November 8, 2012
Read on savewithspp.com
Alison Griffiths podcast
(We apologize for the quality of this recording.)
Hi, my name is Sheryl Smolkin. I’m a lawyer and a journalist. Today I’m pleased to be continuing the Saskatchewan Pension Plan’s series of interviews with financial experts. My guest is Alison Griffiths.
Today I am going to ask Alison to share with us the answers to some questions about retirement savings she has written about recently.
Alison is an award winning financial journalist, best-selling author and broadcaster. She has hosted two acclaimed television shows, Maxed Out for W Network and Dollars and Sense for Viva.
For many years she wrote a a popular financial column for the Toronto Star and her weekly column for the Metro chain of papers “Alison on Money” continues. In addition to her frequent speaking engagements and workshops, she has just released her ninth book: Count on Yourself. It’s a wonder she ever finds time to sleep!
Q. Financial institutions would like us to believe that every Canadian who is earning even a few dollars should save in an RRSP or pension plan for retirement. Do you agree? Can you give me examples of cases where this may not apply?
A. Ideally it’s good to save for your retirement one way or another. However, there are a couple of situations where people should examine that automatic RRSP contribution.
A post-retirement net income of less than about $16 000 is about roughly the cut off for a single person with a guaranteed income supplement. There have been a few cases that I’ve come across in the last few months where individuals who were getting the guaranteed income supplement after age 65, get to the required RIFF withdrawal age in their 70′s and suddenly they’re bumped out of that supplement payment which they’ve been relying on. If you think you’re going to be on the edge than it might be better to put it into a tax free savings account or a non-registered account
Those who may face a claw back from government programs because of higher income. After the age of 65 you get an age amount personal exemption in addition to your existing personal exemption, but that exemption starts to get clawed back after a net income of only about $33 000.
It’s worthwhile looking at that post-retirement income, looking at the government benefits you’re going to get and for higher income people you might be better off and have more flexibility if you deposit to a TFSA or a non-registered account.
Q. What’s more important – paying off debt like a student loan, or starting as early as possible to save for retirement?
A. Students with carry forwards of tuition deductions and a student loan should take the first three or four years post-graduation and really hit that student loan instead of making RRSP contributions. It’s very worthwhile. Then they are in a situation where they can start contributing to their RRSPs without having to decide whether to pay off their student loan or or contribute to RRSPs.
Q.Is it better to contribute monthly or to deposit a lump sum one or more times a year?
A. For most people contributing monthly is a good idea. Investing every month, you’re going to sometimes invest at a market high but you’re going to also invest at a market low, so you smooth out those bumps via dollar cost averaging. Also the discipline is important.
Q. You recently wrote a column advising readers not to take out a loan to max out their retirement savings every year. Can give our listeners a few reasons why you don’t think that’s a good idea?
A. The reality is that rarely do I see it work out even when interest rates are low. It’s not just because the investment return plus the tax deduction has to be higher than the borrowing cost. You also have to pay the money back. The fact is it gets loaded onto the general debt individuals carry for three or four years and they never ever quite pay it off.
Q. How can people find out how much their investments are costing them?
A. The best way to do it is to look at the mutual funds you have. On Morningstar.ca you can easily type in the name of your fund. A report pops up that gives you a snap shot. You’ll see your MER – management expense ratio figure there, and that’s the percent you’re paying.
One thing you need to remember about mutual fund fees is that they have to be considered as a hurdle. The mutual fund has to jump over the hurdle of that 2.5% fee before you even start making money.
Q. How important are fees? If I’m investing $100, a 2.5% fee of $2.50 doesn’t sound like much. How much difference can paying say 1% instead of 2.5% MER on an investment make in terms of accumulated retirement savings over time?
A. It makes a huge difference – in small amounts of money it doesn’t seem to be too much. However, the difference between 1% and 2.5% over 15 years on a $10,000 investment is $5,000 in lost return. The other issue to think of is that not only do high fees reduce your gain, but they maximize your losses – in times of market volatility your losses get magnified.
Q. In your latest book you relate some humorous anecdotes about how people are more ready to discuss intimate details of their sex life than money. Why do you think finances and financial planning so hard to talk about?
A. Not only is money personal, but it also seems a lot of our self worth revolves around money, how much we have, how much we earn. When you poke at people’s self worth by revealing what might make them appear to be negative compared to somebody else, then they start to get very uncomfortable.
We also worry about getting ripped off by the people we’re in a relationship with. But as a result we don’t develop the confidence or the language skills to discuss money when it becomes necessary.
Thanks Alison. It was a pleasure to chat with you. I know Saskatchewan Pension Plan members will be eager to read your new book Count on Yourself and they will also want to check out your articles in the Toronto Star articles and other media.