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Which savings plans are right for you? Sorting out investment options for your needs
Whoever said "Choice can be a dangerous thing" might have been referring to the array of savings plans offered by employers, financial institutions and the government. Since it can be wise to build up your retirement nest egg using a mix of plans, follow our guide below to help select the right combination for you.
Employer pension plans and savings plans: If you're part of a workplace pension and/or savings plan, that's great news, since your employer is playing a direct role in helping you prepare for retirement. However, it's important to understand your plan, and determine if additional savings are needed.
Defined Contribution pension plans (DC): In these employer-sponsored plans, typically both the employer and employee contribute. The employee likely selects from a range of investments and the retirement income received depends on investment performance.
These plans provide an employee with flexibility to choose investments, many of which are only available to group plan members, with competitive investment management fees. Employee contributions are tax deductible and employers may offer ‘win-win' matching contributions, so your savings grow just by signing up.
Group RRSPs: Your employer may offer a group Registered Retirement Savings Plan (RRSP) through your workplace, which allows your savings to grow tax-free until withdrawn. You may also enjoy an immediate reduction in the tax deducted from your pay cheque. In that respect, a group RRSP is similar to a DC plan, but has different rules regarding pre-retirement withdrawals.
Keep in mind that contributions to your RRSP in excess of your deduction limit may result in additional taxes. Your current year RRSP deduction limit, commonly known as your "contribution room", is indicated on your previous year's Notice of Assessment from the Canada Revenue Agency (CRA).
Tax-Free Savings Account: This account, also known as a TFSA, allows you to choose from a variety of investments, like an RRSP. While an RRSP provides tax-deferred savings, investment income and withdrawals from your TFSA are completely tax-free. Although contributions to your TFSA are not tax deductible, they are not subject to age limits like the RRSP - so you can continue saving in a TFSA during retirement. Many employers offer TFSAs as part of the savings options within their group plans.
Defined Benefit pension plans (DB): While these plans are less common today, they provide an employee with a specific ‘defined benefit,' or regular retirement income, based on a set formula. Although employees do not usually make their own investment decisions, they should understand the amount of income they will receive under a DB to determine if it is sufficient to meet their specific needs in retirement.
Non-registered investments: Many employers also offer non-registered plans. Although income in non-registered plans is fully taxable, these plans are helpful saving tools for investors who have no available contribution room in their TFSA or RRSP.
Government sponsored retirement programs: Most Canadian taxpayers can also expect to qualify for government programs like the Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) or Old Age Security (OAS). But remember, these supplements are only meant to provide partial income in retirement. It's up to you to accumulate other savings to meet your standard of living. Also, if you retire early, you may need to draw from your own savings until you meet the age requirements of government plans.
Fit your plans under one umbrella
Although it can make sense to use several savings programs, you don't want to do so in an ad hoc way, with investments scattered here and there.
To avoid duplication of effort or excess fees, you should build a central retirement plan. Online retirement planning tools, like the Investment risk profiler and the Retirement planner on mysunlife.ca - or professional financial advisor will help to develop a plan that is right for you. This plan will capture your entire financial picture by charting your goals and including details about other savings plans and investments you may have.
Your completed plan can suggest specific investments that match your goals and investor profile. For example, you may seek growth from equity or balanced mutual funds, or wish to include more secure fixed income investments like GICs or a high interest savings account. Your retirement plan can then be your roadmap to guide decisions and coordinate your various savings plans.
If you find it difficult to track different accounts and plans, you may want to transfer them under one plan with a single financial institution, for easier administration and one simple online view of everything. Whatever method you prefer, it's good to know you have expert advice and support nearby to help select the right mix of savings plans for your needs.
My plan - Budgeting for health costs in retirement
As we near retirement, it's important to budget for the specific living expenses we will face, such as housing, food and travel. Since health care is a critical category, follow the tips below to help calculate these costs for your post-retirement budget.
