Paul Vieira, Financial Post · Angel Gurria is never short of words, or emotion. The secretary-general of the Organization for Economic Co-operation and Development will talk about almost anything economic-related, and do it with a passion that’s to be expected from a native of Mexico. Mr. Gurria, a former finance and foreign affairs minister in Mexico, has been head of the Paris think-tank since 2006, and has tried to provide a voice of reason during the economic crisis. In its most recent outlook, the OECD said developed economies should begin the process of budget-cutting and get debt levels back to more reasonable levels. And in Montreal this past week for the International Economic Forum of the Americas, the multi-lingual Mr. Gurria warned economies have a tough dilemma ahead: They have to maintain fiscal policies that lead to job creation, while at the same time get their own fiscal houses in order. Mr. Gurria talked to the Financial Post’s Paul Vieira in Montreal. This is an edited version of the interview:

Q Is the euro crisis the beginning of new woes, or did the crisis that broke in 2008 really end?

A You are absolutely correct. The euro crisis is just a different phase of the crisis. And just like the first manifestation of the crisis, this deals with overleverage. First it was overleverage of the banks and the stabilization of the financial system, plus the drop in government revenues due to recession, plus the increase in automatic stabilizers, plus stimulus spending. All this produced these exorbitant deficits and this mind-boggling accumulation of debt, which we would have just laughed at a few years ago of ever happening. The euro crisis is the same problem of overleverage, but has moved from the private sector to the public sector. This is just unsustainable and has to be fixed.

Q Any surprise by the drubbing in the markets, due mostly to Europe? And any shock at how intense it has been in such a short time?

A I think at some point in time, governments took the first decision to do whatever it takes. No more failures of banks. That has consequences. The second decision was to say, “We will go out and stimulate.” That was a deliberate, co-ordinated, co-operative type of decision, and something which we are seeing the consequences of now.

The first decision was linked to stabilizing the financial system. The second decision was a little bit different because, objectively, everyone went into some kind of stimulus, with China doing 15% of GDP, and the United States did something like 6%. The difference was the degree of response that the economies had. And then there was the result of the economy. And that’s when revenue drops, and you have to spend automatically [on unemployment benefits]. That was not planned. It is the result of a general economic situation. Countries were having enough trouble just with that, on top of digging into their pockets and going into deliberate deficit spending. And now we see the consequences.

Q The US$1-trillion rescue package from European policymakers was meant to calm markets and support the euro, but that has yet to materialize. What happened?

A It is going to. It was only on [Monday] night that European policymakers got it together in term of finalizing the conditions. The proposal has been going through legislatures. Germany got its passed two weeks ago, but some of the other countries have been circling the wagons because their parliaments were reticent. But let’s assume everyone chips in, and they are in. Then that’s done. Once the money is in place and ready to be triggered, it is going to produce a lot more peace of mind than it has right now.

There were a lot of skeptical voices out there because they did not see the package gelling. What they don’t understand is the way Europe works, or how things happen. They happen slowly, there’s always a little bumpiness, but it happens. And there was enough resolve. This is sorting itself out.

Q What topic, or topics, is going to dominate the G20 leaders summit in Toronto?

A In 2008, the G20 was focused on stabilizing the financial system, and avoiding a cataclysmic disaster. In 2009, it was about growth. This meeting in Toronto is going to be about a more balanced, more nuanced, more complex formula for growth. The balance has to do with the situation where you need to put an emphasis on growth but also on fiscal consolidation, or deficit adjustment. That balance, and the need to be looking at both sides, will be much more apparent now.

There is also a need for countries not to withdraw the stimulus just yet. The monetary tightening is something that is going to happen by next year. Countries have to roll out all the stimulus packages –some of them are finished, but some of them are still happening. So don’t interrupt until you are through with them. Finish the plan. And don’t start cutting the budget just yet, maybe start in 2011. Leaders need to, at the very least, strongly signal how they are going to address the deficit and debt issues. How are they are going to bring down the deficit to a manageable level, but ensure a soft landing. Then the ultimate issue is, whether markets will be more or less tolerant and patient
Read more: http://www.financialpost.com/subprime+crisis+developed+into+euro+crisis/3145815/story.html#ixzz0qpgBSZDN

Homes are a long-term investment

“Ups and downs of the housing market is near-impossible, so the best time to buy is when you can afford it.”

