Monday, August 24, 2009

Sorry But I'm Taking A Break

As we approach the end of a "brief" summer, I am planning on taking a couple (few) weeks off to refresh and renew. See you in the fall...
Stay Well and Pay It Forward.

Friday, August 21, 2009

Financial Independence (FI)

Every person on this planet will have their own definition of financial independence. To many people in North America, it means a nice home, nice cars, fancy "stuff" and trips. To someone from the African interior, it could be defined as 3 square meals a day. Yet one constant remains - the most important things for those dreaming of financial independence (FI) is manage your cashflow. In the beginning people often get too bogged down in worries about if they have invested right or tax considerations or how much money they need, when in reality managing your cashflow is much more important.

You see in the beginning you likely have a small amount of investments so optimization of your investments and related taxes is a minor issue. A 1% lower rate of return on $50,000 is a mere $500 a year or equal to about $42/month. So you could either do a ton of research and self learning on taxes and investments to get that extra 1% return or just stop buying a coffee everyday on the way to work. Guess which one is much easier to do?

So that’s why I’m suggesting don’t worry about everything else in the beginning. Your first priority is to start using frugal ideas and reduce your spending to increase your amount of money for debt repayment and future savings. You start with the big stuff of paying off your credit card debt and work you way down to $2/month savings here and $5/month there. Every dollar counts so look at everything and ask yourself, "does this make me happy for the dollars I’m spending on it or do I require this". Not “would like” or "kinda enjoy it" but rather "I love doing this" and "I need to eat something to keep breathing" kind of thing.

In the beginning you will likely go over kill and cut back too much. That is fine, once you find those areas you really miss spending on go back and put some cashflow back in. After all
FI is a nice goal, but no one should be miserable on the way to getting there. Life is a once through processes so you might as well enjoy the ride.

In the end you will find out how much you really need to spend to make you happy which then you can use to build a real estimate of how much you need to get to FI. Also after this much time you would have likely had some time to slowly learn a bit more about investments and taxes so now you can go back and investigate doing better there. Just don’t try to take on too much all at once, it is recipe to fail to get anything done.

Read books, talk to successful people (make sure they really are successful and not living on time/credit), watch shows and educate yourself. Most people tend to learn from their parents - whether that advice is good or bad does not matter. Ask around and find out what others are doing. That doesn't mean you need to become an expert. Many people do fine as do-it-yourself investors. They don't need an advisor to hold their hands and seem to come out ahead. If you don't see your self in this category, then stick to the basics:

  • Pay cash whenever and wherever possible
  • Save 10% of your income for emergencies, retirement, child's education
  • Pay your bills and live within your means
  • Decide on whether an item is a need or want
  • Do a budget and stick to it

Stay Well and Pay It Foward.

Tuesday, August 18, 2009

Retirement Income - The Right Mix

Here is one of those great things you find on the net - it will help investors "approximate" how much of their investment holdings should be invested in equities and bonds.

The theory that you should ratchet back on risk as you age is generally a good one. A popular rule of thumb was to subtract your age from 100, the difference being the percentage of stocks you should keep in your portfolio. Then people started living longer, and the target number to subtract from became 110. For example, if you’re age 40, 70 per cent (110 minus 40) of your portfolio should consist of stocks when you're building towards retirement.

Even when you're done working, you'll still likely need to have at least some of your retirement portfolio in stocks to provide inflation-beating growth, however. In fact, some advisors believe the stock allocation shouldn't drop below 50% for many retirees.

But it’s important to realize that close to two thirds of your investment earnings may actually come from post-retirement returns, says Russell Investments Canada. Good news, considering that most investors haven’t been having much luck recently making money before they retire.

Based on Russell’s 10/30/60 ratio, the pattern of your investment earnings during retirement will likely be derived something like this:

- 10% from money you saved during your working years
- 30% from the growth of your savings before you retire
- 60% from growth that occurs once you retire

Because the scheduled withdrawals go up relentlessly every year, they take an increasing bite out of your nest egg. Withstanding that ever-growing bite requires stability, which means minimizing volatility and negative returns like those we’ve seen lately.

The key, therefore, is having the right portfolio mix in place during retirement – one that balances the stability of bonds with the continued growth potential of stocks. What’s the optimal mix? A relatively conservative blend of 35% stocks and 65% bonds, Russell suggests.

How does your portfolio match up?

Stay Well and Pay It Forward

Friday, August 14, 2009

Will CPP/OAS Be There When You Retire?

I often hear this question when talking to people. For some reason, the younger the person, the more it is assumed that there will be no Canada Pension Plan or Old Age Security. However, it is also interesting to see how many older people assume that it is their inherent right to receive OAS benefits. As you are about to see, they may both be very wrong.

While the information I am about to show you is old, rest assured it will explain the problem/crisis we face in the future. These numbers are from the 2003-2004 fiscal tax year. During that year, the federal government brought in $186B in revenue. The largest single expense that year? Interest payments on Canada’s federal debt (money borrowed by previous federal governments, which has not been repaid). These payments – to institutions and individuals who hold federal bonds, Treasury bills and other forms of the debt – cost $35.8 billion. This represents 19% of all tax revenue.

