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Seventies and
Still Singing Along
(Originally published October, 2001)
"There is a fountain of youth: It is your mind, your talents, the
creativity you bring in your life and the lives of the people you love." - Sophia Loren
"Those were the days, songs that made the hit parade...",
Archie and Edith, Linda's parents, love family gatherings and piano
sing-a-longs. Their dream was to keep this tradition, no matter where
they lived. That dream looked like it was about to end as Archie's
health declined and the cost of care began to rise, significantly.
Archie had retired ten years ago at age 65, with an indexed pension of
$25,000 per year. Their challenge became planning for the next step as
major health issues began to set in. Archie was in need of full-time
professional care and maintaining their large home was becoming a
burden.
Their home was valued at $350,000 and they held $75,000 in GICs paying
about 4%. There were no RRSPs, as the company and government pension
plans were to provide for their needs. In the event that Archie should
pass away before Edith, only 60% of his pension income would go to her.
When they are both gone, that entire asset would be lost to their
estate. It became apparent that they needed more than the pension
income and a home that was easier to maintain.
So what did they do?
1. Most of Archie's pension income went towards his full-time care, leaving a modest government pension to Edith
2. Until the family home sold, they rented out a portion of the house for supplemental income
3. 60% of the GICs were converted to a dividend income stream
4. When the house finally sold, 60% of the proceeds financed a smaller home
5. The other 40% of the proceeds were used to produce investment
income, some in the form of a Systematic Withdrawal Plan
During the transition to their new life, Edith imparted to her children
that the one thing she and Archie did not plan for was to have the cost
of their health care govern their lifestyle. Linda then began to
investigate ways to minimize the financial risk to their intended
lifestyle before and during retirement. She discovered that a solid
financial plan should include several types of personal insurance:
1. Disability Insurance to provide a direct replacement for lost employment income
2. Long term care Insurance to provide for services needed when illness prevails
3. Critical Illness Insurance to provide a lump sum payment to assist with expenses associated with specified illnesses
4. Sufficient Life Insurance. Linda's mom runs the risk of an income
shortfall when Archie passes away by losing 40% of the pension. Life
Insurance would replace that financial loss
Did they make it?
Edith has the remarkable talent of being able to live on a shoestring,
so her modest needs were met. Archie then received the full-time care
he needed. Today, they continue to enjoy family gatherings in their
condo, with granddaughter, Lisa playing "As time goes by" on the piano.
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Sweet Sixties and Going it Alone
(Originally published
October, 2001)
"You must do the thing you think you cannot
do." - Eleanor Roosevelt
Meet Sophia, our baby boomer Paul's mom. Sophia is outgoing, enjoys
good health and much like the women in her family, she expects to be
around well into her 90's.
By the year 2031, it is expected that the largest single population
group will be women aged 65, the second largest group women over 70.
Are we ready?
When husband Jack died suddenly several years ago, Sophia's world fell
apart. While she ran the household finances, Jack handled all major
financial decisions. Sophia appreciated the sharing of these
responsibilities but realized that without Jack, she now had a lot to
absorb. She was appointed sole executor of Jack's estate. Sophia is a
very capable woman but the financial aspect was new ground. She felt
uncertain and scared, especially while under emotional strain.
Jack's estate consisted of life insurance to Sophia of $100,000, GICs
of $50,000, Jack's Locked-in Retirement Income Fund (a LIF) of $50,000
previously transferred from a company pension plan and the survivor's
benefit of his government pension.
So what did she do?
Sophia is a wise woman. She carefully listened to her family's opinions
and decided it was time to understand her own affairs. She engaged an
advisor for direction and attended to the details herself.
Her first order of business was paying all outstanding bills. Jack's
funeral costs, his car loan, credit cards and income taxes. In Jack's
case, she discovered additional taxes were due on a failed tax shelter
investment he held several years ago. It took $50,000 of the Life
Insurance proceeds to resolve these bills.
Sophia wanted to present a financial gift from Jack's estate to their
two grandchildren. She was directed to do so only after having resolved
all outstanding issues on Jack's estate.
Next, she had to transfer all assets from Jack's name into hers. A
seemingly straightforward spousal transfer however the financial
institutions insisted on a probated will to confirm that the will being
used was valid. To obtain this probated will, Sophia was required to
make an immediate payment of probate fees based upon the value of
assets declared in Jack's will.
After resolving the estate, Sophia then got around to her personal
plans. She simply loved her mature gardens and entertaining so she kept
the grand $400,000 home. For income, she needed $2,600 a month. The
combined government pensions provided $1,000. From the balance of the
life insurance, $40,000, the LIF of $50,000, GICs of $50,000 and her
savings of $20,000, which in all totaled $160,000, she required an
inflation adjusted annual income of about $20,000 for the next 25 years
of her life!
Even with an estimated 9% annual growth plan, Sophia risks running out
of funds in less than 15 years. However, Sophia feels once she is no
longer able to tend to her beloved gardens, she would be ready to sell
the house and live on the proceeds.
The next step was to update her own wills i.e. Power of Attorney and
Living Will. Jack was named on all her documents. Her circumstances had
changed and so revised estate plans were a must.
Did she make it?
She had a game plan! With guidance, she felt comfortable making
financial decisions. Her newfound confidence helped her move forward.
Sophia continues to enjoy her love of flowers by getting involved in
local garden tours.
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The
Next Generation
(Originally published
October, 2001)
"It is not a parent's job to protect their kids from life, but to prepare them for it."
- Blake Segal
From
our "HERE'S THE PLAN" family, meet the kids, Bart & Lisa. Lisa as
you may recall is our next generation piano player, a gift she garnered
from Grandma Edith. Bart on the other hand is our current day computer
whiz, dispensing his Internet savvy to all members of the family.
