• 12Aug

  The Number

  In Your Best Interest No Comments

  Every once in while, a really great book comes out. If you only read one financial book this year, I highly recommend The Number by Lee Eisenburg. In a nutshell, The Number is about formulating your personal retirement strategy not just the monetary nest egg. What makes this book so unique is that it isn’t written by an investment guru or anyone remotely involved in the financial industry.

  For those who just want to mechanically calculate The Number for themselves, go to the appendix in the back of the book and in about ten minutes you’ll crank out your answer. But that isn’t really what the book is all about. The Number is based largely upon what is going on in the United States and the issues facing everyone and their eventual retirement. While the book’s landscape is south of the border there are a lot of similarities to Canada and even a few direct references. The book is written in three parts. Continue reading »

• 12Aug

  The Naked Investor

  In Your Best Interest No Comments

  A great summer read I recommend is The Naked Investor, by John Lawrence Reynolds. It’s a must for every investor’s library. This book details real-life stories on the dark side of the investment world where unscrupulous advisors have taken advantage of the investor, for their own personal gain. It’s a tough read for any advisor and admittedly does not leave me feeling really good about the industry. Hopefully though, this article will give you the impetuous to read this book, so that you can recognize the signs, if something just doesn’t smell right. Investment education is paramount and this book is a great start. Remember it is your money after all. Continue reading »

• 12Aug

  ANNUITIES: THE UNSUNG HEROES

  In Your Best Interest No Comments

  Annuities are an under-utilized product for those seeking consistent stable income, regardless of stock market conditions. In simple terms, an annuity can be thought of as the opposite of a mortgage for a home. With a mortgage, a financial institution gives you a specific amount with which to purchase a home and in turn you make regular payments back to them. With an annuity, you give the financial institution a specific amount and they in turn make regular payments back to you. This article is a brief overview of two primary types; the “term-certain” and the “life” annuity.

  Term Certain

  With a term certain annuity, you trade a pool of capital for a guaranteed fixed payment each month for a specific time period. A typical term-certain annuity might be for a 5 year, fixed term of $500 per month. The key determinant of cost will be interest rates at the time of purchase.

  Situations where you might consider a term-certain annuity;

  to reduce on-going investment decisions,

  a simple and secure source of income,

  an income need for a specific time period,

  to convert savings into income to fund a child’s on-going educational costs, or

  to transfer inheritances to children gradually (versus a one-time lump-sum).

  Life Annuity

  With a life annuity, you trade a pool of capital for a guaranteed income for life. You might think of it as buying a pension. The key factors in how it’s priced are your age, whether you are male or female, whether the invested funds are registered or non-registered, and current interest rates. You can also specify whether you want it indexed (i.e. increased payment by 2% each year), joint with your spouse so its lasts until the death of the last survivor. There are hosts of other customizing options available to suit your financial planning needs.

  You should also be fully aware that it’s a one-time decision and once you trade your capital for that guaranteed payment going forward, the capital is no longer accessible by you, nor can it be passed along to beneficiaries should you die. If this is a concern, one option at the time of setting up the annuity, might be to specify a “guarantee period” i.e. a five year guarantee period. Then in the event you pass away after two years, the balance of payments (remaining three years) would go to the beneficiary.

  In summary, annuities may be worth considering for your financial plan. They are very flexible and can be customized to meet a wide range of needs. In the next article, I’ll cover a few special concepts for annuities.

  If you’d like a free no-obligation package on annuities, please send me your contact information.

  Don Maycock, P. Eng, CFP is an independent “fee-based” financial advisor, licensed for mutual funds and insurance. If you have a question or comment, please email Don at dmaycock@a-q.com, call (613) 966 8289, or go to www.donmaycock.com for more information. Subscribe to “The MAYCOCK e-Newsletter” for free valuable financial planning tips each month.

• 12Aug

  On a Fixed Income? Give Yourself a Raise!

  In Your Best Interest No Comments

  In my last article, I introduced the concept of annuities. In this article, I’ll introduce a very intriguing concept, the “insured annuity”. It took me a few times seeing this concept presented to fully understand it, so if at first glance it seems complicated, that’s understandable.

  Where is it used?

  The insured annuity is alternative to a GIC. It’s best used when you do not need access to your capital but from an estate planning perspective, you want to pass along the value of that capital to your heirs upon your death. It works best for those in good health, who are generally over 65 years of age.

  What follows is a typical example.

  Assume a male (non-smoker) has $100,000 of non-registered funds and is considering purchasing a GIC that pays four-percent annual interest and that his marginal tax rate is 30%.

  With a GIC after-tax, he would receive the following.

  $100,000 times 4% times (1 – marginal tax rate) = 100,000 * .04 * (1-.30) = $2,800 or 2.8%

  With an insured annuity, there are several steps as follows.

