Friday, 18 August 2017

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 investigate how the rich became richer, and the poor became poorer due to economic disadvantages.  Some of the stats were quite startling. In 1970, a banker in Britain earned as much as a teacher and a GP (General Practitioner or Doctor). The richest 1% of the population controlled 6% of the nation’s wealth; in 1980s, the percentage grew to 11%, and currently the richest 1% controlled more than 15% of great Britain’s wealth.

Even more startling is the fact that the richest 85 people on earth own more than one half of the world’s total assets. You can count Bill Gates, Warren Buffet, Jack Ma, Jeff Bezos in the notable list.   
According to various research conducted, all these wealth have been created at the expense of the other. One author advocated the Glass Hour theory. The rich (top of the glass hour) and the poor (bottom half of the glass) both gained at the expense of the middle class (the middle of the glass hour).  Wealth was created out of intangible with trading options, ala Black -Scholes model. Also, debt was packaged and resold. Tons of money were made by a few. Meanwhile, a  juxtaposition showed a seedy side of London, with people panhandling and struggling on the streets. Neon signs were lit up on pawnshops, payday loans and dollars store.

A professor of Economics indicated that debt is the root of all evil as government forces people to go into debt (think mortgages, line of credit ,and etc.) by encouraging people to own homes so that the people can be controlled (think about no striking at work, forces to work to pay off mortgage).

Even though it is a one-sided theme, I can ‘t help thinking how we currently live our life from childhood, getting a good education, enter the work forces, slave away for thirty to forty years to pay off mortgages, student loans, kids’ education, and saving for retirement.  We are essentially trapped. There has to be a better way to live. Imagine we don’t have to study so hard in order to get good grades so that we can find a good job for keeps so that we can continue paying off our debt. Would life not be better?  You would then find yourself in the bottom half of the hour glass, living off social welfare (which is also a form of exploitation, in my opinion)

There were many other interesting aspects of the show that I could go on and elaborate, but I hope you can catch try to watch the show if there was a replay or on the web. 

Wednesday, 9 August 2017

My Path to Financial Independence

Building a sustainable retirement income portfolio that can withstand market shocks and meet your future expenses requirement is the ultimate goal for everyone seeking financial independence (FI).

For those closer to the normal retirement age of 65, it may be an easier goal to reach compared to millennials seeking early FI.  Given the number of early retires that have been blogging their successes on the internet, one would be forgiven to think that the path is easy to reach.  I truly admire them, but for the vast majority of people, achieving early FI seems an elusive goal. 

Do you fit the profile of single, early 30s, have been working in the tech industry for the past 10 years had cashed in tons of stock options in addition to saving a large percentage of your above average take home pay and investing them at the right time (just after the 2008 market crash)? I figure that you would have investment worth at least $1 million by now not counting the equity on your home.

If you are not one of the people above, you are just like the ordinary masses.

The journey of a thousand miles begins with the first step.  Even without the benefit of the above, you can still achieve your FI earlier than age 65.  Twelve years ago, I would not have even dreamt that I could reach FI before the age 65.  With a large mortgage and not having saved sufficiently for 2 teenage children on their way to furthering higher education in a few years’ time, my wife and I consistently  ponder how to make it work and still achieve our retirement objectives. I have a decent jobs that pays fairly well, yet the after tax dollars came and went quickly without much of a trace.

The secret is perseverance. If you keep working towards your goal, there is a light at the end of the tunnel and it is not from the train coming straight at you.

Fast forward ten years later, by the end of 2015, the mortgage was paid off. My oldest daughter graduated from university,. Through her co-op jobs, she not only managed to pay for school, but she had saved some money and invested at the right time, and also found a decent job in her field of study.  My younger daughter had entered university by then (graduating in 2018). My investments not only survived the 2008 crash, but had miraculously quadrupled in value thanks to some stock bets that paid off and also continued contributions to my retirement plan.  I had also survived multiple company restructurings.  I was contemplating a career change at one point, studying part time for 2 years, obtaining my Certified Financial Planner (CFP) and life insurance qualifications. My wife is still working part-time.  The Toronto housing market also experienced one of the biggest boom in history . Despite the recent housing correction, the value of my home had tripled.  The financial part of the FI process had been accomplished wit a little luck and patience. I self-declared FI on January 1, 2016 at the ripe old age of 52.

If I tell you that all’s well that ends well, you would say it is a fairy tale ending. Throughout the journey, I encountered multiple hurdles. There was a price to pay. The stress had taken a toll on my health and had also strained my family and work relationships. I turned colder, bitter and for lack of a better word …… became a nastier person.  

