Here are five common-sense tips to help you avoid hitting your own personal debt ceilings.

Spend less than you make
This is the key to staying out of debt. It’s a simple concept, but often difficult to execute. Live below your means and save the rest.

Curb credit card debt
Switch to a low-rate card and  pay it down as quickly as possible.

Invest to save
Open a TFSA or a high-interest savings account and start an emergency fund. ING and Ally are two good options–they have interest rates up to 2%.

Pay off your mortgage.
Mortgage is debt too. Increase your monthly payments and cut your amortization by five years to save thousands of dollars in interest.

Have a plan B
Stuff happens.  You could get sick, lose your job or have your car stolen. You need to plan for these worst-case scenarios.

“It just leaves me wondering,” adds Diane, a widow since her 40s with a grown daughter. “Do you just halve the numbers and think that’s you? Or is it totally different?”

As the author of much of MoneySense’s retirement coverage, I have to admit it’s fair criticism. So I decided it was time to go through the key issues of preparing for retirement as a single person. I’ll describe how much singles will need to spend to maintain a typical middle-class active lifestyle in retirement, how much they’ll need to save, and describe some planning issues that are particular to being single.

Some of our findings will seem alarming at first glance. To answer Diane’s question, no, you can’t just take the numbers for couples and divide by two. That’s because singles don’t have the same opportunities to share costs for things like accommodation, vehicles, and running a household. The fact is, singles will have to save more for retirement on a per-person basis than retirees who can split the load with a partner.

But before you get too depressed, many singles do have a secret advantage that tends to level the playing field. If they’re not raising children, they have far more opportunities to save during their 30s and 40s, when couples are typically up to their necks in dirty diapers, daycare costs and monster mortgages.

Read on to see how the grim facts and the good news affect your ability to achieve a comfortable retirement on your own.

Grim FACT #1: Retirement costs more for singles. Sharing saves money. Retired couples split the cost of a home and can often get by with one vehicle, lowering the price tag for the two most expensive items in a household budget. They also share accommodation and car rentals while travelling. Moreover, they can buy food and household items in more efficient quantities, and can divvy up the effort involved in shopping for groceries and preparing healthy, cheap meals at home.

That’s why, as a rule-of-thumb, singles will need to budget for 70% of the combined spending of a couple to achieve a similar retirement lifestyle, says Malcolm Hamilton, an actuary and partner with Mercer Human Resource Consulting.

(I did a quick reality check on this figure, and turned to Statistics Canada to see how much the average single senior actually spends as a percentage of what senior couples spend. The amount was 60%, but I noticed that the average single is a bit older than the average couple. That means this statistic probably understates the cost of an active single senior’s lifestyle, so our 70% figure should be about right.)

Now let’s convert that 70% into actual dollars so you can understand what you’ll need to fork out in retirement.

We’ve found that a typical couple needs to spend a combined $40,000 to $60,000 for a typical middle-class retirement, or about $70,000 for a very comfortable lifestyle.

So, in line with Hamilton’s 70% figure, I estimate that a middle-class retirement lifestyle for a single person will cost about $28,000 to $42,000 a year before taxes. That should apply reasonably well across Canada if you own your own condo or house mortgage-free. If you rent in a big city like Vancouver or Toronto, you probably need to add $5,000 a year to live as well, unless you’ve found a good apartment close to transit and shopping and you don’t need to own a car.

While that range may not seem like much compared to what you spent in your younger years, seniors can usually live comfortably on much less than they spent while working. That’s because they no longer have work-related costs like transportation and clothing, they no longer need to save, they generally pay lower income taxes, and in many cases they no longer have mortgage payments.

Of course, people will disagree about what level of lifestyle is “typically middle class.” Statistics Canada reports that the average single senior spends only $30,300 a year, and the median is even less at just $23,100. However, those numbers include spending by elderly singles who aren’t as active as younger seniors, so I figure my numbers provide a better guideline for an active lifestyle. But recognize that you can get by on significantly less — and many seniors do so without feeling hard done by. On the other hand, if you aspire to something a bit better — such as an increase in your travel budget — you can plan to spend $42,000 to $50,000 a year as a single for an upper middle-class lifestyle.

