Monday, 31 October 2016

Diabetes

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  razorback2628@gmail.com 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!

Tuesday, 25 October 2016

First Time Home Buyers

As a follow-up to my previous posting on home ownership, There are several benefits available for first-time home buyers.

Government Support programmes include:

·        -  Home Buyers Plan, which allows a $25,000 withdrawal from RRSP towards purchase of a home. This translates to $50,000 for a couple, and you have up 15 years to repay.

·         - First Time Home Buyers credit, which offers a $5,000 non-refundable income tax credit, which translates to a $750 reduction in income taxes paid.

·         - GST/HST rebate, which pays back the taxes paid on the purchase of a new home.

Lastly, there is a programme called Fast Track Home Ownership Plan sponsored by the City of Toronto, the Province of Ontario and the Government of Canada. Under this plan, a first time home buyer whose income is between $40,000 to $88,900 one can qualify for a $55,000 interest free and payment free loan.  However, the programme was only available for the purchase of a Rocket condo unit located at the Wilson subway station in Toronto. If you had read the previous posting, you would not have to come up with the additional 10% required in order to bump up the down payment to 20% to avoid having to pay mortgage insurance as the initial 10% plus the 15% that the government provides constitute 25% down payment on the condo unit. 

You can probably tell that I have been condo shopping for the kids. This past weekend, the missus and I saw a new development that starts at $180,000s for a bachelor suite (which I think with some creativity, can be turned into a one-bedroom unit with sliding doors). All one has to do is put $5,000 down, continue to pay $1,000 each month until the amount reaches 10% or $18,000 in this case. What a novel idea!


Is there a fear that Toronto is overbuilt with condos? Yes, there could be a possibility. Is there a fear of an imminent housing correction? Yes, that is an even higher odds of happening. Experts have been calling a global housing correction for an eternity. My belief, however, and it may be biased, is that it is better to invest in bricks and mortars than a worthless piece of paper! In these days of low interest rates and low returns from equity markets, more and more investors are considering alternative class of investments such as real estate. 

Monday, 24 October 2016

Beyond RESP, Boomerang Kids, Home Ownership and Wealth Transfer

Let’s say your children have finished university, found a job in their field of study and are still living at home because …… they can not afford to rent an apartment in the city (of Toronto), or have not even thought about saving for a down payment on a house.  Between paying off study loan and living the good life that Gen Ys are used to these days, it is no small wonder that the Bank of Mom and Dad has to come to the rescue when it comes to home ownership.  Do not despair as you may wish to continue reading on.

There was a recent report published by CIBC that indicated there is approximately $750 billion to be inherited by Canadian baby boomers between the ages 50 to 75. On average, one can expect to inherit $180,000 in the next ten years. This will represent the largest intergenerational wealth transfer in Canadian history. In part, this holds true for mostly GTA-ians (Greater Toronto Area) as well as people living in the Vancouver area due to the soaring real estate prices. Homes and cottages purchased in these areas in the 1960s for $50,000 are now valued in excess of $1 million to $2 million.

In addition, inheritance from life insurance also form a vital part of the wealth transfer. Both the gains from sale of principal residence and proceeds from life insurance are also tax-free.

As a life insurance professional as well as a recently qualified financial planner, I have witnessed such transfers on numerous occasions , especially when attending funerals of close friends and relatives.  Most of the dearly departed (blessed their souls) have left on average their principal residence to their children as well as designated their children as beneficiaries on their life insurance policies.

With this new found wealth, and with the fact that most baby boomers are already well on their way to retirement or their planned retirement, the next best thing for them to do is help out their children own a home.  True, the $180,000 average inheritance will not even qualify as a 20% down payment on a home in the cities these days, but owning a new build condominium can be the next best alternative.  

Consider the following scenario:
Purchase price of an average 1-bedroom condo in Toronto: $300,000

Completion date: 2-3 years

Average down payment required in the first year: 10% or $30,000 which the Bank and Mom and Dad fronts

Average Mortgage: $270,000

Rate: 4.64% (based on the 5-year fixed rate, new rules effective October 17, 2016)

Monthly Mortgage Payment: $1,522 before Property Tax and Maintenance Fees

Assume that in 2 years’ time prior to moving in, your child has also saved another 10% or $30,000, one can avoid having to pay mortgage insurance.

