1. Should I join my company pension plan as soon as I can?
Yes, and this applies to any kind of pension to which your employer is making contributions. In essence, pension contributions by your employer are payments of salary set aside to help you in retirement. If you pass them up by declining to join the pension plan, you’re missing out on part of your salary. Joining your pension right away also means you’re starting to save for retirement. Even if you’re not contributing to RRSPs, you’ve started the long task of providing for yourself in retirement. One other benefit of pension plans is that contributions are automatically made through payroll deduction. You’ll never forget to contribute, or be unable to find the money. Note: Joining a company pension plan may be mandatory.
2. I don’t expect to be at my job forever—what happens to my pension when I move?
You generally have a few options if you depart a company where you’ve participated in a pension plan. One is to leave your money in the pension until you retire and then collect whatever level of payments you’re entitled to. Another is to transfer your pension holdings into a locked-in retirement account, or LIRA, which is very similar to an RRSP except for the fact that you can’t easily access the money. It’s essentially locked in until you retire (although you may be allowed access in cases of financial hardship). You may also be able to transfer your pension to your new employer’s plan.
3. What are some other pension implications from changing jobs?
A defined benefit pension can be left where it is at your old employer until you retire and start drawing on it.
The question you have to ask is whether your employer—and by extension the pension plan—is built for the long term and likely to be around decades from now when you retire. If you’re skeptical, then have your money transferred into a LIRA.
If you have some good-quality funds in your defined contribution plan, you may not easily find better options outside the pension. That’s an argument for leaving your money where it is. DC plans are often thought of as second best to defined benefit plans, but they can actually work well for people who expect to change jobs frequently. Unlike defined benefit plans, a defined contribution plan has nothing to do with time of service with the same employer.
4. I have a defined contribution plan—can I count on someone helping me make sure I’m managing it intelligently?
Short answer: no. DC plans put the onus on the employee to smartly manage his or her pension savings.
This is a hugely important matter. If you make a bad decision and, say, keep your money sitting in a money market fund (safe but very low returns unless interest rates are sky high), you could effectively cheat yourself of much better returns. Conversely, too much risk through the years could leave you with little in the way of investment gains by retirement. Ask your human resources department at work for some guidance on how to invest. Some companies are bringing in consultants to run workshops for employees on how to invest in DC plans.
5. With my DC plan, can I set it and forget it?
Again, no. You’ll want to make the mix of funds in the plan more conservative as you get closer to retirement.
In the early years after you start in the pension, you may also find that you’re able to tolerate more—or less—stock market exposure that you initially thought. You may also find that as you get older and more knowledgeable about investing, you’ll want to take a fresh look at your pension holdings and make adjustments.
6. What questions should I ask about the investment choices for the funds in my DC plan or group RRSP?
You could ask who’s running the funds, but the names won’t mean much to you. You simply want to establish that veteran pension fund managers are handling things. Fees are another question—you want to establish that you’re paying very low fees, which will put you in a position to reap greater returns. Fees are taken off the top of fund returns (returns are virtually always reported to you with fees deducted), so lower fees are better. A website like Globeinvestor.com can help you get some context on fee trends for various mutual fund categories.
Note: Your human resources department should have a brochure that explains your fund choices.
7. What funds should I use?
For a properly diversified portfolio, you’ll want exposure to bonds, Canadian stocks, U.S. stocks and global stocks. Your exact mix will depend on your age, your goals and your stomach for stock market risk, but a quick-and-dirty mix for a 30-year-old would be 70 to 80 per cent in stocks and the rest in bonds. The easy solution: look for a balanced fund, which will include both stocks and bonds. Money market funds are okay for a small portion of your holdings—say, 5 per cent. If interest rates are high, then money market funds are more attractive.
