Money & Career
Financial strategies tailored to you
Money & Career
Financial strategies tailored to you
This story was originally titled "Financial Strategies for Men and Women in their 20s, 30s, 40s, 50s, 60s and beyond," in the February 2008 issue. Subscribe to Canadian Living today and never miss an issue!
You've got goals: milestones you want to achieve along with financial peace of mind. The good news is you don't need to be a gazillionaire to achieve them; you just need to know how to save and spend to get there. While there's no one-size-fits-all answer (because your income, expenses and goals are unique), we've asked four financial planners about how to approach and attain certain goals at various stages in your life.
In your 20s
Goal: Going back to school
You've been working for a few years and have decided more education will help fast-track your career. Great idea. In Canada, the average total tuition cost for a master of business administration, for example, is about $22,000, and housing costs can run anywhere from $3,000 to $15,000. "Save what you can realistically," suggests Robert Bird, a certified financial planner in Amherst, N.S.
If you've started an RRSP, the government's Lifelong Learning Plan allows you to withdraw money from it for education. Even so, you may still need to get a student loan. But with more education, you will presumably have higher earning power, which will allow you to pay back the debt and earn more money over many years.
Goal: Saving for a house
Your 20s are a great time to save for a down payment (typically 20 per cent of the purchase price) for a house or a condo, even if you don't plan to buy till your 30s. If you can't afford to save for a down payment and contribute to an RRSP, Nancy Woods, associate portfolio manager and investment adviser with RBC Dominion Securities Inc. in Toronto, suggests making the maximum allowable contributions to your RRSP and then borrowing up to $20,000 against it by taking advantage of the government's Home Buyers' Plan for your first home.
Goal: Tying the knot
Yes, we all want the fantasy wedding, but unless you're a rising socialite, it's wiser to opt for a modest one. "Some people go into debt, and that doesn't make sense to throw a party," warns Woods. Spend only what you can afford, without using credit.
Best financial move
Start an RRSP. If you start when you're young, you'll generate far more money than if you start later, thanks to compound interest. Starting at age 25: $2,000 per year at a rate of six per cent till age 65 = $309,500. Starting at age 45: $2,000 per year at a rate of six per cent till age 65 = $73,600.
Going off the rails
You're young, want to have fun and have a steady paycheque for the first time. Beware: 20-somethings are prone to blowing all their money or running up credit card debt.
What to do with your income tax return?
There's bad debt and good debt. Good debt passes one of two tests, according to Bird: either the object purchased with the debt will appreciate in value or the interest on the debt is tax deductible. Bad debt doesn't do either. A mortgage is good debt; credit card debt is bad. Pay off bad debt first with your income tax return. If you don't have bad debt, put the money into your RRSP.
Page 1 of 5In your 30s
Goal: Funding your child's university educaion
If you wish to fund part or all of your child's (or child-to-be's) post-secondary education (and parents aren't obligated, you know), it's ideal to start saving by the time your child is five, advises Paul W. Lermitte, family business consultant with Manulife Financial in Vancouver and author of Making Allowances: A Dollars and Sense Guide to Teaching Kids About Money (McGraw-Hill, 2002, $20.95). Consider starting an RESP, which benefits from compound interest. Additionally, the government tops up an RESP with a Canada Education Savings Grant (CESG) – 20 per cent of your RESP contributions, up to a maximum grant of $7,200. If, for example, you invest $2,500 a year from age one to 17 at seven per cent rate of return and add in the maximum allowable contributions, you’ll save a total of $97,522.13. The growth on the money you invested ($42,500) and the grant contributions ($7,200) is a staggering $55,022.13!
Goal: Building wealth
You may want to build up equity, either by paying down your mortgage or though investment vehicles. This may not sound exciting at first blush, but knocking down your mortgage amortization and paying less money to the bank in interest is a great feeling. What you choose to do, however, depends on your priorities and your situation, says Woods. For example, you could pay down the mortgage faster or you may prefer to invest your money in stocks, bonds, mutual funds, etc., if investing gets a higher rate of return than the interest you're paying on the mortgage.
Going off the rails
Even though 30-somethings are often mortgaged to the hilt, they may splurge on a bigger house than they can manage – lenders recommend you spend less than 32 per cent of your gross income on a mortgage – or fancy cars and electronic toys, according to Lermitte. "Before buying an item, wait 24 hours to consider if you really need it and what you might have to give up to have it," says Lermitte.
Best financial bet
Sit down for one hour every January and write out your Top 3 financial priorities for the year, suggests Lermitte. That will help guide you when trying to decide where to contribute (RRSP, RESP, mortgage, car, investments) and how much.
What to do with your income tax return?
If you get a better rate of return investing in an RRSP or RESP than the interest you will save by putting extra on the mortgage, it makes sense to invest in an RRSP or RESP with before-tax dollars.