All I can say is that I had managed to resolve a lot of these issues. I am also not dependent on drugs anymore to treat my medical condition. I had also become a health freak, working out 5 days a week doing cardio and weight training.  I was so thrilled to find out that my health age is actually 45 based on my physical condition.  I still work full-time, but have also started teaching part-time at a local college.  I find that I am much sharper in my thinking, sort of an Alzheimer in reverse. I am  using my CFP knowledge and providing free advice to help people achieve their financial objectives. I would eventually want to leave my full-time job and focus on pursuing these interests. Teaching, working out, helping others and continue to enjoy my family life are my primary objectives.

You see, money is not everything.  I think one of the biggest flaw with the financial planning process these days is that there is too much focus on the number crunching part and not enough on planning holistically and looking to achieve a more balanced lifestyle.  We have also been lead to believe that we need to save an incredible amount of sum of money in order to retire when in fact there are other income streams i.e. government and private pensions available to supplement our own retirement savings. Also, you will be surprised how much less the majority of us would actually spent during retirement. I actually experimented for the past 2 years to try and live like I would if I had retired and can actually attest to it.

Cheers! And here is to the next 28 years of retirement life. Check out on some fancy computer simulations using historical market returns, there is a 97% chance that I will not outlive my retirement savings  assuming I withdraw $50,000 per year inflation adjusted. Note that I aslo assume that I will die at the young age of 81 in the year 2045 based on the mortality tables so finely prescribed by the actuaries. 

Saturday, 5 August 2017

Buying USD the professional way

With the recent surge in the Canadian currency against the US greenback, I consider this an opportunistic time to purchase US currency for your trip to the U.S. or for investment purposes i.e. buying U.S. listed stocks. The following charts illustrate the most cost effective way by using Horizon USD ETF. Many thanks to prior threads discussing this option, but I actually executed the trade below using my TD Waterhouse account, purchasing US$10,000 and saved over C$200 over buying the US currency from the bank.  Here goes!

Buy DLR (Horizon ETF in C$) at Ask at 12.41 in my C$ account. Paid C$12,410 + 9.95 commission.

I then sell short DLR.U (Horizon ETF in US$) at Bid 9.93 in my U.S. account. It can be done since both the DLR and DLR.U share the same investment identification number. I called TD and ask them to journal the transaction over to U.S. Ended paying $35 commission since it is a broker assisted trade.

To summarize, I ended buying USD/CAD at an effective rate of 1.2497 versus the spot rate of 1.2474 or a 23 basis point premium, which is pretty good. Most companies purchasing USD typically pay a premium of at least 10 basis point.  If I bought at a local bank without any preferential pricing, I would have to pay 1.2811, or a premium of 2.7%. The transaction works best for larger purchase. I illustrate a US$3,000 purchase as it is pretty much the break-even point.

Sunday, 30 July 2017

Do I have enough to retire?

For many people who spent a working lifetime accumulating wealth in order to retire to the sunset, the decumulating phase represents a major challenge. Is the $1 million or $2 million that I had saved enough to last me during retirement? What if the stock market collapses like it did back during the credit crisis in 2008 and my portfolio decline more than 30 percent?

Based on the Trinity study by three professors and earlier work by William Bengen CFP, and Larry Bierwirth, using historical stock, bonds and inflation data, they have determined a safe withdrawal rate as a percentage of your initial investment. By withdrawing 4% each year, plus adjustment for inflation the following year, the portfolio can last more than 33 years or more regardless of the stock performance. Mind you, they have been some significant market correction during the time periods used for the studies, including 1929-1931, 1937-1941, and 1973-1974. In each instances, through proper  asset allocation of equity and fixed income, the portfolio had withstood the test of times. Moreover, the stock market has proven time and time again that it always recovers after a major decline.

Too often, many people, myself included, are preoccupied with thinking if we have saved enough to retire. Consider the following points to determine your retirement income:

1)      Using the Trinity study, and assuming your retirement period is 30 years, if you have accumulated $1 million by the time you retire, you can withdraw $40,000 per year. If you have saved $0.5 million, withdraw $20,000.

2)      Government pension, i.e. CPP (Canada)  – maximum approx. $13,000 per year (2017) X 2.

3)      Old Age Pension –maximum amount approx. $ 7,000 per year (2017) X 2.