For
all the joys they bring, kids are a continual challenge for their
ever-evolving needs. To this family, nurturing the interests of Bart
& Lisa are as important as the kid's future education. A few years
ago, Bart and Lisa got a little head start when they each received
$5000, from Grandpa Jack's estate. This opened the door to the whole
area of financial management. The parents needed to consider not only
the future needs of the children but also how to introduce to them the
concept of responsible financial management without being, in their
terms, a real drag.
This exploration began when
Bart & Lisa were six and eight respectively. The primary objective
set out by their parents was education. Upon reflection, the parents
realized that the cost of tuition was only one element of the 'cost of
education'. What about the books, computers, room and board, not to
mention the eventual car? What if Lisa really advances in her musical
ambitions and Bart in his computer world? The family will need funds to
finance their entire world of activity, not simply their education. In
addition, the parents have to plan for their own future retirement. It
became apparent that the parents could not possible fund every interest
for their children and thus the kids would have to learn to earn some
of the extras.
Ever try having a discussion about finding a job, with a 6 year old?
The parents knew the best they could do was help with the tuition. The
next best thing was to nurture healthy financial habits along with
their children so some of their other dreams have a chance of coming
true.
At that point, the average cost of four years of university tuition was
roughly $20,000. So the parents made the necessary monthly payments so
that both the children would have most of this cost covered.
Today the RESP would be a terrific choice as it provides a 20% grant on
new contributions directly to the fund in additional to any growth on
the investments. An automatic 20% growth each year is hard to ignore.
Next came financing the 'other stuff', the extras, the fun stuff. They
wanted or needed a different strategy. One that had an element of fun
and sense of accomplishment so the kids would likely want to be
involved.
So what did they do?
The
kids began to learn to earn. They were paid for performing special
extra jobs around the home. They were not paid for cleaning their
rooms, taking out the garbage or doing dishes. They were compensated
for other projects like weeding the gardens, carrying firewood, raking
leaves, cleaning out the basement and putting photos in albums. I think
you've got the general idea. Essentially they were paid by the bag, the
box, the wheelbarrow i.e. by the unit completed not by the hours
worked.
They learned to work towards completion
of the tasks, not just putting in the hours. That's a life-skill one
can grow with. So if they wanted to 'earn' they saw the direct results
of their efforts. As a result, while they were young, they always
wanted projects to do.
The real bonus came when the 'matching' policy was implemented. For
every dollar they saved into their fund, the parents matched. So, the
kids began to learn about making decisions with money. Naturally they
would spend some but eventually when they understood how the matching
contributed to their pot, more of the money was saved.
The other concept these children learned was to tie the money to a
goal, save for a specific reason, not just to have lots. This is a
concept many seasoned investors overlook.
Did they make it?
Yes they did. Lisa just graduated from Western University with a degree
in Business. Because she was at the top of her class, offers are
pouring in from firms across the country. Music is still a passion and
she often performs as a guest soloist in local concerts. Bart has two
more years to go for his computer degree but he and his best friend are
already successfully operating a weekend computer training business for
executives.
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Turning Age 69
(Originally published
November, 2001)
"The present is future you envisioned for yourself long
ago." - Beth Mende Conny - poet
Let's spend some time with Uncle Sam and his only son Bill. Uncle Sam
loves birthdays. For him they are milestones of a life well lived from
the time he was 13, 16, 18, 21 then onto 30, 40 and 50. But after fifty
the milestone birthdays became a little blurred. They seemed to lead
him to one road, retirement by age 55 or 60. At age 65 his company
pension began, the government pensions kicked-in and so on. He was then
considered retired by everyone, except himself. In fact, Sam enjoys
sharing his wisdom and continues to consult on landscaping projects so
he's by no means fully retired.
As Sam was about to turn 69 he questioned why such an age is an
important milestone for financial planning. He discovered that a policy
maker in the government decided that by age 69 all your RRSP holdings
must be converted to income plans. As a result, you can begin to pay
back the tax you have sheltered in your RSP. Sam had a healthy pension
program, which meant it used up most of his RRSP contribution room so
he had very little RSP outside the pension funds.
He had taken the earlier opportunity to transfer his pension into a
locked-in RSP managed outside his company. This was an important
decision. Sam had no surviving spouse to receive the reduced spousal
benefit upon passing. His accumulated company pension would then vanish
and his son Bill would receive nothing from that asset. With the
locked-in plan, Bill would receive the remaining value of the plan,
after taxes were paid. Sam had made a great estate planning decision.
Sam's challenge now, not unlike others with their largest holdings in
locked-in RSPs, was income. Sam had thought that the locked-in RSP,
once converted to an income fund or a LIF, would have the flexibility
to provide him the income he wanted in the years he wanted it so over
the years he invested his other funds into his country property. Only
recently did he discover that with a LIF the maximum income is limited
by a government schedule based upon your age. With this schedule of
payments, the future payments would be much higher than the early
payments.
Sam wanted higher
payments now while he was healthy enough to enjoy it. However, he could
not request more than the maximum withdrawal per year. Soon he may
fully retire and then the maximum withdrawal from his LIF would not
provide him enough to live on.
So what did Sam do?
He implemented a series of strategies:
1. 50% of the LIF was used for a life annuity income with highest possible payment.
2. He coupled that strategy with life insurance to replace losing the annuity upon death
3. Son Bill then got committed to his future inheritance by paying for the life insurance premiums on Dad.
4. Sam and his advisor re-balanced the other 50% of the LIF to include
more blue chip stocks to increase his potential returns.
During the process, son Bill observed that one has to plan many years
ahead, using several strategies, in order to have the best possible
options when the time comes to fully retire.