While we prefer to look at actual dollar costs of retirement, you can also consider the percentage of your working income that you’ll need to replace in retirement. We’ve found that typical couples will need to replace about 50% to 60% of the income they enjoyed while working to afford the same lifestyle in retirement. That’s less than the target of 60% to 70% (or more) that the financial industry traditionally uses, which MoneySense has often criticized as too high for most couples. But it turns out that, in the case of singles, a 60% to 70% target is a reasonable estimate. Hamilton says that the 60% replacement ratio is a good rule-of-thumb for childless single retirees who own their own home, while 70% is more appropriate for single childless renters. (The reason for the difference is that homeowners typically get used to living on less while carrying a big mortgage. As a result, after they’ve paid off the mortgage and retired, they generally need less income to maintain the lower standard of living to which they’ve become accustomed.)

Now that you have a sense of how much you’ll need to spend, we’ll look at the size of nest egg you’ll need. You’ll see this presents another challenge for singles.

Grim FACT #2: Singles need to save more. It turns out that middle-class singles will need a nest egg of about $300,000 to $650,000 if they retire at the age of 65, assuming they have no defined benefit pension from their employer.

The math works like this. We described how the typical single middle-class retirement costs $28,000 to $42,000 a year. We assume you stand to garner $16,000 from the Canada Pension Plan and Old Age Security, based on a long working life with at least average-paying jobs. Thus you need to make up the difference of $12,000 to $26,000 a year from your nest egg. Research has found that you can withdraw up to 4% a year from your nest egg, plus inflation adjustments, and run only a small risk of outliving your money if you retire at 65. As a result, you’ll need a nest egg that’s 25 times your annual withdrawals to generate the 4%. Of course, if you retire early or have lower government pensions, you’ll need a bit more. And if you have a defined benefit pension plan, or expect a parental inheritance, you’ll need less.

While our estimate for singles is a lot less than the million dollars that some advisers say you need, it’s a big challenge compared to what couples need to do. We’ve found that a couple retiring at 65 will need to save a combined $250,000 to $750,000 to enjoy a typical middle-class lifestyle (assuming no employer pensions). Singles have to save a nest egg of $300,000 to $650,000 on their own. So they have a much bigger savings burden than couples on a per-person basis.

While this no doubt sounds daunting, it’s not all dismal news. Being single may bring with it one major offsetting advantage.

See what’s new with the CPP

The Saving grace: Singles usually have more opportunity to save. The good news is, while singles need to save more for retirement, they often have more opportunities to sock away money during their 30s and 40s, when couples tend to be raising kids. (We realize we’re making generalizations here. Single parents have greater financial burdens than two-parent families, and childless couples have the most opportunities to save. We will look at the situation of single people with children in a future issue.)

Make no mistake: kids are expensive. A typical single without children can live on a lot less than a two-parent family during the working years. It’s not just the cost of food, clothing, daycare, sports and summer camp — not to mention the hefty costs of university tuition. It’s also the likelihood that you’ll buy a three-bedroom house and a couple of big vehicles to accommodate a family, and that one spouse might take time off work to raise the kids.

Then there’s the fact that these costs arise many years from retirement: parents in their 30s and 40s usually can’t afford to put away much for retirement, so the bulk of their saving tends to come after the kids have left home and the mortgage is paid off. But childless singles who start investing for retirement when they are younger can build a substantial nest egg with smaller contributions, simply because they have more time to let their portfolios grow.

What do these costs add up to? Estimates of the cost of raising a child to age 18 have typically come in around $160,000, sometimes more. MoneySense calculated that raising kids in Canada, on average, costs upwards of $240,000 — more than $1,000 a month — until age 18. And that doesn’t include supporting your kids through university, which will run you about $80,000 over four years if a student lives away from home. These are tremendous costs that single people without kids don’t have.

Of course, to build a $300,000 to $650,000 nest egg as a single person you still need the discipline to save much of that money in your 30s and 40s, instead of spending it on your lifestyle. If you can do that, you’ll be on a fairly even playing field with couples.

But what if you haven’t saved early on, and now you’ve reached your late 40s or 50s without much in the bank? There’s still a lot you can do. If you’re a homeowner who has been gradually paying down a hefty mortgage, you often have a chance to supercharge your savings at this stage in life, once you finish paying off your home loan. If you take all the money that once went to your mortgage and redirect it to your investments, you should be able to build a healthy retirement portfolio in a relatively short period of time. If that doesn’t apply to you — or if that’s not enough — you may need to consider less appealing options, like working longer, or paring back your lifestyle to fit your resources.