Page 2 of 5In your 40s
Goal: Take a sabbatical
You might love the idea of travelling or spending more time with your kids. Talk to your company about whether this is a possibility and then save. For example, you might want to save a fifth of your salary for four years (living on 80 per cent of your salary) and then live on what you've saved in the fifth year. Just be aware that taking the sabbatical may affect how quickly you achieve other goals.
Goal: Larger home
Your family has grown, and you want to move to your dream home. Calculate the full cost of a move – it's not only the purchase price. You'll be paying for legal fees, provincial mortgage filing tax, property purchase taxes, new home warranty program fees, moving expenses, utility connection charges and more. And that doesn't include any upgrades or improvements you may want to make to your new home. Doug Gray, a former real estate lawyer in Vancouver and author of Real Estate Investing for Canadians for Dummies (Wiley, 2006, $29.99) suggests budgeting between five and 10 per cent of the purchase price of your home for closing costs and post-closing expenses.
Goal: Retirement catch-up
If you have haven't started an RRSP or contributed much, this is the time to catch up. Though you likely won't accumulate as much as you would have if you had started early, saving something is better than nothing. You might consider taking a personal loan to catch up, suggests Woods. If you have a company pension plan, you may not need to invest as much in your RRSP, but you need to determine how much you'll be getting from the pension plan.
Going off the rails
If you're planning to upgrade your home: don't buy before you sell because you'll be obliged to finance both properties until you can make a sale, notes Bob Tillmann, vice-president of individual wealth management at Manulife Financial in Toronto.
Best financial bet
"Invest in yourself, if possible. Take a vacation because life is short," advises Woods.
What to do with your income tax return?
Fund a vacation, if you're in good financial shape, suggests Woods. Alternatively, if you borrow money ($30,000, for example) to play catch-up on your RRSP, you'll get a refund on the tax you paid on the $30,000, and Woods suggests using the refund to help repay part of the loan.
Page 3 of 5In your 50s
Goal: Freedom 55
Retirement planning will help you determine when that dream can become a reality. Conventional wisdom says that you should plan to live on 70 per cent of your salary, but Bird cautions that this may or may not be realistic. "Seventy per cent of $200,000 is $140,000, which is quite comfortable to live on, but 70 per cent of $40,000 is $28,000, which is a lot tighter," he explains. You need to determine whether you're going to live like a prince or a pauper in retirement and then evaluate whether and when your income sources – RRSP, company pension, government pension plans, old age security, investments, etc. – will cover your expenses, taking inflation into account. A certified financial planner can help you make this assessment. As for early retirement, Tillman says your income sources would need to be able to cover current and future obligations. "The person ready to retire early has typically been saving for some time and has little debt."
Goal: Second property
Some people are keen to purchase a second property – a cottage, a vacation home or an investment property. Even if you've paid off your first mortgage, be sure you can come up with the 20 per cent down payment for the second property without disturbing the equity in your first home because, as Tillman explains, there are many other expenses that go with owning a second property.
Going off the rails
"People in their 50s often underestimate how much they need to save to generate a sustainable income in retirement," says Tillmann. Additionally, a high income is not a guarantee of a comfortable retirement; you need a retirement plan.
Best financial bet
Retirement planning is key.
What to do with your income tax return?
Pay off any non-mortgage debt. If that isn't an issue, put the refund on any unused RRSP (contribution room from previous years).
Page 4 of 5In your 60s
Goal: Enjoy retirement
Assuming you've done your retirement planning, it's time to enjoy life. "Just make sure to live on your budget and avoid spending frivolously," says Woods. Additionally, consult a financial planner on how to best withdraw your retirement savings. "You want to manage this from a tax perspective and avoid changing tax brackets [by withdrawing more money] unless you need to," says Bird.
Goal: Travel
If around the world in 80 days is a goal, then hopefully you will have planned for it. To help fund trips, some people opt to downsize or rent their house after their kids have left home, says Tillmann.
Goal: Downsizing
The kids are grown and you don't need as much space as you once did, so you might decide to downsize to a smaller house or even a condo. Consider your lifestyle when making the choice. "If you're a snowbird, you may prefer the idea of a condo where you can just go away for a few months," says Woods. Also remember that as you'll have less space, this might be a good time to donate family heirlooms to your children. As you'll be buying a smaller place, you'll presumably have money left over from the sale of your larger home. "What better time is there to review your savings and future income than when you go to sell your home?" asks Tillmann.
Going off the rails
Be careful of the temptation to spend your retirement money too quickly. "People in their 60s often rationalize spending money by saying they've worked hard all their life and they deserve this," warns Bird. On the other hand, you can become too tightfisted and not enjoy what you've worked for, says Woods.
Best financial bet
Create an estate plan with a professional, so it will be passed on according to your wishes.
What to do with your income tax return?