Transfer Payments are cash payments that go directly to individuals, to provincial and territorial governments, and to other organizations. Overall, these three categories of transfers combined make up just over half of all federal spending, or almost 51 cents of each tax dollar. Of this group, the biggest transfer category was Major Transfers to Persons. Altogether, these payments cost almost 23 cents of every tax dollar. These transfers included payments to eligible elderly Canadians through Old Age Security payments, the Guaranteed Income Supplement and the Spouses Allowance.

Here is a simple point - for every dollar the government brings in, 42 cents goes to pay the debt and provide OAS and related benefits. Now here is the crisis part - what happens when the first wave of baby boomers turn 65. This will lead to lower tax revenues and higher transfer payments. Over the past several years, the federal government has been paying down the deficit at the rate of about $10B per year. The past 12 months changed everything and it is expected to put us back where we began. The federal debt level was still substantial at $467 billion in 2006-07. expect to see a number in the $550 billion range next by 2010.

If you think we have it bad, the US is in much deeper trouble. I found this best illustrated their problems going forward.

Let's turn to the state of the Canada Pension Plan. Canadians currently receiving their CPP benefits have no cause for concern. The plans has a total (March 2009) of $105.5 billion in it's portfolio. In fact, it will be another 11 years before a small portion of the CPP Fund’s investment income will be needed to help pay pensions. Beyond that time, the CPP Fund will continue to grow for decades to come. The $105.5 billion CPP Fund is broadly diversified and structured to help secure Canadians’ CPP pensions over the long-term and the funding structure of the CPP means that it is able to weather an extended market downturn.

CPP contribution levels have increased dramatically over the past 15 years to their current levels of 9.9%. The reason for this was to preserve future benefits. According to the Office of the Chief Actuary of Canada, the CPP fund needs a real rate of return – that’s return after inflation – of 4.2 per cent, over the 75-year projection period in his report, to sustain the plan at the current contribution rate. Over this long time frame we expect that there will be periods where returns are above or below this threshold. In the ten years since the CPP Investment Board began investing, returns for the CPP Fund in all four-year periods prior to fiscal 2009 exceeded the 4.2 per cent real rate of return.

Public equities make up 44.0 per cent of the CPP Fund. The current asset mix is as follows:
Public equities: 44.0%
Fixed Income: 27.9%
Private equities: 13.4%
Inflation-sensitive assets: 14.7%

Interestingly, only 45% of the portfolio is actually invested within Canada. Don't think that makes sense? Here is a response from the CPP Investment Board to that question.

Our mandate is to contribute to the financial strength of the CPP by investing in the best interests of 17 million CPP contributors and beneficiaries and by maximizing returns without undue risk of loss.With approximately 45.5% of our portfolio (or $48.0 billion) invested in Canada, we will always have a large part of the fund invested here but we do not want to be overly dependent on the strength of the Canadian economy and so are systematically looking for opportunities to diversify internationally. But portfolio diversification by asset class and by geography is a fundamental part of the CPP Investment Board’s long-term investment strategy to manage the growing complexity of the fund. On its own, Canada does not provide sufficient diversification opportunities. Canada’s stock market is small, representing less than 2% of the world market capitalization, and it is heavily concentrated in a few sectors. The flow of contributions to the CPP varies directly with the health of the Canadian economy. By reducing the fund’s reliance on the Canadian economy, global diversification offers a source of returns for periods of weak performance by the Canadian economy.

Since the Canada Pension Plan is funded by contributions from it's "members", there are fewer issues of affordability. Nonetheless, as explained in a previous blog, there are changes pending to the plan and the amount of benefits people can/will receive. Expect lower benefits in the future, as well as possible increases in costs. If I were a gambling man, I would bet on CPP being around for 50-100 years. As to the Old Age Security (OAS) program? I think that the future definitely holds some snake eyes.

Stay Well and Pay It Forward.

Tuesday, August 11, 2009

The Pendulum Never Stops In The Middle

Every now and then I like to "steal/borrow" from some very intelligent people. This blog was taken in its entirety from a piece by Dan Richards, Founder and President of Strategic Imperatives, Dan Richards ranks among today’s leading authorities on strategies for financial institutions and financial advisors to attract high net worth clients and build deeper client relationships.

Occasionally, words of wisdom stay with us and remain relevant decades later. When I was in business school in the 1970s, my finance professor used a phrase that I find useful in markets like the one we're in today: "The pendulum never stops in the middle."

He was talking about market valuations and investor sentiment, and the reality that markets inevitably swing from one extreme to another - from periods of outlandishly elevated valuations to ridiculously beaten-down levels, from periods of unquestioning euphoria to absolute pessimism. The adage applies in lots of other cases as well. Look at the market's and the media's attitude to risk and leverage. Not long ago, companies that were fiscally conservative and didn't borrow to the hilt to boost profits were criticized for failing to maximize shareholder value; you may recall some of the commentary about the failure of Canadian will when foreign companies were outbidding our domestic competitors for acquisitions. Many articles were written about how Canadian banks had fallen behind in global rankings, as they limited themselves to careful, small-scale acquisitions and rejected large bold moves.

