January 2012
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CPP now or later? |
Jan 29, 2012 1:50 PM
Rona Birenbaum
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Q: I am turning 60 next year. Should I apply for CPP now or wait until I am 65?
A: It sounds like you realize that electing to receive CPP prior to age 65 means that your monthly pension will be less than if you waited until age 65 to apply.
There is no simple answer to this question, which explains why you may have received conflicting advice.
Here is what you need to know to make a decision that is right for you.
The most recent changes to the CPP were designed so that if you live an average lifespan, there is no advantage or disadvantage to taking benefits early. There are some situations where taking CPP early or later make really good sense. Perhaps you fall into one of these categories:
Early CPP situation #1
You need the money – If have a cash flow deficit that early CPP benefits will cover, it makes sense to take it rather than build debt.
Early CPP situation #2
You are in poor health – If you expect a shortened life expectancy either because you have health issues or because your family history is one of shorter life spans, taking early CPP is a good bet.
Early CPP situation #3
You spent a number of years out of the workforce - Your pension amount depends on averaging your contributions and “pensionable earnings” from age 18 until you start taking CPP. You’re allowed to drop 15% of your lowest-earning years from the calculation, which amounts to seven years if you retire at 65. If you took time off work to raise kids or because you had a serious disability, you get to drop even more of your low-earning years. The thing is, it’s easy to use up all your drop-out years if you spent a long time getting an education or just “finding yourself.” If you then stop working in your early 60s and don’t take CPP right away, you’ll immediately start adding more years of zero earnings to the calculation. This will lower your average pensionable earnings, which in turn will make your benefit go down. Under these circumstances, you’re clearly better off starting CPP early.
Later CPP situation #1
You expect to live a very long time – If longevity is in your family history, delaying CPP until at least age 65 means that you will have a larger pension for a long period of time.
Later CPP situation #2
You are still working – You can now begin receiving CPP benefits, and grow the benefit through continued contributions while you are working. That being said, you will possibly pay a higher rate of tax on CPP income while you are working than if you delayed receiving benefits until you retire.
As you can see, there is no simple answer to this question. Hopefully this outline will help you determine which approach is right for you.
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Retirement
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30% off University Tuition. Really! |
Jan 9, 2012 8:38 PM
Rona Birenbaum
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Effective January 5th, 2012 students in Ontario are getting a financial boost from the provincial government.
Students in a university or college degree program will save $1,600, while students in college diploma and certificate programs will save $730. These amounts are 30% of the average tuition in Ontario, which is the formula being used to establish the amount.
Your children are eligible if they are:
- A full-time student at a public college or university in Ontario
- It’s been less than four years since they left high school
- They are in a program that they can apply to directly from high school
- Their parents’ gross income is $160,000 or less
- They are a Canadian citizen, permanent resident or protected person
- They are an Ontario resident
The deadline to apply for the term starting January 2012 is March 31, 2012.
How to apply
If your child already receives OSAP no application is necessary. They will be automatically considered and the student will receive the grant by cheque or direct deposit by the end of January.
For those that do not receive OSAP, an application must be completed and requires the following information:
- Student’s Social Insurance Number
- Parents’ Social Insurance Number(s)
- Line 150 from each parents’ 2010 tax return (if a 2010 tax return has not been filed yet, the grant will not be available)
Then you’ll need to:
- Register for an OSAP Access Number
- Fill out and submit the online grant application
- Print the declaration and signature pages which the student and parents sign.
- Mail or fax the signed pages to
Student Financial Assistance Branch
Ministry of Training, Colleges and Universities
P.O. Box 4500
189 Red River Road, 4th Floor
Thunder Bay, ON P7B 6G9
Fax: (807) 343-7278
For more information, check the FAQ's or call the toll-free hotline at 1-888-449-4478.
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Cash Flow Concerns
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November 2011
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Mixed Messages from the Banks - What's new? |
Nov 21, 2011 3:33 PM
Rona Birenbaum
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Royal Bank’s latest housing survey found that one-third of Canadians who are 55 or older have at least 16 years left on their mortgage term. That reality doesn’t line up with the average Canadian’s desire to be mortgage free by age 65.
The survey was picked up by the major media and splashed across both print and online news outlets.
Claude Demone, RBC’s director of strategy for home equity financing stated the obvious, “Canadians want to be mortgage-free as they approach retirement age and beyond, but the reality is that it takes prudent planning and the right advice to stay on track.”
My father forwarded the article to me. He regularly sends me information that he thinks would be of interest to his financial planning daughter. My response to him on the article about the RBC report was,
“It’s a real problem....and the banks are not helping”.
He asked, “How are the banks getting in the way?”