There’s another strategy that you might consider: getting a roommate, or renting out the basement of your home. “As you approach retirement, if you can pair up with somebody, you can find many of the economies that elude singles,” advises Hamilton. If you live in a major city with easy access to good transit, you might also consider services like AutoShare or Zipcar that provide the occasional use of a car, rather than buying your own. And finding a travel companion to share car rentals and hotel rooms can help you to extend your vacation budget.

We realize that single people who are accustomed to independent lifestyles may not relish these ideas. “When I travel with people, I want my own room,” says Diane Wilson. “I’m not 15. I don’t want to bunk with somebody.” And while the Wilson sisters are good friends and often do things together, they both rent separate apartments. “People probably wonder why we don’t share an apartment to save on rent,” says Diane. “No, never. She has her life. I have my life. I think it’s just really healthy. We do not live in each other’s back pockets.”

Whatever their living arrangements, there is no reason why singles of average means can’t enjoy retirements every bit as comfortable as those for couples. The Wilson sisters are well on their way to achieving just that. They were brought up to be responsible with money, and they have both saved diligently while holding down professional careers in the public sector and splitting a moderate inheritance. In Andrea’s case, her former husband wasn’t up to her standards of financial responsibility, and that contributed to the breakdown of the marriage many years ago.

While neither sister has a firm retirement date in mind, they can expect their investment portfolios and generous public-sector pensions will provide a retirement standard of living well above the average. Diane also collects survivor benefits from her late husband’s pension.

The sisters aren’t spendthrifts — they both drive older cars and brown-bag their lunches—but they’re active and they like to travel, often to exotic destinations. They stay fit by working out at the gym. They like to socialize with a wide circle of friends. They like to enjoy life. And while they are open to new relationships with men, they’re careful to protect their hard-earned financial independence. “I don’t want to meet someone who has nothing and is up to his eyeballs in debt,” says Diane. “I’d be running the other way.”

The sisters haven’t always found it easy to get by without a partner, but they haven’t let that hold them back, either. And now they can see their retirement dreams well within reach.

The first step in curving your shopping hobby is to take stock of what you have. Make an inventory so that the next time you’re tempted to drop money on an “Ooooh, I don’t have one of those” item, you know for sure it isn’t lying forgotten behind the impulse purchases you’ve made in the name of your hobby.

Next, learn to reuse stuff. Don’t like how the scarf turned out? Don’t just stick it in the back of a closet. Pull it out, rewind the yarn and use it for something else. Be creative about where you find your supplies. Consider swapping some of what you have for some of what someone else has through a swap coffee or tea party. Watch for sales and buy used; those are two great ways to get what you need to keep having fun, without blowing your budget.

What’s your budget?
You do have a budget for your hobby, don’t you? No? Well set one up. Even if you set aside just $10 or $15 a month for your woodworking, painting or sewing, having some money in your budget means you can take advantage of a great deal when you see it.

If you’re justifying spending money by all the money you’ll “save” through your hobby, you’re in trouble. When Jackie told Sam her new scrapbooking punches would save them a fortune in gift cards, Sam just shook his head. “We’re talking really fabulous cards,” he said with a grin. Jackie should just stick to having fun and stop trying to justify her spending. It’s a hobby!

]]> http://www.moneysense.ca/2011/07/28/save-money-on-your-hobby/feed/ 2 http://www.moneysense.ca/2011/07/28/claymore%e2%80%99s-cgl-when-buying-gold-isn%e2%80%99t-enough/ http://www.moneysense.ca/2011/07/28/claymore%e2%80%99s-cgl-when-buying-gold-isn%e2%80%99t-enough/#comments Thu, 28 Jul 2011 12:00:39 +0000 Canadian Couch Potato http://canadiancouchpotato.com/?p=3415

In Monday’s post, I answered a reader’s question about the iShares Gold Trust, an ETF that is cross-listed on the Toronto and New York Stock Exchanges with the ticker symbols IGT and IAU, respectively. I explained that while it is possible to buy and sell this product in either US or Canadian dollars, neither version gives you any exposure to currency risk. However, that’s not the case with the Claymore Gold Bullion ETF (CGL), which also tracks the price of the yellow metal by holding gold bullion. CGL is unique among gold ETFs in that it uses currency hedging.