By contrast, in today's environment, even prudent risk has become a dirty word. Just a few weeks ago, the most popular article in the online New York Times portrayed Canadian banks as the model for the global banking system - a notion that six months ago would have been absurd. From pitied to paragon is common when the pendulum swings. Consider investors' attitudes to owning resource stocks. Not long ago loading up on these was all that many investors wanted to discuss. Today, those same investors don't want to hear about owning resources. This is also reflected in expectations on oil prices. A year ago, the "peak oil" theory held sway and demand from China and India was going to push oil to $200 (U.S.) by year-end. Today, we've begun to hear about the "peak demand theory," the view that demand for oil peaked last year and we'll never see demand at that level again. With the benefit of hindsight, the first forecast is now clearly absurd - as, almost certainly, the second will prove to be.

Finally, think about the wild swing in consumer sentiment on appropriate spending that's taken place in the span of just a few months - from the norm of lavish expenditure to "the new frugality." While the stock market may be efficient and rational in the mid and long term, in the near term the "swinging of the pendulum" creates opportunities for companies and investors who maintain perspective. That was true 30 years ago, and it's true today. That's because the notion of the pendulum of market sentiment swinging from one extreme to the other captures two of the most important and widely recognized truths about investing.

The first truth is that what really drives markets at their extremes are the twin emotions of greed on the upside and fear on the downside. Both can be costly - and it takes real discipline and resolve to withstand the forces of those emotions as the pendulum moves through its arc.

The second truth is that the costliest advice for investors is "it's different this time." Seasoned investors know it's never different. Investors who listened to market prophets saying that the historical rules didn't apply to tech stocks in 2000 and resource stocks a year ago ended up paying a huge price. Chances are that those investors taking counsel from the most extreme voices of doom today will pay a similar price in wrong-headed investment strategies and missed opportunities. It would be foolish to deny that the global economy and stock markets are facing formidable challenges. That said, open markets, the spirit of innovation and the entrepreneurial ethic have demonstrated remarkable resilience in the past in working through periods that seemed at the time as dark as the one we're in today.

We may not be all the way to the extreme of despair and pessimism, but we are almost certainly well past the midpoint - and into an area we may remember more fondly years from now. We'll see that the drastic shift in sentiment has created significant value for those disciplined and bold enough to look past the swinging of the pendulum.

Back in June, Dan appeared on BNN and discussed the best way to approach finding a new advisor. This is definitely worth watching.

Stay Well and Pay It Forward.

Friday, August 7, 2009

Choosing Your Advisor

On April 12, 1959 in a speech in Indianapolis, John F. Kennedy made the following statement:

"The Chinese use two brush strokes to write the word 'crisis'. One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger - but recognize the opportunity."

The basic idea is that a moment of crisis presents two possible outcomes: either growth and positive change or regression and failure. Sounds like some pretty deep ancient wisdom, right?

Far be it from me to criticize someone like JFK, but many native Chinese speakers don’t see it that way (though some do), saying it’s only coincidental that “crisis” (wei ji) contains parts of the terms for “danger” (wei xian) and “opportunity” (ji huay). But then “wei” and “ji” each have a range of meanings that suggest “crisis” really is a combination of the two ideas, whether the wisdom we attach to the term was intended or not. And isn’t that even deeper?

So where are we on the "investment cycle" now? The only person who can answer that question is the one who looks at you in the mirror each morning. I would like to think that the denial, fear, desperation and panic stages are well past us. Capitulation, despondency and depression are now in our rear view mirrors too. Are we approaching hope, relief and optimism? Maybe over the coming months.

Markets are cyclical in nature (see 10 different blog postings in the past year) and so are the emotions of investors. The best investors (Warren Buffett and his ilk), liken a financial crisis to an 80% off sale at your favourite boutique which you can not, or will not normally shop in. Billions and perhaps trillions of dollars were there for the making if you were bold enough to buy at the bottom.

For the average investor, the chances of getting rich or losing it all are remote. When it comes to investing, 8% of your returns are determined by which fund and when you bought it. The other 92% of returns are determined by the types of funds and where the monies are invested. As I have often said, one of the most important roles for an advisor is to simply ensure you are invested according to your risk tolerance. People don't worry about the markets when things are going well - but when they head in the other direction, advisers change from providing advice to holding hands and acting as babysitters. I apologize if that analogy offends anyone. Perhaps the best analogy I ever heard was from a successful advisor at a conference in the US. He stated very plainly:

I manage investments portfolios and protect clients from themselves.

Advisers cannot afford the luxury of panicking. In uncertain times, people become frightened about the viability of their "commodities" - the things they buy and the jobs that they hold. The best advisers tend to disregard their own "commodity". They don't try to "sell"you something - people at the best of times hate getting sold something. What people want at all times is value creation - solutions that help them eliminate their dangers, capture their opportunities and reinforce their strengths.