4)      Defined Benefit (DB) pension plan – if applicable

5)      Part-time work

Assuming $0 for DB and no income from part-time work total pretax income of $80,000 from 1) to 3) should be more than sufficient for a couple in their 60s to last until 90 years of age.  Note that items 1-3 are also adjusted for inflation. Remember, when you are retired, you should not have to be concerned about paying down your mortgage or saving for your education costs. Lastly, when you are retired, you do not have to worry about having to save for retirement again. In fact, various studies have concluded that retired couple live comfortably on less than $50,000 per year.  The major disclaimer is on health costs. I thank God for living in Canada, which has one of the best and affordable health care system in the world.

Friday, 28 July 2017

When is your time up?

Unless you have been working for a long time for a company, you would probably not understand this.  In these days of constant corporate restructuring, when you start reading announcements about long serving employees departing, you often wonder when your turn would come.  Such is my predicament. Do I wait for the tap on the shoulder to indicate that my time is up or do I be brave enough and walk out the door myself instead?  I can’t help but recollect the times I worked together with people who have recently left the company (mostly not by choice).

My advice to those who just join the workforce is to not think that you can work for one company for the rest of your life. Instead, spend the first couple of years making sure that you benefit from your experience at the company that you work for.  And don’t hesitate to hop to another job when the opportunity arises, especially when you know that you are constantly being passed over from a promotion that you deserved or when you do not get along with your supervisor.

At the end of the day, it is always about business, and also whom you know (or suck up to) in the leadership chain. This is why it is important to plan for your financial future early enough in your career so that you are always in control, and not be controlled. Beef up the emergency cash fund in the event that you are out of a job.  Think about what else you can do with your skills. What if you are the sole breadwinner and your spouse and children are dependent on you for financial support. I don’t have the answer. Based on my experience, we always fear for the worse, and the reality is not even remotely close to being what you initially thought.

I am lucky enough to escape the multiple corporate restructurings, but my fellow colleagues who did not escape the chop always ended up doing better in their next endeavor.  Most companies are fairly generous with the severance packages, and most people who found jobs later use their severance packages to pay down the mortgage on their homes. 

Thursday, 27 July 2017

Canada Food Guide

The new and improved Canada's Food Guide is now available. Do check it out. I find it much easier to determine the variety and amount of food to consume on a daily basis.

Vegetables and fruits are labelled GREEN, YELLOW is for Grain products, Milk is BLUE, and anything in RED is for Meat lovers,

Serving sizes are also provided. For example, 1 slice of bread equals 1 serving size. I am not sure about Texas toast, though (maybe 1.5 servings?)

Remember, key to a healthy lifestyle begins with eating right and exercising.


Wednesday, 26 July 2017

Health and Retirement Years

The doctor finally uttered the word “Remission.” All I could felt was joy beyond comprehension. After being on medication for over a year and a half to treat my hyperthyroidism, I can finally stopped taking the tapazole medication to lower my overactive glands. However, I will still need to have T3 and TSH blood testing done to ensure that the recovery is a permanent one.

I truly believe now that the greatest wealth is one’s health. There was a study that recently concluded that money can buy happiness, but the happiness is only limited to material purchases that are not everlasting.  As I contemplate embarking my journey towards my retirement years, I feel that I am in better health than ever. I feel  10 years younger physically. I am rejuvenated. I am more confident than ever. I work out constantly , doing both cardio and resistance training five to six days per week averaging 45 minutes per session. I even ran a 5K race with people half my age and finished in the top ten despite a strenuous hill climb..  According to health experts, we should be averaging 150 minutes of exercise per week.

There is also a strong correlation between one’s health and happiness. And this is so true, especially since we are blessed with living in one of the best countries in the world -Canada.  The healthcare and the social safety net systems are among the best in the world.   You can get your blood tested, go to see your doctor, and you don’t need to pay a cent! You can also retire penniless-and yet the Canadian government will provide you OAS and GIS for the rest of your life! And there are other benefits, too such as the Trillium Drug Plan, rebate for hydro usage, GST rebates and others.

My personal goal is to try and be disease free until I am at least 70 years old, or about 17 years from now. I feel that it is an achievable goal given my current fitness regime and being conscious about my diet to not overindulge. True, I can’t escape calamities such as being stricken with cancer all of a sudden, but that is life and that will be a card I have to deal with when the time comes.

Too often, we only focus on the financial aspect of retirement. It is great to be able to travel around the world, but you have to be healthy enough to do so.

So, what are your retirement goals?

Tuesday, 25 July 2017

Do you need life insurance for estate planning?

