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Wednesday, 15 March 2017

Pension Dilemma (or Opportunities Abound!)

For someone facing the choice of receiving a fixed monthly pension income from a company or in the form of an annuity from an insurance company, versus receiving a commuted value and having to invest the amount oneself does present a dilemma.

Let’s look at the details using some very realistic numbers assuming one is indifferent between monthly pension income or annuity.

Monthly Pension or Annuity (Option 1)
Commuted Value (Lump Sum) (Option 2)
Amount per month
$600 fixed, guaranteed for 5 years
$130,000. Invest conservatively in fixed income to yield 4% or $433 per month
Principal remaining at end of life
Monthly amount
About $167 more than option 2
Guaranteed by insurance company for 5 years, or in the case of private company pension, guaranteed by PBGC
Default risk if company goes bankrupt. Can opt to invest in Government of Canada bond, but yield 1% less . Also face reinvestment risk if rates are lower. However, rates are at historic lows and can only go up.
Ancillary benefits
Some companies may tie in health benefits with monthly pension
May forgo health benefits if opt for CV
Dependents/(or surviving spouse)
Monthly benefits may be reduced (assuming company pension and opting for Joint and Survivorship).

If opting for annuity, once guaranteed period ends, $0 for dependents or surviving spouse)
Dependents or surviving spouse can inherit the principal balance if included in will
Taxable income; annuity may have some tax advantage
Taxable income or capital gains at a lower rate
Life expectancy
Based on mortality tables, would be advantageous to receive monthly amounts if expected to live a long life (above 80 years of age)
Not applicable

So what is the conclusion? It all depends on the person’s situation. If I were a betting person, have a spouse or dependent, and can tolerate some risk, and assuming that we are in a historically low interest rate environment, I would choose Option 2.  I would choose to accept a lower income now, wait for rates to go higher (or at least above the $600 per month in Option 1), and then invest the whole amount and obtain more than $600 per month in later years. When I pass on (hopefully many years later), my surviving spouse or children can still inherit the principal amount of $130,000.

If one is in need of income and also cannot tolerate any risk, then choose option 1.  Mind you, in addition to this pension ,there are also other government benefits such as CPP (current maximum per month -= $1,114.17 at January 1, 2017) and also OAS (current maximum per month -= $578.53 at January 1, 2017)

There are other options that I can think of, but for now, I do think that this opportunity warrants further discussion with your financial advisor before making a decision. Because rates are at historically low, and we are starting to see the U.S. Federal Reserve Bank beginning to hike interest rates, CV or lump sum payouts may never be this high again and one can reinvest the CV or lump sum to one’s advantage.

Thursday, 2 March 2017

Stars Alignment

I can’t seem to recall when was the last time all the stars were aligned in the world of investments.  We currently have a roaring stock market reaching new highs almost every day (at least in the United States), higher interest rates , which is good for retirees or people contemplating retirement, and a irrationally exuberant real estate market (mostly in the Toronto area and part of United States).

When will this come to an end? Or is this the start of a wonderful era? I seem to recall back in November last year, the world was coming to an end once the results of the United States Presidential election were announced. If only I had a crystal ball then. Hindsight is always 20/20.
With that in mind, I would like to take a moment and put on a reality check hat and use my financial training to properly chart a long lasting and sustainable retirement plan for my clients as well as for myself.

See my assumptions below and if the situation applies to you , and if you need further assistance, please contact me at for further assistance . For full disclosure purposes, I am Certified Financial Planner professional (CFP) based in Toronto, Canada.

Assumptions (very conservative):
Age and Family: Somewhat Irrelevant, willingness to relocate is a plus!
Total Net Worth of $1 million and upwards consisting of home in Toronto or GTA (depending on your equity, approximately $750K and upwards), other financial holdings such as RRSP, TFSA ($250K and up).

List your home, expect multiple bids, and sell for at least 30% above your wildest expectations. Pocket $800K net after commissions and other expenses .

