The Benefits of Generosity

The benefits of generosity are greater than you think.

When you think of being generous, initially you may think the benefits of giving are for the recipient. While this is true, the benefits can be significant for the giver as well. Research has demonstrated the following benefits for the giver.

  1. Healthier Physically

Studies have found that people who are generous are healthier

  1. Healthier Mentally

Remarkably, studies also found that people who are generous have lower activity in their amygdala. A highly active amygdala results in higher anxiety.

  1. Healthier Relationships

Studies have found that regular, small acts of generosity towards others results in healthier relationships.

  1. Healthier Finances

Those who are generous financially receive significant tax deductions in Canada. After the first $200 of donations in a year, you receive a reduction off your income at the highest marginal tax rate even if you aren’t in the highest tax bracket.

The Canadian government also lets you donate shares of publicly traded companies in kind to a charity. When doing this, you get the donation credit for the full amount of shares at the time of donation and you don’t pay tax on the capital gain of the shares donated. Double bonus.

The government recognizes the incredible benefit charitable organizations bring to society through tax breaks for donations that are better than any other tax incentive.

  1. Longer Life

They say to save the best for last, right? Studies have found that people who are generous seem to live longer than those who are not.

It is important to clarify that generosity doesn’t have to be being generous financially. It can be serving others or volunteering for a cause important to you.

Be Generous! It’s good for others and it’s good for you!

References:

https://www.medicalnewstoday.com/articles/322940?c=1101852366524

https://www.huffpost.com/entry/generosity-health_n_4323727

https://health.clevelandclinic.org/why-giving-is-good-for-your-health

Financial Pitfalls; Avoiding COSTLY Mistakes

The English dictionary describes a pitfall as “a hidden or unsuspected danger or difficulty.” Alternatively, it also defines a pitfall as “a covered pit used as a trap.” When it comes to finance, I can make the case that both definitions hold true.

Avoiding financial pitfalls in general really comes down to managing discretionary spending. Now more than ever, we live in a world where it is easier to spend money that you may or may not have, at the click of a button. We have been afforded online shopping, dine out options, grocery delivery services and more. Navigating through what is necessary and what is needed is up to us as the consumer.

Here are 4 Financial Decisions to AVOID: Keeping you from making costly mistakes

1. Buying a New Car:

The moment you drive that new car off the lot it has gone down significantly in value. According to the Canadian Black Book, “During the first year, the average depreciation for new cars is around 30 to 40 per cent.” Most Canadians tend to finance vehicles which can eat into a significant amount of their free cash flow each month. These payments are typically attached to low interest rates but have long payback terms. Additionally, increasingly more vehicles need premium fuel which could also pose as a significant monthly expense.

2. Spending Too much on a House:

It is important to live within your means, even when it comes to your residence. Homes have typically gone up in value in the greater Vancouver area, however, you must be mindful of how much you are willing to spend each month to afford a house. Too many Canadians are living month to month with a house rich and cash poor mentality hampered by a large mortgage payment. A larger house also tends to have larger utility bills, property tax, and overall greater repairs and maintenance costs.

3. Using Home Equity as Fun Money

It is easy to justify pulling money out of your home to do a kitchen renovation or go on a vacation. Interest rates are low, and your house has gone up in value significantly over time. However, keep in mind how refinancing your house might impact your overall long term financial plan. Short term thinking could prolong retirement plans down the road.

4. Not Having a Financial Advisor or Plan

Having a comprehensive Financial Plan helps ensure you are making cost saving decisions. I recommend engaging a Financial Advisor to meet with you to put together a comprehensive financial plan.  They will ensure you are prioritizing your objectives, needs and your short term and long-term goals. To keep you accountable to these cost saving decisions, they will meet with you regularly to ensure you are on track, start investing early, stick to the plan and monitor and adjust along the way. According to a national Ipsos poll, households with a Financial Advisor have nearly three times more investable assets than those without. It’s a relationship that can make all the difference in helping you achieve financial wellness.

If you don’t currently have a financial advisor or would like to discuss any of these ideas, please give us a call.

2021 Contribution Limits and RRSP Top-up Deadline

January 1st of each year often brings expectations of new things to come and the hope of new beginnings. 2021 is no different, though with some added variables such as masks and hand sanitizer. This new year also brings financial changes, such as new TFSA and RRSP limits and deadlines. Below are financial contribution limits and dates to remember for this year.

