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not generate a tax credit but any income, dividends or capital gains earned inside the TFSA are not subject to tax when withdrawn.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?

While Canada is undoubtedly a great place to invest, to achieve broad portfolio diversification it is generally recommended to have exposure in both the US and internationally. However, when we invest outside of Canada we face what is known as “exchange rate risk”. Specifically this is the currency exchange rate between Canada and other countries. In my opinion, it’s an important consideration for your portfolio.

We’ll begin by looking at the US broad market. A representative mutual fund would be the TD US Index Fund (f-class). The investment objective of the fund is to provide long-term growth of capital by primarily purchasing U.S. equity securities to track the performance of The Standard & Poor’s 500 Total Return Index (S&P 500 Index). The S&P 500 Index is comprised of 500 widely-held U.S. companies. If we compare it to the currency hedged version of the same fund (the “currency-hedged version” has a similar objective except it also seeks to eliminate substantially the fund’s foreign currency exposure.) you’ll see the performance is quite different.
 

TD US Currency Hedged versus TD US Index

TD INTL Currency Hedged versus TD INTL Index

Source: Morningstar Paltrak as of August 31, 2009

Whether you choose to currency hedge your portfolio or not, is a matter of strategy. It’s best to inquire if a currency-hedged version of your investment exists and analyze whether the impact of currency is substantial or not.

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.

This office is being shared with my colleague, Mr. Garry Quinn, PFPC, Financial Planner who is also an Armstrong and Quaile advisor. Garry and I continue to operate as separate entities and he has no access to any of your client information.

This office is open by appointment only. There are two buildings that make up McNabb Towers. The office is located in the lower level of the McNabb Tower that is furthest off the road. There is free parking in the area designated between the two buildings.

There is no change of email address or phone numbers.

Click here for a photo

While markets have rallied off their March 2009 lows, investors face uncertainty when investing solely in equity markets especially when it comes to their retirement portfolios. This article addresses the issue of stress testing your retirement income plan.  I’ve written about this numerous times but it bears repeating especially in this environment.  It’s time to take a serious look at the big picture.

Fewer and fewer Canadians have defined-benefit pension plans at work. Companies have opted to go to defined-contribution pension plans to remove their liability for pensioners in the future. Now it’s your responsibility to look after the money and make the best decision for yourself. Do you have a plan?  If yes, does it answer 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?

As a financial planner, I use the Otar Retirement Calculator to “stress test” a client’s retirement income plan. The basic steps are as follows.

Step 1: Determine your annual withdrawal rate (WR) in retirement.

Step 2: Determine the sustainable withdrawal rate (SWR) for your retirement income plan. This is the maximum amount you can withdraw each year and not run the portfolio out of money.

Step 3: Determine the annuity rate (AR) i.e. how much can an annuity pay you annually for life.

From that a “Zone Analysis” is performed. Quite simply it would be great if everyone were in the green zone meaning their annual withdrawal (WR) was below the sustainable withdrawal rate (SWR). Below is an example of a zone analysis.

Zones

If a client isn’t in the green zone then further planning alternatives need to be explored.
 
Our firm offers this analysis free for all clients. We charge a nominal fee for non-clients to have their plan independently accessed.  More information on the Otar Retirement Calculator and the Zone Strategies can be found at www.retirementoptimizer.com.
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.”

Over the past year I have spent time reviewing the history of the markets. While it does not predict the future, there are some interesting observations that you may be unaware of which could make a significant impact on how you view the markets and how you invest going forward.

Over the longer term (75 to 100 years) markets go up. However, most investors do not invest over that time-frame. Generally, an investor’s long-term time horizon is in the neighbourhood of 20 or so years and would be defined as an intermediate timeframe. The trends for “secular” markets generally last longer than market or business cycles. During these intermediate timeframes, markets are either in “secular bulls” (going up) or “secular bears” (going sideways or down). Below I have labelled the “secular bear” markets for the Dow Jones Industrial Average since 1898.

 Source: Reuters Data, Metastock software, (see note below)

A worthwhile book on the subject is “Unexpected Returns: Understanding Secular Stock Market Cycles” by Ed Easterling. While this book was published in 2005, it provides a great overview of history. Note: The chart in this article was derived from Figure 5: Secular Bear and Bull Markets Profile of this book.

Since 2000, we have been in a “secular bear” market. How long will it last? No one knows for sure. What kind of investment strategy is necessary in this environment? In my opinion, whether you are a do-it-yourself investor, advisor, portfolio manager or pension fund, “tactical asset allocation” will be the key! Shifting assets when necessary away from the long term strategic asset allocation will be necessary to achieve and protect returns going forward.

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.”

This is the question on everyone’s mind. Unfortunately no one knows for sure!

Leading economic indicators change before the economy changes

You may have noticed that the equity markets have risen of late even though the economic news continues to be bad. Company earnings are down but in many cases are beating expectations and their stock price rises. Stock market returns are a leading indicator, as the stock market usually begins to decline before the economy declines and improve before the economy begins to pull out of a recession. Leading economic indicators are important because they help predict what the economy will be like in the future.

Market Returns

While returns were negative for most equity markets, it’s interesting to note that in March the equity markets listed below were all positive for the first time since April 2008.

* adjusted for Canadian/US dollar exchange.
**Source: Morningstar Paltrak March 31, 2009 data.

Where do we go from here?

I’ve shown this slide many times in the past. As you look at the chart below, how do you feel? Most likely it’s somewhere between “despondency” and “depression” or maybe an even stronger term that I can’t put in print. I understand your feelings.

Only when we look back some time from now, will we be able to confirm that this was indeed the “point of maximum financial opportunity”.

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.”

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.”

www.globecampus.ca

Market Data December 31, 2008