Relocate to another city, preferably  Ottawa and the long lasting winter comes to my mind.  It has been ranked the number 1 city to live n in Canada for the past couple of years.  Purchase the same type of home for $300K. Net  savings $500 to invest.

Start looking for a job, preferably with the federal government or at a municipal level. Ideally, start the process before you move.  You could potentially be earnings less (or more), or if you are retiring , does it really matter?

Oh, and make sure your better half and your kids are on board as well. I recall my daughter asking for a pony when we had to relocate for a job once.

Final analysis
The additional $500K can be invested in a combination of low cost ETF and laddered GIC and earn 5% a year almost guaranteed.   You will be surprised  at how few so-called experts financial managers fail to even attain this return. In addition, the same amount pocketed will l take one approximately a lifetime to save assuming one saves 10%-15% of his or her paycheck each month, continue working at your dreadful  job,  and pray to God that the market returns (before fees!) are in line with the mutual funds with huge fees that the  financial advisors at the bank sold you.   If you are onboard with my analysis so far, you can essentially retire early (or at least continue to have one person working while the other one stays home (notice that I did not refer to either “He” or “her” in this equal opportunity world.

Contact me at if you are interested!

Tuesday, 8 November 2016

U.S. election, Black Swan and Post Mortem

The worst fear has materialized as a Trump presidency has become a reality triggering a massive selloff in the global financial markets.  Dow Jones Industrial Average futures are down by more than 800 points or 5 percent. The Mexican peso is down more than 11 percent.

This rare event called Black Swan in a book by Naseem Taleb talks about rare event as such with low probability of occurring but high risk or tail events in statistical terms.  In addition, financial markets are mostly ill-prepared for such event as can be seen by the huge selloff.  Brexit is another Black Swan, but the impact may not be as significant as the U.S election.

What did the political pundits who have been calling for a Hillary Clinton victory, albeit a narrow one, miss? Even key swing states such as Ohio, Florida and Michigan which y were supposed to be safe for Democrats evaporated into solid red Republican strongholds on election night.    

I think one exit poll said it the best. Most Americans, especially the have-nots, mostly male, White, non-educated, have suffered a lot economically in the past decade. As companies shut down plants and shutter production to low-cost labour countries such as Mexico and China, these people have not been able to transition to the new knowledge-based economy.  We only think of how much wealth is generated by Facebook, Netflix, Amazon and the likes, but the wealth is only concentrated in a few hands. And for the majority of the rural folks who have been left behind, Donald Trump represents the last hope of bringing back the jobs and the glory days. We know this is not going to happen. But when you are down, you don't think rationally. Hence the vote for Trump represents a hope for change.

I believe the email issues surrounding Clinton and the allegations about Trump's sexual abuse of women, may just be big red herrings clouding the real issue, as voters already made up their minds long ago and wanted change.  Don't get me wrong, though, as I am totally against what Trump had allegedly done.  My hope is that cooler heads can prevail and his advisers can charter a much more realistic path for his presidency.

Another lesson learned...... or not .   This will go down in history books as one of the most fascinating presidential race.    

Monday, 7 November 2016

The craziness of real estate in Toronto

Fact: In 1970, the average price of a house in Toronto was $30,000. Forty year later, the average price of a detached home in Toronto is well over $1.2 million. For all homes including condominiums, townhouse and semi-detached houses, the average price in Toronto in 2016 is well over $600,000.   

Conclusion: Based on the $600,000 figure, the average rate of increase is about 7.6% annually. 

Projection: It is estimated that by 2056, the average price of a home in Toronto would cost well over $3 million assuming a 4% average increase per year. I think I will include this article in my will to be handed down to my children and my grandchildren to see if it materializes. Better yet, put it in a time capsule to be opened on December 31, 2056 long after I am gone or if I am still alive at 92 years of age.

Fact: Over the same 41 year period from 1970 to October 31, 2016, the S&P 500 returned an average  10.2% , including dividends reinvested.