8. How will I know how I’m doing?
You’ll get annual statements—be sure to read them. Defined benefit pensions will tell you how much in monthly retirement benefits you’re eligible to receive based on your personal details. DC and group RRSP statements focus on how your investments are doing. Details can sometimes be sketchy on your statements, but at very least you’ll be able to see how you’re doing this year compared to last year. Ideally, you’ll get an average annual return since you started contributions.
If we estimate long-term inflation at 2.5 per cent, then you’ll need to make more than that just to break even on a real-world basis where costs are steadily rising. A balanced fund making 5 to 6 per cent annually is doing a pretty good job.
9. Is my pension bulletproof?
Defined benefit plans are only as solid as the financial status of the pension fund itself. The key is how well the plan is funded. Fully funded is ideal, but underfunded isn’t a worry as long as your employer has the wherewithal to add more money. When a weak company goes bankrupt with an underfunded pension, employees and pensioners can end up with less money in retirement income than they expected.
Defined contribution funds and group RRSPs are invested in funds that are kept separate from the assets of both your employer and the financial firm that offers them. So even if they go under, your investments should remain separate and safe. Then you’ve only got financial market risk to worry about.
10. Will my company look after my best interests in managing the pension plan?
No. The company will look after its own best interests. Employees must remain vigilant. Pension matters are boring and hard work to understand, but they’re as much a part of your compensation as your dental benefits, vacation pay and salary.
Copyright © 2012 Rob Carrick. All rights reserved.
This is deceptively simple. Start early with RRSP contributions and then make regular payments year after year. I do this, but I think I’m in the minority, judging by the persistence of a particularly dumb financial ritual called RRSP season.
You’ll notice RRSP season getting under way in January, with lots of advertising by banks, mutual fund companies and advice firms. It then runs through February to a deadline somewhere around March 1. That’s the last date for making an RRSP contribution that will count toward the previous tax year, and it’s always a busy one for banks and advisers. Often, you’ll see branches staying open to midnight to accommodate the worst procrastinators.
The financial industry is happy to beef up service for the RRSP deadline because it helps suck in dollars that generate revenue through fees and commissions. Why investors participate in RRSP season, I’ll never know. It’s not only more time-efficient to get on a regular, automatic RRSP savings program, but also more comfortable from a psychological point of view.
First off, let’s define an automatic RRSP savings plan. It involves you arranging to have money electronically transferred from your chequing account into your RRSP account every payday or every month. You could do it quarterly, too, but you’ll find the drain on your cash flow much easier to manage if you contribute lesser amounts more frequently.
The key to an automatic RRSP plan is that it’s nondiscretionary. No matter what financial diversions emerge, you’re building your retirement savings on a steady basis. Don’t just contribute the money to your RRSP and let it sit there in cash. Choose some quality mutual funds or ETFs to buy gradually. This is called dollar-cost averaging, which means you’ll be buying at both high and low points for the stock markets and your cost will be averaged out. Frankly, some studies have shown that plunking down a big chunk of change can get you a better return for your investment dollars, but psychologically, dollar-cost averaging is the better strategy for the most investors. First, it keeps people buying during bad times for the stock market. That’s when you’re supposed to buy, but most people don’t have the confidence.
Dollar-cost averaging also prevents you from jumping into an overheated market, when the upside is almost gone and downside risk looms. Instead, you chug along month by month and year by year, contributing without fail and building your retirement savings assets.
Set the amount of your contributions by figuring out how much you want to add annually to your RRSP and dividing by twelve or twenty-six. When arranging your automatic plan, don’t forget to keep your RRSP properly balanced. If you have a portfolio mix of 70 per cent stocks and 30 per cent bonds, break a $100 monthly contribution into $70 for an equity fund and $30 for a bond fund. Once a year, rebalance your holdings by selling your winners and buying your losers so you get back to a 70–30 mix.
Copyright © 2012 Rob Carrick. All rights reserved.
In this excerpt from my new book, I look at the kinds of things that young adults should be thinking about if they’re forced to move back in with their parents.
