Business owners face and evaluate risk every day. One tool to consider using is a risk matrix as shown below. The key point is to make sure that your highly critical, low probability risks are minimized i.e. moving from point A to point B.
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Probability |
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Risk Severity |
High |
Medium |
Low |
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Critical |
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A |
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Material |
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Minor |
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Insured |
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B |
Many people build their financial plan using the 50% probability method. That’s the value you get when you assume all the variables are fixed. One major problem that may happen is that if you assume an average rate of return, you are not taking into account the natural variability (called standard deviation) of different asset classes that happens in the real world. Some years you get higher returns and some years it’s lower, even negative. For example, if you withdraw 8% in year one and also experience an overall market downturn of 12%, you’re down 20% in total in year one. You then need a 25% return in year two just to get even, not taking into account your planned withdrawal. It’s possible but not highly probable. In practice, a Monte Carlo simulation takes into account the variability of returns by running numerous “what-if” scenarios and statistically varying the return of each asset class in your portfolio. Continue reading »
Tax Deferral
While it’s nice to get the refund for making an RRSP contribution, the primary reason is to defer income tax until your retirement. I have heard on several occasions that some people have commented, to my clients, they wished they had never contributed to an RRSP because now in retirement they are being taxed on the withdrawals. While this is true, many people forget that this tax is at your marginal tax rate (the tax you pay on the next dollar earned) and it’s probably much lower in retirement than in your working years. The Canadian tax system is a progressive system i.e. the higher your taxable income the higher percentage of income tax you pay!
Here’s an example.
If your taxable income was $52,000 in 2005 then your marginal tax rate is just over 31%.
If your taxable income was $26,000 in 2005 then your marginal tax rate is just over 22%.
Please consult Canada Revenue Agency, CRA for your individual circumstance.
If we make a basic assumption that in your working years, you were in the 31% bracket and in your retirement years you were in the 22% bracket, your net tax savings in 9%. Yes, you still paid taxes but at a much lower rate! Here are a couple more strategies to consider.
What do you do with your tax refund?
Financial planners typically recommend you reinvest the refund back into the RRSP for next year’s contribution, into your children’s RESP or possibly make an extra payment on your mortgage. These are options that help increase your net worth and reach your financial goals faster; however, even if you spend the money on a trip or buy something somewhat frivolous, you have still come out ahead because you haven’t spent your regular income to purchase the item. Maybe you should consider half for the RRSP and half for fun.
Spousal RRSPs
If you expect you or your spouse to be in a higher tax bracket in retirement then the spousal RRSP is one of the most effective methods for income-splitting. Using the example above this tactic can be used to illustrate. It is more tax efficient for a couple to earn $26,000 each than if one earns the entire $52,000.
Pay Yourself First
One of the easiest ways to get that RRSP working for you is to set up a monthly savings plan. If you don’t see it, you won’t miss it. Enough said on that subject.
New RRSP Limit for 2006
The RRSP limit has been raised to a maximum of $18,000 (or 18% of 2005 earned income whichever is less) for 2006.
Take control of your RRSP for a successful 2006. Maybe it’s time for a financial plan!
For more information, please contact me at 966 8289 or email: dmaycock@a-q.com. Visit www.donmaycock.com and subscribe to “The MAYCOCK Letter” for valuable financial planning information.
So what is an unfunded liability?
It’s the amount by which the liabilities of the pension plan exceed assets in the plan, at a given date.
What are some of the factors that affect this unfunded liability and how does it occur?
1. The company is not profitable enough to keep up the payments into the plan. These plans are only as healthy as the underlying business. Look at Stelco or General Motors.
2. Retirees are living longer. This requires more assets in the plan.
3. The ratio of retires to contributing workers is growing. Continue reading »
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 »
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 »
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.
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.
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.
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.
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