‘You know, you’re making the biggest mistake of your life. The housing market is going to fall.”

I got this great piece of advice from another journalist at the Financial Post, who has since left the newspaper, after buying my first home. Not exactly the type of thing you want to hear after taking on huge debt and making the biggest financial decision of your life.

Lucky for me, I didn’t heed that advice about Toronto’s red-hot real estate market — in 1998. I’m not going to say I made a shrewd business decision 12 years ago, or even six years later when I bought a larger house.

For me, it wasn’t a case of not following what turned out to be bad advice from a fellow business journalist. Nor was it about trying to time the market.

I was simply following the same pattern as most Canadians: I got married and decided to stop renting and buy something. Later came the need for a bigger home when the second kid was on the way.

Which brings us to today. The supply of housing is rising fast as people try to list their homes for sale before the market “crashes.” This is happening at the same time that demand is starting to wane. Economists and even the real estate industry, are all predicting a correction — the only argument being how severe it will be.

So, the question for anyone buying is: should you wait?

Don Lawby, chief executive of Century 21 Canada, thinks the strategy of waiting for a crash is not going to work during this economic cycle. “For a market to crash, you have to have people who are desperate to sell,” says Mr. Lawby. “People will [only sell] if they can’t afford their mortgage or they don’t have a job.” He doesn’t see a decline in prices, “unless you are predicting that mortgages will renew at a hefty premium — which is not the case — or a whole bunch of people are going to lose their jobs.” Mr. Lawby believes neither will happen.

And, he adds, you are really into a risky game if you are timing the market. “A house is a home. If all you are doing is looking at it as an investment — that’s what happened the last 15 years — it’s not just that. It’s a place to live and a place to raise a family,” says Mr. Lawby. Even Benjamin Tal, a senior economist with CIBC World Markets, who, last month, said in a report that Canadian housing is 14% overvalued, has doubts about playing the market. But he suspects that’s exactly what some Canadians will do.

“Is there a sense that prices will go down and people will wait? I think it might be an issue,” says Mr. Tal. “It won’t be the main reason [people don't buy], but it will happen at the margins. The fact that people sell at the peak and wait to buy is a normally functioning market.”

But even if you do make the right call on housing prices, it could end up backfiring on you in other ways. For example, if interest rates rise fast enough, any gains you make on price could be erased by interest charges, says Mr. Tal. Edmonton certified financial planner Al Nagy says you need to think of your house the way you think about any long-term investment. “Whether it’s an investment for use in your retirement or a house to live in, it’s a long-term thing. The timing becomes less critical than it would be if it is a speculative [investment].”

And he says making a call on the housing market is as tricky as any other investment call. “It’s very rare you catch the bottom. You can’t let the market dictate when it’s time to buy. The time to buy is when you can afford it,” says Mr. Nagy.

I’m not sure that philosophy would fly with my former colleague, but the problem with timing the market is: what if your timing is off ?

gmarr@nationalpost.com

Terry McBride , For Canwest News Service SASKATOON — Canadians have taken advantage of extremely low interest rates to overextend themselves. The Bank of Canada wants to try to prevent inflation by raising interest rates to slow the economy down. How will debtors manage?

Inflation vs. deflation

Actually, debtors generally prefer inflation (when prices go up) because that can make it easier to repay a debt, which is a fixed dollar amount owing. Loan payments become more affordable when wages keep up with inflation.

Debtors usually fear deflation (when prices go down) because it becomes more difficult to repay an obligation when the fixed number of dollars can buy more. Deflation is already a major concern these days in Europe where some governments are raising taxes and cutting back on spending to tackle mushrooming public debts. Businesses there may be forced to cut prices and workers’ wages to cope with the economic slowdown.

Debtors fear deflation. How can they handle debt payments after their wages are cut or they lose their jobs? Serious household debt management issues arise.