Being an insurance professional, I always try to approach the topic carefully, especially with friends and relatives because they are afraid that I am trying to sell them insurance policy. I feel the same way too,  sometimes, that I am no different from an ordinary salesman or another annoying telemarketer.  The cold calls that I made to prospects that the insurance agency had purchased from a reliable source ultimately proved once and for all that people genuinely dislike dealing with life insurance phone calls.

I hate to use the word “I told you so”, but for the people that realize later the importance of having purchased either a life insurance policy, critical insurance , disability or health insurance has renewed my faith in the profession.

Since I am also a CFP, I recently advised a close friend ,who is single, in her fifties, financially well-off, and planning early retirement.  The topic of estate planning came up. Since she has no dependents, she wondered what would happen to her assets once she pass away. Even though she has a will naming her niece and her sister as beneficiaries, she did not realize that certain assets such as her RRSP would trigger tax implications upon her death.  Since she is unable to roll-over her RRSP proceeds to her spouse  (she is single), taxes at the marginal rate (almost 45%) would be applied before the net proceeds are given to her sister and her niece. In summary, a $100,000 RRSP balance will be reduced to $55,000 once the tax authorities gets their hands on it.

If, for example, she had purchased a $50,000 10-year whole life insurance policy in her twenties and had named her sister and niece as beneficiaries, she would have only paid a total of $5,000 for the premium and have insurance for her whole life that could be used to offset the taxes on the liquidation of the RRSP upon her death (Annual premium $500 per year X 10 = $5,000).  You see, proceeds from life insurance policies are tax-free and can be a valuable tool in estate planning to help minimize taxes paid.

In addition, life insurance plays an important role when your children are young and you require the assurance that their needs can be taken care of in the event that you die suddenly. In addition, life insurance is also useful when you have a mortgage that can be paid off in the event that you passed away prematurely.

So, before you brush off someone who tries to sell you life insurance the next time, think carefully. 
Yes, the sales person is being compensated when he or she sells you the policy. But he or she is also doing you a favor that you may not realize immediately.

And finally, remember, it is best to purchase life insurance when you are younger and healthier as the premiums escalates exponentially once you gets older and sicker!

Monday, 24 July 2017

Preparing for a Market Crash during Retirement Years

What is the best preparation for a stock market crash? Unless you have a crystal ball in front of you, I don’t believe anyone can predict when that will happen. I know for sure it will happen one day, just like the meteorologist that predicts rain will eventually get it right one day.

Since the last major correction that ended in March 9, 2009, the S&P 500 has climbed from 676.53 to almost 2,500 in July 2017, or almost 270%  in total returns, including dividends reinvested.  Average annual return is more than 30%. No wonder there are so many early people who have achieved Financial Independence by investing almost at the bottom of the market.  Conversely, people who withdrew their investments at the trough would not only have lost almost a third of their fortune, but also the opportunity cost of staying the course, and waiting for the market to recover, and finally profit from waiting.  This, my friend, is the essence of investing for the long-term.

Even though we are closer to a major market correction now than before, it is important to not time the market by making major moves with your investment strategy. Stick to an asset allocation strategy appropriate to your risk profile and your retirement timeline. My experience with overseeing the company pension plan assets tells me that this strategy works best over time. When the equity markets do well, the pension plan tends to underperform due to exposure in the fixed income. And vice versa, during the market crash in 2008, the pension plan was able to escape the worst due to investment in fixed income, which thrived due to shift to government bonds and lower interest rates.

Having said that, I am a little concerned that the current bull market may be slightly overextended due to the following reasons:

Central bankers are starting to raise interest rates beginning with the Federal Reserve Bank of the United States, and now the Bank of Canada. Despite benign inflation rates, I think it is time to unwind the balance sheet of debt.

There is a glut in oil supply. The Saudis are suffering, even though their cost of production is the lowest. Higher cost producing countries such as Canada, the U.S., Norway, will suffer the most.

The stock market has been on a tear for the past 8 years, which surpassed the longest bull market run on record.

Company earnings may be peaking. As measured by S&P 500 trailing P/E ratio, it is almost 27. Normal average is less than 20. Note however, that stock market’s performance is driven by future expectation, and not historical data.

Market is driven primarily by a handful of high tech companies, notably FANG (Facebook, Apple, Netflix and Google (Alphabet).  Emerging FANGS include Amazon, Microsoft, and Tesla. Leadership is definitely lacking. Just so you know, the S&P 500 is a weighted index, and the top 5 companies above comprised 20% of the market capitalization.

A lot of companies are shedding their workforce in order to meet the earnings estimates. Top line growth or sales or decreasing.

Global housing prices have reached an unaffordable level.  Look at the correction that the Toronto GTA market is experiencing now- down almost 18% from the peak in April 2017.