  Step 1: Purchase a term-to-100 life insurance policy for $100,000. The premium (annual cost) for a 65-year old male, non-smoker in this example is estimated to be $3,072. Remember, you must be insurable or this concept does not work.

  Step 2: Purchase a prescribed annuity for $100,000. A prescribed annuity has level taxation each year whereas the tax for standard annuity is variable. In this example, a prescribed annuity is estimated to pay $7,418 before tax. The prescribed annuity is estimated to have an annual taxable portion of $1,638 which at a 30% marginal tax rate is approximately $491. Therefore on net, the prescribed annuity pays $6,927 annually after-tax ($7,418 minus $491).

  Step 3: Use the proceeds of the prescribed annuity to pay the life insurance premiums as follows.

  Prescribed Annuity after-tax = $ 6,927

  Less: Insurance Premium = $ 3,072

  Difference =$ 3,855

  While the GIC paid $2,800 after-tax, the “insured annuity” pays $1,055 more after-tax which is over 35% more income.

  In Summary

  The insured annuity concept needs to be implemented in a very efficient step-by-step manner.

  This is not a do-it-yourself strategy. You need to work with a trusted financial planner who is life licensed and understands your personal situation to make sure this is a sensible solution. Because a life insurance policy is involved, it takes some time to setup and you must be insurable. Once it is set-up, you cannot change the terms. With a GIC, rates may rise.

  If you’d like a free no-obligation package on the “insured annuity” concept, please contact me.

  Don Maycock, P. Eng, CFP is an independent “fee-based” financial advisor, licensed for mutual funds and insurance. If you have a question or comment, please email Don at dmaycock@a-q.com, call (613) 966 8289, or go to www.donmaycock.com for more information.

  Subscribe to “The MAYCOCK e-Newsletter” for free valuable financial planning tips each month.

• 12Aug

  What’s Your Personal Net Worth: An example of how to calculate your Personal Net Worth

  In Your Best Interest No Comments

  One of the simplest financial planning steps you can do is to complete a Net Worth Statement each year. Your Net Worth is simply a snapshot of the difference between what you own (your assets) versus what you owe (your liabilities).

  Click here for a sample Person Net Worth Statement as an excel spreadsheet.

  I downloaded this sample from Microsoft’s website for templates and made a few changes. The primary change was to identify “investable assets”. These include items such as RRSPs and non-registered accounts. In this example, investable assets total to $235,000. This is one of your important numbers as it represents a source of funding for future goals such as your retirement.

  I recommend updating your net worth once a year. A good time is to do it in late January because, that’s when you’ll be receiving annual investment statements based upon year-end values. You can also estimate the value of your real estate and other items or look them up. Once complete, simply print out the statement and attach the back-up information for reference.

  Lastly, store this document in a reference file folder called “Net Worth”. Then next year, you can refer back to it and see the changes. It’s also a valuable document to take when meeting with your financial advisor to update your financial status.

  click here for a blank net worth calculator using excel

  Feel free to email me any suggestions for improvements.

  Don Maycock, P. Eng, CFP is an independent “fee-based” financial advisor, licensed for mutual funds and insurance. If you have a question or comment, email Don at dmaycock@a-q.com, call (613) 966 8289, or go to www.donmaycock.com for more information.

  Subscribe to “The MAYCOCK e-Newsletter” for free valuable financial planning tips each month.

• 12Aug

  Do You Know Your “Number”?

  In Your Best Interest No Comments

  With RRSP season having just ended and tax season ramping up, the last thing on most people’s minds right now is planning for their retirement.

  Whether you do your own investing on-line, use your local bank, broker, or a financial planner do you know your “Number”?

  Experience shows that many people don’t have a good handle on the one number that will mean the difference between a quality retirement and having to struggle. Your “Number” is the amount of money necessary to give you the retirement you want.

  One of the simplest tools I have come across to give you a rough estimate of your “Number” is the Human Resources and Social Development Canada website. Click on the “Canadian Retirement Income Calculator” link or type the following into your web browser.

  http://www.hrsdc.gc.ca/en/isp/common/cricinfo.shtml

  To get the most out of this calculator, make sure that you have as much of the following information as possible:

  · your most recent CPP Statement of Contributions or QPP Statement of Participation;

  · financial information about your employer pension (if applicable);

  · recent RRSP statement(s) (if applicable);

  · your most recent statements for other savings that will provide ongoing monthly retirement income (annuities, foreign pensions; survivor pensions, etc.); and

  · enough time to complete the calculator – usually about 30 minutes.

  While using this calculator, please keep in mind that it is a rough estimate of your future income. Many factors may affect your retirement income and your actual income may differ from the results in this calculator.

  In summary, if you were able to work through this calculator you now know have a handle on your “Number”. If you struggled and need more assistance, that’s where an investment professional can and should be helping you. Good luck in finding your “Number”.