The best analogy of a good trusted advisor? They act as the Chief Financial Officer (CFO) for their clients in their personal and/or corporate lives. Their work provides their clients the time to focus on what is truly important to them, both now and in the future.

The trusted advisor is usually busy, but always seems to be available to help a client no matter how trivial the matter. They have a plan for the future and share it with their clients. They are also honest with their clients - even at the risk of losing that client. Having a YES man/woman for an advisor is a ticket to financial ruin for many people. When you find that advisor, hold onto them with all of your strength. While the work they do for you adds a little something to their own bottom line, their effects on you and your family can be rewarding. I can put a price on many things - how do you put a price on confidence, satisfaction and piece of mind. What do I mean by that? Read this...

When we first met our advisor, we were living in a two bedroom apartment with our son and daughter, and sleeping on a pull out couch. We had high interest rate credit cards, car payments, all the usual debts. Our advisor started us on the right track, contributing to RRSP's, taking out life insurance and insurance for disability which we didn't think we needed. Within a couple years we bought our first home.

Whenever we needed him, he was there, guiding us along, even when it didn't pertain to his job. He helped our children get started with their homes, and gave us piece of mind. Last year, my husband had to take an early retirement due to a work related disability, and with the benefits of the disability insurance and the savings, we are now mortgage free and living in our dream home in New Brunswick.

Even in the face of chaotic markets and disappointing performance over the past nine months, most investors are hanging in with their financial advisers. In a recent Ipsos Reid survey, 87 per cent of Canadians said their current adviser will be their primary adviser a year from now. Most recognize that even the best managers didn't foresee last fall's financial meltdown and that almost everyone is in the same boat.

Of course, that's not universal. Some investors are rethinking the relationship with their adviser, while others are responding to invitations to a “second opinion” on their portfolio. Some investors are questioning whether they want to work with an adviser at all and are considering switching to a discount broker.

Working with the right adviser can have a huge effect on achieving your long-term financial goal. The wrong one can result in you looking like our friend at the left. It's a decision that shouldn't be rushed. Some investors select the first adviser they speak to or make a decision based on an adviser's glitzy office – and later regretted the choice. When looking for an adviser, most investors begin by asking people they know for suggestions. While a referral from someone you trust increases the odds things will work out, just because an adviser is a good fit for a friend doesn't mean he or she will be right for you.

Selecting an adviser is like any important decision. First impressions matter, but to tilt the odds of getting this right, you need to first identify the key things you're looking for (ideally in writing) and compare what you hear with that list before deciding. There's nothing wrong with telling an adviser you'd like to sit down for a couple of in-depth discussions before making a decision.

During these meetings, you have two goals. The first is to get a sense of whether this a good fit. For example, here are some questions focusing on the past 12 months: How did you suggest positioning portfolios like mine going into the beginning of last year? What kinds of changes have you recommended to clients in my situation since last fall? What kind of advice are you providing to clients like me today? How are you managing risk amid recent uncertainty? In general terms, would you share what you held in your own portfolio going into last fall and what your portfolio looks like today? What are the most important lessons you've learned from the past year's events?

The second component in making the decision is getting a reading on chemistry. Are you comfortable talking to this financial adviser? Does he really listen to your answers and appear truly interested in your situation? Does he talk in plain English? Do you like him as a person and feel you could be absolutely open with him? Do you feel that you would have confidence in his advice?

Remember, it's not only you making an assessment; in these initial meetings discerning advisers are also evaluating you and often have tough questions of their own. Today, it's not only investors who have choices as to who to work with: The best advisers can pick and choose their clients. Don't believe it? This video should be required viewing for all investors.

Stay Well and Pay It Forward.

Tuesday, August 4, 2009

Random Thoughts

The past month provided some very interesting changes. Stock markets continued their upward ascent, posting their fifth monthly gain in a row. The reason? Better-than-expected GDP data in the U.S. and corporate earnings in the second quarter that have largely beat expectations.

The Dow Jones industrial average gained 7 per cent on the month, making it the best July since 2002 for the index. The S&P 500 rose 6.95 per cent in July. In Canada, the economy contracted by 0.5 per cent in May, worse than consensus estimates of 0.3 per cent. Still, the S&P/TSX rose 4 per cent in July.

Recessionary forces are still prevalent in Canada, but the effects are easing. As most experts had predicted, the third quarter is looking very promising. In the past year, the Canadian economy shrunk 3.5%, most of that in goods production which shrank 9.9%

Does this mean we can pack away the panic button? Not yet. Unemployment remains at 15 year highs, and eventually interest rates will climb pushing those who racked up "bad debt" to the brink. Personal and corporate bankruptcies will continue. Nonetheless, as mentioned previously, there is light at the end of the tunnel (and it no longer says AMTRAK on the side).