I am not a firm believer that politics drive stock market returns. There may be  few hiccups due to Trump’s presidency in the United States or even impact from terrorism, but markets usually shrug them off.

Here are some of the steps that I am taking to reduce my risk in the equity market:

Start buying precious metals, preferably physical gold. History has shown that the precious metal has a negative correlation to stock market performance. Gold prices were up 25% during the 2008 market correction. And to a lesser degree, gold stocks, too. I would say no more than 10% of your total portfolio should be allocated to precious metal.

Review your asset allocation. Stick to a more conservative portfolio by investing more in fixed income -government and high quality corporate bonds with staggered maturity dates to hedge against interest rate risks. . Even though the current yield is about 3%, it is better to preserve your principal rather than losing 30% in an equity market downturn. Plus, with interest rate rising, you should be able to get a 4% yield. Depending on your investment horizon, I would say no more than 40% should be invested in fixed income.

Keep at least 1 year of living expenses in cash. I have to say that I found this while reading some of the personal Finance blogs, and I must say that this is a great tip. Assuming you have $50,000 in either savings or fixed deposits.  This avoids the need to tap into your portfolio and sell the stocks while they are down due to a market correction.  Assume this is 5% of your total portfolio of $1 million.

Lastly, your equity selection should yield at least 3% in dividends. Including interest from fixed income above,  your $1 million portfolio should provide an estimated 3% return in cash or $30,000 - $160,000 dividends and $14,000 interest per year. Assuming you intend to harvest 3% of capital gains from your equities, which will provide another 3% or $12,000, your total portfolio should provide $40,000 a year in cash, which should be sufficient for a basic retirement lifestyle if you add in CPP and OAS (or even private pension plans) .

In summary, here is my ideal portfolio to ride through a market correction and basically a portfolio for all seasons:

For full disclosure purpose, I have initiated some of the steps above, but have yet to reach my targeted mix.

Monday, 17 July 2017

Options Trading

Stock Options in the forms of call and puts can be a great tool for risk mitigation. Call it a form of insurance. The auto or house premiums that you keep paying ensure that you are compensated in the event your car is involved in an accident or that your house catches fire.

Definition of option as follow from Investopedia

An option is a financial derivative that represents a contract sold by one party (the option writer) to another party (the option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date).

Applying it to practice takes effort, patience and paying tuition fees upfront (i.e. pay the price initially and learn from mistake).  I find that my most successful options trades are not the one that are speculative in nature (i.e. banking that a stock is going to increase significantly by buying calls or thinking that a stock is going to tank by buying puts), but the option strategy that works best is writing covered calls.

Writing covered calls basically means that I own a stock, say 1,000 shares of TD Bank.  To further generate additional returns, I write a call for 10 contracts of TD Bank (1 contract = 100 shares) to sell at a strike price of $70 in 3 months (current price = $65 per share).  In return, I received a premium of $1,000 (or $1 X 10 contracts X 100 shares). 

My assumption is that since the stock has already appreciated 30%,   the stock has already reached its upside, and in the short term I assume that the stock will either decline or remain unchanged. If the share price stay below $70 for the next 3 months, the option will expire worthless. If the share price is above $70 prior to expiration, the buyer of the call will receive the shares at $70.  Regardless of the outcome, I still keep the premium, and therefore I am able to increase my return by another $1,000. There is obviously commissions involved.

In summary, there are various options that can be employed such as the basic buy or sell puts, writing calls and puts, to more exotic strategies such as straddles, collars, and etc. However, they can be quite costly for the inexperienced investor to participate in. 

Thursday, 13 July 2017

Funding Your Retirement

When planning for retirement, it is important to estimate where your sources of income are coming from.  You would also need to determine how much you expect to spend. Take a look ath list below, try to estimate how much you would get and need.
Sources of Income (assuming age 65 and above and maximum benefit as of July 1, 2017):
Canadian Pension Plan (CPP) per month:1,114
Old Age Security (OAS):                            584
   Total CPP and OAS                             1,700

Guaranteed Income Supplement (GIS) if applicable: 524.85 maximum
Defined Benefit (DB) Pension Plan if applicable
Dividend or interest income from investment portfolio
Part-time work if applicable

Monthly Expenses for 1 assuming frugal lifestyle:
Housing, transportation, food, clothing, and misc (basic lifestyle):            (1,700)
Add: another $800 for travel, dining and other lifestyle needs

If your sources of income exceeds your expenses, congratulations!