It’s worth pausing to think about this concept. As most index investors know, it’s common for funds that hold foreign stocks or bonds to hedge their currency exposure to protect Canadians from the effects of a rising loonie. But gold is not a foreign-denominated asset, like shares in Coca-Cola. Yes, its price is widely quoted in US dollars, but that’s not the same thing. Think about it this way: if you were buying gold bullion from the Royal Canadian Mint, would it have occurred to you to hedge your purchase against a falling US dollar?

An extra layer of risk

So what’s going on with CGL? Claymore has designed its ETF to deliver to Canadian investors the returns of gold in US dollars. In practice, CGL’s returns should be the same for Canadians as the returns of the iShares Gold Trust (IAU) are for Americans. Since it launched in February 2010, it has done a very good job in this respect:

What investors need to understand is that CGL not only gives them exposure to gold, but also to the US dollar. If the greenback loses value versus the loonie, then a Canadian holding CGL would get a boost in returns. Indeed, since its debut early last year, CGL has dramatically outperformed the TSX-listed version of the iShares Gold Trust: it has increased over 43%, versus 30% for IGT. However, a surging US dollar will detract from the returns of the Claymore ETF, regardless of the price of gold.

While hedging is usually designed to reduce currency risk, CGL actually adds a layer of risk that wouldn’t otherwise exist. Buying IGT or IAU (or coins or bullion) makes you long gold. Buying CGL makes you long gold and short the US dollar.

If this discussion sounds familiar, it’s because the same strategy is used in the Claymore Broad Emerging Markets ETF (CWO), which I wrote about in a previous post. CWO invests in stocks that are denominated in a basket of overseas currencies, but adds hedging against the US dollar.

Doubling down

Using currency hedging in a gold ETF is an interesting strategy, because historically the US dollar and gold have been negatively correlated: when one goes down, the other tends to go up. So for a Canadian holding CGL, a declining US dollar could be doubly good: it would likely correspond with a rise in the price of gold, and the hedging would mean even higher returns in Canadian-dollar terms. If the US dollar were to surge, then CGL might suffer losses on both the gold and the currency.

One would think this relationship would make the price of gold in Canadian dollars more volatile. However, the Fact Card for CGL quotes data from 1994 that shows the standard deviation of gold returns is actually slightly lower in Canadian dollars (14.69%) than in US dollars (15.15%). Whether that would hold up over longer periods, I don’t know.

What I do know is that investors who decide to buy a gold ETF need to understand the role it plays in their portfolio. I think it’s fair to say that most retail investors who own CGL do not understand the currency exposure they are getting. They are likely unaware that they are not just buying gold, but also making an active bet that the US dollar will fall. Hating the US dollar is a popular pastime these days, but it’s a hard decision to justify in a long-term portfolio.

For investors who prefer to get pure exposure to gold and leave the currency plays to the speculators, Claymore launched an unhedged version of its gold ETF (CGL.C) in March. It should be expected to perform in line with IGT, although at 0.50% its management fee is double what iShares charges.

Disclosure: I do not CGL, IGT or any other gold ETF in my own portfolio.

The increase comes on the heals of an April report that showed housing prices were up in all six of the major metropolitan markets, which include Toronto, Montreal, Ottawa, Calgary, Vancouver and Halifax.

• Vancouver: May’s increase marked the eighth consecutive monthly increase;
• Toronto: home prices topped the peak (which was originally achieved in July 2010);
• Calgary: while prices continued to rise, the average home price was still 4.6% below their previous peak;
• Ottawa: prices were fractionally higher in May than the city’s home price peak in August 2010.

While this activity might sound exciting to prospective sellers, recent numbers may not be reflective of a continuing strong market. That’s because of the time lag between home sales and their entry into public land registries. Because of this lag, it’s possible that the large April and May increases in the home price index were due to March sales. Sales rose in March — theoretically to beat the effective date for the shortening of the maximum amortization period (from 35 years to 30 years) for insured mortgages.

What’s also significant is that the Canadian Real Estate Association has publicly stated that, while conditions were “balanced” across the country, the market is beginning to tighten in Toronto. This is evident from the city’s year-to-year price change, which was second last (at 4.6%) behind Calgary with its -4.1% year-to-year price change.