Quarterly installments (on investment income, for example) are geared so that this age group rarely sees a significant tax refund.
Read more: 30 simple ways to improve your finances.
Page 5 of 5
You've got goals: milestones you want to achieve along with financial peace of mind. The good news is you don't need to be a gazillionaire to achieve them; you just need to know how to save and spend to get there. While there's no one-size-fits-all answer (because your income, expenses and goals are unique), we've asked four financial planners about how to approach and attain certain goals at various stages in your life.
In your 20s
Goal: Going back to school
You've been working for a few years and have decided more education will help fast-track your career. Great idea. In Canada, the average total tuition cost for a master of business administration, for example, is about $22,000, and housing costs can run anywhere from $3,000 to $15,000. "Save what you can realistically," suggests Robert Bird, a certified financial planner in Amherst, N.S.
If you've started an RRSP, the government's Lifelong Learning Plan allows you to withdraw money from it for education. Even so, you may still need to get a student loan. But with more education, you will presumably have higher earning power, which will allow you to pay back the debt and earn more money over many years.
Goal: Saving for a house
Your 20s are a great time to save for a down payment (typically 20 per cent of the purchase price) for a house or a condo, even if you don't plan to buy till your 30s. If you can't afford to save for a down payment and contribute to an RRSP, Nancy Woods, associate portfolio manager and investment adviser with RBC Dominion Securities Inc. in Toronto, suggests making the maximum allowable contributions to your RRSP and then borrowing up to $20,000 against it by taking advantage of the government's Home Buyers' Plan for your first home.
Goal: Tying the knot
Yes, we all want the fantasy wedding, but unless you're a rising socialite, it's wiser to opt for a modest one. "Some people go into debt, and that doesn't make sense to throw a party," warns Woods. Spend only what you can afford, without using credit.
Best financial move
Start an RRSP. If you start when you're young, you'll generate far more money than if you start later, thanks to compound interest. Starting at age 25: $2,000 per year at a rate of six per cent till age 65 = $309,500. Starting at age 45: $2,000 per year at a rate of six per cent till age 65 = $73,600.
Going off the rails
You're young, want to have fun and have a steady paycheque for the first time. Beware: 20-somethings are prone to blowing all their money or running up credit card debt.
What to do with your income tax return?
There's bad debt and good debt. Good debt passes one of two tests, according to Bird: either the object purchased with the debt will appreciate in value or the interest on the debt is tax deductible. Bad debt doesn't do either. A mortgage is good debt; credit card debt is bad. Pay off bad debt first with your income tax return. If you don't have bad debt, put the money into your RRSP.
Page 1 of 5In your 30s
Goal: Funding your child's university educaion
If you wish to fund part or all of your child's (or child-to-be's) post-secondary education (and parents aren't obligated, you know), it's ideal to start saving by the time your child is five, advises Paul W. Lermitte, family business consultant with Manulife Financial in Vancouver and author of Making Allowances: A Dollars and Sense Guide to Teaching Kids About Money (McGraw-Hill, 2002, $20.95). Consider starting an RESP, which benefits from compound interest. Additionally, the government tops up an RESP with a Canada Education Savings Grant (CESG) – 20 per cent of your RESP contributions, up to a maximum grant of $7,200. If, for example, you invest $2,500 a year from age one to 17 at seven per cent rate of return and add in the maximum allowable contributions, you’ll save a total of $97,522.13. The growth on the money you invested ($42,500) and the grant contributions ($7,200) is a staggering $55,022.13!
Goal: Building wealth
You may want to build up equity, either by paying down your mortgage or though investment vehicles. This may not sound exciting at first blush, but knocking down your mortgage amortization and paying less money to the bank in interest is a great feeling. What you choose to do, however, depends on your priorities and your situation, says Woods. For example, you could pay down the mortgage faster or you may prefer to invest your money in stocks, bonds, mutual funds, etc., if investing gets a higher rate of return than the interest you're paying on the mortgage.
Going off the rails
Even though 30-somethings are often mortgaged to the hilt, they may splurge on a bigger house than they can manage – lenders recommend you spend less than 32 per cent of your gross income on a mortgage – or fancy cars and electronic toys, according to Lermitte. "Before buying an item, wait 24 hours to consider if you really need it and what you might have to give up to have it," says Lermitte.
Best financial bet
Sit down for one hour every January and write out your Top 3 financial priorities for the year, suggests Lermitte. That will help guide you when trying to decide where to contribute (RRSP, RESP, mortgage, car, investments) and how much.
What to do with your income tax return?
If you get a better rate of return investing in an RRSP or RESP than the interest you will save by putting extra on the mortgage, it makes sense to invest in an RRSP or RESP with before-tax dollars.