If your only sources of income consist of CPP and OAS (total $1,700), you may be able to still afford a minimalistic lifestyle (Expenses = $1,700).  I know I can live like a King! In addition, there are other social benefits that one can qualify at that income level, which would include GIS, hydro rebate, Ontario Trillium drugs and healthcare benefits and others.  

This just goes to show that you should not just blindly be led to believe that you need $1 million dollars in the bank to be able to afford to retire. But of course, we want to retire and travel the world, and live in luxury! This is when the extra planning and savings during your working years will pay off in the latter years. 

Saving an extra $100 per month for 40 years assuming a 5% annual return would provide $150,000. The same $150,000 when used to buy an annuity from a life insurance company would provide a monthly income of almost $700.

Alternatively, find a job with the government (local, provincial or federal), work for 30 years, and you can qualify for at least a  $4,000 a month pension for life! In order to receive $4,000 a month at retirement, one would have to save almost $800,000 lifetime and use the amount to buy an annuity to generate the same $4,000 income.  I know what I will do. Hope you do as well. Problem solved! And good luck getting the public servant job unless you know someone internally. 

Thursday, 6 July 2017

Another reason why you should opt for commuted value payment from Defined Benefit Pension plan

As I reiterated before, it is best to receive lump sum payment or commuted value (CV) from the defined benefit plan when you leave the company and invest in annuity. Note that there are some taxable events to consider. Sears Canada, which filed for bankruptcy protection, recently filed a motion with the courts to suspend certain monthly payments to its pension plan and post-retirement health and life insurance benefits, citing cash constraints. At stake is $3.7 million worth of cash payments to various DB plans, postretirement health and benefit plans.
Such issues are not uncommon. U.S. Steel Canada in Hamilton, Ontario filed similar motion with the courts to reduce pension and other benefit payments. Nortel Network, which has long been bankrupt, recently resolved its pension payment issue, resulting in a huge reduction of benefits to pensioners.
Just so you know, and I repeat, DB pension payments, despite being ‘guaranteed’ are not truly guaranteed.  If a company defaults on its payments to pensioners, the Pension Benefit Guaranty Fund (PBGF) essentially guarantees pension payment up to $1,500 (assuming the latest pension reform). If you are entitled to $5,000 a month payment, and the company that you worked work declared bankrupt, you may only get $1,500 from PBGF, thus losing $3,500.

FYI, the $1,500 a month that you finally receive after months or years waiting are also essentially a return of principle in most cases. Recall that you have been contributing approximately 5% of your pay into the pension plan each year. Assuming your average pay over the years was $100,000 and you have worked 40 years, and the rate of return was 6%, you would have accumulated almost $800,000 by the time you retired. And if you have invested $800,000 purchasing an annuity with an insurer, you would have received a monthly income of $4,000 a month - GUARANTEED. This is because ASSURIS ,which acts as an insurance fund, guarantees the higher of $2,000 of the amount or 85% of the promised benefits. 

Wednesday, 5 July 2017

Defined Contribution (DC) Pension Plan

For the unfortunate majority of workers who do not participate in company sponsored Defined Benefit (DB) pension plans, but instead contribute to DC plan instead, below are a couple of watch-outs. The typical DC plan includes a 50% matching contribution from the Employer up to 5% of salary (or 2.5% Employer + 5% Employee).  This is great because you get to double your money from get go.  However, unlike a traditional DB plan where future benefits are promised, you have to roll the dice with a DC Plan and select your own investments, ranging from targeted benefit investments to various equity and fixed income funds. And the biggest drawback is that future benefits are not certain despite the constant belief that the stock markets have always provided an average return of 10% or so. Tell that to the folks who suffered a 30% haircut in 2008 during the U.S. credit crisis when they were about to retire.

What I wanted to discuss further is actually the Management fees, or also known as MER, IMF and a host of other names. These are fees charged by the investment managers to operate the fund, regardless of whether the fund returns are positive or negative. The fees can range from a low of 0.1% to more than 2%. 

What I finally realized from looking at the fund prospectus is that in a typical DC Plan, the average fund in a DC plan is higher by at least 0.3% compared to a similar Exchange Traded Fund (ETF) as illustrated below. This, despite the promise that there are savings to be generated. The truth of the matter is that there are other fees tacked on to the MER besides the typical MER in a similar ETF.  I am not exactly sure what these fees are, but will try to find out.

On many  occasions, one can even leave the funds in the DC Plan when one retires.  But if I can make a suggestion, you would be best served if you move the money to a self- managed ETF. For a $1 million portfolio below, there are savings of at least $3,500 per year pre-tax by doing so. It may appear insignificant at first, but the amount adds up if you consider the fact that you will live an additional 20-25 years to live assuming you retire at the age of 65.

