Tuesday, May 11, 2010

Budgeting for pension cut-- 4 Savings

The first two posts in this series were aimed at helping you determine what your disposable income will be going forward after the cut to the Nortel Canadian Pension occurs in October. The third post was to assist you determine the amount of money you are spending on a monthly or annual basis.

Basically your disposable income is gross income minus taxes.

If your current expenses exceed that amount then you are going to have to take some actions to reduce your costs or increase your income so that you can stay solvent. This post is aimed at some ideas to try to increase your income.

One area that can be examined is your savings. If you are lucky enough to have money set aside in an RRSP/RRIF, an IRA, a 401K, CDs, GICs, or personal savings accounts, you should take stock of that and think about how best to use those funds to augment the pensions your are receiving.

If you are not yet withdrawing money from those accounts you should consider carefully how you can best access them to avoid any tax penalties, and you should also examine the interest rates you are receiving to see if you can increase the earnings on those savings.

If you can afford to use a financial planner that is the best thing to do to assist you in making decisions regarding the best way to maximize income from your savings.

If you can't afford to do that, many investments companies offer free courses through churches, senior centers, and other organizations to help seniors decide what to do to help fund their retirement. Many of those sessions include planners who hope you will sign up with them, so be aware of that, though your don't have to use their services.

One idea is to convert some of your savings to annuities that will pay out a fixed amount over your lifetime. Unfortunately the interest rate on all of these instruments is at an historical low at this time so before jumping into long term agreements think about the idea of "laddering" your choices so that you can take advantage of higher interest rates when they increase some time in the future.

Laddering means putting your savings into a set of financial instruments such as CDs or GICs but spreading them out over different time frames. For example,decide on how much of your savings you want to put into a specific investment vehicle such as CDs. Then place 20% of that amount, into a 1 year CD, 20% into a 2 year CD, 20% into a 3 year CD, 20% into a 5 year CD, and 20% into a longer term such as a 7 year CD. That way you may be able to get better rates on the 5 and 7 year CDs, but still have money available in a year or two years to reinvest if rates go up.

One other way to increase your income is to downsize. That means selling your house and moving into a smaller house and investing the difference. This is a traumatic move and one that can't be taken lightly. Also there are many additional costs involved such as real estate agent fees, loan origination fees, moving expenses etc and they will eat into your profit and reduce the amount your can invest.

In the US there is an idea called reverse mortgage. I'm not sure if it exists in Canada. With a reverse mortgage, seniors can obtain a loan on their house from a financial institution which is then invested and pays them a monthly amount. They can still live in their house and don't have to pay back the loan until after they sell the house or pass on. There are various catches involved in this process. The children will inherit the house and the debt associated with it. There will be interest charged on the mortgage which will have to be paid back eventually. So it isn't a panacea but may be useful for some people who just can't make ends meet after the pension cut.

To help keep track of what you are doing with your savings I strongly suggest you maintain good records and look at the returns monthly. I plan to post a specific section in this series on the records that I try to maintain monthly, however to help you at this point I will provide a little input on the savings records I keep.

I split my savings statements into two categories. Liquid, and deferred.
By liquid I mean the amount of money that I have in bank accounts or investments that I can access without paying additional taxes when I withdraw from that account. The deferred category includes funds held in tax deferred accounts such as IRAs, RRSPs, 401Ks, etc.

Each month at the end of the month, I check each account to see where it stands and then I build that into a spreadsheet which gives me a view for the year to date gain or loss in each account. It also helps to find out what the impact of expenses are on those accounts and will help me make some decisions in October when I have to cut back on various categories of expense.

All banks and financial institutions carry your account information in their computer databases. By opening an Internet account with them you can access your own personal information in a safe and secure manner and see what is in each of your accounts at the end of the month without having to wait for paper copies. This also helps you see charges and withdrawals so that you can keep on top of what your income and expenses are.

Keeping a record like that is going to be even more important when your income is reduced so that you don't fall short and end up overdrawn. Banks charge inordinate fees and penalties for overdrawing on your account, so try to keep current with your accounts to avoid having to spend extra money that you can ill afford.

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