  Don Maycock, P. Eng, CFP is an independent financial advisor, licensed for mutual funds and insurance. If you have a question or comment, email Don at dmaycock@a-q.com, call (613) 966 8289, or go to www.donmaycock.com for more information.

  Subscribe to “The MAYCOCK e-Newsletter” for free valuable financial planning tips each month.

• 12Aug

  Tax-Effective Investing with Corporate Class Mutual Funds

  In Your Best Interest No Comments

  Traditional mutual funds are set up in a “trust” structure. When you make a purchase, you buy “units” of a specific fund, for example, Fund A. However, if you decide to sell Fund A or switch to Fund B, outside a registered plan you incur a deemed disposition. If there is a profit, you’ll have a capital gain and may be subject to tax. Wouldn’t it be nice, if there were a way to defer the tax until you actually want to sell all or a portion of the investment? There is and the way is to use “corporate class” mutual funds.

  “Corporate class” funds are set up in a “corporate” structure. The advantage to the corporate structure quite simply is that when you sell or switch from Fund A to Fund B no deemed disposition occurs, therefore no tax implications. Below is a simple diagram to illustrate.

  

  Depending upon your personal financial circumstance, what follows are several strategies where “corporate class” funds may be beneficial.

  1. If you earn a salary of more than $105,555 your maximum RRSP contribution limit is $19,000 for 2007. If your goal is to put away additional funds for retirement and get tax-deferred growth, consider “corporate class” funds.

  2. If you are in a company with a Registered Pension Plan, when your employer makes contributions on your behalf, it reduces your RRSP room. This occurs because the Pension Adjustment (PA) must be factored into your total RRSP contribution room. Again, if your goal is to put away additional funds for retirement and get tax-deferred growth, consider “corporate class” funds.

  3. If you are an older investor, you may be able to minimize or avoid the OAS clawbacks. “Corporate class” funds can help structure your cash flow by receiving capital gains which are taxed more favorably than interest income.

  The above are just a few strategies to consider using “corporate class” funds in your financial plan. For further information, please contact me.

  Disclaimer:” “Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.”

• 12Aug

  Mutual Fund Bilingualism

  In Your Best Interest No Comments

  If you invest in mutual funds, have you ever wondered how your funds get classified? What’s makes a fund, for example, a Canadian Balanced Fund, in the first place? That’s where the Canadian Investment Funds Standards Committee (CIFSC) comes in. As stated on their website (http://www.cifsc.org) “the primary purpose of the committee is to provide investors with a consistent set of mutual fund categories”. Over the past several years, it’s been anything but consistent and especially difficult for advisors who need to do research on the funds they advise their clients on.

  Last year, Morningstar broke away from CIFSC and created its own fund categories due to frustration with the CIFSC’s methodology. As an advisor, I found it frustrating because for the same fund, CIFSC might have it in one particular category and Morningstar another. Advisors had to become “mutual fund bilingual” so-to-speak.

  In March of this year, it seems Morningstar and CIFSC have patched things up and agreed to come back together. This has now set the stage for re-establishing a single set of basic industry-wide categories, and everybody’s happy again.

  So what about your Canadian Balanced Fund? It might stay the same but it depends upon its equity and fixed income holdings. Otherwise it may fall under the following categories.

  · Canadian Balanced – Equity Focused

  · Canadian Balanced – Income Focused

  · Canadian Balanced – Income Balanced.

  If you go the CIFSC website, you can look at the rules and flowcharts for how all the new categories will likely unfold. Interested parties can provide feedback on the proposals up until May 11, 2007. Here is mine. “Just get it done, please. Get funds in the same categories, so whether I get my data from Morningstar, Globefund, or Fundata, it’s consistent for advisors too! You have cost me considerable time and money trying to determine which system to use. Let’s move forward.”

  Disclaimer:” “Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.”

  Don Maycock, P. Eng, CFP is an independent financial advisor, licensed for mutual funds and insurance. If you have a question or comment, email Don at dmaycock@a-q.com, call (613) 966 8289, or go to www.donmaycock.com for more information.

  Subscribe to “The MAYCOCK e-Newsletter” to receive valuable financial planning tips each month.

• 12Aug

  The new kid on the block…the Variable Annuity!

  In Your Best Interest 2 Comments

  In June 2006, I attended the Morningstar Investment Conference, which focused on “Retirement Income Planning”. One well-known speaker, Moshe Milevsky, introduced the concept in retirement planning of not just how to generate retirement income in your portfolio by having a proper asset allocation (a mix of cash, bonds and equities according to your risk tolerance) but also the importance of product allocation. Product allocation refers to your allocation to various products such as GICs, mutual funds, annuities and a new category called the “variable annuity”. This article focuses on the variable annuity as a consideration.