So, one can conclude that it would have been better to invest in the S&P 500 instead of real estate, right?  If one had rented instead of owning a home (with mortgage and interest payments, maintenance, and etc.), the math can get interesting.  I have yet to figure out how to best present  the analysis,  but have concluded that Investing in Real Estate by purchasing a home beats renting and using the down payment and additional costs of home ownership to invest.

And the difference is due to …… leverage.

Assume you put 20% down payment or $100, 000 on a $500,000 property  . If the property appreciates 7.6% per year, which is what the Toronto market experienced on average,  you gained $38,000. But on a $100,000 investment.  So, the true gain is 38%, which beats the 10% average return on the S&P  500.  

The opposite would also hold true if the property lost 7.6% in value, and you would have lost 38% on your initial $100,000 investment or down payment.  As in most financial literature,  I assume no transaction costs and ceteris paribus (everything else remains equal).

See  link to the Toronto Real Estate Board historical prices.

Monday, 31 October 2016


Working with your financial advisor at the early stages of your working life makes sense to ensure that you build a foundation to a solid retirement plan. A good life/disability and critical insurance plan will also ensure that the needs of your dependents are taken care in the event of your premature passing. Equally important is your health.

As countries continue to develop, people have become more affluent. Lifestyles have also changed. Instead of manual labour, there are more sedentary jobs. Productivity in agriculture and livestock have also enabled better food to be produced. The combination of less exercise and richer foods have resulted in diseases such as cancer, high blood pressure, stroke and diabetes becoming much more common.

The Canadian Diabetes Association recently reported that in 2016, 9.2% of the population, or 3.5 million people in Canada have either Type 1 or Type 2 diabetes. It is also projected that by 2026, almost 12% of the population or 4.9 million people, will struggle with diabetes.

Even emerging countries have similar disturbing statistics. In Malaysia, it is estimated that 3.5 million or 17.5 per cent of its citizens aged 18 years and above have some forms of diabetes. The number of cases is also growing each day.

Lest I sound like the proverbial boy who cried wolf, if this is not a wake-up call, I don’t know what is. 

There are at least 3 easy steps we can take to prevent or at the very least reduce the chances of being diabetic. Since I am not medically trained, I would advise you to speak to doctor first.

 - Early health screening for blood pressure and cholesterol are also important as these are telltale signs of being diabetic.

- Adopt a more active lifestyle (aerobics exercises, weight lifting, swimming)

- Watch your diet.  Eat more healthy greens, beans, tofu, lentils and less meat. 

Growing up in Malaysia almost forty year ago, most people have never even heard of diabetes, cancer or high blood pressure. It must be because we were always poor and had to walk miles to school, and our parents were mostly manual labourers. Plus, the diet were mostly consisted of vegetables, fish and rice.   

Friday, 28 October 2016

Health Care Costs Comparison – USA versus Canada

An average family of four living in the state of Minnesota, U.S.A. without any health coverage from employer pays on average US$ 20,000 for health insurance. In addition, there is a $9,000 deductible. They also have to pay 20% of the cost of prescriptions, doctor’s visit or lab tests. For example, based on a grossly inflated price of an EpiPen, one has to pay $120, or 20% of $600.  Plus, one is limited to the type and location of health providers due to the in –network vs out of network provision.  The above numbers assume that the family is in generally good health without any significant prior claims.  Depending on how you do the math, it would cost at least US$35,000 or more for health care coverage. With or without Obamacare, this is the reality of the health care system in the United States, which is the only major industrialized country in the world without a universal health care system.  

Moving north to Canada, the Fraser Institute reported recently that the average Canadian family will contribute just shy of C$12,000 in taxes for public health insurance in 2015.  But wait a minute, isn’t health care “free” in Canada? We don’t pay any deductibles or fees when we visit doctors. Sure, there are co-payments and dispensing fees paid for prescriptions, but never that much, right?  According to the Fraser Institute, there is no one single health care tax, but instead , funding for the system comes from multiple sources, including income taxes, the Canadian Pension Plan, and Employment Insurance. This combination "blurs the true dollar cost of the service," the study authors argued.  As a result, many people to grossly underestimate the true cost of health care. Note that the figure is derived by taking the total healthcare spending in Canada divided by the total population.

