Archive for June, 2010
Baby Boomers & Old Age Pensions
The year 2011 will mark a milestone event. Next year will be the first year that members of a special demographic bulge in society, known as Baby Boomers, will start to turn age 65. At this age a person qualifies to receive Canada’s Old Age Security Pension. For years now this group of individuals, born between 1946 and 1964, has been studied as to the anticipated effect their aging will have upon our society.
Corporate North America has marketed to the anticipated wants and needs of Baby Boomers for decades. Why wouldn’t they? According to some statistics, Baby Boomers currently control over 80% of personal financial assets and represent about 50% of all discretionary spending. In general, this group loves to travel and enjoy life. However, it has been noted that many Baby Boomers have become complacent with regard to their personal debt levels. As retirement years approach, trying to balance current wants and needs against the debt servicing requirement for past financial excess might become a challenge for some Canadians.
These are the same challenges that our corporations and governments are currently facing. Today, both our federal and provincial governments are being forced to deal with past budgetary excess while simultaneously trying to find and fund policies that will lead to sustainable job creation. Meanwhile, corporate Canada is also dealing with their past years of over leverage and excess. In a recent luncheon speech, the Governor of the Bank of Canada pointed out that the “global recovery will not be smooth.” Retirement expectations for many have changed to include working longer, part-time retirement, or the addition of self-employed business income. During the years prior to your retirement it would be very prudent to take a hard look at your overall financial situation. For many clients this will involve seeking good independent financial council.
If you find that you are faced with the need to reduce excess personal debts, here are ten recommendations:
1. Always pay off your debt with the highest interest rate first.
2. Establish a realistic budget that allows for principal debt repayment.
3. Set both short and long term goals.
4. Review your progress regularly and reward your successes.
5. Make the application for debt restructure/consolidation while you are still employed not when you retire. The approval process will be much easier while you are working and have a higher income.
6. Consider refinance options. A refinance of your mortgage to consolidate high interest and/or unsecured debt can greatly lower your overall borrowing cost and improve your cash flow.
7. Give consideration to what your shelter needs truly are. Perhaps selling your current residence and buying a lesser valued property might place you in a much stronger financial position.
8. Do not consider selling your house or re-mortgaging to consolidate your debts until a careful cost benefit analysis is done.
9. Always remember that the payments you make on personal debt are being made with after-tax dollars. You have to first earn the money, pay taxes on it, and pay the interest due on your debt before you can see a principal reduction.
10. Most importantly, be truthful with yourself and your partner or spouse about your finances.
Paul E. Croy
“Much Ado About Nothing”
It’s been over a year of media focus on the potential end of historically low levels of Canadian interest rates. This week, it might be appropriate to quote the words of Mr. William Shakespeare, much ado about nothing, as the Bank of Canada recently decided to increase the Bank Rate by only 0.25%.
This increase was probably the single most anticipated and talked about increase ever witnessed in Canadian history. Many people originally anticipated a full half percentage increase, but recently almost every financial analyst expected the 0.25% increase that raised the prime rate at most Canadian banks to 2.5%.
Had Mark Carney, the Governor of the Bank of Canada, failed to raise rates this would have caused more of a concern as financial markets want certainty and predictability. After months and months of dealing with mortgage client’s concerns, this increase simply became a non-event. It was also very interesting to note that some mortgage lenders actually decreased their five-year mortgage rates shortly after the Bank of Canada rate announcement. Financial Institutions need to have certainty established in the long term trend of market interest rates before they can become truly competitive in their mortgage rate pricing.
In contrast to Mr. Shakespeare’s play, Much Ado About Nothing, which is a comedy, the Bank of Canada’s decision on interest rates is very serious business that effects a great cross section of our society. From small home based businesses to the construction industry and manufacturing firms, all feel the effects of the Bank’s Canadian Interest Rate Policy. Along with the value of our Canadian dollar, our Canadian family standard of living is affected too. The Bank of Canada is very aware of this fact as they attempt to balance the need to fight inflation while at the same time trying to grow our economy.
The bottom line looking forward is that we are going to see a slow and gradual increase in interest rates and this should not be a surprise to anyone. For clients still on floating rate mortgages, this may be a good opportunity to consider increasing your mortgage payment thereby accelerating your repayment and decreasing the amortization on your mortgage. This would also prepare you for slightly higher interest rates in the future while at the same time taking advantage of our still very low mortgage interest rates.
Paul E. Croy