My answer to him was:
In spite of what the banks say in the media, I see what they do in practice every day.
1. Encourage people to borrow more than they can afford
2. Approve amortizations that are too long
3. Encourage the use of home equity lines of credit vs. mortgages
This is how I see the above playing out in my practice daily.
Over-borrowing
The banks will approve credit based on a simple formula called “Total Debt Service Ratio” (TDSR). If your total monthly debt payments (mortgage, loans, credit cards, lines of credit) divided by your monthly before tax income is less than 40% that is acceptable. This assumes that your credit history is good and that you live in a perfect world.
There is little or no consideration for whether you are:
- Saving enough for retirement
- Saving enough for your children’s education
- Adequately insured for disability or death
- In a position to have enough money left over to pay for other ongoing expenses like home repairs, supporting aging parents, a new car etc., etc.
The bottom line is that it is generally not a good idea to borrow as much as you qualify forif it puts other important financial priorities at risk.
Extended amortizations
Mortgage amortizations are typically based on current interest rates. I gave an example of how a modest increase in interest rates can blow up your repayment strategy in a prior blog posting here.
“Never out of debt” lines of credit
There is a trend towards the banks encouraging home equity lines (HELOC) of credit instead of conventional mortgages. The theory is that a HELOC provides greater flexibility to deal with fluctuating income and expenses by only requiring interest only payments. The theory is sound, but for the majority of Canadians the result is slower (or no) progress on reducing the principal outstanding. Why? Because life is imperfect and invariably, an event will occur that will interfere with your ability to reduce principal. Worst of all, the banks have your house as security for the debt, so they win even if you make no progress towards your debt retirement objective.
So, what are some solutions?
• Consider all of your financial goals, not just your home ownership goals, when determining how much you are prepared to borrow
• Do your own cash flow analysis and be sure to include expenses that only arise from time to time as opposed to on a monthly basis. Make sure to include room for savings at a level that will meet your long term retirement objectives. If you are not sure what that amount is, try out an online calculator or ask your financial advisor.
• If buying real estate, make sure that your real estate agent knows clearly what you upper price limit is and don’t waver!
Being mortgage free takes planning. Make sure that you are in charge of the plan, not the banks.
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Cash Flow Concerns
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October 2011
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Why now is the time to pay down debt |
Oct 16, 2011 1:10 PM
Rona Birenbaum
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With interest rates at historical lows, the majority of Canadians with mortgages, lines of credit or conventional loans are making the minimum payments required by their bank or credit union.
This is a mistake.
When interest rates are low, more of your payments can go towards principal rather than interest. This allows you to reduce the debt outstanding so that when rates inevitably rise, you have less principle outstanding at the higher rates.
Here’s an example:
$400,000 mortgage at Prime less .85% is 2.15% (best rate I’ve seen of late),
Amortized over 25 years the monthly payment is $1,724 per month. The borrower assumes that they will be mortgage free in 25 years.
Let’s fast forward 2 years. The good news is that the mortgage has been reduced to $375,000. The bad news is that interest rates have increased by 1% and this borrower is now paying 3.15% on their mortgage.
If the borrower leaves their mortgage payment at $1,724 per month, instead of only having 23 years left to be mortgage free, the amortization has become 27 years!
In order to keep the amortization at the original schedule (23 years remaining) the payment would need to be increased $206 to $1,930 per month.
Since the mortgage is fully secured by your home, the bank will likely not ask you to increase your payments. The longer you are indebted to them, the better their profits.
I think that anyone who decides to spend more rather than pay down debt when rates are low simply have not done the math. It’s easier in the short term to avoid debt repayment….but it bites in the long term.
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September 2011
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The latest on the European fiscal crisis |
Sep 16, 2011 11:16 AM
Rona Birenbaum
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Yesterday, CNBC interviewed the President of the International Monetary Fund (IMF) Christine Lagarde on Europe’s fiscal problems. You can see the interview here. It is well worth 8 minutes of your time.
In our view, resolution of the debt problems in Europe will take time, and will be expensive. To protect our clients, we have avoided European bonds, and minimized exposure to European equities for some time now. That being said, uncertainty regarding Europe’s fiscal imbalances and the likely cost of restructuring that the European banks will have to bear will continue to drive stock market volatility globally.
We believe that the fear triggered by bad economic news and increased market volatility will result in short-term indiscriminate selling of a wide range of quality company shares. The rational and prudent investor will benefit over the longer term by accumulating shares in great companies during this time of volatility.
Will you be rational and prudent? |
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All about investing
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The risks of leveraged investing |
Sep 5, 2011 2:57 PM
Rona Birenbaum
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Every once in a while I come across an investor who was convinced to borrow money and invest the loan proceeds. This was presented to them as a smart way to build their net worth and reduce their tax bill at the same time.