Mortgage term

If your mortgage is coming up for renewal, how do you choose the best mortgage term? If you have had a variable or floating rate of interest tied to the prime rate, should you take the safe route and lock in a fixed, usually considerably higher, interest rate for five years?

If your mortgage payments rise, then you will have to look at various ways to manage other debts.

Consolidate

One popular debt management strategy is to combine various loans into your mortgage or a line of credit. Consolidation can eliminate high-interest credit card debt. Free up some cash flow by reducing your interest costs.

Talk to a professional debt counsellor. Can you have a single monthly payment? You could continue to make the same level of payments on your consolidated loan as you did before consolidation. Aim to reduce your principal owing and cut interest costs.

Amortization

Knowing how amortization works will help you to understand how to properly manage your debts. Amortization is how long you are scheduled to repay an instalment loan.

If interest rates rise, consider stretching the repayment period on an instalment loan to reduce the size of your monthly payments. Making your payments smaller seems very attractive at first. However, by making payments over a longer time period you will eventually pay much more interest in the long run.

Debt snowball

Here is a strategy for cutting down your overall debt level:

Make a list of your debts. Add up how much you pay on each loan.

Pick the smallest debt to tackle first. Pay the minimum on all debts except for your target debt. Pay whatever is left on your target debt until it is paid off. Then, continue with the debt snowball strategy by choosing the next debt on the list as your target debt. Pay it off.

Borrow wisely

The next time you have to borrow, avoid buying something that drops in value. The only time you should buy something using debt is if it is something that will appreciate in value or generate additional cash flow for you.

As a general rule, if you are buying something with borrowed money, make sure that what you buy lasts longer than the debt. Don’t add to your debt burden by going on a vacation financed by credit cards.

Emergency fund

Do you have to borrow when you have an emergency? Instead you should build an emergency fund with cash held in reserve. You could use a Tax-Free Savings Account, the cash surrender value of a whole life policy or a Canada Savings Bond payroll savings plan, for example. Having cash available to pay for an emergency will give you greater financial security than an untapped line of credit.

Terry McBride is a member of Advocis (The Financial Advisors Association of Canada)
Read more: http://www.financialpost.com/personal-finance/mortgage-centre/Managing+debt+while+rates+grow/3136091/story.html#ixzz0qXodyQrw

CALGARY - Calgary is the best place in Canada to invest in the residential real estate market, according to a new report released today.

The Real Estate Investment Network’s report said that Calgary experienced one of its best economic and real estate periods in Canadian history a couple of years ago but then entered a strong, and needed correction.

“During the economic downturn, Calgary’s market is making a predictable correction resulting in slightly more affordable housing compared to recent years passed,” said the report. “It was economically impossible for the market to continue at the pace at which it was heading and now finds itself adjusting to market realities.

“This adjustment period, as the market searches for its new foundation from which to build, should continue in 2010 as the provincial economy is poised for another growth spurt.”

The REIN report said the in-migration pace in the city continuing to lead the country combined with the “renewed affordability” will help propel the local market over the coming years.

“We, fortunately, should not see the massive over-boom situation we previously witnessed as the market remains more in line with the fundamentals,” said the report.

Following Calgary as the top Canadian real estate investment cities are Kitchener-Waterloo-Cambridge, Edmonton, Surrey, Maple Ridge, Hamilton, St. Albert, Simcoe Shores (Barrie-Orillia), Red Deer, Winnipeg and Saskatoon.

“Successful real estate investing is all about identifying a town or neighbourhood that has a future, not a past,” said the report. “Sadly, many investors like to invest based on past performance; thus, they are constantly chasing the market. This is called speculating - not investing.”

MTONEGUZZI@THEHERALD.CANWEST.COM

Read more: http://www.calgaryherald.com/business/real-estate/Investment+report+ranks+Calgary+Canadian+real+estate+markets/3111466/story.html#ixzz0qH4MXMeZ

by Gail Vaz-Oxlade, for Yahoo! Canada Finance
Thursday, May 27, 2010

Ever wonder how that magical number – The Credit Score – is computed?