Page 2 of 5In your 40s
Goal: Take a sabbatical
You might love the idea of travelling or spending more time with your kids. Talk to your company about whether this is a possibility and then save. For example, you might want to save a fifth of your salary for four years (living on 80 per cent of your salary) and then live on what you've saved in the fifth year. Just be aware that taking the sabbatical may affect how quickly you achieve other goals.
Goal: Larger home
Your family has grown, and you want to move to your dream home. Calculate the full cost of a move – it's not only the purchase price. You'll be paying for legal fees, provincial mortgage filing tax, property purchase taxes, new home warranty program fees, moving expenses, utility connection charges and more. And that doesn't include any upgrades or improvements you may want to make to your new home. Doug Gray, a former real estate lawyer in Vancouver and author of Real Estate Investing for Canadians for Dummies (Wiley, 2006, $29.99) suggests budgeting between five and 10 per cent of the purchase price of your home for closing costs and post-closing expenses.
Goal: Retirement catch-up
If you have haven't started an RRSP or contributed much, this is the time to catch up. Though you likely won't accumulate as much as you would have if you had started early, saving something is better than nothing. You might consider taking a personal loan to catch up, suggests Woods. If you have a company pension plan, you may not need to invest as much in your RRSP, but you need to determine how much you'll be getting from the pension plan.
Going off the rails
If you're planning to upgrade your home: don't buy before you sell because you'll be obliged to finance both properties until you can make a sale, notes Bob Tillmann, vice-president of individual wealth management at Manulife Financial in Toronto.
Best financial bet
"Invest in yourself, if possible. Take a vacation because life is short," advises Woods.
What to do with your income tax return?
Fund a vacation, if you're in good financial shape, suggests Woods. Alternatively, if you borrow money ($30,000, for example) to play catch-up on your RRSP, you'll get a refund on the tax you paid on the $30,000, and Woods suggests using the refund to help repay part of the loan.
Page 3 of 5In your 50s
Goal: Freedom 55
Retirement planning will help you determine when that dream can become a reality. Conventional wisdom says that you should plan to live on 70 per cent of your salary, but Bird cautions that this may or may not be realistic. "Seventy per cent of $200,000 is $140,000, which is quite comfortable to live on, but 70 per cent of $40,000 is $28,000, which is a lot tighter," he explains. You need to determine whether you're going to live like a prince or a pauper in retirement and then evaluate whether and when your income sources – RRSP, company pension, government pension plans, old age security, investments, etc. – will cover your expenses, taking inflation into account. A certified financial planner can help you make this assessment. As for early retirement, Tillman says your income sources would need to be able to cover current and future obligations. "The person ready to retire early has typically been saving for some time and has little debt."
Goal: Second property
Some people are keen to purchase a second property – a cottage, a vacation home or an investment property. Even if you've paid off your first mortgage, be sure you can come up with the 20 per cent down payment for the second property without disturbing the equity in your first home because, as Tillman explains, there are many other expenses that go with owning a second property.
Going off the rails
"People in their 50s often underestimate how much they need to save to generate a sustainable income in retirement," says Tillmann. Additionally, a high income is not a guarantee of a comfortable retirement; you need a retirement plan.
Best financial bet
Retirement planning is key.
What to do with your income tax return?
Pay off any non-mortgage debt. If that isn't an issue, put the refund on any unused RRSP (contribution room from previous years).
Page 4 of 5In your 60s
Goal: Enjoy retirement
Assuming you've done your retirement planning, it's time to enjoy life. "Just make sure to live on your budget and avoid spending frivolously," says Woods. Additionally, consult a financial planner on how to best withdraw your retirement savings. "You want to manage this from a tax perspective and avoid changing tax brackets [by withdrawing more money] unless you need to," says Bird.
Goal: Travel
If around the world in 80 days is a goal, then hopefully you will have planned for it. To help fund trips, some people opt to downsize or rent their house after their kids have left home, says Tillmann.
Goal: Downsizing
The kids are grown and you don't need as much space as you once did, so you might decide to downsize to a smaller house or even a condo. Consider your lifestyle when making the choice. "If you're a snowbird, you may prefer the idea of a condo where you can just go away for a few months," says Woods. Also remember that as you'll have less space, this might be a good time to donate family heirlooms to your children. As you'll be buying a smaller place, you'll presumably have money left over from the sale of your larger home. "What better time is there to review your savings and future income than when you go to sell your home?" asks Tillmann.
Going off the rails
Be careful of the temptation to spend your retirement money too quickly. "People in their 60s often rationalize spending money by saying they've worked hard all their life and they deserve this," warns Bird. On the other hand, you can become too tightfisted and not enjoy what you've worked for, says Woods.
Best financial bet
Create an estate plan with a professional, so it will be passed on according to your wishes.
What to do with your income tax return?
Quarterly installments (on investment income, for example) are geared so that this age group rarely sees a significant tax refund.
Read more: 30 simple ways to improve your finances.
Page 5 of 5
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