Did Sam make it?
Sam always makes it. The re-balanced LIF did increase his returns and
therefore the maximum dollars paid-out each year. With Bill's
contribution to the insurance, Sam was therefore able to fully utilize
the annuity income. Sam however, still enjoys consulting on landscaping
projects.
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Here a Tax, There a Tax
(Originally published
December, 2001)
"Death and taxes and childbirth! There's never any convenient time for any of them!"
- Margaret Mitchell (1900-1949), U.S. novelist. Scarlett O'Hara, in Gone with the Wind
Here a tax, there a tax, everywhere a tax, tax. The ritual of paying
taxes will remain with us until death do us part and thereafter, at
least one more time. Some folks do not mind paying high levels of
taxes. They see value received for the taxes they pay. One such woman
said, "I don't mind paying taxes, I like our government". Some folks
even like paying taxes. For them it's a measure of success, the more
money you make, the more taxes you pay. A voice from the back of a room
once shouted to me, "I like paying taxes, it means I'm making money".
So, that's how some folks feel about taxes. Then there is another camp
of taxpayers. Those who are caught between the two tax worlds; trying
to keep most of what they earn and making money on the after-taxed
earnings, without once again being taxed to the hilt. That camp would
be among the majority.
Meet Jack. Jack, simply stated, wants to pay fair tax. Let's clarify
what fair tax means. It means taking reasonably prudent steps by
implementing generally acceptable tax strategies and the tax laws, to
reduce the amount of tax you would otherwise be required to pay.
By now, you may be envisioning your hard earned dollars a-float on a
Cruise-liner to the Cayman Islands or spiraling down the tunnel of some
new invention. Perhaps, even worse you may be seeing your capital
eroding away because you simply were not aware that there are
reasonable options to defer or reduce the income tax bills.
Well, rest assured you will not be floating off to the Caymans, unless
you choose to do so with the taxes you saved by implementing some tax
saving strategies.
So what did Jack do?
Jack was retired, so using the RRSP tax deduction, was not really an
option. He implemented a series of tax planning strategies, over a
period of time.
1. He shifted from highly taxed interest income to more tax-efficient Dividends and Capital Gains.
2. He secured a line of credit with his investments, using these funds
for major purchases instead of taking higher levels of taxable
investment income to do so. Upon his death, the insurance on the line
would repay the loan.
3. A portion of the line of credit was used for investment, creating a
tax deduction for that portion of the interest on the loan.
4. He implemented the use of a Systematic Withdrawal Plan for income
from his mutual funds. This provided for a blended income of dividends,
capital gains and return of principal, which in turn deferred taxes and
kept tax on the income received to a minimum.
5. The use of Incorporated class mutual funds, which allow switching
from one fund to the other without triggering capital gains, by far
created his biggest advantage over time.
6. For a very small portion of his portfolio, less than 5%, he took a
higher investment risk to receive tax credits and special tax
deductions to recover tax dollars he can use today. He participated in
Labour Sponsor Funds and some Oil & Gas flow-through Shares.
7. Income splitting the investment income with his wife Sophia through
jointly held investments resulted in not all the income impacting
Jack's tax bill.
8. He increased the income from his RRIF to the maximum possible
although this increased taxes slightly. He used the additional RRIF
income to acquire Joint Life Universal Life Insurance. A policy which
will pay out tax-free after both Jack & Sophia are gone. At his tax
bracket, the alternative was to lose 50% of that registered asset to
taxes, leaving significantly less to their children &
grandchildren.
9. Annually, he reviews his investments for Tax Loss potential, which may be used to offset any capital gains.
During the process, he observed that someone really has to plan many
years ahead, using several strategies, in order to truly reap any tax
savings relief.
Did Jack make it?
You bet. Jack was tax smart and focused on making his tax savings
meaningful. Over several years, Jack put into his "Wish" savings fund,
the difference between what he would have paid in taxes and what he
actually paid; in other words the savings. Before he passed away, Jack
and his wife, Sophia went on their dream holiday to Fiji using the
"wish" fund.
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Keeping a Perspective
(Originally published
December, 2001)
"Perception is
reality." - Anonymous
In times of highly volatile stock markets and economic uncertainty,
it's important to keep our wits about us and keep a perspective on what
this activity really means. It helps to ask three questions each time
the concern arises:
1. Has it ever been possible to predict the day-to-day ups and downs of
the stock markets consistently and accurately?
2. Was there ever a time when the current economy was reported without any uncertainty or concern?
3. Is it possible that all companies listed on the world's stock
exchanges will go bankrupt, all at once, so that your portfolio will be
worthless?
To an investor, the final question is the most important of all.
However, most would agree that the answer to all three questions would
be, no.
To be a successful investor requires having a positive, optimistic
outlook of human evolution. After all, that is what the stock market
reflects. It reflects products and services we are demanding or need,
thereby causing companies to be created or re-engineered to meet that
challenge. Stock market volatility occurs when this confidence is
temporarily shaken and stirred.
When investors fail over the long haul it's usually the result of
investment behavior rather than market performance. Investment behavior
such as trying to time the highs and lows, speculating with many eggs
in one basket, trying to make a quick buck on the next hot tip, or
selling out good investments that are temporarily down and missing a
market recovery. Investment behavior is investment decision-making.
Remember, a stock or mutual fund is a cold unemotional thing; it
doesn't know you own it. However, we do have control over how we behave
towards our investment.
Let me introduce you to J.J., a woman who has kept her investment
perspective through many a ride up and down the Stock Market Mountain.
So what did J.J. do?