What are the best lessons from the past year? Looking at things from the bottom up, consumers need to better heed the want/need approach to life. I would love a new 52 inch flat screen and blue ray player. Do I need them? No - I simply want them. Would I be better served spending my money replacing a perfectly good TV with a newer flashier model or paying off a debt. How about a blue ray with great picture quality versus saving for retirement or a child's education. If you can afford to go out and buy these types of items and pay cash, please feel free to do so. If no one spends money, the economy will never turn around. That being said, it is frightening how many people know so little about finances. They run amok and spend without regard to their futures. I'm not a fan of CSI Miami, but the other night they had an episode where a young "couple" attempt to commit suicide. The reason? A credit card company that preyed on students by offering them credit they could not afford or qualify for. Sounds suspiciously like the US banking and housing crisis doesn't it.

Gail Vax-Oxlade has a television show where she works with people with poor finances. In her recent blog, she states:

"I’m not sure what this comes from… this don’t-much-care attitude toward our money and the role it plays in our lives. It could be that we want to distance ourselves from the “money-grubbing,” “money means everything,” “money is what counts” attitudes some people display. We don’t want to be those people so we throw out the baby with the bath water. We spend years ignoring the most basic rules of money and then, if by chance we convert to Money Maniacs, we spend years trying to make up for what we’ve missed by becoming rampant Frugalistas. Or we come to believe that nothing can ever be different and that we might as well just blow it all now and have a great time.

Fact is people, money is the tool that gets us the things we need and the things we want. And since we work so hard for our money, we should be willing to work equally as hard making it do what we want. No control doesn’t mean you’re free, it means you’re stupid! And over-control means you become a slave to the tool. Balance is the key. We must balance today’s needs and wants with tomorrow’s dreams, while taking care of any mistakes we’ve made in the past. Balance is how we get to have money AND a life.

So how do you get through to your young person just how important it is that they save something of what they earn and that they put it to work early? How do you convince them that just because they’re making more money doesn’t mean they have to spend it all? How, in a society where credit is as common as air, do you convince the young-and-wanting that they should NOT use credit? And is the old saying, “take care of the pennies and the dollars will take care of themselves” really going to have an impact on our next generation?

Wow! Could not have said it better myself.

Stay Well and Pay It Forward.

Tuesday, July 28, 2009

The Recession Is Over !!!

The recession is over, but not the pain. Canada's central bank predicted Thursday that the economy would expand this quarter, suggesting the economic contraction lasted for about nine months, considerably shorter than the previous two recessions in the early 1990s and the early 1980s. The Bank of Canada's reassessment of the state of the economy is perhaps the clearest signal yet that the worst of the recession is over.

Does that mean that unemployment rates will magically drop back to the 5-6% range overnight - of course not. Does that mean that your investment losses will be undone as quickly as they occurred? Also a very big no. Bank of Canada Governor Mark Carney stopped short of celebration, saying it will take more than a year to replace the wealth destroyed by the financial crisis. He also stressed that the rebound is fragile, sustained by low interest rates and massive government spending. Business investment is weak, and Canada's exporters are dependent on global demand rebounding as the Bank of Canada assumes it will.
“There are still risks to the recovery,” Mr. Carney said. “The point we really want to underscore is that this recovery is the product of policy and where policy is.”

Due to the nature of our economy (as a massive producer of raw materials), everyone kept saying how Canada would not be as affected by the downturn as other countries. Stephen Harper (not an endorsement) stated that we would slump but we would not stop. Here is an amazing stat - China's GDP (Gross Domestic Product - cost of all goods and services produced in a country during a year) is still growing albeit at a slower rate. That rate? It dropped from the 10-11% range down to 7-8%. I did a little research and Canada has not had a GDP over 7% since - well the research didn't go back that far. Let's just say that the last time the GDP of Canada was where China "dropped to", I still had a full head of hair.

Now before we start singing and dancing in the streets (promo for the Caribana festival), let's be mindful of something else I have pointed out several times over the past few months. While recessions always end, they don't end on a Friday and we go back to stupidity on Monday. There is a slow upward economic curve as companies slowly begin the process of hiring new (or old) employees back. Those employees then start paying down the damages. They don't run out and buy a new car - this behaviour is what caused much of the current damage. The next issue is how the various "banking leaders" adjust going forward. The phrase quantitative easing will be heard more in the next 12 months than "gas is too expensive". The Bank of Canada and it's global counterparts need to ensure that they don't suddenly increase interest rates to fight inflation, or we head back into the same predicament. As governments around the globe printed money to spend their way out of the problem, the resulting inflationary pressures could have equally devastating results.

Stay Well and Pay It Forward.

Friday, July 24, 2009

Is Your Mortgage Really Insured?

It baffles me how many people can be sucked into one of the truly great scams of this century (and the last one too). You have just finalized the purchase on your first home with all of the assoicated problems (getting approved, finding the perfect home, negotiating the price etc). Now the time comes to sign on the dotted line for the priviledge of a financial institution allowing you to stay in one of their "homes" in return for the largest part of your paycheque. Just before signing, the loans officer asks you whether you want to "insure the mortgage". You're spending $1400 per month in mortgage payments; what's another $50 per month. You quickly sign the paperwork and file it with the rest of the mortgage documents and forget about it.

