suggest that you should only buy term insurance while you are young because you will not need it later in life. Although there is some truth to this general rule of thumb, it's a little too simplistic.

Insurance in retirement

Just like cereal and milk or strawberries and whipped cream, life insurance and estate planning go really well together. As we said, the most obvious reason why people buy life insurance is to protect their dependents. However, there are other situations where life insurance in retirement might make sense.

To pay off debts. It used to be that retirement happened only if you paid off all your debts. However, we live in times where debt is abundant and in many cases, Canadians are retiring with more debt than in the past. This debt comes in many different forms like lines of credit, credit cards and even mortgages. If you are carrying debt in retirement, then life insurance can be used to pay off those debts when you die instead of having to liquidate assets (sometimes at times when you do not want to sell). Alternatively if you have enough liquid savings or assets to pay off debts to the estate, then life insurance may not be necessary.
To cover taxes at death. When you die, there may be a substantial tax bill to the estate as a result of income from RRSPs, capital gains from investment portfolios, real estate and other sources of income. Life insurance can be used to ensure there is money in the estate to pay for this tax liability. Keep in mind that the government will still get paid their share of tax. You can't avoid that. Life insurance just means your beneficiaries will get more because the tax bill is paid with life insurance proceeds.
To cover final expenses like funeral expenses and legal fees. Every estate has expenses but where will the money come from to pay for these expenses? It is crucial to ensure there is enough liquid cash to pay for fees and expenses. For some, life insurance can be a great way to inject liquid cash into the estate.
To provide income for your dependents. Generally, the plan in retirement should be to not have dependents but these days kids are staying home longer. Or if they do leave, sometimes they are coming back home later in life and occasionally they could be bringing children with them. The more common dependent in retirement may be your spouse (not the kids). Will your spouse need your income when you pass away? If they need some or all of your income to make ends meet, then you are a likely candidate for life insurance in retirement unless you have significant savings or assets to leave behind. Before you jump the gun on this questions remember the best way to think about this is to simply think of yourself as the survivor.
To leave a larger estate for your beneficiaries. The standard joke in retirement planning is the notion that the ideal strategy is to spend your money so you can die broke. The flaw with this strategy, of course, is you never know when you are going to die. Most people never die broke because running out of money is the biggest fear we face in life. In fact, leaving money to your spouse, kids, grandkids or others is not a bad thing. Leaving money represents relationships and creates legacies. Life insurance is a great way to pass money on to the people you love as it passes tax free.
To equalize your estate. Life insurance can create a pool of cash to allow your executor to make things equal for your beneficiaries when some things can't be divided. One common example is where real estate is involved. For example, you might have a family cottage that is really only being used by one of three children. If the cottage is willed to the three kids, there is a good chance the one child that uses the cottage will have to buy out the other two siblings but where will the cash come from? Life insurance is a great way to equalize the estate by giving the cottage to the child that wants it and giving cash through a life insurance policy to the other two children.
To help corporations and business arrangements remain viable. There are many uses for life insurance and estate planning when a business is involved. Every situation is unique and should involve a team of professionals.
Provide for charities. Most often when we donate money to charities, we do it in the form of a direct contribution. Typically, someone knocks on your door or solicits you through the phone. Sometimes, we give a little by leaving our change at the cash register or even by attending a fundraiser of some sort. Charitable gifting with life insurance is much different. The most attractive advantage using life insurance is that it allows one to make a much larger gift to a charity. In addition to the goodwill, giving to a charity through your estate can save a lot of money in taxes.

Obviously, this list is not exhaustive but it does represent some of the key uses of life insurance in the estate planning process. Life insurance is one of the few assets that transfers to beneficiaries completely tax free. As a result, life insurance can be a great tool in the estate planning process.

The information in this article was taken from Jim's book 10 Things I Wish Someone Had Told Me About Retirement. For more information on this book, visit Jim's website www.JimYih.com.

Financial Literacy on CanadianFinanceBlog.com

This week, Tom gave me the opportunity to post a blog on his site www.CanadianFinanceBlog.com. Tom is a fellow Edmontonian. He works as a Financial Analyst for a major retailer and has developed a passion for personal finance.

www.CanadianFinanceBlog.com is one of the leading Canadian Blog sites. It's got some good numbers and even got nominated for a few awards. Most importantly, it has good sensible posts.

Tom has a great blog and I am really honored to be asked to provide some content on a topic that is very near and dear to my heart - Financial Literacy and Education.

For more on my post, check out http://canadianfinanceblog.com/2010/03/11/what-is-financial-literacy-part-1.htm

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GICs are important but so are stocks

Recently one of my friends and an exceptional advisor in Sarnia, Jeff Burchill, wrote to me irrate about some things said in an article by David Trahair.