Still, CREA is sticking to its assessment: Canada is experiencing a balanced housing market — with no advantage going to either buyer or seller. The primary rational for this assessment is that the national sales-to-new listings ratio (CREA’s measure of market balance) was at 52.6% in June, slightly higher than May’s 52.2%. CREA also points out that 80% of the local housing markets in Canada experienced a year-over-year price increase in June (including Toronto where there is a “tight balance between supply and demand”).

But the bottom line is that supply is beginning to match demand — demand that’s fuelled by low interest rates. When interest rates rise the demand for houses will drop dramatically, putting severe downward pressure on housing prices. While that correction may not be for 12 months (or longer), it will come.

As soon as cheap lending for expensive houses disappears, buyers will settle in to renting-and-saving. And this will prompt a price correction. So if you can wait to buy. Wait. Sock your money away in a money market fund and save for that bigger down payment. You’ll own more of your house straight out of the gate (and probably buy that house at a cheaper price).

-Buy an iPod touch instead of a cell phone, since you can get Skype for free or pay about $14 to get a phone number through them.

-Don’t buy anything without seeing if someone is selling it on Kijiji or Craigslist.

-Search for online coupons and check out local daily deal sites — but don’t buy it just because it’s on sale. Only buy it if you would have bought it at full price.

-Reduce your book budget by downloading textbooks. Try www.coursesmart.com, or Google your textbook online to see if a PDF version exists.

-Instead of buying a laptop, consider buying an iPad. It’s about half the price of a laptop and has many of the same functions.

However, an upcoming wedding had me stepping into a retailer today for some fancy duds. My game plan was to pick up a new shirt, new pants and a tie. After a few minutes of looking lost amid the sea of apparel, a saleswoman offered a hand. We got to chatting and I guessed (correctly) that she was from the Philippines, and when I told her I’ve been there we were instant friends.

We chatted while I tried on various outfits, and when I found the right combination I made a big show of looking at the price tags and looking crestfallen. “I love these clothes but this will break my budget,” I said. “Can we do anything about the prices?”

Turns out I was in luck. The shirt (normally $55) was 25% off, and a tie sale had just ended a few days ago. “I’ll extend the sale for you,” she said. “You need to save for your next trip to Boracay.”

She couldn’t do anything for me regarding the pants, unfortunately. But at $85, I felt it was a reasonable price. (They’re pretty sweet pants).

All said, I saved $40.

The lesson: if you’ve got time, spend a few minutes chatting up the salesperson if plan on negotiating. It makes them much more willing to cut you some slack.

]]> http://www.moneysense.ca/2011/07/27/small-talk-big-savings/feed/ 3 http://www.moneysense.ca/2011/07/27/pet-peeves/ http://www.moneysense.ca/2011/07/27/pet-peeves/#comments Wed, 27 Jul 2011 14:37:25 +0000 Gail Vaz-Oxlade http://www.moneysense.ca/?p=16912 Man, that’s a lot of kibble! And that’s an increase of more than 70% since 2001. Why the run-up? Well it seems we’re not happy to treat them like pets anymore. Now we want them to have all the stuff children have: designer outfits, stimulating games, organic food.

Back when I was a kid, my mother used to cook up a batch of cornmeal, throw in some veggies and add the left-over meat to make dog food. Not good enough anymore. Back then, “a dog’s life” meant sleeping outside and making do with table scraps. The American Pet Products Manufacturers Association reports that 2% of dogs now sleep in the same bed as their owners. And owners are happy to shell out $400 for an indoor potty, $225 for a trench coat, and bucketsful of money for drugs. It’s estimated that 77% of dogs and 52% of cats have been medicated in the past year.

If you’re looking for ways to trim your spending on your pets so you can actually some money for the future, why not:

Get pet insurance. It is astounding what people will pay to care for their four-legged babies. Just be aware that most pre-existing conditions won’t be covered and if you’re pet is older than 9, you may not get approved.

Stop buying so much food. In 2010, pet-lovers spent over $18 billion on food. Since more than 50% of cats and dogs are overweight, you’re not doing your poochie any favours with all that rich food you’re feeding him.

Learn to do your own grooming. Bathe ‘em yourself. Clip their nails. Clean their teeth. Hey, remember why you got that dog, cat, bird, fish, or hamster: you wanted something to take care of. So do it yourself and you’ll save a fortune!

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