Some thirty years ago, J.J. was in her 50s, she invested in a mutual
fund with a beautiful chart, commonly called The Mountain Chart. Many
have seen it. She saw it in its infancy, with only 10 years of
performance history. This was in an industry when that was one of only
a limited selection of mutual funds which all had fewer stocks to
choose from globally. J.J. felt confident with her understanding that
her investment would reap positive results by investing in the things
that were being offered to improve her life. One day J.J. asked me if
she could meet the manager who helped to make her financially secure
some 30 years later. At that meeting, more than the delight of meeting
her "hero" J.J. was most impressed with what surrounded her, the
technology and the facility. J.J. had never seen a large screen,
video-conferencing, halogen lights, or an auditorium with "such
goings-on". Although she did not see the evolution directly she knew
her investment fund played a role by investing in the companies that
introduced many of these products.
Did J.J. make it?
On her mountain ride to wealth she experienced the ups and down.
However, she held to her basic investment knowledge that she was
investing in human progress, regardless of the economy or the
day-to-day market fluctuations. She had indeed invested wisely, stuck
with her program and today reaps the benefits of a healthy retirement
lifestyle.
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Dream a Little Dream
(Originally published
January, 2002)
"If you can dream it, you can do it." -
Walt Disney
Dream a little Dream, dream, dream, dream… a little number from the hip
sixties by the Mamas and the Papas. Well, many hippies are now today's
Mamas and Papas and dreaming has taken on a new twist. For many,
financial peace of mind can be a dream. It means being confident of
having enough funds to live out the rest of their lives comfortably
with enjoyment along the way. Enjoyment is really where most of the
dreams begin. These dreams are less of fame and fortune and more of
lifestyle choices. The fame and fortune dream comes with the big
lottery or stock market pay-off. Everyone can dream of having such, but
only few live their lives exclusively on playing those odds.
Lifestyle dreams are usually attainable. Some desire retiring with a
lake view cottage with all the trimmings, perhaps traveling to new
destinations, even a new sunroom to enjoy your morning coffee, how
about golfing on the world's finest courses, maybe winters in a warmer
climate or helping your child start a business, owing a B & B, or
simply having the time to paint a beautiful landscape. Whatever the
dream, usually there is some relationship to having the financial
capability.
Meet David; age 49, marketing professional, divorced three years ago.
After the difficult and costly experience, David felt all his dreams
were scattered. The beautiful estate home and manicured gardens were
gone, the travel lifestyle became restricted by his children
visitation, his financial assets were depleted and his income was
reduced by support payments. He felt beaten.
So what did David do?
David took stock in himself. His income was strong. His professional
skills were current and in demand. His hobby as an installation artist
gave him great pleasure. David loved to cycle. He enjoyed a great
relationship with his 18-year-old twins, Jack & Jill. His balance
sheet on life was very strong. So, David began to dream again. His
dreams inspired new goals, then plans.
His artistic drive and love of cycling began to invite new friendships
and travels. Traveling with a group was cheaper than in his previous
life. He then made time to work on his art. In the past, he had little
or no time for these projects. He also held on to giving his children a
good financial start to their individual lives.
By reviewing his discretionary spending very closely, David
re-prioritized over $800 per month towards his new plans. He traded in
his prestigious sedan for an affordable SUV. He began by renting a
house. Now, he will be buying a home, renting the basement to an artist
friend, and using the equity in the house, to invest prudently for his
retirement. For his kids, he matches every dollar they save on their
own. From the potential sale of his art, he plans to finance more
trips, art projects, help his kids and his community.
Did David make it?
"Goals are dreams with deadlines." -
Diana Scharf Hunt
What a comeback! In only three years, David moved forward from an event
that can hold many in a state of transition for a very long time. He
created a new mission by redefining his goals. Jill recently received a
postcard from her Dad while he was on a cycling trip in Italy. As a
welcome back gift, son Jack launched a new web site to promote his
Dad's artwork. Dreams can come true and new dreams are possible, after
all.
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Mortgage Free - Yippee!
(Originally published
January, 2002)
"Success is not so much achievement as it is achieving." - David J. Mahoney
For many people the most overwhelming financial hurdle is having a
mortgage. It is only once this debt has been almost paid off that they
feel financially relaxed and free to pursue other investment
opportunities. On average, most get to that point in their mid to late
forties. Along the way, some modest effort is made toward retirement
savings.
That very common strategy leaves most people under-funded in their
retirement savings because now there is only 15 years to save for the
next 30 or more years of their lives, a most difficult challenge. It
also means that they have not developed a regular savings regime and
that they have the tendency to liquidate investments at the drop of a
hat to finance the latest adventure, the larger deck or simply pay off
other debt, usually the credit card debt they have since
accumulated.
Mary and John did not want to become a statistic. From the moment they
decided to purchase their first home, they sought advice. They were
focused on having a home but not risking the retirement plans by losing
years of compounded growth on their savings. In effect, they wanted
both! Is that possible, you may be asking?
Mary and John are both working, so they had two incomes to work with.
Mary brings in a stable steady pay cheque. John's consulting income is
lower and more sporadic however he is more accessible to the kids with
his flexible schedule.
What did Mary & John do?
They presented their challenge to a professional advisor. The goal was
to have the house and not risk losing years of the compounded growth on
their savings. It was a balancing act indeed. The first step was to
develop a retirement projection of what it would take to prepare them
for a comfortable retirement. The next step was to establish the budget
price for the new house and hence the mortgage that they would bear.
The house budget was based upon the dollars remaining after they had
made investment contributions. Most people will do the exact
opposite.
