Here is a quick review of TFSA versus RRSP. The TFSA does not generate a tax credit but any income, dividends or capital gains earned inside the TFSA are not subject to tax when withdrawn. With an RRSP you receive a tax credit each year for contributions made based upon your marginal tax rate (see table below for examples). But the RRSP is a tax-deferral mechanism and down the road when you make withdrawals, the RRSP will be subject to tax as ordinary income i.e. fully taxable.

While you have the option to contribute to either or both the RRSP and/or TFSA, you may want to consider your marginal tax rate. The marginal tax rate is the amount of tax you pay on the last dollar earned. If we look at the three examples below, you will notice that the tax system is progressive i.e. the higher the taxable income, the higher the tax paid on the next dollar earned.

TFSA versus RRSP

* assuming only the basic personal tax credit is claimed.  Source (Manulife Investments: 2010Advisor’s Quick reference Guide).

If you expect your retirement income to be roughly the same as during your retirement years, the TFSA may make sense. The RRSP only defers tax until you make withdrawals in retirement.

If you expect your taxable income in retirement to be lower than your working years, then the RRSP may make more sense.  Assume that your taxable income were $60,000 in your working years but $30,000 in your retirement years. Contributions to the RRSP get a 21% tax credit now but upon retirement withdrawals would only be taxed at 14.1%.

For 2010, the RRSP contribution limit is 18% of earned income or $22,000. This equates to an earned income of $122,222.  The annual TFSA room is $5,000.

In the end, it all comes down to having a plan and executing a strategy that makes sense for you.  TFSAs will play a larger and larger role in the retirement planning for Canadian over the years.  Have you developed a TFSA strategy with your advisor?  Do you have a financial plan?

Do You Know Your Number?

While extreme market volatility continues and the length of the recession remains uncertain, investors are understandably scared about their investments and their ability to retire comfortably. Whether you invest on your own or use an advisor, my recommendation is that you should review your retirement plan to determine where you stand personally.

One of the best methods to model your retirement plan is using the Otar Retirement Calculator (ORC). It is straightforward to use and answers the following questions.

• Do I have enough money to retire?

• How long will my money last?

• When can I retire?

• How much do I need to save for my retirement?

• Do I need a life annuity?

• What is my optimum asset mix?

It arrives at the answers in a unique way that is different than any other retirement planning program that I have ever used or reviewed. It does not use “forecasting” i.e. expected rates of return or expected inflation as predictions for the future. Instead, the ORC uses “aftcasting” by using actual market history to show the client’s potential outcomes. Jim Otar, the designer of this program recognized this phenomenon many years ago and in 2001 published, “High Expectations & False Dreams: One Hundred Years of Stock Market History Applied to Retirement Planning”.

I urge you to visit his website at www.retirementoptimizer.com. You can read numerous articles as well as download a free trial version of his software. He is a very soft-spoken man with a powerful message.

Kudos to Jim Otar in developing a revolutionary new method for retirement income planning.

Don Maycock, P. Eng, CFP, CIM is an independent financial advisor …advising you to and through retirement! Don is licensed for mutual funds which are provided through Armstrong & Quaile Associates Inc and insurance which is provided through Armstrong & Quaile Insurance Agency Inc. 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.

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.”

1.      Variable products such as mutual funds, stocks, bonds or cash can be used to design a portfolio with which to take regular income withdrawals in retirement. These portfolios are subjected to sequence of return risk especially if you retire in a down market and are making regular withdrawals.

2.      Guaranteed products such as GICs or annuities can also be used. In the current interest rate environment, GICs have low rates of return and generally do not keep up with inflation.  Annuities provide a guaranteed income stream for life, much like a pension. However once purchased, there is no access to the capital and typically no estate value.

Along came the “variable annuity” or what it has been more commonly referred to in Canada as the GMWB, Guaranteed Minimum Withdrawal Benefit. In a nutshell, a GMWB provides guaranteed income for a specific time period with the potential for increased income depending upon the performance of an underlying investment to which it’s linked. It can best thought of as a combination of items one and two discussed above. For this guarantee, you pay a higher management fee i.e. portfolio insurance. Manulife was the first insurer to introduce the product to the Canadian marketplace since it had purchased John Hancock in the US where variable annuities have been used for several years.  Canadians have been receptive to the product and now there are many insurers offering GMWBs. Manulife remains at the forefront in not only sales but in product evolution. For more information on GMWBs, I recommend the Manulife microsite at http://manulifeincomeplus.ca/ as a primer.

Advisors need to conduct their own due diligence when new products are introduced to the market.

My major concern from the outset concerning GMWBs was that there were no guidelines on what percentage a client should hold as part of their overall portfolio.  One independent advisor, Jim Otar, offers a software tool called “the retirement calculator” that uses historic market data and allows you to model combinations of product allocations which include GMWBs. It’s a great tool that helps determine ( based upon your financial resources today), when you can retire, how much you need to save for retirement, as well as the probability of running out of money in retirement.