Well, I hate to be the one to tell you this, but you are now offically a (see picture at left). Why you may ask? Well the old saying that if it sounds too good to be true comes into play here. When you arrange for mortgage insurance at the "bank", in fact you are purchasing "group creditor life insurance". Coverage with a lending institution, is part of a group policy owned by the lender, and you, the borrower, have no control. What if you decide to buy your own policy.

With your own policy, your premium is guaranteed and fixed in advance, but group policy premiums may be subject to fluctuations if the lender raises charges for the whole group.
Your own policy is for any amount of coverage you want. If you already have insurance, you can add the mortgage amount to your existing policy. Insurance with a lender, however, is for the outstanding amount of the mortgage loan, and reduces as the loan balance declines.

An insurance company cannot cancel or refuse to renew your own policy, but a policy married to your mortgage can be cancelled by the lender or the issuing company. Bank employees are not licensed or trained to look at the borrower's overall need for life insurance. Independent insurance agents and brokers examine the client's total insurance needs, and not just the payment of the mortgage.

One of the most important benefits of owning your own policy is the ability to switch lenders when the mortgage matures. If your policy is linked to the mortgage, it terminates if you refinance or pay off the mortgage. If you switch lenders but have become uninsurable for health reasons during the original mortgage term, your old coverage terminates. What if you move? Under some group creditor plans, you may need to requalify for coverage. An individual plan faces no such problems.

Well at least the plan from the "bank" is cheaper than an insurance company right? Think again. Depending on whether you smoke or not, the insurance company could be significantly cheaper - as much as 30%. You are not penalized for paying down your mortgage quickly as you are under a "group plan". If you want an entire list of the pros of an individual plan over a "group creditor" plan, it would take 45 minutes of reading.

Last year, CBC broadcast a segment on their "Marketplace" show on the perils of "group creditor" insurance for mortgages. The only issue I had with the broadcast was that they pointed the finger at the insurance companies for not paying claims.
The issue presented in the show is not with the insurer or the lendor but specifically with the product and the way it is marketed. Check out the link and watch the video. They presented it in an interesting way and it certainly shocked many people who watched it judging by the "comments" on their website.

So why would people intentionally buy an obviously problematic plan, with numerous issues attached, at a price that may be no bargain you may ask? I have only come up with three possible reasons.

  1. The lendor indicates that you must purchase the plan from them. They may also suggest that you cannot get the mortgage without it. This sort of coercive or tied-selling is illegal and should be reported to the bank's ombudsman. In fact, the plan is cancellable at any time by simply sending a letter to the insurer.
  2. The process is simple. They ask a few simple questions and you "qualify". Buying from an insurer means you may need to go through a medical exam/blood/urine tests/ doctors reports and see if they would be willing to insure you. INSURERS TEST YOU UP FRONT. We buy insurance to protect things. We don't want problems. Group creditor coverage works in a different fashion - investigating you when you have a claim. If you made a small "mistake" on the application, your claim could be denied.
  3. Ignorance. I firmly believe that this is the biggest reason. Ask some of your friends or co-workers if they insured their mortgage? Then ask if they did it with their lendor? For these people, send them a link to this blog and help them avoid a possible catastrophe.

Stay Well and Pay It Forward.

Tuesday, July 21, 2009

Their Schooling Will Cost How Much?

Nothing warms the cockles of my heart than seeing the complete shock on the face of a new parent when they find out the cost of their child's "post secondary" schooling. Just be grateful you don't live south of the 49th parallel where costs are often five to ten times as much.

Canadian Business magazine has an interesting calculator that shows the costs associated with most universities in Canada. You simply decide where Johnny or Susie is going to school, whether they will be a doctor, lawyer or engineer and it does the rest.

The only problem is that it shows the current costs for an education and that is a huge problem for people with younger children. Here's the solution - take the results of the Cdn Biz site and then plug the "real numbers" into
Mackenzie Investments RESP calculator. You can input the number of children, where they will go to school, the costs, and inflation and come up with a very real (and terrifying number). Consider a 4 and 7 year old. Four years at school, while living at home, and with no "extras" like textbooks, school fees, sports etc and the costs are over $80,000. A law program at U of T? Double or triple that number.

If those numbers scare you, then let me point out something truly petrifying - those costs pale in comparison with the costs of not doing anything. In the first example, a child graduating from University with a $40,000 debt load can expect to pay an additional $20-$40,000 IN INTEREST ON THEIR DEBTS. I once made a statement that some people found to be quite prophetic (and others said it was pathetic so what do I know).

People who do not plan for their child's education costs are teaching them the merits of debt financing and establishing the groundwork for future financial misfortune.

In the above example, if mom and dad had set aside roughly $100-$110 per month in an individual RESP (not one of those scholarship type plans - that is a full blog in itself) from birth, it would have paid for the education in full. Don't even get me started on what happens when you wait. Simply waiting for 3-4 years means you need to contribute 20-30% more money. Contributions are not tax deductible, and the grant and growth is taxable but in the hands of the beneficiary. Since your child will likely not have sufficient income to pay taxes, essentially it's a tax free strategy. If you want to learn more about the types of RESP plans, then click on this link.