Also assume that on average, the condominium has appreciated 5% annually over 2 years (this is totally realistic considering the state of the housing market in GTA and Vancouver). In fact, real state has also proven to be a good hedge against inflation.

The same $300,000 pre-build condominium purchased is now worth $330,750.

Recall, the initial $30,000 down payment has now resulted in an additional  return of $30,750 or 102.5% due to leverage.

Try doing the math yourself if you are unsure.  Is this not the best thing you can do for your children?


Disclaimer: I believe the above assumptions are totally realistic as most people I talked to are fed up with anemic stock returns and are putting their money in something more tangible. The only people making above average returns on stocks are either insiders who have privy knowledge, senior management  getting stock options for hardly doing anything, or the banks touting these stocks to innocent investors. Don’t get me wrong, there are still a lot of great companies out there worth investing, but one has to look beyond just stocks! 

Tuesday, 18 October 2016

Financial Planning

For the longest of time, and maybe it still is, financial planning is thought to be only available and affordable to the wealthy group. Perhaps this is one reason why the majority of people tend to defer planning for their retirement until they are in the 40s, 50s or not at all.  The second reason for not requiring to do any financial planning was due to the availability of Defined Benefit pension plans (DB) which promised a fixed monthly income when one retires depending on the number of years worked, pay and the level of benefits.  Together with income from CPP and OAS, one should be able to live reasonably well during their retirement years. Third, most people also associate going to bank and meeting your average investment advisor during RRSP contribution season to invest your hard-earned money as financial planning.

I am here to tell you that all the above are myths.

The financial planning industry has evolved over the years to enable the majority of people to afford some basic financial planning advice for a fee ranging from a few hundred dollars to a few thousand dollars, or percentage of assets. Some companies have provided employees either ‘complimentary ’ or charge a ‘nominal fee’ financial planning advice through a third-party.  I strongly encourage you to take advantage of the offer or ask even if you are not sure if the company offers such services.  Also, make sure that you work with a qualified financial planner, such as one holding the Certified Financial Planner (CFP) designation.

The number of companies offering DB plans have also shrunk as most of them are not allowing new participants to join (or ‘frozen plans’ as the industry calls these plans).   These plans are very costly to maintain and the decline in interest rates have forced companies to contribute more cash into these plans to maintain the benefits. If you are still enrolled in these plans, you are really lucky.  Chances are that you either work in the public sector (you should check out how much pension Stephen Harper, MPs and MPPs  get) or were grandfathered in these plans due to your age and service.

Companies have instead switched to the less costly Defined Contribution (DC) plans where both employer and employees  put in fixed amount each period. Unfortunately, there is no guarantee there will be a pension at the end of the day. Think what happened in 2008 during the stock market meltdown.  If you were retiring that year, your portfolio essentially took at least a 30% hit!  This is another reason why sound financial planning is essential . Obviously, there is no guarantee that  you would not have lost money that year. But a good financial planner would have told you to not sell everything at all cost as the markets more than recovered the losses in the next couple of years.


Truth be told, your average investment advisor at the bank is only interested in getting you to sign up for a RRSP loan to invest in mutual funds with high management fees (in excess of 3% in some cases).  Yes, you do get a tax deduction on the contribution for now, but you would have to pay taxes later when your withdraw from your RRSP.  So, before you even start making any money, you would have to pay interest on the loan (typically at prime +or 2.7%+) and 3% of fees per year. 

You would have to earn at least 6% a year in order to break-even. No wonder, people are always complaining the funds don’t make any money. But they do. The financial advisor is compensated. The senior management of the bank are even more highly compensated.  Everyone except you!   This is why working with a financial planner who can properly review your current portfolio, asset allocation and make the proper recommendation to at least advise you to move your funds to less costly index mutual funds or even better,  exchange traded funds (ETFs) which requires opening a brokerage account.   