There are a number of financial organizations that are known to encourage their financial advisors to recommend leveraged investing as a way of building their assets under management. How else can one get a prospective client with few or no investment assets to make an investment that will generate a sizeable commission?
I came across an example of such a case recently, and present it to you along with information about the strategy that you should read thoroughly before leveraging to invest.
Investment loan snapshot
(A) Initial loan value: $50,000
(B) Market value $41,358
(C) Current loan balance $49,052
(D) After tax interest cost since inception (2007 to present): $4,625
Total loss if strategy closed out $12,319 [$49,052 (C) - $41,358 (B)] + $4,625 (D)
So, the client has invested $4,625 in the form of loan payments, and if she wanted to close out the strategy now should would experience a loss of $12,319.
Leveraging lesson #1 – If the investments go down in value and you have borrowed money, your losses would be larger than had you invested using your own money.
Clearly, closing out the strategy now will only trigger the loss. If the investor can afford to continue making the loan payments, they would be wise to hang in there until the portfolio recovers in part or whole.
Now, if the investor had not borrowed to invest, but simply invested cash, the portfolio, which has declined 17%, would need to grow by 21% to break even. Unfortunately, the leveraged strategy raises the break-even hurdle rate to 42% because of the additional after tax cost of the loan.
Lesson #2 - If the investments go up in value, you may still not make enough money to cover the costs of borrowing.
Here is the full summary that I share with clients when they ask about leveraging.
Is leveraging right for you?
Borrowing money to invest is risky. You should only consider borrowing to invest if:
- You are comfortable taking a high level of risk.
- You are comfortable taking on debt to buy investments that may go up or down in value.
- You are investing for the long-term. (20+ years).
- You have a stable income.
- You do not have any non-deductible debt such as credit cards, lines of credit, car loans or mortgage.
- You have maximized your RRSP and Tax Free Savings Account contributions.
You should not borrow to invest if:
- You have a low tolerance for risk.
- You are investing for a short period of time.
- You intend to rely on income from the investments to pay living expenses.
- You intend to rely on income from the investments to repay the loan. If this income stops or decreases you may not be able to pay back the loan.
You can end up losing money.
- If the investments go down in value and you have borrowed money, your losses would be larger than had you invested using your own money.
- Whether your investments make money or not you will still have to pay back the loan plus interest.
- You may have to sell other assets or use money you had set aside for other purposes to pay back the loan.
- If you used your home as security for the loan, you may lose your home.
- If the investments go up in value, you may still not make enough money to cover the costs of borrowing.
Tax considerations
- You should not borrow to invest just to receive a tax deduction.
- Interest costs are not always tax deductible. You may not be entitled to a tax deduction and may be reassessed for past deductions. You may want to consult a tax professional to determine whether your interest costs will be deductible before borrowing to invest.
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All about investing
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August 2011
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Earthquakes and Bear Markets |
Aug 23, 2011 4:53 PM
Rona Birenbaum
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I subscribe to one daily blog, and it is the one written by Seth Godin. Seth is a wonderful thought leader on all things business.
He posted a second blog on August 23 following an earthquake in Virginia that measured 5.9 on the Richter Scale.
Please replace the word “earthquake” with the words “stock market correction” and it makes just as much sense. Seth's blog follows:
Two earthquake-related thoughts about human nature
1. The first thing that happens after we encounter an earthquake is to wonder if anyone else felt it. The need for group validation is widespread and happens for events that don't involve earthquakes as well.
If those in the tribe feel something, we're likely to as well. That's why people look around before they stand up to offer an ovation at the end of a concert. Why should it matter if any of these strangers felt the way you did about the event? Because it does. A lot. Social proof matters.
2. Organizations are busy evacuating buildings, even national monuments. Even though experience indicates that the most dangerous thing you can do is have tens of thousands of people run down the stairs, cram into the elevators and stand in the streets, we do it anyway. Why? Because people like to do something. Action, even ineffective action, is something societies seek out during times of uncertainty.
Seth does a great job summing it up doesn’t he?
Now, I’m one of those people that stand up to offer an ovation right away if I’m so inclined. I’m not at all interested if no one else in the audience does so.
That also may partially explain my tendency to recommend that investors add to equities when the majority are selling.
I don’t give standing ovations for just any performance, and I don’t recommend just any equity investment when bear markets strike. But for the deserving, I am happy to be one of the first to recognize the value that I see, stand up, and be counted.
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All about investing
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Cash Flow 101 - A non-credit University Course |
Aug 16, 2011 9:19 AM
Rona Birenbaum
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Before your child heads off to University this fall, give them a chance to earn their first “A” by having them complete a Caring for Clients Student Cash Flow Worksheet.