The biggest bang for the buck within an RESP is the grant monies. Essentially for every loonie you put into the plan, the government kicks in 20 cents. If your net family income is below $37,178, you get an extra $100 on the first $500 you save for each child. If your income is between $37,178 and $74,357, then they provide an extra $50 on the first $500 you save for each child. That really begins to add up. Here's an example:

Let’s say you save $650 a year for 15 years. Now let’s say your invested money will grow by 5% each year. The numbers below show you how much faster your savings would grow with the grant added in. With no grant money, after 15 years you would accumulate $15,656. With the various grant monies available, you contribute the same amount but end up with $18,790. In this case, you could get more than $3,000 for free.

There are several myths associated with RESP's. If my child doesn't go to school, I lose all of my money is the one I hear the most. In an individual plan, that is not true. You lose the grant money. As well, if you have more than one child on the plan (a family plan), then the money can be used by any of the children. Another popular myth is that you have to pay a lot of taxes on RESP's. In fact, only the grant and growth portion of the plan is taxable, and is taxed in the hands of the child. As long as their income is below $10,230 (and that is after all deductions including tuition costs etc), then they pay no taxes on the money.

Stay Well and Pay It Forward.

Friday, July 17, 2009

Did You Look At Your Investment Statements?

Back in January, the general consensus seemed to be resignation and panic. Many people told me they simply refused to open their investment statement. Others mentioned that they literally shredded them or ignored them. The brave souls who actually opened them spent the next month trying to comprehend what went wrong.

Well six months have passed, markets have begun to return to some form of normalcy and now comes your statement. Should you open it? Is there another whammy inside? What would a smart person do?

Simple. Remember that investing is a marathon and not the 100 metres. Your December 2008 statement represented a stumble - a fatal issue in the 100 metres but hardly a concern in a race of 26 miles (42 kilometres). Grab a beverage, sit down in a comfy chair, clear your mind of all negative thoughts and then open the statement. Did you survive?

Of course you survived and the reason I know this is very simple. With the exception of certain specific market segments and foreign investments, most markets returned a somewhat modest 5-10% return over the past six months. Some of the biggest naysayers before this whole mess are now starting to backtrack and are predicting an end to the recession is near. Within the actual stock markets, some did better than others - include the Toronto Stock Exchange (15%) and the Nasdaq (16%) in that group. Want a more telling indication that we are slowly leaving the drama of the past 10 months behinds us?

The Conference Board in the US analyzes tons of economic data to come up with (among other things) three monthly indexes that claim to provide insight for business leaders to use in planning what to do next.
The leading economic index (LEI) is made up of items generally judged to show changes ahead of the general economy. To gauge the future direction of the economy, you’d look at the LEI.
The coincident economic index (CEI) is made up of items generally judged to track (coincide) with current economic conditions. To take the current temperature of the economy, you’d look at the CEI.
The lagging economic index (LAG) is made up of items generally judged to lag behind the general economy. To confirm where the economy came from, you’d look at the LAG.
Here is a historical chart of the Conference Board’s LEI and CEI

Do you notice that the blue line is continuing a downward trend but seems to be "flattening"? This line represents current economic conditions. Look at the red line - this is the leading indicator for the future of the economy. Notice the dramatic uptick over the past 3 months? On March 9th, stock markets bottomed out and since then have been rising and falling but on an upward trend. My best explanation is this - take a Yo-Yo and get on an escalator going up. Start playing with the Yo-Yo. Even though the yo-yo is going up and down, the general direction for the yo-yo relative to your starting position is upward.

Does this mean everything is fine and we can go back to spending like drunker sailors? Of course not. The coming months will show that there are still areas of the economy in bad shape. One of my biggest hopes is that this economic downturn will make more people realize the importance of proper planning for the future. Having an emergency fund instead of using a credit card to solve those unexpected problems. Paying for things with cold hard cash instead of putting it on time. The days of running a deficit will hopefully be contained to governments who have the option to do so.

As always, Stay Well and Pay It Forward.

Tuesday, July 14, 2009

How Safe Are Your Benefits?

For people who worked for a company with an employee benefits program twenty years ago, the concept of "paying" for some of their benefits would have been considered ridiculous. Well as I have stated many times before, the times they are "a changin".
Nowadays, pension plans are in "deficit" positions and employees wonder what else could happen. Last week, a VERY BIG SHOE dropped. I'm sure that most people didn't even notice this headline, but for some people, it will dramatically affect their future.

Many years ago this major company, who spent money in questionable terms, whose stock market rise enabled a few people to get rich, and many times that number of people made poor, announced that their "disability program" was in jeopardy. The company which shall remain nameless (I don't feel like taking on their lawyers although I imagine they cannot afford them anymore), was a major global player in the fibre optics field and the largest company on the Toronto Stock Exchange 10 years ago. In a National Post article on July 8th, it was explained that the company's disability benefits program was not a true insurance program. Rather the company had created an administrative services only(ASO) plan and was "self insured".