Essentially, Trahair says makes one very bold, controversial and contrarian statement like "Put your hard-earned savings only in ultra-safe GICs -- and rest assured that you are earning returns on par with those in the stock market." Trahair wrote a book called Enough Bull: How to Retire Well without the Stock Market, Mutual Funds, or Even an Investment Advisor because he was tired of hearing from people who have suffered financially because they followed "traditional" retirement planning advice. He beleives the problem is compounded because people beleived they had to invest in the stock market to make the illusive 8-10% a year return to build their retirement savings quickly. As a result, many have been devastated, especially many seniors that have little time to make up for their losses.

Trahair goes on to present some data to back his claim that people who investing in stock markets would be no better off than people who invested in GICs. I'd like to offer some of my thoughts on the data and the comments.

Firstly, I would agree with Trahair that too many people have been over exposed to the stock markets and it has especially affected people who are approaching retirement or in retirement. I wrote and article a while back about the Retirement Risk Zone and the problems that arise from being over exposed to the stock market as you approach retirement. I think this is the major reason we have seen more and more people in the last 10 years delay retirement or go back to work because of the stock market. Essentially having too much money in the stock market means less predictability and control over your own retirement. It's all a case of timing so how lucky do you feel?

I would agree that as you near retirement, you need more predicatbility and should invest more of your money into GICs and other guaranteed investments but going full tilt might be a little extreme. One of the problems with Trahair's data is something I call end date bias which means that the most recent data is skewing all of the results, even the long term results. His data represents a snapshot in time which happens to be a period when stocks did not do all that well. A different snapshot like the end of 1999 would show a very different picture.

The other concern is a statement he makes that is overgeneralized "As you can see GIC returns seem to be competitive - in the long term not much lower than the TSX Composite Total Return Index." The data he talks about shows the differencein coumpound returns over 10, 20, 30 , 40 and 50 year periods. The smallest difference is the 40 year period where the S&P/TSX Composite Total Return Index outpaced GICs by 2%. The biggest difference was the 10 year period where the stock market outperformed the GICs by a whopping 6.1%. How can that not be significant? Burchill is quick to point out that 1.5% to 2.0% difference on a $10,000 investment per year can mean over a $500,000 difference over time.

Anyhow, I think the key to success is finding some balance based on your personal needs and circumstances. I think that the closer you are to needing the money, the more conservative you need to be. I also think that GICs tend to get a bad wrap not just because of the low interest returns but maybe because there is more compensation in other managed products.

I know a lot of advisors who are exceptional and sell GICs because it is the right thing to do even though they do not pay a lot. I also know some advisors who won't touch GICs maing due to compensation. I think you should be careful with some of Trahair's controverisial message. While the underlying message has some merit, it may also be a little extreme. If you think GIC's should be part of your portfolio, the best place to start is with the Registered Deposit Brokers Association of Canada (www.RDBA.com) or read my book Seven Strategies to Guarantee Your Investments.

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New AUDIO CD on Investing

As a professional financial speaker, most of my work is getting hired by
corporations, organizations and associations to speak to their employees or
members at private events, conferences and functions.

In every presentation I always get people asking if I hold public seminars
because the want their friends or family to hear the presentation. In the
past, I had not options but now I am very excited to launch my new KEYNOTE
AUDIO CD series.

I have gone to the studio and recorded three of my most popular keynote
presentations. I am very excited to share with you a sample of my investing
keynote called INVESTING IS NOT ROCKET SCIENCE: The Secrets to Make You a
Better Investor.

If you are interested in more information on my KEYNOTE AUDIO CDs or any of
my other products visit www.retirehappy.ca/products

To purchase my AUDIO CDs, visit my store: www.WealthWebGurus.com/store

Jim Yih is one of Canada¹s leading experts on wealth, retirement and money.
Since 1990, Jim has dedicated his career to educating people in the area of
retirement planning, personal finance, investing and wealth management. For
more information on Jim, visit his website www.JimYih.com.

(download)

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JIM Yih

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New credit card measures coming in Canada

Will putting this information on statements make a difference?

Take control of your portfolio before you retire

Other related investing

Unlocking pension money: Getting money out of a LIRAs

How can you get money out of a LIRA?

Exceptions to every rule.

Other related Articles

Learning about Locked-in Retirement Accounts

Use caution before you cancel life insurance policies

But use caution before you cancel your life insurance policies

Other Relevant Articles

Problems with over contributing to the Tax Free Savings Account

Other articles about TFSA over-contribution penalties.

Do you need life insurance in retirement?

Insurance in retirement

Other Relevant Articles

Financial Literacy on CanadianFinanceBlog.com

GICs are important but so are stocks

New AUDIO CD on Investing