DC Plan
Savings in Fees
TSX Composite Index (70%)
Management Expense Ratio (MER)

Canadian Corporate Bonds Index (%)
Management Expense Ratio (MER)

Assume 70% Equity/30% Bonds
Management Expense Ratio (MER)

  Difference in Fees on a $1M portfolio
     Assume 20% tax on $60,000 income, annual pre-tax income on savings in fees
ETF - Exchange Traded Funds, managed by individuals, commissions may apply
DC Plan - Company sponsored, management and OTHER fees (MER) paid by employees

Thursday, 29 June 2017

Pension and Insurance Revisited

For those lucky enough eligible to receive benefits from a Defined Benefit pension plan,  a decision will sometimes have to be made to either receive monthly pension payments or commuted value/lump sum payments (CV).

Let me summarize for you the pros and cons as I see it.

Pros of receiving monthly pension payments

Certainty of payments each month.

Amount guaranteed by PBGF up to a maximum of $1,500 with the new proposal in Ontario.


Payment stops when the pension dies unless the Joint and Survivorship (J&S) option is selected (in which case the surviving spouse continues to receive pension payment at a lower amount).

Selecting the J&S option also means a reduction of almost 30% in pension payment in some cases.

PBGF guarantees a maximum of $1,500 in pension payment. If the pension plan performs poorly and  the company is not able to fund the pension plan, any benefits above $1,500 may not be paid.

Once the pensioner dies, and if there is no J&S option available, no further payments will be made.

On the other hand, one may be able to choose to receive CV, which is layman terms means a lump sum payment based on the present value of pension benefits earned,  

Summary and recommendation

My suggestion, being both a CFP and a qualified Life Insurance professional, is to purchase a whole life insurance policy that can be fully paid off in 10 to 20 years as soon as one can walk if one opts to receive monthly pension benefits without the J&S option.  The advantage is that the monthly pension payment is 30% more than the pension with J&S option, and even if one passes on, the surviving spouse/beneficiary receives the insurance proceeds tax-free. 

Based on some quick math, a 10-year $100,000 whole life policy probably cost $1,600 a year for a 21 year old and will be paid off in 10 years.   A 30% reduction on monthly pension payments based on a $2,000 monthly pension  is  about a $600 reduction. As such, the breakeven point is about 2-3 years. Again, in layman terms, if you had purchased the insurance policy way back, you can have the assurance that after 2-3 years, you will come up ahead by not opting for the J&S option.

Pros of receiving CV

Depending on the monthly benefits one is entitled to and his age , the pensioner may be able to transfer a portion or all of the CV to a Locked In Retirement Account or Life Income Fund.  This will be suitable to someone who can make his own investment decision on what to invest it.  More importantly, one can preserve the principal unlike a monthly pension payment that will stop when one dies (assuming no J&S option  is selected)

The typical amount is based on the Income Tax Act, but is generally based on the Annual Benefit multipled by a factor of 10 and above.  For instance, if one is entitled to $20,000 of annual pension benefit, one can transfer up to $200,000 to a LIRA based on a multiplier of 10,  The remaining CV balance, if over $200,000, will be taxable.

In addition, if the whole amount is transferred to purchase an annuity, the whole amount will be taxed free. The advantage is that annuity payment received from insurance companies are guaranteed up to $2,000 per month or 85% of the monthly benefit, whichever is higher.  If you were to ask me, I would rather trust the insurance company over the company paying the pension since PBGF only guarantees payment up to $1,500, which is up from $1,000 .

As indicated above, only a portion of the CV can be transferred in most cases, and the balance is taxable at the marginal tax rate. 

Summary and recommendation

Again, my suggestion, being both a CFP and a qualified Life Insurance professional, I would recommend that one should always purchase whole life insurance policy as young as possible, and pay off the policy as soon as possible. The benefit is that the policy can be used to provide reassurance to your dependents in the initial years, while serving as an estate preservation tool at your latter years.

Secondly, do seriously consider the CV option even though there are some tax consequences because of the principal preservation nature as the amount you can move tax free to a LIRA is under your control as   it can be used to generate investment income and possibly growth., while still maintaining the principal amount. 

Thursday, 22 June 2017

Minimum Wage in Ontario

While I appreciate the Ontario Liberal’s Party intention to increase the standard of living for lower income wage earners by increasing the minimum wage to $15 an hour effective January 1, 2019, I can’t help but wonder if the plan is going to succeed, never mind the hundreds of thousands of dollars wasted invested paying consultants to justify the idea in the first place.  