Things to Remember:

  • TFSA – If you are over 18 years old in 2021, as of January 1st you get an additional $6,000 of contribution room. As well, any unused room AND any money taken out of your TFSA in the previous calendar year can be reinvested into your TFSA. If you have been eligible for the TFSA since its inception and have never contributed, your available contribution room is $75,500.
  • RRSP – Contributions made to your RRSP account in the first 60 days of 2021 (March 1, 2021) can be applied to your 2020 tax return. The 2020 RRSP contribution limit is $27,230.
  • RDSP – January 1st means the new calendar year grant and bond money is eligible for you or a loved one who qualifies.
  • RESP – January 1st means the new calendar year grant money is eligible for your children’s education. $2,500 of contribution provides a minimum 20% grant ($500). There may also be past year catch-up available if you have not maximized your child’s contributions in previous years. This grant is no longer available the year your child will turn 18 years of age.

Feel free to reach out if you have any questions. We’re looking forward for what is to come in 2021.

HOW BUDGETING CAN SAVE YOU IN THE LONG RUN

What do a minimum wage worker, a Fortune 500 executive and a successful entrepreneur all have in common? They all NEED a budget. A budget is the starting point and catalyst that allows our clients to get where they want to go. It also gives us, their financial advisor team, a financial road map as […]

The Art and Science of Wealth Decumulation (Part III)

How to Decumulate well is both an art and science. In the first two blogs on the topic of decumulation we talked about why planning is an ongoing process and identified some of the biggest financial challenges faced in decumulation during retirement. This third article will outline four important basics for decumulating wealth well.

1. Maximize Government Programs

The rule of thumb that says “take your CPP as soon as you can” no longer holds true. With the changes to the CPP and OAS bonus and CPP penalty rules, there are many ways to optimize your government plans. Some things to consider:

  • Your Health – we talked about this in a previous blog. If your health is poor, you may wish to consider taking CPP early.
  • Your employment status – if you are still working we almost always recommend waiting to take your government plans.

Consider this: If I told you I had an investment that would guarantee you an increase in your annual retirement income by 7.2% per year for every year you wait to take it…and when you do take it it would increase your annual retirement income at the rate of inflation. Would you wait? I would. Over 5 years that is a 36% increase in your retirement pension. For this reason, it is worth considering withdrawing other investment assets earlier and waiting on the government pension depending on your life circumstances and what your end goal is.

There can be significant complexity in these options, it is wise to talk with a financial professional prior to making a decision on optimizing government programs.

Planning Idea: If you retire before age 65 and are healthy consider using other assets to generate retirement income instead of taking CPP. Analysis shows that there aren’t many investments that can beat the bonusing offered in the government pension plans.

2. Know what your end goal is

There is great diversity on what clients would like to see happen with their money at the end of their life (estate planning). There are two predominantly common life goals: legacy gifting and lifestyle making.

  • Legacy gifting: The phrase we hear here is “I want to keep all of the principal to pass on to my kids when I am gone.” If this is the end goal, then our planning will be focussed on maximizing the estate and preserving capital.
  • Lifestyle making: From this type of client we hear “it is all about providing a comfortable retirement. If there is money left when I’m gone, they are welcome to it.”

There are obviously many variants in between. Identifying the priorities for your wealth will dictate planning strategies such as paying down debts in retirement vs. keeping debt payments low to increase cash flow.

3. LIF and RRIF

Not all retirement plans are alike. It is important to know the difference and optimize a plan’s characteristics.

For example, if you receive a Life Income Fund (LIF) account as a result of being part of an employer sponsored pension plan, the funds have a minimum withdrawal amount and, more importantly for planning, a maximum withdrawal amount. For example, you could have $250,000 in your LIF account and have a $25,000 bill to pay but are unable to take out anything from the LIF account if you’ve already taken out the maximum amount for the year.

Registered Retirement Income Funds (RRIF) will have a minimum withdrawal amount but no maximum withdrawal limit.

Planning idea – take the maximum LIF right from day one in retirement. Use your RRIF as your flex account because it has a minimum but no maximum limit.

4. Play the TFSA game

Tax Free Savings Accounts (TFSA) are one of the best government programs for retirees. TFSA grow tax free and are not taxable when you pull the money out.

Planning idea: Use your TFSA as your financial pressure valve. Draw down non-registered or registered investments to a certain level of taxable income. If you have surprise expenses in a calendar year, consider using the TFSA to create the cash flow needed without increase your taxable income. You can replenish your TFSA in the next calendar year.