Whether you’re obsessing over your FICO score or your Beacon score, you’re likely shopping for credit. The FICO score was developed by Fair Isaac & Co., which began credit scoring in the late 1950s. The point of the score is consolidate your credit profile into a single number. The Beacon score is a brand name used by Equifax, the largest credit-reporting agency in Canada. While Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed, whether you get a loan or not is a numbers game: The more points you score on your credit app, the better you do.

There’s a reason you have to fill out so much information when you’re applying for credit. Everything counts. Your age, your address, and even your telephone number all have a role to play in whether or not you’ll get credit.

Young ‘uns and old folk are at a disadvantage since under 21 and over 65 likely means you aren’t working; no points for you. If you’re married, you’ll get a point for being “stable.” And while you might think that being divorced would work against you (all that spousal and child support), most creditors don’t give a whit.

No dependents? Zero points. You’re probably still gallivanting like a teenager since you haven’t yet “settled down.” One to three dependents? Score one point. You’re a solid citizen. More than three dependents? Score zero. Have you no self control! And don’t you know you that with all those mouths to feed you could get in debt over your head?

Your home address counts too. Live in a trailer park or with your parents? Bad risk, score zero points. You could skip town with nary a look over your shoulder. Rent an apartment? Give yourself one point. Own a home with a big fat mortgage and you’ll score major points since someone has already done some checking and you qualified for a mortgage. Own your home free and clear? Even better. You’ve proven you can pay off a sizable debt and now you have a pile of equity that the card company would love to help you spend.

Previous Residence? Zero to five years (some applications only go to three years), score zero points since you move around too much. No land-line: zero points. How the Dickens are they gonna find you when you fall behind in payments. Since they can’t use your cell phone to actually locate you physically, it doesn’t count.
Less then one year at your present employer earns you no points. Again, it’s a stability and earning continuity thing. The longer you’re on the job, the more likely you are to be bored out of your mind but you’ll score more points. And, not to overstate the obvious, the more you make the better.

The more willing you are to make your lender rich, the higher your score will be. Since the FICO score was originally designed to measure customer profitability, if you pay off your balance in full every month, you’re going to score lower than the guy who only makes the minimum payment and pays huge amounts of interest.

Scores range from 300 to 900 and if you manage to hit 750 or above you’ll qualify for the best rates and terms. Score 620 or lower and you’ll pay premium interest if you even qualify; 620 is the absolute minimum credit score for insured mortgages.

Your credit score can change quickly. Payment history accounts for about 35% of your credit score and just one negative report can drop your pristine score into the doldrums. Since scores are updated monthly, your bad behaviour won’t go unpunished for long.

The type of credit you have counts for about 10% of your score. And your current level of indebtedness accounts for about 30% so going too close to your credit limit is another way to deflate your score. One rule of thumb is to keep your balances below the 65% mark. So if you have a limit of $1,000, you won’t ever carry a balance that’s more than $650.

Having too much credit available can also hurt your ability to borrow since the more credit you have, the more trouble you can get yourself into. If you’ve got a walletful of cards, canceling credit you’re not using can be a good thing – for both you and your credit score – over the long haul. Careful though. If the card you’re eliminating is one with a long, positive history, you’ll eliminate what could be a very good record of your repayment when you cancel the card. You’d be better off cutting up the card so you aren’t tempted to use it, while you establish a track record (six months or more) before you actually cancel the account.
Credit shopping can also cost you points. Since about 10% of your credit score relates to the number and frequency of new credit enquiries, applying willy nilly for new credit will end up costing you.  However, it’s only when a lender checks your score that this registers on your score. Checking your own credit report/score is considered a “soft” inquiry and does not go against your score.

http://ca.finance.yahoo.com/personal-finance/article/yfinance/1623/credit-score-secrets

Jeremy Torobin Globe and Mail

Mark Carney is taking a cautious approach to raising interest rates, weighing Canada’s powerful economic rebound against the uncertainty of an “increasingly uneven” recovery across the globe.