In fact, it’s a great project to complete together with your child, since you are likely a big part of the income side of the equation.
Completing the worksheet has the following benefits:
1. Reduces the chance of a “cash call” towards the end of the school year.
2. Helps the student see how individual expenses that seem minor add up to a really big annual number.
3. Identifies shortfalls that you and your children can discuss. Ask your child how they suggest closing the gap. (Part-time job perhaps? Contribution from their summer earnings?)
4. Begins teaching them the importance of budgeting since they don’t teach that in University. (High Finance doesn’t help you balance a personal budget!)
The worksheet is sufficiently detailed to ensure that all possible expenses and sources of income are taken into account.
Have a gold star sticker in your back pocket to put on the finished project. You may get a roll of the eyes, but don’t kid yourself, your child will be proud of themselves.
Let’s get started! You can find the worksheet here.
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Cash Flow Concerns
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Why you need an Investor Policy Statement? |
Aug 7, 2011 7:57 PM
Rona Birenbaum
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Investors are again wondering what they should do as stock markets decline around the world.
They wouldn’t be wondering if they had a well crafted Investor Policy Statement (IPS).
An IPS is developed by your investment manager/advisor with your input, participation and ultimate endorsement. It represents the guiding principles for the management of your portfolio.
If your advisor has not prepared one for you, ask them why.
When done properly, it prevents advisors and clients from making some of the most common investment mistakes:
• Investing in equities with a short-term time horizon
• Choosing illiquid investments when access to capital is needed
• Expecting less volatility than is likely
• Expecting higher returns than is likely
• Paying more tax than is necessary
• Buying high and selling low
How can an IPS do this?
It outlines the following parameters specific to a client:
• Risk Tolerance – including quantifying how much of a decline you can take and for how long.
• Time Horizon – when you will need access to part or all of the investment.
• Return Expectations – what your portfolio return is most likely to be, and if it differs from what you would expect.
• Asset Mix – an outline of what percentage of your portfolios will be in stocks, bonds, GICs, cash, annuities, etc.
• Rebalancing – when and how your portfolio would be adjusted as market conditions change.
During times of volatility, the IPS reminds clients (and advisors) what strategic adjustments are appropriate (and inappropriate) for you. It can act as a form of discipline, leading to rational vs. emotional investment decisions.
Let us know if you would like to see a sample Caring for Clients Investor Policy Statement.
An IPS cannot make your portfolio bulletproof, but it can ensure that you and your advisor are on the same page, in black and white. |
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All about investing
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July 2011
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Synergy Part II – Overall coverage limitations |
Jul 3, 2011 3:05 PM
Rona Birenbaum
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This second entry seeks to further explain how Manulife can offer a package of coverage (life, disability, critical illness) for up to 30% less than if you purchased individual policies.
In Part I of this blog, I highlighted some of the differences between the disability coverage within the Synergy product as opposed to individual disability coverage that Manulife offers. Those differences explain, to some degree, the lower price point for the Synergy bundled product.
Lower Cost reason #2 – Manulife’s maximum exposure
Let’s assume that you qualify for the maximum amount of Synergy coverage. The maximum policy coverage is $500,000.
The amount of coverage is reduced by the amount of benefits paid out over the life of the policy.
- Life Insurance $500,000
- Disability Insurance $2,500 per month maximum
- Critical Illness Insurance $125,000 maximum
If you had bought individual policies with the above coverage limits, and you are age 45, the insurance company would potentially have to pay out $1,225,000 in the event that you experienced a qualified critical illness that disabled you totally and you ultimately died prior to age 65.
With the Synergy product, the benefits would max out at $500,000. So the bundled product should be less expensive.
Just because you purchase $500,000 Synergy coverage, does not necessarily mean that you are eligible for the maximum disability benefit of $2,500 per month. Your income must justify the benefit. If you have taxable income below about $46,000, you may not be eligible for the $2,500 monthly disability benefit. You may want to structure the size of your Synergy policy based on the maximum disability coverage that you are eligible for given your income level.
Lower Cost reason #3 – Age limits
Synergy cannot be purchased after age 50 and the policy expires at age 65.
The expiry date is an important one. The risk of death or being diagnosed with a critical illness increases dramatically after age 65. It is at that point when the Synergy product expires as compared to stand alone Critical Illness policies that can be purchased to age 75 or for life. Product warranties have this down to a science. This allows Manulife to price Synergy at a discount to stand alone policies that may extend beyond age 65.
As always, I recommend that you make insurance purchase decisions in the context of a comprehensive financial plan. The best solution is obvious when considered in light of cash flow, debt and retirement planning considerations to name just a few.
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Risk Management
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