Final Words

I hope you have found this 3-part series on wealth decumulation helpful. We have just scratched the surface on this topic. Give us a call if you want to chat about your unique decumulation plan.

In this rapidly changing world, never before has managing your wealth in retirement been so important.

The Art and Science of Wealth Decumulation (Part II)

How to Decumulate well is both an art and science. In the first part of this three-part series, we discussed why planning is a lifelong process. This second part of the series will identify some of the biggest financial challenges faced in decumulation during retirement. The third article will outline important basics for decumulating wealth well.

BIGGEST CHALLENGES

The following challenges must be addressed in a decumulation strategy that leads to financial success in retirement.

Market Volatility

If retirees do not plan their asset allocation well, a bear market can significantly impact their odds of success in retirement.  Research has shown that if a retiree can survive the first several years of retirement, their odds of success increase significantly. Having low volatility investments (bonds) or guaranteed investments (GICs) can help weather volatile markets.

An often overlooked asset class for cash flow certainty is Annuities. Annuities provide guaranteed cash flow and Life Annuities guarantee this cash flow for the rest of your life. Annuities do not change in volatile markets. It is worth considering the option of an annuity of you want to guarantee a specific level of annual income. If your assets are non-registered, there are prescribed annuities which can create tax efficient cash flow throughout retirement. Annuities are worth considering but make sure you keep the annuity within the guarantees offered. After all, an annuity could be around for a long time.

Low Interest Rates

For today’s retirees, low interest rates are causing a significant challenge. While their parents enjoyed a yield of 6% – 7% on their interest-bearing investments, retirees today are dealing with 1% – 2% yields. On a $1 million portfolio that’s the difference between $60k per year versus $20k. No wonder clients are taking more risk with their portfolios to increase their yield.

Beware of chasing yields to increase cash flow. This strategy can run into trouble in times of stress. Ask good questions before investing, including the downside risk of the investment.

Taxes

Tax gets mentioned again because it can be such a killer of wealth. Each year, it is critical to review taxes and look for ways to reduce, defer, or avoid tax through legitimate strategies in the most efficient manner possible. Tax is one of our biggest financial partners in life. Take the time to manage this relationship well.

Business Ownership

For many of our clients, owning a business is their biggest wealth accumulator. Business owners often sacrifice a lot to achieve this success. Their next challenge is often how to move money from their business to themselves personally in the most tax efficient manner possible.

The rules of building wealth are getting more and more difficult.  We expect this challenge to continue for the foreseeable future as public debt increases and governments seek alternate ways to generate tax revenue. Be shrewd while working within the tax laws of Canada. It’s worth the effort.

SUMMARY:

In many ways, decumulating wealth is a greater challenge than accumulating wealth. In wealth accumulation, time is on your side. In decumulation, time is working against you. You don’t have time to recover if your investments don’t do well. In the final article of this series, we will provide five strategies for decumulating wealth well.

In this rapidly changing world, never before has managing your wealth in retirement been so important.

The Art and Science Of Wealth Decumulation (Part I)

Much of the financial services industry is focused on Wealth Accumulation.
You’ve likely heard:

“Contribute to RRSPs”

“Maximize your TFSA”

“Buy an RESP for your child’s education”

So what happens when you reach retirement and all that hard work of building wealth for your future becomes your main source of income?
Your questions might now become:

“Should I take my CPP at age 60?”

“I’ve heard RRSPs are the last investment you should use before age 72. Is this true?”

“Should I really reduce my non-registered investments first?”

The Answer – it depends.

How to decumulate wealth well (to decrease in amount or value) is both an art and science. In this first part of this three-part series, we discuss why planning is a lifelong process. This second part of the series will identify some of the biggest financial challenges faced in decumulation during retirement. The third article will outline important basics for decumulating wealth well.

Life Long Planning:

Government Changes:

It might seem that just when you build a plan that works within government regulations, the government changes the rules. Especially for business owners with holding companies, rule changes can significantly impacted their future planning. With governments now ballooning debt due to Covid-19, we need to be prepared for new government changes in tax that will likely help pay for this.

Reviewing government legislative changes regularly is important.

Tax

The Government is one of your biggest financial partners in life. They take the largest amount of your income; in some provinces, amounting to more than ½ of your income. Managing tax and monitoring tax rules is critical.

Annually managing your taxable income can legitimately keep more money in your pocket rather than passing it on to the government.