WHEN PLANS GO AWRY:
INTRODUCING THE BOOMERANG GENERATION
We’ve been talking here as if you have made a successful transition from school to the workforce, with a decent salary, a place to live and the upward mobility we all expect at this time of life. It may not happen, though. A tight economy can make it tough to find a job. Or maybe you haven’t found the necessary focus to land gainful employment (you’ve been slacking, in other words).
Let me tell you a story about my early post-university days. I thought I had a job lined up for at least the summer following graduation, but I learned just before school ended that it had fallen through. I moved back home. I applied for many jobs, got some interviews and was offered a few things that I turned down. All the while, my parents were supportive without being patsies. On the whole, I think they were happy to have me back at home after being away at school.
Aside from a little freelancing here and there (I wrote something for a sporting goods magazine on the latest in ski equipment, even though I had never been on skis in my life), I was unemployed from April through the summer and into the fall. Then, after checking in with the employer I thought I had a job with before graduation, I was offered a temporary position. I took it, moving out within a few weeks, and my life as a working adult began.
My point here is that a little parental support at a key moment can help position you for a lifetime of success. If it happens that you need to move back home, you can at least tell your parents you’re not unique. In fact, there are enough young adults in this position that a catchphrase has emerged to describe them—the Boomerang Generation.
Boomerang kids left home, stayed away for a while and now are back.
The boomerang phenomenon gained notice during the recession that ended the last decade. Better economic times may put this catchphrase to rest, but that doesn’t mean parents won’t have to make boomerang decisions like:
• Whether they should charge you room and board. This is totally discretionary on their part. If they feel you’re a responsible, financially savvy, ambitious kid who has hit a patch of bad luck, then maybe they won’t see any need to charge you room and board. If they think you could benefit from the structure of paying for accommodations, they may decide to arrange a monthly payment. Still another possibility is that you move back home to save money for the purchase of a house or some other savings goal. Here, it’s totally a judgment call about whether to charge you for accommodation.
• Whether to provide some day-to-day spending cash. Personally, I wouldn’t mind spotting my hard-up kid a bit of money here and there to enjoy a social life. Providing, of course, that he or she was working overtime to find a decent job.
• Whether to push you to take any job you can get. A career-minded graduate with decent credentials and a focused job-search approach should not be encouraged to take anything that pays a salary. We’re talking about career-building here, not casual or part-time work. The day may come, though, when your parents have to say it’s time to find some gainful employment of any type.
I BELONG TO THE BOOMERANG GENERATION
(AND I CAN TAKE IT OR LEAVE IT EACH TIME)
Apologies for appropriating Richard Hell’s nihilistically poetic song “Blank Generation,” but it seemed relevant to the much newer Boomerang Generation. Media coverage of this demographic seems to tilt toward the perspective of the unfortunate parent, as in the young ’uns have left home to go to college or university and it’s not natural for them to come back. Well, no kidding. Very few twentysomethings want to move back home after a period away at school. Back to your little room, with your little bed and the big-boy desk your parents bought you when you were five. Back to your parents knowing when you leave and when you get home (and with whom). Back to sharing bathrooms with siblings and doing household chores you thought you were off the hook for until you bought your own home.
HOW TO HANDLE THE ’RENTS IF YOU HAVE TO MOVE BACK HOME
As undesirable as it might be for you to move back home, it’s a very real possibility in today’s highly competitive and specialized job market. Here are some suggestions on how to handle the financial aspects of moving back with your parents:
• Be an adult. Rather than just announcing your imminent return engagement chez parents, tell your mom and dad that you are having cashflow difficulties and would like to discuss the idea of moving back home for a while.
• Have a plan. Tell your parents what you plan to do to find work, and how long you estimate it may take. Make it clear you’re building a career, not looking for hours at Tim Hortons.
• Offer to pay. Figure out how much you can reasonably afford to pay for your room and board and make the offer. Best case, they tell you, “Thanks for offering, but that’s not necessary.”