Don’t get me wrong. I am all for paying someone a decent wage, but this is the incorrect approach.

By increasing the minimum wage, you must also increase wages at all levels to keep pace. Otherwise, it creates a disincentive. Take for example, wages for a lifeguard. Depending on which city or private facility you work for, the current wage starts at $13 an hour. Do you know the amount of time and investment required to qualify as a lifeguard, and the requirement to maintaining your qualifications through continuing certifications?  I know that for a fact because both my daughters used to be lifeguards, but stopped as soon as they went to university and found better paying positions. This is also why there is a shortage of qualified lifeguards because of the disparity in pay to the minimum wage standards, which have risen considerably over the years, while the pay scale for lifeguards has stagnated.  

Who wants to spend all the money to be a lifeguard when you can make more money working at McDonald’s?  Guess what, you may not even get a minimum wage job at McDonald’s that easily. Just take a look at the number of self-ordering kiosks that have sprung up lately.  

In addition, small business owners and retailers suffer the most as they will not be able to pass on the increased cost of payroll to consumers easily. To make ends meet, they must reduce the number of hours or eliminate workers. The business owners are the true risk takers, and if Ontario wants to continue to encourage entrepreneurship, increasing minimum wage to such levels will be counter-intuitive.

The only way to increase one’s standard of living is not by waiting for handouts. One must upgrade one’s education, skills and be relevant in this changing world. The gap between the haves and have nots have widened.  But sadly, our government policies have not kept pace.  Life is tough, suck it up!  

Tuesday, 9 May 2017

Words of Wisdom from Warren Buffet

When I first began working in the financial reporting department of a publicly traded company in Minneapolis, U.S.A. many decades ago, my first assignment was to read the Plain English Handbook. It is a document published by the Securities Exchange Commission (SEC) on how to write annual reports and other financial information in plain (spoken) English.  

I still have many fond memories of reading it over and over again.  Warren Buffet, the second wealthiest person in the world, well-known investor and Oracle of Omaha is credited with helping SEC create this footprint for companies to write in simple and understandable English.

Things such as dangling modifiers, action verbs, run-on sentences are considered taboos by Buffet as he was amazed on how complicated, wordy, and utterly incomprehensible annual reports and disclosures were being written.  As a result, when I was first talked with writing the draft Management Discussion and  Analysis (MD&A) section of the annual report, I had to double and triple check my grammar. I have to always emphasize the use of personal pronoun such as “We” instead of using “The Company.”  Instead of constantly using commas to join three sentences into one, I had to try and create sentences with no commas, semi-colons, and etc where possible (lawyers, please take note!). 

Thirty years later, Warren Buffet, at the young age of 85, is still outsmarting everyone in the investment world.  What I admire his most however, is his act of generosity and his simple way of life. He had pledged to give more than 99% of his wealth to philanthropic foundations. He has donated billions of dollars to the Melinda and Bill Gates Foundation.
Below are some of his famous quotes that I like to share with you not only because it makes sense from a financial perspective, but it also teaches me to be a better person and to contribute to mankind.
·        Look for a job that you would take even if you did not need the money – His advice to the younger generation looking for advice on career.

·        Be fearful when everyone is greedy, and be greedy when everyone is fearful – Buffet’s investment philosophy

·        I will not bet against America - Spoken during the height of the U.S. credit market crisis in 2008.  

·        Rule number 1: never lose money, rule number 2: never forget rule number 1 – enough said!

·        It takes 20 years to build a reputation, and only 5 minutes to ruin it.  

·        Price is what you pay, and value is what you get – another investment philosophy

·        Only buy stocks that you would be perfectly happy to hold if the market shuts down for 10 years – Buy and hold strategy that almost always pays off. One exception may be IBM.

·        It is difficult to compete with companies using high leverage and low equity - spoken recently on why Berkshire Hathaway is holding on to so much cash when interest rates are at historic lows and valuations are sky high.

·        I buy expensive suits. They just look cheap on me –All his suits are made by a lady from China that he has known for many years.

·        Risk is part of God’s game, alike for men and nations – General Re, his main insurance company,  re-insures a lot of risky but carefully measured and calculated events.  

·        Diversification is only necessary if you don’t know what you are doing – The reason why the majority of portfolio managers never even beat the S&P 500 index.

·        If you get to my age in life and nobody thinks well of you, it does not matter how big your bank account is, your life is a disaster – Well said, money is not everything!

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...