  While the variable annuity has existed in the US for over five years, Manulife introduced it to the Canadian market in the fall of 2006. Manulife calls it “Income Plus”. A dedicated consumer website can be found at

  http://www.manulife.ca/canada/Investments.nsf/Public/GIFSelectIncomePlus_splash

  In a nutshell, it addresses concerns retirees might have of outliving their money, inflation and the effect of poor early returns in their portfolio.  The variable annuity attempts to address this as follows.

  • It offers a guaranteed payment of 5% of your original investment each year for 20 years with the potential to increase the payments in the future, using a “reset” feature (resets are beyond the scope of this article).  For example, a $100,000 investment would have a minimum guaranteed payment of $5,000 annually for 20 years.
  • It offers a 5% “bonus” of your original investment for each year your defer taking a withdrawal (up to 10 years maximum). For example, a $66,667 investment today would get a 5% bonus of the original investment each year i.e. $3,333 and grow to a balance of $100,000 in 10 years.  The investor could then start payments and get a guaranteed minimum payment based upon 5% of the $100,000 value i.e.$5,000 annually for 20 years.

  Recently, CI Investments and Sunlife introduced a similar product as an option on their existing SunWise Elite segregated fund product line. It is known as SunWise Elite Plus. A dedicated consumer website can be found at

  http://www.ci.com/sunwiseeliteplus/index.jsp?lang=ENG

  These products can be used in registered and non-registered accounts.

  As there is no free lunch, a variable annuity has an added cost to get the guarantee. This cost depends on the percentage equity held in the underlying investment.

  While the basics of how a variable annuity works is quite simple, the product can get complicated as you dig deeper. This article only serves to raise the awareness that “variable annuities” are the new kid on the block. As with any new investment, do your due diligence.

  For further information on “variable annuities” or to learn how they might compliment your current retirement income strategy, please contact me.

  Disclaimer:” “Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.”

  Don Maycock, P. Eng, CFP is an independent financial advisor, licensed for mutual funds and insurance. If you have a question or comment, email Don at dmaycock@a-q.com, call (613) 966 8289, or go to www.donmaycock.com for more information.

  Subscribe to “The MAYCOCK e-Newsletter” to receive valuable financial planning tips each month.

• 12Aug

  Your Cash Management Plan: The Emergency Fund

  In Your Best Interest No Comments

  As a financial planner, I often observe when I meet prospective clients for the first time is their lack of an emergency fund as part of their cash management plan. Why do we need an emergency fund? At anytime, we could experience a situation where our cash flow cannot meet the demands due to an unexpected emergency. These range from the moderately inconvenient, like a major car repair, to the potentially disastrous, like the death or disability of an income earner, or a long period of unemployment. Some of these problems can be moderated by life or disability insurance, or by unemployment insurance, but some financial impact will likely remain.

  Some form of emergency fund is crucial to every cash management plan. The size of fund that is right for you will depend upon your circumstances. Some questions to consider include:

  · How secure is your job?

  · If you lost your job, how difficult would it be for you to find a new one?

  · Are you the sole breadwinner in the family?

  · What would happen to your cash flow if you or your spouse died or became disabled?

  · What is the condition of your car? Your furnace? Your major appliances?

  · What would happen to your cash flow if one of your parents or children suddenly became ill, and you had to take a leave of absence from work?

  From the Canadian Institute of Financial Planners, Practitioner’s Guide, the recommended emergency fund should be between four and six times monthly expenses. Remember it’s based upon expenses, not income! So how is it calculated? Add up the following expenses.

  · Shelter

  · Household and Family

  · Transportation

  · Discretionary

  · Other Debt Repayments

  If we assume total monthly expenses of $2,000, then the emergency fund range should be between $8,000 and $12,000. While this may seem like an insurmountable challenge, it can be implemented over several years and can begin with as little as $25 per month.

  You don’t have to keep emergency funds sitting in a cash account, and in fact, this is not recommended as if it’s too accessible, you might be tempted to spend it! Some of the more traditional possibilities for emergency funds include money market mutual funds, high yield savings accounts, Canada Savings Bonds, or T-bills. It may also be possible to restructure some of your existing assets so that they can be accessed in an emergency.

  In a pinch, you might withdraw funds from the RRSP. This might be appropriate during a long period of unemployment when taxable income is reduced anyway. But be forewarned, the contribution room cannot be restored at a later date. While overdraft protection or a personal line of credit might be considered, I would generally warn against it. With borrowed money, principal plus interest must be repaid and what happens if you get into serious financial difficulty, such as job loss where the emergency lasts longer than expected.

  I believe that the financial planning concept of an “emergency fund” can help remove some of financial stress in your life! Included on my website, is an “Emergency Fund Worksheet” that you can download and complete. Go to www.donmaycock.com and look under the Cash Management section on the home page.

  Disclaimer:” “Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.”

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