Income Changes:

RRSPs are one of the biggest game changers the government implemented to help people retire. An RRSP allows for pre-tax money to grow tax sheltered and then to be taxed in the future at (hopefully) a lower tax rate than when you initially earned the money.

At age 72, a good saver may encounter tax challenges and in some cases Old-Age Security (OAS) clawbacks (loss of government programs).

Reviewing portfolio values and income changes on an annual basis can benefit a retiree’s pocketbook.

Imbalance of Assets

Part of good planning is ensuring that during a wealth accumulation stage you are strategically allocating assets so that in retirement one spouse doesn’t have significantly more income than the other. This is especially true for retirement income prior to age 65 when income splitting rules kick in for RRIF, LIF and Corporate Dividends.

Reviewing assets on a regular basis to ensure they are optimally balanced is important to keep more of your income rather than paying it in tax.

Life Changes

Life doesn’t always go as planned. For example, sometimes a spouse pre-deceases another just into retirement. This can create tax challenges for the surviving spouse. RRSPs that were meant to be split between two people are now only for one. Non-Registered income is now taxable in the hands of a single person. CPP and OAS are often reduced as the survivor benefit doesn’t offset the reduction in government programs.

When doing planning, it is important take into consideration the health of the couple. Are both individuals healthy? Do their families have a history of longevity? Your financial advisor may recommend decumulating differently depending on these facts.

If one of the clients is in poor health, it is most likely beneficial to start CPP as early as possible. Whereas a healthy client with a family history of longevity may wait longer and take advantage of the government bonuses on CPP and OAS.

If a spouse is diagnosed with a serious or even a terminal illness, it is important to prepare for the worst while still hoping and praying for the best outcome. A lack of planning can significantly impact the surviving spouse and their income stability into the future. In this case, ensuring the ill spouse’s TFSA is maxed out prior to passing can transfer into the surviving spouse’s account and double their TFSA limit.

When life circumstances change, it is often valuable to meet with your advisor to review your financial plan.

Estate Planning

For some clients, passing a significant portion of their wealth onto their kids/grandkids is important. This can change how we decumulate. For example, for business owners, this may include restructuring their corporate structure to efficiently transition a business for the success of the next generation.

We find that ongoing discussions regarding estate planning are helpful to discover what is really important to the client with regards to estate planning.

Summary:

In many ways, decumulating wealth is a greater challenge than accumulating wealth. In wealth accumulation, time is on your side. In decumulation, time is working against you. You don’t have time to recover if your investments don’t do well.

In this rapidly changing world, never before has managing your wealth in retirement been so important.

Is it okay to retire with debt?

Canadians are having a harder time than ever saving for retirement as well as paying down debt. Debt levels are higher than they’ve ever been. For example, 2003 Debt-to-disposable income was 120% versus today at almost 180%. Real estate and consumer goods have jumped significantly in price and it doesn’t appear to be slowing down any time soon. We are often asked, “Is it okay to retire with debt?” There are a few things to consider when we look at this question.

Obviously, the simple answer is “No”. Our sole aim with our clients is to help them achieve their financial goals and have a healthy, prosperous retirement. We factor in debt elimination as well as savings into our clients plan to help reach their goals. Every once in a while we have clients entering retirement while still having debt. The question is, how do you service that debt? The answer is, the same way you would prior to retirement… from cash flow. When talking about retirement and carrying debt the question we need to determine is if your retirement cash flow can sustain the debt payments. This can be determined through investment vehicles such as RRSPs, general savings, or TFSAs. Perhaps you have worked at a position that had a pension or long term incentives attached to it. Typical pensions can cover up to 60% of income over the span of that individual’s career. Pension income is a great source of income as it provides a predictable cash flow in retirement.

There are 2 kinds of debt that we often come across, good debt and bad debt. Good debt can be something that produces cash flow and can be a future income stream in retirement like a rental property for instance. As long as the debt’s cash flow is positive then we view this as a good viable investment.  Bad debts are loans such as credit cards / lines of credit / mortgages; this type of debt often carries high interest rates and unforgiving terms. These kinds of debt are something that needs to be addressed immediately as it will hamper your retirement long term.

A recent study showed that Canadians typically retire on 67% of their pre-retirement income.  This is a result of lower mortgages (or none at all), kids having grown up and moved out, and fewer expenses in general. Additional things such as no longer funding children’s education, no longer having CPP and EI deductions, and paid off vehicles can allow for this.

So, can you retire with debt? The answer is yes, as long as your investments or pension income can sustain it. We’re happy to help review your unique financial situation and provide valuable insight where we can.

