Income Trust | Personal Finance | Real Estate SEO

You may have heard the term “three-legged stool”, taken from the idea that a stool needs three legs to maintain balance. (Photographers use tripods, no duopods or quadrapods. Even a four-legged chair will likely wobble.)

Old Three-Legged Stool of Retirement

Traditionally, the components of the three-legged stool of retirement have been presented as Social Security benefits, Pensions, and Personal Savings (401k, IRA, and other assets).

image via Michigan.gov

This is partially supported by data from the Social Security Administration:

image via Pbs.org

The Qualified Retirement Plans slice combines pensions, 401ks, and IRAs together, making it hard to see the breakdown. The Other Assets include income from other investments like capital gains or dividends from taxable accounts and real estate. We observe that a quarter of all income in retirement is still from working for a paycheck.

Shaping Your Own Retirement Legs

These are just averages, and each of us will have their own path to retirement. If you’re planning on retiring early, you won’t have Social Security yet. For people born after 1960, the full retirement age for benefits is already 67, and expect it to rise even further the younger you are. I think some form of SS will still be around when I’m 70, but who knows.

1. Flexible, reliable, part-time income
We already saw that lots of people over 65 still work. Even though I want financial independence early, I’ve also come to realize that I’ll never stop working. Ask yourself what are you really going to do in retirement? In addition, I think it would be stressful to stare at a big pile of cash and think to myself – “Crap, I hope this lasts for 30+ years!” Maintaining a part-time job and the related skills would help my cashflow, and also ensure that I could return to the workforce if disaster strikes.

I would want a part-time job that could provide some socialization and a sense of improving your community or helping others. Most of my imagined jobs involve teaching, coaching, sporadic technical consulting, or something tourism-related. It can’t be 9-5, and I’d want to be able to take months off at a time. This won’t be easy to find, so I need to start developing more “fun” skills as well as personal relationships now.

2. Personal Savings: Accumulate 30 times annual (non-housing) expenses
Without a pension or Social Security, you’ll need to live off your own savings. If you invest in a balanced portfolio of 60% stocks and 40% bonds, studies have estimated that you can have a “safe withdrawal rates” of about 4% per year. By being a bit more conservative than that, this means accumulating 30 times your annual expenses.

For example, if your annual expenses are $30,000, then you need to save $900,000. This is a very general rule of thumb. Taxes are tricky, but if your income is only $30,000 per year, you won’t be paying very much income tax. Check out the historical effective tax rate over a past 25 year timespan:

image via krusekronicle.typepad.com

For reference in 1995, to be in the bottom 50% (safely in Q1/Q2) your adjusted gross income had to be under $31,000. And this even includes payroll taxes of about 9%, which you won’t have to pay on investment income. The result: very low taxes (possibly under 5%) if you keep your expenses down! Which brings me to…

3. A Paid Off House
I don’t think everyone needs to own a home. However, I happen to enjoy many of the intangibles of owning a home, I love my house and neighborhood, and plan on staying here a while. The cost of this leg can vary widely, from a $1,900 house in Detroit to… where I live, so choose where you want to live carefully.

Financially, owning a home protects you from future inflation and rising rents. You are still subject to property taxes and maintenance costs.

In addition, not having to pay rent means you need less income from savings, reducing your needed nest egg in #2 above. You also pay less taxes. Withdrawing additional money from an IRA, for example, will mean subjecting them to your marginal tax rate, which could be 25% or higher. So to pay $750 in rent, you’d have to withdraw $1,000. Not very efficient.

So there, you have it, my three-legged stool. Yours may be very different – you may like renting, have a pension, own investment property, or have some other sources of income. I still worry about health insurance, but I’m still hopeful that some positive health care reform will occur that will create affordable health insurance for individuals under 65 not covered by an employer group plan.

* You can read more about the last two legs in my related post A Quick & Dirty Plan To Reach Financial Freedom.

Filed under: Finance, Money Saving Ideas | No Comments »

I started coaching in a kind of unconventional way. A number of my friends knew I had an interest and a passion for personal finance and began to ask me for advice. Most of the advice they needed was extremely basic even though these were teachers, executives, and other well educated people.

When no one taught them about banking, saving, how much to save for retirement, how to live below their means, how much to spend on a house, etc, etc they just did what everyone else around them did. They used credit cards and lines of credit and got themselves in over their heads in debt.

When I would sit down with them to ‘do the math’ they would be shocked at how much they were spending on interest and misc bank fees and credit card fees. With a few tweaks (changing their cell phone plans, canceling extra cable packages, quitting the gym they never went to, switching to a no fee credit card, canceling credit card balance insurance and other miscellaneous useless fees) they were able to free up money to begin their emergency fund and begin investing once the emergency fund was full.

