Below are some popular and not so popular questions I've gotten asked. Hopefully these will answer some of yours. If you have a burning question that hasn't been addressed fill out the contact form below.
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Should I save for retirement or make accelerated payments on my mortgage?
This seems to be the age-old question asked most often, particularly as mortgage balances grow as a result of rising home prices particularly in Southern Ontario and Vancouver. People sometimes over- think this one and complicate a fairly straight-forward situation. The answer I prefer is, both. Being mortgage-free is definitely a great goal and should be achieved before retirement but it’s not going to happen overnight so funnelling all of your resources into that goal and the neglect of other prudent financial planning measures is rarely a great long-term strategy. Being mortgage free in retirement but not having sufficient money to retire on seems to miss the point of the entire exercise. A balanced attack is always a smart way to go. Why not save for retirement and if there is a tax refund as a result of a contribution to an RRSP – then apply that refund to the mortgage. You can also increase your mortgage payment each year slightly which will reduce the time frame for it to be completed. Increasing payments slightly each year may be more palatable and feel less like your sacrificing other financial goals. I suggest you refer to page 104 of Mapping Your Retirement Road on mistakes made with the RRSP, review Chapter 17 on Real Estate and also page 163 that includes the section on ways to pay of a mortgage.
How much money should we keep as a short-term reserve in savings?
Financial planning standards would recommend a minimum of 3 months living expenses as a reserve fund. This is a function of many long-term disability benefits not beginning until after one has been disabled for 90 days, but that is not the only reason. How much of a financial reserve is right for you is a personal decision. I suspect as one gets older they would prefer a larger short term reserve so 6-12 months is certainly normal. After that, the money could likely be allocated to more effective investments. The amount is not set in stone but merely a guideline and you do the best you can. If you’re monthly expenses are $3500 then having $10,000-$20,000 in a bank account is certainly not unreasonable and likely recommended. But if your expenses are $3500 and you have $100,000 in a bank account, that money could likely be put to better use considering the interest you are being paid is nowhere close to the rate of inflation and therefore you are losing purchasing power on those funds. Again, it’s a personal decision.
How much life insurance should I own?
Life insurance is the most personal decision in financial planning and is a function of your income and expenses. You should review my chapter on this topic but more importantly have your trusted advisor complete a Needs Analysis on your particular situation to arrive at an industry standard amount for your personal situation. When it comes to insurance, the question you should ask yourself is; “what am I most worried about”? Protect that with insurance in the most cost effective manner possible, much like you would protect your home or automobiles.
Since the equity market has been on quite a tear of late, should I reduce my investment in equities and wait for the market to pull back to avoid any losses?
Although that sounds like a prudent strategy, it is impossible to do on a consistent basis. I have found that, for those people who did follow this plan and did avoid an initial drop in value, they were not able to re-enter the market as it dropped thinking that they would catch an absolute bottom. The end result being that they often re-enter the market at a price higher than when they exited when they finally realize the market is not coming back to lower prices and they fear being left behind. The 2008-09 financial crisis and the subsequent recovering since then is a classic example. However, when reviewing your financial plan you realize you have a larger, short-term expense on the horizon, it would be prudent to park this money in a short-term investment for the upcoming withdrawal. This is not a market-timing strategy, it is an awareness of your financial needs and I would encourage this being an on-going activity.
Should I use retirement savings to buy-back workplace pensions?
In my experience, I have found this to be beneficial if it advances the time in which you are eligible to retire without incurring a penalty or reduction in benefits for retiring at your desired age. However, when you calculate a reasonable rate of return for keeping the money invested in your own name, then plan how much income it can provide in retirement, you may realize that having more control over the funds is more desirable as the pension income is based on a strict formula. Often, people following this strategy do not want to have the responsibility for the investment and thus lose control over having complete access to the funds. All things considered, it can be a good diversification tool if the transfer amount represents a smaller portion of your overall total amount you have saved for retirement. This question, and ones like it, is why the creation of a financial plan is important as your advisor will be able to provide you a number of scenarios and illustrate the pros and cons of each avenue.