The Bank of Canada Governor became the first central banker in the Group of Seven to raise borrowing costs since the financial crisis and recession, increasing the benchmark overnight rate Tuesday by one-quarter of a percentage point to a still exceptionally low 0.5 per cent.

Policy makers will keep an eye on Europe’s troubles, and won’t move more aggressively than they see fit, the Bank of Canada suggested, even though the economy is rebounding rapidly and inflation will likely exceed its 2-per-cent target this year. Much like in 2008 when the U.S. financial crisis pulled Canada into recession, the country’s economic health depends in large part on policy makers in other countries successfully containing homemade problems.

“Interest rates are incredibly low, given the strength of the domestic economy, but the global story is where it’s at right now,” Eric Lascelles, chief economic strategist at TD Securities in Toronto, said in an interview. “The level of uncertainty suggests there’s not a lot of confidence in the forecasts.’’ The open-ended nature of the announcement sparked a fall in the Canadian dollar and yields on two-year government bonds as investors pulled back their bets on what they had expected might be a series of uninterrupted rate hikes going forward.

Last Updated: Tuesday, June 1, 2010 | 9:11 AM ET T CBC News

The Bank of Canada did the expected and raised its benchmark interest rate to 0.5 per cent on Tuesday, the first rate hike in nearly three years.

The bank moved its overnight lending rate 25 basis points higher, up from 0.25 per cent.

In doing so, Canada became the first G8 nation to raise rates after an aggressive round of cuts at the start of the recession in 2008, and after most developed economies showed signs of rebounding in 2009.

“The bank has decided to raise the target for the overnight rate to ½ per cent and to re-establish the normal functioning of the overnight market,” the bank said in a statement.

The rate has been frozen at 0.25 per cent since April 2009, when the bank made a “conditional commitment” to keep rates at such an extraordinary low as long as economic circumstances continued to warrant the shot in the arm of easy lending.

After recent reports showed Canada’s economy expanded at a 6.1 per cent annual pace in the first quarter, and created a record 109,000 jobs in April alone, the bank decided the time was right to act.

It’s the first time Mark Carney has opted to raise interest rates since he became the governor of the Bank of Canada more than two years ago.

There were concerns that the deteriorating economies of Europe and elsewhere might compel the bank to stand pat, but the bank clearly paid more attention to undeniable signs of local strength.

“The domestic case for higher rates simply overwhelms concerns about the international backdrop,” BMO chief economist Doug Porter said.

Paul Vieira, Financial Post

Ottawa — Bank of Canada governor Mark Carney has had a busy time of it since taking over as the country’s central banker 27 months ago, mostly tackling the financial crisis, mapping out the road to recovery and reassuring Canadians that at the end of the day the bank’s extraordinary policies would work.

The one thing he has yet to do during his term, however, is raise interest rates. That might be about to change on Tuesday. If he does pull the trigger - and that is what most analysts expect - it won’t be after grappling with competing forces that convey two starkly different messages about the economic outlook.

“We are at point where it is a tug of war between structural issues that are facing the eurozone and a very strong economic cyclical backdrop,” says Stéfane Marion, chief economist at National Bank Financial.

Weighing on the governor are the economic data, which call out for a rate hike - as much as 50 basis points, some reckon. The data have been consistently strong and surprising to the upside. Job creation is in full swing, with a record 109,000 workers added to payrolls in April; consumers are buying up goods at a healthy pace, tax credits or not; corporate profits are rebounding to pre-recession levels; and inflation is creeping closer to the central bank’s preferred 2% target. The sterling fundamentals prompted the central bank last month to ditch its conditional commitment to keep its policy rate at a record low 0.25% until July, leading traders to price in a nearly 100% chance of a rate hike on June 1.

That was until sovereign debt worries exploded in Europe, once Greece formally asked for international help days after the last Bank of Canada rate decision. That sparked an across-the-board retreat in global equity markets, down 9.3% since the beginning of May, as traders sold stocks and poured into risk-averse U.S. treasuries and other government securities on fears that another credit crunch was at hand. Mr. Carney is likely aware of this better than most, given his capital markets background from Goldman Sachs.