Then I found out about http://www.crown.org/ and while I don’t agree with some of their advice, they do provide certification and training for volunteer (non-professional) coaches. We never sell students anything or talk about specific investments. We can refer them to a professional for this type of help. Most of what we do is walk them through the steps, very similar to the steps outlines in Dave Ramsey’s Total Money Makeover (an excellent beginner book if you haven’t read it!).

People like the accountability and find it motivating. They often need a bit of tweaking in their finances or just someone to talk to about something they’ve never shared with anyone. Most of the people I work with are either referred through friends or referred through the church who provided the training. I get everything from newlyweds wanting to start out right to executives (usually women or couples).

Many are heavily in debt and just need some advice on how to start paying the debt off. Some have more money than they know what to do with and just needed some advice on how much to spend on a mortgage and what percentage to put away for retirement.

Basically I encourage them and walk them through the steps.

1. $1000 emergency fund.
2. Have an up to date will.
3. Have enough term life insurance.
4. Pay off all debt except for the mortgage.
5. 3-6 months fully funded emergency fund.
6. 15% pre-tax income automatically going for retirement (either through TFSA or RRSPs depending on their income).
7. RESPs for their kids if they have kids and hope to help with their education.
8. Pay off the house.
9. Live debt free! This frees them up to invest more, give more, buy real estate and live the life of their dreams however they see that carried out.

I give homework every time .. getting them to figure out their net worth, lists of debts and how much is owed plus interest rates for each debt as well as a list of all of their monthly expenses.

I also have them begin writing down EVERYTHING they spend for the whole time we meet. (I usually meet with them once a month for 6 months and then how often they like after that). Each month they need to show me their updated spread sheets. As they watch their net worth going up and their debts going down, they are often highly motivated to keep working at it.

I really try to encourage them along the way and make myself available through e-mail for any questions they have throughout the month. As they write it all down, we continue to tweak things that they can change.

I had one person who was spending $5 every day on diet coke and a chocolate bar the gas station across the street from her work. When I suggested she buy a case of diet coke and a pack of chocolate bars from the grocery store and keep them in the fridge at work, she had never thought of that and began saving nearly $4 a day .. and not changing her daily snack at all!

Almost everyone I’ve worked with pay huge amounts of bank fees. One person had 4 accounts with different banks all with monthly fees over $12.95 a month. She just thought this was normal. Once we got her switched to PC Financial and canceled all her other accounts, she had nearly $50 a month extra to pay off her debt with. She was pretty happy!

Editors Note:  As described in Kathryn’s profile below, she volunteers as a financial coach.  Question for personal finance beginners – Would you be willing to pay for basic financial coaching/education?

Kathryn works in public relations and training for a non profit. In her off hours, she volunteers as a financial coach helping ordinary Canadians with the basics of money management. Her passions include personal finance and adult education. Kathryn, along with her husband and two children live in Ontario.

Popular Posts:

• Canadian Discount Brokerage Comparison
• Top 6 ways to Save on Auto Insurance
• High Interest Rate Savings Accounts
• MBNA SPG Credit Card Review
• Child Care Tax Credits
• Questrade Review
• Are Hybrid Vehicles Worth it?
• Tax Free Savings Account (TFSA)

Copyright 2009 MillionDollarJourney – All Rights Reserved

Filed under: Finance, Money Saving Ideas | No Comments »

I’ve been tardy in keeping the Sleepy Portfolio in line with the target allocation (cash — 5%, bonds — 20%, stocks — 70% and REITs — 5%), failing to rebalance earlier in the year. As a result, the low-risk part of the portfolio had a higher allocation compared to target and the portfolio missed out on some of the strong rebound in the equity markets. Still, the portfolio is up 5.2% year-to-date and fixed-income and cash still make up 32.7%, compared to a target of 25%.

Fortunately, I was paying more attention to our portfolios, rebalancing it regularly when adding new savings to our accounts. As a result, our portfolios performed much better and are up 16% YTD. I did get around the rebalancing the Sleepy Portfolio and will post an update next week.

Related Reading:

• Introducing the Sleepy Portfolio
• 2Q-2008 Report Card
• Sleepy Mini Portfolio Q3-2008 Update
• 3Q-2006 Report Card
• Sleepy Mini Portfolio Q2-2008 Update

Filed under: Finance, Money Saving Ideas | No Comments »

I saw this LA Times article San Francisco beefs up renter protections over at SavingFreak, and it nagged at me all day as both a recent renter and possible future landlord.