• Contribute in a non-financial way. Shovelling snow, cutting grass, doing dishes and taking out the garbage are ways to offset the extra costs your parents are incurring (like groceries, for one thing).
• Contribute in a financial way. Buy the groceries one week, send your parents out to dinner, buy them Leafs TV for a year.
• Keep them updated. Get out in front of all the questions your parents are inevitably going to have about what you’re doing to find work and how things are going.
Understand that they’re not trying to hassle you; rather, they’re concerned and want to see you moving on to the next steps in life.
• Accept advice. Hey, your parents have probably been in the workforce for a few decades. They may have some legit ideas about finding a job.
TOUGHER ECONOMIC TIMES?
Back in late 2010, Maclean’s magazine ran a cover story with the headline “Generation Screwed: Lower Incomes. Worse Jobs. Higher Taxes. Bleaker Futures. What Boomers Are Leaving Their Children.” I think Maclean’s was on to something.
First, though, let’s acknowledge that people were still feeling the after-effects of a global financial crisis and recession at the time that piece appeared. Pessimism was trendy; optimism was scarce.
But even if you discount for passing gloom, there are still trends at work that will make it harder for today’s young adults to enjoy the same economic success as their parents. For one thing, older workers are staying in the workforce longer. Statistics Canada has reported that between October 2009 and October 2010, the fastest rate of employment growth was among workers aged 55 and over. At the same time, there was an offsetting decline in employment for those aged 25 to 54.
Another factor is the alarming state of government finances. As politically toxic as tax increases are, it’s hard to see all levels of government balancing their budgets without raising taxes. Cuts in government services are likely as well, regardless of whether taxes rise. Translation: you’ll quite possibly have to pay more for things like a university or college education and health care.
I raise this discouraging outlook for one simple reason— as context for discussions parents and their young adult children will have as they consider the issues covered in this chapter. The Boomerang Generation: defined by necessity, not by choice.
Copyright © 2012 Rob Carrick. All rights reserved.
Top Banking Blunders
- Racking up excessive ATM fees. Believe it or not, it wasn’t that long ago that you could dip your bank card into any bank’s automated teller machine and make a no-fee withdrawal. Today, you can pay upward of $1.50 on the spot to use another bank’s ATM, and quite possibly another $1.50 network access fee from your own bank later on. Avoid the no-name ATMs that you see in stores, sports arenas, etc.—they always charge you for access.
- Paying bills in the branch. Pay bills online and it’s a free transaction with most bank account packages; venture into a branch to have a teller handle the transaction for you and you might pay $1.50 for the service.
- Last-minute bill payments. Online banking seems instant, but money you move around using your bank’s website may take twenty-four to forty-eight hours to get where it’s going. So if your credit card due date is November 15, don’t pay it on the fourteenth. Also, the weekend is a dead spot for money being moved electronically. If you pay a bill on Saturday morning, your bank doesn’t start processing it until Monday.
- Careless bill payments. A misplaced decimal point can be costly when paying bills online, so carefully review each payment before submitting it. Check the date as well, and ensure your account number is correct. Note: You should be able to have a bill payment containing an error called back if you contact your bank immediately by phone.
- Not reading bank statements. If you believe banks are infallible, then there’s no need to read the monthly account statements. My experience is that errors do happen, and that they’re usually fixable if you bring them to your bank’s attention. It’s a virtual certainty your bank will never come to you to admit an error, unless it involves money being mistakenly deposited in your account. Note: Banks are increasingly offering account statements online, which is a great option not only because it saves paper but also because the statements are archived online and thus easy to store and refer back to when necessary. Be especially vigilant with bank accounts you don’t use a lot. I’ve heard of cases where fees have mounted up for months on end before the accountholder noticed and put a stop to them. Checking your account often online is another way of making sure everything’s okay.