When thinking about seniors' health care costs, you can take comfort from knowing that our government pays for most ‘necessary treatments' or ‘catastrophic care' in Canada. However, since our public health system does not typically cover ‘health maintenance' costs (such as prescriptions, therapies, extended or long-term care).
Gather the facts: While it's not easy to predict future health needs, you can apply some facts to your calculations. First, consider your present medical condition, current drug or maintenance costs and family medical history. Second, if your employer provides health/dental benefits, investigate whether they include retirees or if you can purchase post-retirement coverage. Keep in mind that some companies have eliminated health coverage for former workers.
Consider major health needs: Review the typical costs, and determine if you will be covered by your employer or public health plan. Since government plans vary, see the links below to find the coverage offered in your province or territory.
Eye/hearing/dental care: Most provinces cover an annual exam or necessary surgery, but eye wear is not included. Hearing tests ordered by a doctor may be covered, as well as partial costs for hearing aids. Most services at a dental office are not included.
Physiotherapy/medical equipment: Most provinces pay for therapy performed at a hospital or licensed physiotherapy clinic but, not private clinics. Provinces may provide partial coverage for equipment.
Drugs costs: Typically among the largest out-of-pocket medical expenses, most seniors age 65+ are covered by some provincial/territorial or federal drug plan. Seniors often pay a deductible, a premium, or make co-payments, depending on income.
You'll want to make your own calculations based on where you live. Remember that your costs may increase from the 50+ to 75+ age brackets, and don't forget to factor in inflation. A Statistics Canada survey of household spending in 2011 found that average direct health care costs reached $1,998 per year for households run by seniors aged 65+.
Prepare for home care: Seniors living at home may need help with daily activities, from housework to taking medications. If family and friends are not available, you might need home support services from a personal support worker. Based on frequency, you could incur costs of $12 to $90 an hour for homemaking, personal care or nursing care if you cannot access publically funded or subsidized services.
For more serious health needs, home nursing could be required, and may be funded by a government agency. The Canadian Life and Health Insurance Association 2012 Guide to Long Term Care Insurance reported that in-home care, depending on the type of care required, could add up to $35,000 to $65,000 a year.
Review seniors' home costs: If living at home becomes unmanageable, you may consider facilities such as retirement residences that provide assisted living or housekeeping. Costs can equal thousands of dollars per month, depending on level of luxury or health services, and there are generally no government subsidies.
Long-term care residences/nursing homes that provide 24-hour nursing often cost less than retirement residences. Nursing home costs may range from $1,000 to 3,000 per month, depending on subsidies, co-payments, and whether you choose a private or shared room. In most provinces, chronic care is covered for medical treatment, room, board and other basics, but co-payments may be required depending the patient's level of income.
Managing the costs: If you are concerned about future health costs, discuss your options with family and look into publically funded or subsidized services. Some seniors purchase insurance products, such as supplementary, individual health care benefits, to pay for services not included in public health plans. Long-term care insurance can pay for personal or nursing care at home or in a long-term care facility as well.
Whatever your circumstances, consider your health care expenses, possibly with a qualified financial advisor to identify realistic costs and solutions. By budgeting today, you'll reduce the worries and maximize the highlights of retirement life.
Find public health coverage details by searching your Ministry of Health website for terms like seniors drug plan, home care or health insurance.
Or visit: http://www.canadabenefits.gc.ca/ f.1.2ch.4me@.jsp?lang=eng&geo=99.
Search for Community Care Access Centres or equivalent in your province for home care or local long-term care options.
(E.g. In Ontario, http://www.ccac-ont.ca; British Columbia, look for ‘home & community care' at www2.gov.bc.ca.)
My money - Dress for success on a budget
Some offices have a dress code, while others are more casual.
No matter what your situation, it is important to look professional and dress for success. For example, as you prepare for a promotion, you may need to reconsider your wardrobe – a move to a more senior role may require a different approach to how you dress.
And, a move up in the company may not necessarily mean a raise or a new wardrobe budget. So how do you make improvements without breaking the bank? Here are a few easy tips for dressing up on a budget.