To fully meet their plan, Mary & John decided to live on one
income, Mary's income. John's income became dedicated to paying off the
mortgage. From Mary's income, after living expenses, they still managed
to make maximum RRSP contributions to both their plans. The tax refunds
received from the RSP deduction were immediately applied to the
mortgage. Therefore, in addition to regular mortgage payments, they
managed a significant principal repayment using the tax refunds.
Did Mary & John make it?
Champagne flowed at John's recent birthday in celebration of his
milestone fortieth and, you guessed it, being mortgage free! In
addition, they have accumulated years of compounded growth on their
savings giving them a strong head start into retirement. It worked so
well, they will continue to live on Mary's income and fully invest
John's. Remember, financial planning is not a product it is a process,
a live long, evolving process.
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Doing Nothing Takes Planning
(Originally published
February, 2002)
"A vacation is having nothing to do and all day to do it in" -
Robert Orben
Imagine the joy of doing nothing for a while but sitting on the dock of
the cottage by the lake or perhaps doing nothing while sitting on a
sidewalk café in Paris. How about doing nothing while lying on a beach
of a South Pacific Island or even in Florida. We often hear, the best
things in life are free. However, it would appear that doing some types
of nothings have a price tag. Within the context of planning for the
future, be it near or far, it is the cost of getting to that place,
geographically or to that place in life
Jill is over fifty, a single woman, with no children. Jill has the full
financial responsibility of aging parents. There is no spouse or
sibling with whom she can share this obligation. It means, she has to
be financially secure for herself and her parents. What Jill wanted
most in life was more time each year for, as she called it, basically
doing nothing.
Jill knew she had a destiny to care for her parents. She started to
plan ahead when her parents lost their savings in a failed business.
The only remaining asset her parents had was a modest city home valued
at about $200,000. Jill, now retired, lives on a small pension. She has
an investment portfolio of $150,000 to last her the rest of her life,
perhaps another 30 years. She needed a new strategy, as she retired and
her income was reduced.
What did Jill do?
She quantified her situation by placing a price tag on doing nothing
each year. It meant having 24/7 fulltime care for her parents for three
weeks or more, a housekeeper during this time, a premium airfare so she
could return on a moment's notice. As a result, the cost of her
time-off each year was increased by 100%. However, there remained the
daily on-going cost of their care, which she could no longer afford on
her pension.
Selling the family's city home and moving to the country, was not an
option. Her parents needed regular medical attention, which could not
be found in a smaller town.
She had to use the only asset available to them, the house. She
obtained a home equity loan at prime, for 50% of the house value. The
cost of this loan was considerably less than carrying the full cost of
the on-going care. She then invested these funds prudently for income,
which she then used to fund her parents needs. Because the funds were
used to invest, Jill was able to deduct the interest expense of the
loan from her taxes.
Jill never worried about this debt, because the home was still theirs
to sell at full market value, and at any point this loan could be
repaid. Upon her parents passing, the house would be sold and the
proceeds used to eliminate the loan. Any remaining fund inherited, Jill
would use for her eventual home in the country where she hoped to do,
nothing much.
Jill also took life insurance on herself, in the event of her passing
prior to her parents; these funds would pay off the home and provide
tax-free proceeds to continue the care of her parents.
Did Jill make it?
Jill has an amazing capacity for being objective about her
circumstances. As much as she cares for her parents' well being, she
places equal priority on her personal happiness. So in taking the time
out each year to enjoy her life, the house proceeds are used to look
after her parents while the majority of her personal portfolio remains
invested for growth. Jill's recent postcard to her parents said, "Doing
nothing but enjoying the ocean air from the deck of a ship while
cruising the Mediterranean".
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How Much is Enough?
(Originally published
February, 2002)
"Those who are victorious plan effectively and change decisively" -
Sun Tzu - Philosopher
"If I had a million dollars, I'd buy…" that peppy little tune by
Canada's own Barenaked ladies, does more than just put a hop in your
step. It speaks to the dream of having enough money to do as you choose
in life. While it may not be, as they sing, buying ketchup or fancy
ketchup…, it's whatever you would like in your life. The song ends with
…I'd buy you love. While money can't really buy happiness or love, it
does go a very long way in paving the way to reaching those
dreams.
Does it really take a million dollars?
One of the most commonly asked questions on investing is "Will I have
enough?" According to a poll conducted by Environics Research on how
much Canadians thought they would need for retirement, respondents with
annual incomes of more than $100,000 pegged the figure at $1,046,000
while the average of all age and income groups was $652,000. (Figures
taken from Investment Executive - February 2002)
The most common and most dreaded answer is "It depends". The second
part of the answer is "It's all relative". Having enough means having
some idea of how you future life is to be spent, a vision. This vision
can then be brought down to earth by quantifying in dollar terms the
cost of such a lifestyle.
By assessing your current investment position and projecting out to the
average Canadian life expectancy of about age 75-82, any financial
professional can help you determine whether you will be OK or have a
shortfall. If your long-term investment capital and your continued
investment commitment are aligned to that goal, then you have a great
chance of succeeding.
Remember, the saying 'Failing to plan, means planning to fail'. It
holds true in financial planning as in any other plan. Many people
habitually spend more time planning for the new deck, researching the
new car or the dream vacation, than they do planning their financial
future.
What's can an investor to do?
In a nutshell, face the music by knowing if you're on track.
Let's meet JP, an engineering manager, age 53, who manages the family
finances personally. Over the years, JP contributed to a company
pension and did lots of buys and sells in the family investment
portfolio. The fear of running out of money in retirement drove JP to
focus exclusively on trying to get higher returns with little regard or
knowledge on the appropriate level of risk. However, JP had no clue how
much capital they would require to retire by 55 and play golf
everyday.