Canada Pension Plan – How stable is it?

Canadian workers rightly assume that the Canada Pension Plan (CPP) will be there for them when they reach retirement. In honor of this expectation we thought we would dig a little deeper into this national program. Here is what we found:

Interesting Facts:

  • It is the 10th largest pension in the world ($392 Billion as of March 31st)
  • It is run as an independent entity (not government run)
  • 10.2% of an employee’s income (up to $57,400 (2019)) goes to CPP (split equally between employee and employer)
  • There are five (5) departments that oversee 25 mandates
  • It currently has projected pension stability for the next 75 years
  • There is a lot of great information on this web-site http://www.cppib.com/en/ such as:
    • Investment Philosophy
    • Investment Performance

How much will you receive when you retire?

  • The CPP is a contributory plan. This means, it depends on how much you have put into the plan during your working career
  • The maximum CPP (2019) is $1154/mo
  • This amount adjusts annually for inflation

When should you start taking your CPP?

  • There are several factors to consider:
    • Your life expectancy
    • Your marginal tax rate when you start taking CPP
    • Your current age
    • The penalty or bonus from CPP
      • If you are below age 65 and start CPP you are penalized at a rate of 0.6% per month (7.2% per year)
      • If you are over age 65 you get bonused at a rate of 0.72% per month (8.4% per year)
      • In other words, it can pay to wait
  • If you would like to run some “what-if” scenarios, check out our web-site. https://www.singerolfert.com/resources/#cpp-calculator

CPP is currently a well-run, stable pension plan that will provide pension income for Canadian workers for a long time to come.

Are you a stock or a bond?

Measured Risk – this is usually the determining factor in how we view our client’s portfolios. We take a snapshot of the stage of life you’re in and put together a plan that will suit your needs for the short and long term. Often times we get asked, “How do I know if a portfolio is appropriate for me?” Let’s take a look at what determines whether you are better suited for stocks or bonds.

Stocks – the dictionary describes stock as: the capital raised by a business or corporation through the issue and subscription of shares. When I think of stock, I think of growth. Owning stock, or fractional shares in a company, gives you the opportunity to participate in the benefits and growth that a company may experience. Good companies pay the owners dividends and the really good companies regularly increase their dividends. Owning a stock doesn’t guarantee it’s going to make money, as history has shown us, but one that generates dividends generally is a lower risk option than one that doesn’t.

When you evaluate whether you are more like a stock or a bond, it comes down to your goals,  objectives, time horizons and quite frankly… risk tolerance. If you an investor that is ok to go on a roller coaster ride of highs and lows, then you can take comfort in investing in stocks. The stock market fluctuates frequently because investors have the ability to sell or buy stock at any time. Naturally, this will create movement in the market and overall price of a stock. Imagine what the housing market would look like if people could just click a button and sell their house? It would make for a very volatile market and a lot of uncertainty. Historically, owning stocks has been what’s contributed to the most growth in client portfolios. Having good portfolio managers pick the right stocks to own is the key to realizing that growth.

Bonds – inversely when I think of a bond, I think of stability. If you have ever gone to a bank, and asked for a loan then you will have a pretty good understanding of how a bond works. The bank loans you the money at a fixed rate (%) and you agree to pay the loan back to the bank over a set period of time along with interest. To put it simply, with bonds you’re the bank and you are lending your money out and getting back a fixed rate of interest/return on your money. When you buy a bond you are lending money to governments and corporations.  By definition, a bond is an instrument of indebtedness of the bond issuer to the holders. Bonds are well suited for clients who are close to, or already in retirement.

A rule of thumb, is that the percentage of bonds you have in your portfolio, should replicate your age. The logic being, that your portfolio should be more conservative the older you get to preserve your investment. Bonds are generally predictable and actually work contrary to interest rates. When bond prices are high, interest rates are low and vice versa. If you are a conservative investor then bonds just might be the right fit for you. Portfolio managers are still able to see value and yield for their investors through prudent money management.

To conclude, it comes down to measured risk.  How are you willing to invest your portfolio, based on your goals, aspirations and more importantly…risk?  There is no correct answer on what path to take; it all comes down to how you get there. Working with a team of Financial Advisors and Portfolio Managers will give you the freedom to do what you enjoy and the give you the peace of mind knowing that your stocks and bonds are looked after.

If you have any questions on how these changes may affect your financial future, do not hesitate to contact us!