Make a plan
Remove the clothes that you don't wear anymore and put them in a donation bin. Take stock of what you have in your closet and determine exactly what you need. Make a list of the various occasions you'll need to dress for and the elements that make up each outfit. For example, you'll likely need to dress for business meetings, formal parties and casual Fridays among others. Perhaps you have a great pair of trousers or the perfect pencil skirt, but need a tie, a blazer or a blouse to round things out. Making a list will prevent impulse buying.
Mix and match
Don't look for single outfits to purchase. Instead buy separate items and match them together for greater possibilities. Three great shirts and one pair of pants can create three separate outfits. Look for solid colours since they are easier to match with other accessories, providing more variety for less money. For men, look for a navy or grey suit, good for all seasons, and goes well with a variety of different shirts. According to fashion experts, women should make sure they have a few basics such as dark trousers, a single-breasted blazer and a knee-length pencil skirt.
Buy the best quality you can afford. The clothing will last longer and give you more bang for the buck.
It is critical to wear clothing with a proper fit to ensure you look your professional best. If you've gained or lost weight, update your wardrobe so you don't look sloppy. Consider getting a few shirts custom made. Even if they cost slightly more, they'll likely be of higher quality and cost less per wear than something off the rack.
When it comes to workplace fashions, it is always safer to dress one step up. If you follow these basic guidelines, upgrading your wardrobe doesn't have to break the bank. Avoid the sticker shock of high-end designer shops, and search for well fitting, on-trend clothing at retail and department stores. Alternatively, look for designer deals at one of the many retail outlets that offer designer labels at discount prices. Resist the urge to buy everything at once – and you'll be on your way to looking like an executive in no time.
My life - Get ready for your first day
Congratulations! You're out of university and entering the work force for the first time. It may not be your dream job, but it's a steady pay cheque and the experience will hopefully help you meet your career goals. Once you start working, it's important to make the most of your new work environment – and build your savings.
Expect your first day to be a bit like the first day of school: a series of orientations. There might be a "welcome to the company" seminar, along with a briefing on some of the corporate goals and strategies. There will likely be some interaction with I.T. folks as you set up your computer on the network. You should go on a tour of the building and find the washrooms, vending machines and water coolers. Most importantly, you'll meet your new co-workers and bosses.
It's important to be social. Go for coffee and lunch with your co-workers and ask plenty of questions. But you shouldn't try to become everyone's best friend. After all, you're there to work. Don't start adding your cubicle neighbours to Facebook right away. And if you do, put your co-workers on a limited profile, so they don't see anything embarrassing.
It's likely that you met your boss when you interviewed for the job, but if you haven't, it's a good idea to introduce yourself and book a meeting. That's an opportunity to ask questions on the day-to-day workflow and discuss your overall goals in the company. It shows that you're serious about meeting expectations.
Don't ask for a raise or a promotion on Day 1. But you shouldn't feel shy about showing that you're a motivated worker, or that you're looking to move up over time. If you are negotiating your starting salary, research industry averages in your field, and expect something near the lower end for entry-level positions.
Enrol in Group Benefits
When you start a new job, many companies have a waiting period before your benefits kick in. While the human resources department may remind you of this, you should be proactive in signing up and filling out the necessary paperwork. Many health and dental benefits plans require that you submit copies of a doctor's referral and receipts for reimbursement. Stay organized and don't neglect this step - nobody will do it for you.
Since you're early in your career, you're not likely to be making your dream wage. But every little bit of savings will help in the long run. If your employer has a group pension plan or group retirement savings plan, make sure to maximize your contributions and take advantage of any company matching. Don't miss out on this free money. You should be able to set it up so your contributions are automatically deducted from each pay cheque. When you're early in your career, a regular savings habit can go a long way toward ensuring your future financial health.
If you have a general question or suggestion about this newsletter, please send an e-mail to firstname.lastname@example.org or write to my money At a Glance Newsletter, Group Retirement Services Marketing, Sun Life Financial, 225 King Street West, Toronto, ON M5V 3C5.
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