Suddenly, life brings on a surprise… D-day. Not the day of retirement
as hoped, but decision day because of corporate downsizing. The pension
offered would only cover 35% of their income needs. The severance would
only cover one year of income. The investment portfolio of $200,000,
had fallen 40% in the tech meltdown.
What did JP do?
After dealing with the attendant stress of the end of his current
career, JP took the time to put some plans into place. Step one: With
the aid of computer projection tools, establishing how much capital
would actually be needed for their choice of retirement lifestyle and
how much more they needed to save to get there. For them, the
retirement pot of gold needed to be around $500,000. Step two: Move
forward, JP accepted contract positions to keep on paying the bills
until they could fully retire. Step three: Hand over the reigns to an
advisor for objectivity, and an overall strategy which included tax,
estate and investment strategies. While it may not be in JP's nature to
completely let go, the priority now was on finding continued employment
contract positions and making the best of the changed financial
circumstances.
Did JP make it?
No, not yet. However, now armed with a plan and a well-balanced
investment strategy, in 5 years or so, providing they stick to the
plan, there is expected to be enough funds for JP to be yelling "Four"
as often as possible from some of the finest golf courses in the world.
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The Great Rollover Challenge
(Originally published
February, 2002)
"Change your thoughts and you change your
world." - Norman Vincent Peale - Author
For times they are a-changing…a poignant line from the 1970's song by
Bob Dylan. The Canadian investor's best friend, the GIC knows change
only too well. It has been a slow steady decline for years, and now it
has become prolific. Once GICs delivered an 8% to 12% return, in
today's reality perhaps 4% at best. The life of a GIC as a long-term
hold is becoming a rather dim prospect. These low returns are hurting
its survival as a long-term tool for investments.
Any true investor has always known that GICs were not long-term
investment tools. For a GIC to pay 10%, inflation and borrowing
interest rates would be equally high. So net-net there is little after
tax dollars to keep pace with the real world. However, for investors
the GIC continued to be the core of the Canadian investment
portfolio.
Herein now lies the great rollover challenge. Billions of dollars in
GICs are coming alive from years of well-padded hibernation into a
world of lean returns.
What's an investor to do?
Meet Gord & Gale, antique business owners, both over 65. The
business is a labor of love, however as with any business, it carries
the inherent risk of slow or no revenue at times. As a result, with
their investment portfolio they took the secure route, GICs. Their
retirement plan was to wind down antique acquisitions, use the GICs for
income and furnish their cottage with any remaining antiques.
With $300,000 in GICs earning on average 8-10%, it seemed like a
reasonable plan at the time. Today, retirement is upon them and they
find themselves in a financial crunch. The cottage is in need of
upgrades for about $50,000, they need a new van and the renewal
interest rate on their treasure box of GICs is at an historic low. They
are about to undertake the great GIC rollover challenge.
What did Gord & Gale do?
The goal was to have an income, upgrade the cottage, and own a reliable
vehicle. Gord & Gale's financial strength is that they understand
cash flow and are able to take some risk. The financial risk was no
longer the business risk, but the new risk to their planned
lifestyle.
Step one was to assess how much capital they would really need for the
next 15 years or more of living. They discovered it required all their
capital to be earning at least 8% to make it.
Step two then fell into place; a secured line of credit was used to buy the new van and renovate the cottage.
Step three, the GIC portfolio was re-balanced to introduce alternative
income bearing investments, such as blue chip preferred shares and
income funds. The fixed monthly income was now derived primarily from
the use of a Systematic Withdrawal Plan.
While the day-to-day price of the investments fluctuated, an on-going
regular fixed income was deposited to their bank account. Gord and Gale
were comfortable with the trade-off of the fluctuating principal for
the greater anticipated income returns. As a by-product of the new
investment strategy, more dividend income was earned and income taxes
were reduced using the dividend tax credit.
Did Gord & Gale make it?
"When you're through changing, you're through." - Bruce Barton - Politician
At the recent cottage revival BBQ, Gale shared with a friend that at
this stage of their life it was necessary to undertake investment
changes to have the life they had dreamed of. Gord & Gale continue
to dabble in antiques but apply any profits towards reducing their line
of credit.
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Life is Long, be Ready
(Originally published March,
2002)
"Half our life is spent trying to find something to do with the time we have rushed through life trying to
save." - Will Rogers
Remember the golden girls - Dorothy, Rose, Blanche, and yes, Ma Sophia?
The 1980's Television series was about four single women over 60 and a
mother over 80, all living together. Could that be a likely future? In
medieval times the average life expectancy was about age 40, in the
1800s closer to age 50. With rapidly increasing medical advancements,
only 200 years later the average Canadian life expectancy is close to
80 and women can expect to outlive men by several more years. It is
expected that by the year 2031, the largest group in the population
will be women over 65. How about that, a Canadian population lead by
Golden Girls.
How ready are we for a long life? In past generations, the average
retirement age was 70. The retired male would likely pass away by 76,
leaving his spouse with a reduced pension, a paid-up house and modest
life insurance to live out her next decade.
Today we need to plan for 30 or 40 year of retirement living. Many
people may be retired longer than they have worked. At retirement,
pension plans typically fulfill about one-third of the total financial
needs; the rest is up to the individual. How about Mom or Pop, were
they factored into your long-term care plan?
What's an investor to do?
While everyone's situation is different, statistically we are all
living longer, healthier, active lives. Many people, however, are so
busy living, they wait far too long to even get started planning.
Let's meet Howard & Maude, baby-boomers, hoping to retire by age
55; neither can expect any significant pension income. Their financial
plan consisted primarily of real estate. They owned two rental
properties and lived above one of them. The first property was mortgage
to obtain the second. When the bottom fell out of the real estate
market in the 1980s, the price dropped 40%. Today, they have one fully
paid property and one which barely covers itself and after 20 years, is
in need of a renovation face-lift. Let's not forget their Ma Sophia,
who lives in one of the rental units and is now unable to live on her
own.