Investment Returns

                                                            YTD Change        Oct. 17, 2016
TSX 300  Index:                                  12.20%                    14,596.52
S&P 500 Index :                                    4.04%                      2,126.50
U.S. 10-year Treasury bond               +22.02%                      1.766%

Take a good look at the numbers above and compare to your own portfolio returns and let me know if you are anywhere close.  The reality is that most investors’ returns trailed the major indices. I would think that the average individual returns hover around 1%-2% at best, and money managers, a little better, at 2%-3%.

Do you know that on average, less than 20% of mutual funds or ETFs even beat the market? Funds that beat the market this year in Canada include gold, silver and energy related.  Since the TSX 300 is heavily skewed towards these sectors, it has outperformed major global stock markets . The S&P 500 index in the U.S. is much more diversified.

Global uncertainties such as Brexit, slowing China economy, recessions in  Brazil and Russia, weakening Europe have all contributed to a decline in interest rate as central bankers struggle to get the economy going and have to resort to easing monetary policies. The U.S. remain the strongest, but going into the November 8 election with some uncertainties. . As a result, interest rates have declined 22% as shown by the 10-year U.S. Treasury bond.  Since bond prices are inversely related to interest rates, those holding bonds or fixed income investments have been rewarded quite handsomely this year.

The message here is that investors should manage their return expectations when planning for their future.  The Financial Planning Standards Council  of Canada (FPSC) issued the following projection guidelines for 2016 assuming a 1.25% management fee:

Conservative:      3.30%   (25% equity, 70% fixed income,5% cash)
Balanced:            3.94%    (50% equity, 45% fixed income, 5% cash)
Aggressive:         4.80%    (75% equity, 20% fixed income, 5% cash)


Factoring in a 2.1% inflation (think hydro bills,auto insurance rates, childcare and higher education costs), and the projected returns declined to 1.2%, 1.84%, and 1.62%, respectively. 

Sunday, 16 October 2016

Health

An ounce of prevention is better than a pound of cure.  As we grow older, our body slow down. Aches and pains began to appear out of nowhere.  After toiling for forty years in the workforce and saving for retirement, are we content to just move from working to living miserably in a nursing home?  

There is a solution. In order to enjoy the retirement years, we need to be mentally and physically prepared.  There is a perception that one needs to be incredibly wealthy to be able to retire. As my previous article ‘ Retirement Analysis’ showed, it does not  take much financially to reach the nirvana stage.  I encourage you to visit projectbiglife.ca and do a self-assessment of your health.  I did it last year and started to change my life by exercising more and paying attention to my diet.  I kept track of my progress using the questionnaire on the website to estimate my health age and probability of developing chronic illness.  


We are also incredibly lucky to be living in Canada as 2 of the healthiest food in the world is grown in abundance right here –oats and barley!   Not only are these grains low in fat and high in fibre and protein, which makes them great substitutes for meat at times, they have also proven to lower cholesterol and risk of Type-2 diabetes.  Yes, they taste bland, but you can be creative and add honey, milk or peanut butter to enhance the taste.

Wednesday, 12 October 2016

Retirement Analysis

Below is a quick analysis based on my best guess on how much one should planned to save in order to retire reasonably comfortably in Canada.  As always, start saving early, maximize your RRSP and TFSA contributions and most importantly, take advantage of your workplace RSP/DC matching programmes because they are really’free money.’  Make sure you have a good and lasting insurance policy for estate planning and other contingency purposes as benefits are tax-free.

Things are not as bad as one think. Don’t be misled by shrewd financial advisors that tell you that you should have million of dollars saved in order to retire! Once your mortgage and higher education obligations for your children have been taken care of, you should not require as much income to live a comfortable lifestyle.

Summary
Income from Government-CPP and OAS: $30,000
Income from other sources:                        $20,000
Total pre tax income                                   $50,000
 Less: Taxes                                                (  5,000)
Net Income                                                 $45,000

Major Assumptions for a retired couple. I used Ufile 2015 tax return software to calculate the taxes
Retirement age : 65 (for men), 60 (for women)
Life Expectancy: To 90 years of age  (25 and 30 years of retirement for men and women, respectively)
Annual pre-tax income required for 2: $50,000 at 2016 level (No mortgage or children expenses,1 major vacation per year plus 2 mini trips during the year. Do your own budgeting to verify my number)
Inflation rate: 2%
Return on investment, net of 1% fee: 4%
Tax rate: approximately 10 % per person or $5,000 in total assuming all exemptions and credits are taken. Actual taxes calculated were $3,500 or 7%, but I wanted to make the math easier to understand, so I used 10% instead.