Moshe Milevsky, the Executive Director of The IFID Centre (www.ifid.ca) and Associate Professor of Finance at the Schulich School of Business at York University (www.yorku.ca) in Toronto is well known to many Canadians for his numerous books and lectures on money issues. He is also President, CEO & Chairman of the QWeMA Group (Quantitative Wealth Management Analytics Group). Manulife has partnered with QWeMA to develop software to addresses how a client might best optimize their “product allocation” between the following.

1.      Guaranteed investments (annuities),

2.      Variable investments (traditional RRSPs/RRIFs with systematic income withdrawals in retirement) and,

3.      GMWBs.

Based upon the clients expected financial resources at retirement (company pension, CPP, OAS, RRSPs, etc) and the key variable of how much income the client desires in retirement, the software calculates their RSQ (Retirement Sustainability Quotient). Values range from zero indicating a low probability of having sufficient retirement income to last your lifetime to an RSQ of 100 indicating a high probability of sufficient income. Lastly, a modeled scenario with an improved RSQ value (plus allowable product allocation ranges) is presented for consideration.

Defined benefit pension plans continue to decrease for Canadian workers. These investors must take a more active role in their retirement income planning. In my opinion, product allocation is the newest major development that needs to be given high priority in the quest to produce sustainable income throughout retirement.

Don Maycock, P. Eng, CFP, CIM is an independent financial advisor …advising you to and through retirement! Don is licensed for mutual funds which are provided through Armstrong & Quaile Associates Inc and insurance which is provided through Armstrong & Quaile Insurance Agency Inc.  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.

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.”

Here is the video

It is my understanding that in the event you were a victim of identity theft; the burden of proof may be on you to prove your innocence. What steps could we do now to make sure our identity and credit rating is secure and not violated. Ever wondered about what’s in your file and if it’s accurate? Curious consumers may obtain copies of their reports free of charge from the following sources.

Equifax (www.equifax.com/EFX_Canada/ )

I tested this service out myself on this as they provided a toll –free number (1-800-465-7166) and it only took a few minutes to order. You will be giving your SIN # and credit card number for verification (they don’t ask for the expiry date) among other personal information. They already know all this about you, so it’s just verification. In about a week you’ll receive a detail report. You should be able to recognize any credit facility that has checked into your credit history in the past.

Trans Union Canada (www.tuc.ca)

This service is not as straightforward as with Equifax, because their free report requires you to mail in the request. From the main page www.tuc.ca, click on “Personal Solutions”, and then click on “Order Credit Report and Score”, select “Option 2”. Details are provided on where to mail the request and what information to send.

There are also great tips and even a monthly newsletter on how to keep your identity safe.

Identity theft is a real threat. Baseline your credit situation by following the steps listed above. It makes sense to me, what do you think?

For more information, comments or questions, please contact me at 613-966-8289, email dmaycock@a-q.com or go to (www.donmaycock.com).

While the easiest and most enjoyable strategy is the “spend the refund”, the following are disciplined ways to improve your RRSP growth and ultimately your retirement plan.

1.Reinvest refund strategy:

Use this year’s refund to make next year’s RRSP contribution.

2.Gross-up refund strategy:

While getting a tax refund may feel good, what you’ve actually done is loaned the government your money over the past year, and now they are giving you back what was owed to you. The “gross-up” strategy involves grossing up RRSP contributions by your marginal tax rate and invest all of your intended cashflow to “pay yourself first”. Every month invest the appropriate grossed-up amount using pre-authorized withdrawals from your chequing account. Then have your employer adjust your withholding taxes to get your tax refund working for you immediately instead of being spent. Lastly, file a “Request to reduce tax deductions at source” form. Email me if you need a form or assistance.

3.Top-up loan strategy

This is a short-term strategy whereby an “RRSP loan” (typically under two years in length) is used to “top-up” the RRSP contribution. The RRSP refund and the monthly loan payments are sufficient to pay off the loan over the period.

4.Catch-up loan strategy

When you have substantial RRSP room that could not be handled by a short-term loan (one or two years) a long-term “catch-up” loan for up to 10 years could be considered. This method lowers your monthly payment substantially thereby reducing the strain on monthly cash flow.

With low interest rates, RRSP loans may make sense. Please note that interest is not tax-deductible for RRSP loans, as this is not considered an investment loan.

Planning an effective RRSP strategy is just one of the many value-added benefits your financial advisor should be assisting you with. Having an “RRSP Optimization Strategy” just makes sense to me. What do you think?

For more information, comments or questions, please contact me at 613-966-8289, email dmaycock@a-q.com or (www.donmaycock.com) for more information.

“Using borrowed money to finance the purchase of securities involves greater risk than a purchase using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and interest by its term remains the same even if the value of the securities purchased declines. Please read any disclosure statements outlining these risks before purchasing.”

Maybe it’s time for a portfolio clean up as well. A good place to start is the Investment Policy Statement or IPS.