In summary, we now know that healthcare is not totally “free” in Canada even though I feel that we get better bang for our bucks compared to our neighbour in the south. There is definitely excesses in the healthcare system in the USA, namely in the form of health care providers such as physicians, drug manufacturers, plan operators, and etc. who profit immensely from this inefficient delivery system.

Wednesday, 26 October 2016

Tips to achieving Financial Independence /Early Retirement (FIRE)

I am a big fan of reading early retirement blogs. Since there are too many great ones to talk about, I will let you use your investigative skills to find them, or you can drop me a line at and I can direct you further.

What is even more fascinating about reading these blogs is the majority had achieved financial independence/early retirement (or “FIRE”) at a relatively young age (under 40 in most cases). Who says you have to be aged 65 to retire?  The tradition of slogging away at a job that you hate for 40 years so that you can collect a “pension” (only exist in the public sector these days) at the end has been broken.

Hindsight is always 20/20. Huh, If only I had the courage to do what these kids had done! It is not too late, people. The journey of a thousand miles begins with the first step.   You do not have to be born a millionaire’s child to retire early.  Nor do you have to win the lottery.  Or perhaps hit a ten-bagger by investing in Facebook, Amazon, Netflix when they were at bargain basement prices.  Or the  lucky few who worked in high-tech Silicon Valley were able to retire when they cashed in their lucrative stock options.  Fortunately, many did not achieve early retirement through the above means.  They shared their following  “secrets.”

Save,  and save early. Target saving at least 25% to 30% of your gross pay. The power or savings over time and compounding interest do wonders to your accumulated savings. For instance, saving just $200 per month for 30 years results in a $166,000 nest egg at the end.

Frugalism and minimalism are very much in trend these days. You don’t have to be the first one to own the latest gadget or parade around in the latest fashion.  It is estimated that the average North American consumer throws away at least fifty pound of clothing a year. Think about the environmental impact. Think about how much cotton and precious water is required to grow the cotton.

Car is a depreciating asset.   Get a good late model reliable car.  Maintain and drive it to the ground. The approximate cost of owning an average car is at least $6,000. The figure includes insurance, maintenance, gasoline and depreciation.  The amount is much higher if you own a new or high end car.

Eat out less often. Not only it is expensive, but it is also less healthy as restaurant food is typically laden with high levels of sodium, fats and sugar.

Take advantage of company matching programmes on RRSP, pension and other benefits.  It is the only ‘free lunch’ in town.

Invest in yourself and your children through education.  On average, a person with a university degree makes twice as much as someone with only a high school diploma. 

Read inspirational books such as The Millionaire Next  Door. Your typical millionaire does not brag about living in a big McMansion or drive a fancy car, but is instead a down-to-earth person. 

Invest in low-cost ETFs or through company offerings. On average, the market has appreciated at least 4%-5% on an annual basis, net of inflation. 

Avoid getting into debt like the plague with the exception of mortgage debt. Still, it makes sense to own and use credit cards to build your credit. One trick I learned is to auto pay a set amount from your bank account to your credit card account each month.

Plan to own your own home. May be tough in certain markets such as Toronto or Vancouver, but you have to start somewhere.  As mentioned before, real estate is a good hedge against inflation. On average, real estate prices have appreciated at least 5% annual or house prices have doubled in prices every 14.4 years.

Marry someone with the same inspirational habits as you. After all, it takes two to tango.

Develop healthy eating habits and take care of your health by joining a gym. They will pay dividends in your retirement life as you would be spending less money on prescription drugs.

Be charitable! What goes around comes around. You may never know when you would need a helping hand.

Live a less stressful life. You can never solve all the problems in the world.  When the going gets tough, the tough gets going.

I am sure there are many more tips that you can share. Would appreciate your constructive comments!