The most worrying sign on Mr. Carney’s radar screen might be the small but steady increases in the cost of borrowing among banks, a signal European lenders are finding it tough to access cash from their peers on concern over how much Greek, Portuguese and Spanish debt they hold.

In the end, the consensus is Mr. Carney is leaning toward a rate hike - a modest one, though, of 25 basis points. The thinking is, an ounce of prevention now is worth a pound of cure later.

“We can’t look at things in a vacuum, because there are so many other factors besides Europe’s issues” says Jonathan Basile, an economist with Credit Suisse in New York who closely watches Canadian markets. “The truth is the macroeconomic evidence is outweighing the financial risks right now.”

The last time the Bank of Canada raised its benchmark rate was in July 2007, by 25 basis points to 4.5%. At the time, former governor David Dodge said the economy was operating above its production potential, and inflation was likely to stay above its 2% inflation target for longer than forecast.

Little did Mr. Dodge know that the U.S. subprime crisis would morph into the worst financial crisis since the Great Depression, roiling markets and economies around the world. This is why Europe’s recent fiscal woes have triggered a case of nerves, and might prompt Mr. Carney to rethink any rate move.

“The Bank of Canada wants to raise rates, but it doesn’t have a crystal ball,” CIBC World Markets said in a note to clients. “It can’t be certain that the recent financial market downturn isn’t going to morph into something more severe that would make a rate hike look out of place.”

There’s another school of thought, though, that suggests markets have overreacted to a regional problem. In this context, it is key to remember the Bank of Canada didn’t expect the eurozone to contribute much to global growth, envisaging only 1.2% expansion this year and 1.6% in 2011.

“The European picture will calm down and people will realize it is not as dramatic as being played out,” says Carlos Leitao, chief economist at Laurentian Bank Securities.

Yes, he acknowledges, the debt-ridden southern European economies have tough years ahead. But other countries, led by Germany and France, are going to capitalize on the lower euro and boost their exports to emerging economies and North America, which will help offset the drag from the so-called Club Med nations.

Besides Europe, Mr. Carney has other factors to consider.

Canada’s sovereign debt levels are indeed much better than the industrialized world, as our politicians like to remind us. But the amount of debt held by households, measured as a percentage of disposable income, stood at a historical high of 146% - of which 98% is mortgage related - at the end of 2009, rating agency DBRS estimates. That would put Canadian households ahead of the United States but behind Britain on this measure. A rate hike would signal it might be time to live more modestly and refrain from too much debt-financed consumption (which helped fuel those nasty asset bubbles that central banks may want to pay more attention to in the aftermath of the subprime debacle).

Mr. Carney’s other challenge is to explain why, and what’s ahead. He has come off a period where he provided extraordinary guidance to markets. Don’t expect similar language from the governor.

If anything, Mr. Marion warns the central bank should refrain from using the type of guidance the U.S. Federal Reserve deployed in 2004, when it signalled a period of “moderate” rate hikes were in the offing.

In retrospect, the Fed’s use of the word moderate “encouraged more financial excesses,” leading to the subprime bust, Mr. Marion says. “Carney doesn’t have to be brusque about it. He has the luxury to start slowly, and leave his options open,” from pausing should Europe deteriorate to hiking aggressively, by 50 basis points, if conditions warrant.

Mr. Carney reminded us recently that “nothing is pre-ordained” at the Bank of Canada. He’s likely to drive home that point on Tuesday, rate hike or not.
Read more: http://www.financialpost.com/news-sectors/story.html?id=3084621#ixzz0pVYuP0cD

by Diana Cawfield, Bankrate.com
Wednesday, May 19, 2010

When it comes to retirement, there is no shortage of opinions on the need for a hefty $1 million to carry you through your golden years. The demographic trend of living longer and more actively also means extending our financial lives, so suggestions of needing plumper nest eggs are common. Outliving our money is a big concern for many.

While a six-digit portfolio may be the target to meet the lifestyle choices of some people, there are more modest and more achievable financial targets for many others. If you are in the lifestyle camp that requires close to $1 million to retire, and you’re comfortable with that, both financially and personally, this article is not for you.