Here’s the quick summary. City Supervisor Chris Daly introduced legislation to add the following additional tenant “protections”:

• Landlords cannot raise the rent above 33% of tenant’s income. An alternative amendment restrict this to situations where the tenant has a “hardship” – defined as being unemployed, having wages cut, or living on a fixed income and receiving a cost of living increase.
• Allows tenants to add roommates other than family to help pay rent, even if explicitly forbidden in the rental contract.

My take. I think this going too far, and I am glad the mayor seems to agree and will veto it. Already 88% of rental units in San Francisco are subject to rent control, with annual rent increases being capped at an average of 2% per year. Now a landlord must charge rent based on a person’s future income? How can they control that? And then tenants can bring in whomever they want as additional roommates, also creating more wear and tear on the place?

This is different from having the government provide unemployment benefits, or even “bailouts”. This is forcing individuals to directly subsidize other individuals arbitrarily. Imagine being a cabinet maker and being forced to accept a 50% discount to any customer who lost their job recently, regardless of your own costs or financial needs. I echo the concerns of this editorial:

We all like the idea of businesspeople doing the benevolent thing when their customers are hurting, but it is not fair for a public entity to force such behavior on a private one.

Am I way off base here? Let me know in the comments.

Filed under: Finance, Money Saving Ideas | No Comments »

Welcome to the Million Dollar Journey June 2009 Net Worth Update – The Car Shopping Edition.

With one of our cars already 8 years old, the repairs are starting to add up.  So we’re currently in the process of shopping for a good used car/compact SUV, preferably a late model that is off lease with low kilometers.  We are leaning towards foreign models (Honda/Toyota) as we have had good experiences with them in the past.  Do you have any used car buying tips?  Should I be looking at dealerships?  Or perhaps private sales are the way to go?  Here’s an article I’ve written in the past about negotiating your new car purchase.

Back to the topic at hand, the net worth update.  Not a big change this month with most of the increase due to savings.  Portfolios gained a little, but nothing compared to last month.  The markets have pulled back a bit since the June high and some analysts are calling that further correction is needed/inevitable.  I’m not sure of the future direction of the market, but I do know that there is a mountain of cash on the sidelines.  Once the fund managers start deploying their cash, I expect that the markets will aggressively go higher.

You may have noticed as well that our vehicles have been depreciating at an accelerated rate over the past few months.  That’s intentional as I am looking to take the cars off the balance sheet soon.

Assets: $447,350.00 (+1.29%)

• Cash: $4,500 (+0.00%)
• Savings: $11,000 (+46.67%)
• Registered/Retirement Investment Account: $65,000 (+2.69%)
• Pension: $22,350 (+0.00%)
• Non-Registered Investment Account: $15,500.00 (+2.69%)
• Smith Manoeuvre Investment Account: $46,000 (+2.22%)
• Investment Property: $ 124,500 (+0.00%)
• Principal Residence: $275,000 (+0.00%) (purchase price)
• Vehicles: $8,000 (2 vehicles) (-11.11%)

Liabilities: $91,500.00 (-1.82%)

• Tax Liability: $3,000 (-0.00%)
• Investment Property Mortgage: $92,000 (-0.11%)
• Principal Residence Mortgage (readvanceable): $35,500 (-6.58%)
• HELOC balance: $53,000 (+1.53%)

Total Net Worth: ~$355,850.00 (+$7,400) (+2.12%)

• Started 2008 with Net Worth: $309,950.00
• Year to Date Gain/Loss: +14.81%

Some quick notes and explanations to net worth questions I get often:

The Cash

The $4,500 cash are held in chequing accounts to meet the minimum balance so that we pay no fees (accounting for regular bill payments). Yes, we do hold no fee accounts also, but I find value in having an account with a full service bank as the relationship with a banker can prove useful.

Savings

Our savings accounts are all held with PC Financial. We hold a fair bit of cash in case “something” comes up. The “something” can be anything that requires cash such as an investment opportunity that requires quick cash or maybe an emergency car/home repair.  We also need cash to cover any future tax liabilities.

Real Estate

Our real estate holdings consist of a primary residence plus a rental property. The value of the principal residence remains valued at the purchase price despite significant appreciation in the real estate market that we’re in.

Hope you have a great Canada Day!

Popular Posts:

• How capital Gains Tax Works
• How Dividend and Interest Income Tax Works
• Registered Education Savings Plan (RESP)
• Top Cash Back Credit Cards in Canada
• Questrade Review
• Are Hybrid Vehicles Worth it?
• Tax Free Savings Account (TFSA)

Copyright 2009 MillionDollarJourney – All Rights Reserved

Filed under: Finance, Money Saving Ideas | No Comments »