- Being careless with your bank card PIN. You are virtually bulletproof against theft or fraud involving unauthorized use of your bank card, provided you have taken reasonable precautions to keep your username and personal identification number private. Don’t disclose these passwords to anyone, and never write them down anywhere where a thief who has stolen your bank card might come across them (like on a slip of paper in your wallet or, worse, on the back of the bank card itself). Your bank will have zero sympathy for you if your account gets cleaned out and there’s reason to believe you were lax with password security.
- Being careless about online banking on shared computers. Bank websites use 128-bit encryption, which makes it highly unlikely that anyone is going to intercept your personal information while you’re banking online. But there’s an additional security risk of leaving personal information on the computer after you’re finished your banking session. If it’s your home computer, you should be okay. But if it’s a computer at work or in an Internet café, then it’s conceivable that someone could end up seeing some of your personal information. Avoid shared computers for online banking, or if you must use one, clear the browser’s cache memory, cookies and history when you’re done. And of course, make sure no one is looking over your shoulder when you type in your username and password.
- Getting sucked in by premium bank account packages. Premium bank accounts can cost as much as $20 to $25 per month, and they’re never worth it despite the perks thrown in. Watch out for the bank sales pitch—it usually involves flattering descriptions of you as a serious player who needs a higher level of banking services.
- Expecting the bank to tell you about its best deals. It’s not unheard of for a banker to suggest a better, cheaper way of doing things, but plan to look after yourself when it comes to getting the best deals on banking. If you’re ringing up lots of fees and paying lots of interest, that’s revenue for the bank.
- Neglecting to use your last resort in a dispute with a bank. All banks have their own internal ombudsman, a person who investigates customer complaints that haven’t been resolved by front-line bank staff. If you still can’t get any satisfaction and truly believe you’re in the right, then escalate your complaint to the Ombudsman for Banking Services and Investments (OBSI) at www.obsi.ca.
- Getting phished. Phishing is the process whereby online fraudsters try to fool people into logging into a fake version of an online banking website, thereby disclosing their username and password. This is usually accomplished through what can be amazingly realistic-looking emails apparently sent by a bank’s security department.
The email asks you to log into your account—when you do, your private information is no longer private. No bank will ever send you an email telling you to log into your account. Ever. Ergo, all emails from banks about security matters are dangerous fakes.
Copyright © 2012 Rob Carrick. All rights reserved.
This is an except from my latest book, How Not to Move Back in With Your Parents: The Young Person’s Complete Guide to Financial Empowerment.
From Chapter Seven: Buying Houses
Three Money Myths About Houses
• Houses are always a good investment. People usually say this after a stretch of years in which house prices have soared, just as they get excited about stocks after a few good years for the markets. Houses can be a good investment, but a lot depends on when you buy and where you buy. Big, growing cities are better than small industrial towns in decline. That said, you can lose money in big cities, too. When my wife and I were looking for our first home in Toronto back in the early 1990s, we viewed several houses put on sale by people who had paid top dollar in the late 1980s and then watched the value of their home plunge below what they owed on their mortgage. Between April 1989 and February 1996, the average resale home price in Toronto fell to $192,406 from $280,121, a drop of 31 per cent.
• It’s smart to buy as much house as you can afford. Building on the previous myth, this old bit of nonsense is based on two often erroneous ideas: one, that bigger houses are always better; two, that your house will become more affordable over time (ignoring such matters as slow wage growth, inflation and the cost of having kids).
• Your house will pay for your retirement. The thinking here is that you’ll sell your house for a big whack of tax-free money (you generally pay no tax when selling your principal residence), carve off a piece to buy a condo or a cute little bungalow and then invest the rest to pay for a carefree retirement. The flaw in this plan? So many people have done this that the price of condos and cute little bungalows has soared. You’ll probably have some money left over when you sell the family home and downsize, but it won’t be a big factor in your retirement savings.
Copyright © 2012 Rob Carrick. All rights reserved.