What did Harold & Maude do?
Within 5 years of their hopeful retirement, they obtained a
professional opinion. What they discovered is that over the years that
had lacked two important investment strategies, no matter what the
investment.
ONE: Diversification. The plan lacked a diversified strategy; all their assets were held in one investment class.
TWO: Periodic Reviews. Their plan needed on-going reviews throughout
the twenty years to be sure this was still the way to proceed.
The bottom line was they were not going to see retirement at 55 and
support Sophia, unless they were prepared to unload a property. As
such, the net proceeds yielded $200,000, which they invested in a
well-balanced portfolio of mutual funds, stocks, bonds and real-estate
investment trusts for income.
Then strategy THREE was introduced, called dollar-cost-averaging. The
income from the bonds and the real-estate investment trust allowed them
to continuously invest, especially when the markets declined and
opportunities arose. While a real-estate trust may hold more stock
market risk than other forms of investments, this couple had already
lived through a significant decline in actual real-estate property so
the risk to them was manageable.
As a result of periodic reviews, the portfolio was evaluated for tax
planning opportunities, overall balance of investments, income
splitting opportunities, re-investment opportunities and for annual
income as retirement drew closer.
Did Harold, Maude & Sophia make it?
Their life plan evolved, retirement at 55 really meant working less and
enjoying more. They happily continued to pursue part-time job
opportunities in areas of interest. Every member now contributes to
Sophia's care. The changes they had implemented in their financial
plans now yield a well-managed strategy which provides the family with
a sense of financial comfort.
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Retirement - Happy Ending or New Beginning?
(Originally published April,
2002)
"See the possibilities in the new and do not be paralyzed by the difficulties to be overcome."
- Paul S. McElroy - author of New Beginnings
The Golden years remember when retirement was associated with images of
a golden sunset slowly disappearing into the horizon. Let's face it;
retirement ain't what it used to be. Many are more active during the
after-work period of their life than before. Many retirees continue to
play golf, hike, travel to new or favourite destinations, spend time
with grand children and can be very involved in a variety of
organizations like Art Galleries, Local Theatre to Professional Clubs
and helping those less fortunate. Retirees continue to actively seek a
continued sense of contribution, purpose and adventure. As exciting as
it can be however, many retired or newly retired people have anxieties
and fears about everything from money to their spouse.
What can an investor do?
Meet Sally, age 58, a recently retired newspaper executive. Sally's concerns were similar to other new retirees:
1. Will I have enough money?
2. After golf, what else am I to do?
3. Stan, her husband. She anticipates now being with him 24 hours/7days
a week. For the past 25 years, they shared dinners, family time &
one vacation a year, about which he always found reasons to complain.
Financially, Sally had a company pension of $15,000 and $150,000 of
investments. Stan's pension was about $20,000 per year and he was
receiving Canada Pension Plan and Old age Security. Stan's savings were
about the same as Sally's. They needed additional income for living and
the funds to enjoy their retirement.
The fear of running out of money, the anticipated lack of routine
activity and the full-time presence of a spouse underfoot, are three of
the most common retirement concerns.
So what did Sally do?
Sally had to answer her question 2 & 3, before question 1. Why?
Because how she spent her time all added up to the lifestyle she
wanted. Once she had some idea of how she saw the rest of her life
unfolding, she could determine if she had enough money to move forward.
Sally's biggest challenge was Stan. He had little or no interests
outside his previous career; he was older and cared little for
traveling.
Sally, with Stan's support followed a three-step program
Step One: Determine what retirement meant to them both. After much
contemplation, Sally finally realized she would be happy traveling and
learning gourmet cooking. She wanted to play golf more often and, in a
few years, do some community work in the Arts. Stan's only interest in
travel was to visit their children in Montreal and Vancouver. Stan
wanted to visit so he could help them around the house. In fact, Stan
sparkled with interest at the thought of having a home where he could
do his own projects. Together they decided that a more cottage-like
lifestyle instead of a city home would be best.
Step two: A new home. Sell the city home and buy a home where Stan
could keep busy. Sally could then have a fabulous kitchen to prepare
her gourmet delights, built by Stan, of course. The sale of the house
would free up some capital to undertake Stan's house projects and
Sally's travels. Sally finally felt the excitement of a new chapter in
their life about to begin.
Step three: Re-balance their investment holdings to generate more
income. In addition to the current holdings of exclusively Growth
Stocks and Government Bonds, the new portfolio would include other
income-generating investments, such as dividend funds, preferred shares
paying a dividend, higher yield corporate bonds and income funds. Sally
also decided to take the early CPP income. Although reduced, the income
was welcomed.
Did Sally make it?
Sally and her gourmet travel group have just returned from a cooking
school in Provence, France and are planning for Tuscany. The new
kitchen, built by Stan, now hosts delightful gourmet feasts prepared by
Sally when she's not playing Golf. While Stan is now happily overseeing
the plans for the new solarium, he's realized he must find an ongoing
passion to maintain his vitality as Sally has with her travel, cooking
and golf. He's thinking he might dust off his fly fishing equipment now
that they live a little closer to some good streams. What a turnaround
for Sally and Stan, like many other retired couples they needed to come
to terms with their new lifestyle and its on-going evolution. Only then
could a successful financial plan be in place.
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Seniors' Estate Plan Gets a Reality Check!
(Originally published
January, 2003)
"Give what you have. To someone, it may be better than you dare to think."