While a comprehensive financial plan looks at the big picture reviewing both your investments and insurance, the IPS concentrates on each specific investment goal. It’s much more than the results of a risk tolerance questionnaire; it’s your blueprint.

Your Investment Policy Statement is an important document that details your overall investment strategy. The process of creating the IPS establishes your investment objectives and constraints and details how these requirements are to be met. It provides a long-term plan and a basis for making decisions. The plan is not carved in stone – your situation will change over time. But without a clear direction your investment strategy may drift and be at odds with your requirements.

The IPS should discuss the following aspects:

· Your investment profile: Are you conservative, balanced or aggressive? What is your time horizon?

· Your level of investment risk: How would you act under various market situations?

· A recommended portfolio, which will help you, achieve your investment goals as well as key reasons why this portfolio is an ideal solution for you.

· Information on your recommended portfolio including its underlying fund holdings, the asset class weightings (cash, bonds or stocks) as well as the investment managers.

An example where an IPS could be used is when setting up an education plan for a child. A 4-year undergraduate program is estimated to cost over $100,000 in 18 years; so if you’re serious about really helping finance their education, starting a Registered Education Savings Plan, RESP is just the beginning. The IPS will document the plan details, goals and keep both the advisor and client focused on the plan. Regular reviews each year will show if you are on track or not and what changes need to be made.

Volatile markets can unnerve clients, but the IPS can help you stay focused on long-term objectives and prevent yourself from making rash decisions like dumping equities and piling into money-market funds. An Investment Policy Statement, IPS, just makes sense to me. What do you think?

For more information, comments or questions please call 613-966-8289 or email dmaycock@a-q.com. To see a sample IPS, go to www.donmaycock.com.

I recently completed reviewing my annual client survey and the results were interesting although not at all unexpected. The number one feedback from clients was that they would like more assistance on ways to reduce income taxes. Big surprise!

I read an interesting book this summer “The Tax Freedom Zone” by Tim Cestnick. It’s not about paying no tax; it’s about reducing the amount you pay as low as possible given your personal circumstances i.e. The Tax Freedom Zone. Tim’s writing style with short humorous stories makes reading a tax book enjoyable.

An IPP is a form of defined-benefit pension plan and as such guarantees a set level of retirement income – something that RRSPs cannot do. If the IPP pension fund is not performing up to expectations, additional tax-deductible contributions may be made to top up the fund. In fact, these additional contributions are required by pension funding legislation. In contrast, if RRSP funds do not perform up to expectations, there is no opportunity to top up those savings with additional tax-deductible contributions.

Under certain conditions, the IPP allows for contributions for years of service prior to the plan being set-up. This opens up the possibility of additional deposits into the plan.

Since it is a registered pension plan, an IPP is entirely creditor-proof, except for marital breakdown. This feature is particularly attractive to entrepreneurs, since there is no risk of losing the funds as a result of business failure. In contrast, RRSP savings, except for those associated with insurance contracts, are usually vulnerable to claims by creditors.

An RRSP has no rules on diversification while the IPP mandates a safety first approach by ensuring that the portfolio is not allowed to invest more than 10% of its assets in any one investment. The 30% foreign content restriction however applies in both instances.

At retirement, in a typical company pension plan scenario the former employee is paid a pension for their lifetime and either in full or in a reduced amount to the spouse after their death, for the duration of their lifetime. If both spouses die early into their retirement, the obligation of the company pension is finished – any unused assets remain the property of the pension fund. However, with an IPP the assets in the plan belong to the plan member, and upon their death and the death of their spouse, any remaining benefits will be paid to their estate, to be distributed according to their wills.

IPPs make sense to me, what do you think?

Fast-forward to today and things are a bit different. You can now fully configure a car and get the MSRP price online, however, you still need to go to the dealer and negotiate the final price. Still one issue remained. What is the dealer’s cost? If you don’t know their cost, how can you determine a reasonable offer?

What’s really interesting is that I stumbled upon a web site www.carcostcanada.com. For $39.95, you get five price reports, meaning you can configure up to five different cars including options and their service will provide you with a price report showing both MSRP price as well as the dealer invoice price. They also provide the current dealer incentives that are available. This site is well worth checking out! You can even view a sample report.

As recommended by carcostcanada.com, I printed out the report for the vehicle I wanted and presented to the salesperson. Surprisingly, he was familiar with the report and verified their numbers were indeed correct. This sends a clear signal to the salesperson that you are in fact serious about buying the car, so negotiation, in my opinion, is much easier.

If you absolutely hate negotiating, carcostcanada.com offers a secondary service. For $99 they will seek out the dealer willing to sell the vehicle to you on your terms. You specify the percentage over invoice, maximum administration charge, maximum distance you are willing to travel to get the vehicle, plus a first and second choice on exterior color. If they can’t find any dealer willing to meet your criteria, you don’t have to pay that $99. The service probably works well in a large metropolitan area where there are many dealers in a small geographic location. I did not try this option.

As car purchases are a big-ticket item, it pays to spend a bit of time to save money. If you have any questions, please don’t hesitate to contact me.