Of late I have seen some excellent articles on why we "insure" things (our home, car, life, ability to earn an income). I will provide some more information in a coming blog that better explain the benefits. The problem here is that the company stopped "insuring" their employees through an insurance company. The company decided to take on the risk themselves to save money. Now they are going through bankruptcy and the employees who are currently on disability may be left out in the cold along with other "creditors". How could this happen you ask? Could it happen to you?

Benefits are offered by companies as a way to attract and retain employees. They are a tax- effective form of compensation for the company and many people consider "benefits" after income as primary reasons for choosing an employer. When times are good, benefits attract employees; when times are tough, they remain a principal reason for the downfall of companies. General Motors was a good example - it is not the wages they pay their staff that hurt, it was the cost of the "benefits" that drove them into bankruptcy. Benefits are made up of but not limited to the following:

  • life insurance and disability insurance
  • health and dental insurance
  • retirement benefits

In previous blogs I have discussed the problems facing some types of pensions (defined benefit plans). Life insurance is almost always a component of a benefits plan - if you have a sufficient number of employees, everyone can have some basic coverage without a medical. Once you cross a threshold, then medical requirements are needed. Disability insurance works in a similar fashion. Health and dental coverage provides reimbursement of covered expenses to maximums under the plan. Most employer go through an insurance company to insure their plans, especially smaller companies. The reason is simple - insurers have thousands or even millions of people insured which spreads out the risk. They take a percentage of the premiums paid to cover the administrative costs and profits.

What happens in an administrative services only(ASO) plan? Essentially, the employer takes on the risks associated with the plan and simply hires an insurer to "administer" the plans. Rather than buying insurance to cover employee benefits, companies can create their own trusts to provide benefits directly to employees, and use insurance companies to simply administer those benefits. But while ASO arrangements offer some tax and premium savings to employers, they put employees at risk when the company hits rough waters.

"It's not insurance; there's no insurance guarantee," says Frank Zinatelli, vice-president of legal services for the Canadian Life and Health Insurance Association (CLHIA).
There are more than a million Canadians whose LTD are covered by ASO arrangements, and whose coverage may be in jeopardy if their companies go under. If an insurance company goes bankrupt, its policyholders would continue to receive their LTD payments from Assuris, a non-profit company set up to deliver payments.

This type of arrangement can make very good sense for both the company and employee to cover dental benefits or perhaps even covering the health insurance portion of their plans. The disability or life insurance portion of the plan? Not in my eyes. As we have already seen with this company, people already on disability may now be in jeopardy as to their future income benefits.

The next time the discussion of "benefits" comes up, remember this blog entry. If you have a question about your plan, ask an advisor but not the one that sold the plan. An answer from a disinterested third party may open your eyes.

As always, Stay Well and Pay It Forward.

Friday, July 10, 2009

How Is Your Business Doing Financially?

I wonder how many people will read the title of this blog entry, then not bother reading any further. You know what they say when you assume. Oh well - it will definitely be there loss. When I talk about your business, people automatically assume I am referring to a physical "business". Even if you have a regular job, whether you realize it or not, you have an important business - your personal finances are just like a small business. If you run a company and don't watch what you spend, you get in financial trouble. There are literally dozens of similarities.

Do you have a budget? I'm not talking about that basic set of numbers you sketched out on a napkin one day at Timmie's. I am referring to a physical document where you actually track your expenses and see how much you take in and put out financially. Have one? Great. Follow it? Not often? Then it's not a budget - just some guidelines.

One of the biggest things I have been doing of late is sitting down with people and actually constructing a budget based on their income and expenses. It can be somewhat intimidating as some people have found out. One couple wondered where all of their money went until they did their budget and realized that their expenses exceeded their income by $500 per month. Some small changes and now they are in a plus position, but can you imagine the damage that would have happened if they had not done a budget. Do you have to spend months poring over bank statements to come up with something? Not at all - a simple little excel spreadsheet is more than sufficient. It will provide the basic guide for most people to manage their household finances.

I took a look for something fairly generic that most people could work with. This will link you to a simple excel spreadsheet from Microsoft. You just download it then start filling in the blanks. You may have expenses not listed - simply delete something else and then add what you do need. One simple tip - make sure you list your income first. When you start seeing a bunch of red numbers, that should be a warning flag that your "business" is bleeding.

How do you come up with your expenses. Don't take shortcuts and estimate things. If you want to get good results then remember this - garbage in equals garbage out. Take your time and come as close as possible to the real numbers. The automatic payments from your account are fairly simple, but for other things you will need to do a little digging. If you can get it from the internet, or if you kept copies, get 4-6 months worth of bank statements. These will really help. They will also show you where you spend your money wisely or otherwise. The magic of debit cards is that you often spend money you cannot account for. Let me also say that these issues affect many people - don't assume that someone who makes a lot of money does not have budget issues. If history has taught me anything it's that many people face this problem - the bigger the income, the bigger the potential problems.

At the end of doing your budget you have some "issues" and debts to be paid off then click on this link to help. This simple program will show you how long it will take to get out of debt. One simple rule to remember - it usually takes 2 to 3 times longer to get out of debt than it took to get into debt.

Stay Well and Pay It Forward.