But if you are among the many other investors who will retire with far less than a million dollars, read on to find out how to make your funds last a lifetime.

Retirement less expensive than you think
According to Malcolm Hamilton, a consulting actuary with Mercer, in Toronto, we don’t read about the comfortable retiree a lot because it doesn’t fit the stereotype. “The stereotype,” he says, “is the extravagant lady spending, the impoverished senior or the poor boomer in the sandwich generation having to help the poor senior.”

Yet, people who are frugal - not miserly, notes Hamilton - and don’t like wasting money often find that they don’t spend anywhere near as much as they have saved.

It’s all based on what you’re used to. According to Hamilton, many people don’t increase their spending once they retire because they’re already doing what they like and it doesn’t cost them very much. “It becomes obvious when they’re 10 to 15 years into retirement that they’re just getting richer and richer, not poorer and poorer,” he says.

Hamilton points out that retirement offers a host of enjoyable, low-cost activities that include local community centres, subsidized courses and discounts on clubs and recreation. Then there’s a wide choice of free or affordable activities like walks in the park, playing cards with friends, or reading and watching television for armchair adventures.

The rule of $20
Other positive factors bode well for retiring with more modest means. “Canadians tend to be very conservative about their approach to finances anyway, and our banking system has certainly helped that and it’s given retirees right now a greater piece of mind,” says Patricia Lovett-Reid, senior vice-president at TD Waterhouse Canada.

In fact, according to her research, close to 70 per cent of Canadian retirees already say their retirement is exactly, or mostly, what they expected. “It’s the preretirees who worry about their retirement, because they’re not sure how much they’re going to need. So when they hear that you need a million dollars, it’s overwhelming.”

Lovett-Reid credits Russell Investments Canada for the helpful retirement Rule of $20. Essentially, for every dollar of annual income that you expect to need during your retirement, you need to have saved $20 by the time you retire, without inflation indexing.

For example, a couple heading into retirement with $400,000 of registered savings can expect it to generate $20,000 a year in retirement income. “Now, you combine that with an estimated $25,000 of Canada Pension Plan, or CPP, and Old Age Security, or OAS, and this couple is looking at a yearly retirement income of approximately $45,000,” says Lovett-Reid.

For illustrative purposes, Lovett-Reid says research from Statistics Canada indicates that the median household income for a married couple is $63,000 gross. Therefore, if you want to maintain, say, 70 per cent of that income, then a couple at age 65 would need just shy of $45,000 a year in retirement, pretax.

For individuals who fall short of a $400,000 portfolio - especially those with no company pension - you’re going to require $20,000 of income from your own savings a year to maintain close to that $45,000 in annual income.

“So you’re going to have to look at the co-mingling of all your income sources - registered retirement savings, tax-free savings accounts and nonregistered accounts,” says Lovett-Reid.

Three job descriptions in retirement
According to Keith Pangretitsch, director of national sales at Russell Investments Canada, to simplify the process of calculating income needs, “we always say every dollar a client has should have a job description.”

To that end, he earmarks three main job descriptions for retirement funds. The first is to cover essentials such as food, shelter, transportation expenses, taxes and any other expenses beyond your control.

The second job description, lifestyle, offers flexibility because it is a discretionary expense. You can choose how to use your money when it comes to entertainment, travel, clothing and eating out, along with many other lifestyle choices.

That’s not to say that controlling discretionary expenses is an easy task. “I’ll put out an economics terms from my university days: We’re all utility-maximizing individuals. We all want to do more than less,” says Pangretitsch. So, you need to choose investments that will produce the amount of money you need.

While individuals vary greatly in risk tolerance and financial circumstances, a portfolio that offers a balance between risk and return is often necessary to generate growth of capital in retirement. “What we recommend is 60 per cent equity and 40 per cent fixed income to give you the growth that you need and to reduce the risk from equities,” says Pangretitsch.