Henry Wadsworth Longfellow (1807 - 1882)
Hmmm,
you must be wondering how you just go about doing it, regarding your
estate plan, if you're still alive. The solution as you will see is
fairly simple but the "doing" can be the challenge. Correct you are, in
saying that estate plans only take effect when one passes away.
However, the key is that until then, it's just a plan. Plans are
subject to revisions. Luckily and thankfully you are still here to best
direct how your plan is to be executed.
What can an investor do?
Take the great estate challenge. We'll put a little spin on a subject
most people find very difficult to deal with. Here it is, for the
greater part of a day, with notebook and pen, become the Executor of
your own estate plans.
That's what Tom and Patty did. Both are over 70 and have accumulated a
lifetime of assets and "stuff". Patty owns a printing business,
inherited from her dad. She's the main income provider now and has no
pension. Her income comes exclusively from the business. Tom is a
retired car salesman on a small pension. He has an investment account
of $100,000 and another $100,000 in a spousal RRSP in Patty's name. Tom
is a pack-rat extraordinaire, with a paper trail to pave the path to
the hereafter. Good news, they have current wills and Powers of
Attorney for both health and financial matters. Their personal assets
have been left in each others hands and beyond that, to their two sons
Bob and Ray. Patty's business, in accordance with her father's will,
must go to her side of the family.
So what's the problem?
Assigning beneficiaries to assets, that's what most people do for estate planning, right?
Let's see some of things Tom and Patty learned about their estate plans
once they pretended to be the Executors of their estate.
-
Patty's
business is being left to her sister Marge (by request of her father)
without any compensation to her immediate family. Remember, Patty had
become the main income provider and throughout most of her marriage
with Tom, she ran this business. Tom felt they were entitled to retain
some financial benefit.
-
Tom,
as the executor of Patty's estate, was uncomfortable dealing with this
specific matter as he had little knowledge of the business affairs.
-
Patty's
business has current year's tax liability and at transfer of ownership
to her sister Marge, will trigger significant tax consequences. There
wasn't sufficient capital to cover this liability.
-
Tom's pension would be reduced to 50%, leaving only half to Patty and nothing to the boys.
-
Tom
was involved in several tax shelters before he retired to "save" taxes
on his final years of high earnings. One such tax shelter has already
been re-assessed resulting in taxes owing plus interest. The potential
is the same for the others. Tom's investments may cover the tax bills
but that will leave nothing to Patty or the boys.
-
Tom's
boxes are everywhere, just chuck full of life's stuff on paper. Even
Tom had trouble finding out where the current documents were.
-
Then
came the usual stuff, the house, the small cottage, their cars,
investment accounts, some fine art and jewelry. Patty loved jewelry and
collected it much like Tom collected papers, some valuable, some not,
who knew? The family agreed it would be best to sell things off at a
fair price. In the interim, there were property taxes, insurance, house
maintenance bills, appraisals, and of course probate fees to validate
the will. How will they manage to hold on, until a fair price comes
along, without any immediate capital?
What did Tom & Patty do?
As Executor's for a day they truly pretended that they were looking at
their stuff as someone who knew little or nothing about their affairs.
Asking the where's, what's and how to's about everything they own and
owe. Lots of question arose and there were of course no notes to help
them out on things that just weren't obvious. (Remember that you will
not be able to answer these questions, when they need to be answered.)
Tom & Patty then proceeded to "clean up". They threw out the old
stuff and made notes about the "not so obvious" stuff. They made plans
to handle many of the things that they were not aware of prior to this
exercise.
They made the big discovery that estate plans are more than just the
transfer of assets; it's not required but would be very helpful to
spell out how to look after the people and the assets during and after
the transition.
-
Patty
recognized that she wanted some capital from the company for her
efforts, to pass on to her family. Patty and Marge created a Buy-Sell
agreement. A complex but commonly used agreement spelling out terms and
conditions for arranging a buy or sell of the business between specific
individuals. Marge was also made minor shareholder of the company to
begin to protect her inheritance.
-
The
business tax liability and the cost for Marge to acquire Patty's share
of the business required capital, which Marge did not have on-hand.
They choose to use a life insurance program to fund this buy-out.
-
Patty
set up an Individual Pension Plan to transfer some company capital into
a pension plan for herself, which could then be inherited by Tom and
the boys.
-
Tom
reduced his box load from over one hundred to only a few, keeping
important items like current investment statements, other ownership
documents and his last seven* years of tax returns with all relevant
documents. (* Six years plus current is required by law.)
-
Tom took out an affordable amount of life insurance to assist with the transition for Patty or the boys.
-
They
both used The Executor Kit™ tool to organize and document their
affairs. Noting everything from the obvious investment accounts, house
and other asset ownership to the not so obvious key contacts, email
addresses and magazine subscriptions. It's a soup to nuts, estate
organizing process for confidentially documenting your affairs for your
executor's and family's eyes only.
-
As
for the spousal RRSP (now converted to a RRIF-Registered Retirement
Income Fund), it must remain in Patty's name. It can not be reverted
back to Tom while Patty is alive. The income will continue to be paid
to Patty. She is already earning a higher level of income than Tom;
hence the taxes will be higher on this income. In setting up Spousal
plans, be as sure as you can be that the spouse receiving the income in
the future will be earning less than the one making the contribution
now.
Did Tom & Patty make it?
It was difficult but they enjoyed cleaning up. Your executor however,
will not have the benefit of this dress rehearsal. So wherever possible
give detailed instructions to follow. Well, Tom's clean up revived the
basement apartment, which is now being rented for additional income.
Patty's newest shareholder Marge took a keen interest in the success of
the business and landed a significant printing contract with a Bridge
players association. Now that's estate planning that yielded direct
dollars for Tom & Patty to enjoy today.
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