Annual Income Analysis
CPP:   $9,832 (for men at 100% at age 65 X 75% assuming less than 40 years of work after age 18)
             6,293  (for women at 64% at age 60 X 75% assuming less than 40 years of work after age 18)
GIS:            -   (do not qualify) 
OAS:  13,885 ($6,942.36 maximum per person, no clawback)
Total:  $30,000  (rounded)

Additional amount required: $50,000 - $30,000 = $20,000 [note that this is the Annual Pre-tax income required less all the government benefits CPP and OAS). I also split the $20,000 equally between the couple.

Assuming one does not have any defined benefit pension plan, required savings from RRSP or defined contribution pension plan should equal  $312,000 at retirement .  This will enable one to withdraw $20,000 per year for 25 years until the amount is fully depleted at age 90. Or total savings need to be $346,000 if the amount is required for 30 years to age 95.

Enhanced Canadian Pension Plan (CPP)

With the blessing of British Columbia province, the enhanced CPP is well on its way of being implemented beginning January 1, 2019. Note that  consent from two-thirds of provinces representing two-thirds of the population is required to proceed with the expansion. Below are some highlights of the plan:
Increase income replacement to one-third from one-quarter of pensionable earnings, thereby boosting the maximum CPP benefit to $17,478 from the current level of roughly $13,000.
Contribution rate to gradually increase from 4.95% to 5.95% beginning January 2019 for both employee and employer. In 2020, the rate increased to 5.25%, 2021 to  5.45%, 2022 to 5.7%, and finally by  2023 to  5.95%
A worker earning $55,000 a year would see monthly premiums increase by $7 in 2019. By 2023, that would increase to $34 a month.
In 2025, the yearly maximum pensionable earnings threshold will be $72,500, and upper earnings limit will move to $82,700. Difference of $10,000 will be subject to a four per cent contribution rate.
Both employee and employer contributions to the CPP enhancement will be tax-deductible.

For those of you still skeptical on whether or not there will be a government pension to draw upon, it is comforting to note that at the end of December 31, 2015, total CPP assets stood at C$285 billion, excluding assets from Quebec Pension Plan (QPP).  By global standards, CPP ranks 9th in terms of asset size.  The largest pension fund is the Government Pension Investment Fund of Japan with assets in excess of US$1.2 billion. 

Exemption on Sale of Principal Residence and other new mortgage rules in Canada

On Monday, October 3, 2016, the Canadian government announced new rules affecting principal residence exemption and other rules to in part, to curb the runaway housing market prices in Vancouver and GTHA (Greater Toronto/Hamilton area).

Without being too technical, here is a quick summary:

-   Sellers will now have to attest that they are Canadian citizens or a minimum 25% witholding tax of the sales price will apply. This will prevent non-residents to buy homes and then sell homes for a profit to avoid paying capital gains tax by claiming it as principal residence.

-   Seller will have to complete Form T2091 effective 2016 tax return, i.e for any sale starting January 1, 2016. Big brother now wants to know how many homes you have purchased and sold and may even potentially deems the gains as normal income vs capital gains. In addition, they can even cross-reference against seller's reported income for further analysis and for potential audit.

-  Prospective buyers in most cases will now have to qualify for mortgages based on the 5-year posted interest rate or currently 4.64% instead of the mid 2% currently offered. This means a 20% reduction in the price of home they can afford to purchase.

Together, with the recent measure by the British Columbia government to impose a 15% tax on foreigners purchases of property, this will hopefully bring some law and order to the housing markets in Vancouver and the GTHA. Note that housing prices in these areas have almost tripled in the past ten years.



 

The Wealth Effect

I watched a documentary on TV Ontario last night called “The Super-Rich and Us.”  Shot mostly in London, England, Jacques Peretti investiga...