The third job description is planning. “Most people, quite frankly, start planning too late,” says Pangretitsch. “I think the regulatory environment is good for folks to retire well, but we also need that added piece of financial planning to ensure that we’re on track. Retirement is far too complicated, with tax issues and reduced income issues, not to take it seriously.”

Diana Cawfield is an award-winning freelance writer, specializing in finance and health sciences.

By Julian Beltrame, The Canadian Press

OTTAWA - The Canadian dollar plunged to its lowest level in eight months before recovering Tuesday, sending a clear signal that Europe’s debt crisis has the potential to reach across the Atlantic and impact Canada’s mending economy.

The loonie has lost about eight per cent of its value over the last month in reaction to fears in global equity and financial markets about the lasting imprint of government debt, and now a new risk — the threat of war on the Korean peninsula.

Over the weekend, the Bank of Spain had to bail out Cajasur — the second savings bank in that country to receive public money since March 2009. On Monday, four other Spanish savings banks announced plans to merge amid concerns over solvency in the sector.

Tension in Asia has also risen since last week after North Korea was accused of the sinking in March of a South Korean warship. Seoul has called for sanctions against the North.

The Canadian dollar closed down 0.94 of a cent at 93.46 cents US on Tuesday after bouncing off a low of 92.18 cents US earlier in the day.

The loonie is not alone in seeing its value eroded. Other commodity currencies have also taken a hit in the flight to dependable and liquid U.S. Treasury bills.

The short-term impact on the Canadian economy of frightened financial markets and a loonie closer to 90 cents than parity, ironically, may be mostly positive.

A weaker dollar will give a much-needed boost to manufacturers and exporters who prosper whenever they can sell their products abroad with a currency discount.

And the unsettling of financial markets has caused real interest rates to soften for mortgages and other loans. Many Canadian banks have dropped posted rates on five-year mortgages to below six per cent.

As a result, prospects that Bank of Canada governor Mark Carney will start hiking rates next Tuesday have gone from a virtual sure thing a month ago to a coin-flip today.

Export Development Canada’s chief economist, Peter Hall, welcomed the fact that the loonie’s wings have been clipped, saying that a dollar at par had the potential to take two or three points off economic growth next year — the equivalent of about $30 billion to $45 billion in output.

But the longer term implications may be that Canada’s recovery won’t go as smoothly as many had hoped. The loonie is acting as a proxy for the global economy: when the Canadian dollar is down, it means so are prospects for global expansion, say economists.

“Everything and anything that happens in the world affects Canada,” said TD Bank chief economist Don Drummond, noting Canada’s dependence on trade and on the prices of commodities it sells to the rest of the world.

The longer term outlook is that many governments, not just the poor cousins of Europe, will soon need to deal with debt burdens that cannot be sustained, and the ensuing clampdown on spending will stall the recovery.

Several economists, including David Rosenberg of Gluskin and Sheff, said the risk of a second downturn in key economies, including the United States as Washington withdraws stimulus spending, has become very real. Much like in 2008-09, Canada would become collateral damage, they said.

“For a small, open (and) commodity-sensitive economy whose entire recession in 2009 was imported from abroad and south of the border, the answer is yes,” Rosenberg said when asked whether a second dip is possible.

That still remains a minority view, although the TD’s Drummond puts the risk at about 20 per cent.

The key question is whether the European crisis is an overblown temporary crisis, or the precursor of government debt woes in the United Kingdom, the United States and other larger economies.

Scotiabank portfolio manager Andrew Pyle said he believes the fears over Europe will blow over in a matter of weeks, which will cause both oil prices and the loonie to recover to previous levels.

“I think people will be surprised to see how quickly that will happen. I wouldn’t be surprised to see us back to parity in July,” he said.

But it’s the longer-term prospects that most worries Drummond. He says the perception that the situation will stabilize if the bailout of Greece and other countries works, or that things will implode if the bailout doesn’t work, is simplistic.

“Those countries (with large debts) aren’t getting out of this any time soon . . . easy bailout or not,” he said.

http://ca.news.finance.yahoo.com/s/25052010/2/biz-finance-loonie-s-plunge-signals-long-term-risk-canadian.html