When You Aren’t Able to Stomach the Ride

 

When the market value of your investments is falling, do you feel skittish?  Do you question your motives for investing in the markets?  Do you believe you can handle the volatility yet in reality are unable to stomach the turbulences?  You want to earn a higher return than the amount paid on GIC investments but at the same time know you can’t afford or are unwilling to take the risk.  What are other options?

In the previous blog, Investing in the Rise and Fall of the Markets, mutual funds were introduced as an option for participating in the markets.  The notion of combining your investment dollars with others to invest jointly and diversify broadly into different asset classes and sectors of the world’s economy certainly has its appeal but nevertheless still comes with potential market risk.  If you are still feeling skittish, you may be consoled knowing a layer of protection can be added to guard the value of your capital investment.   You must determine if the cost that comes with this protection is worth having in exchange for peace of mind.

A segregated fund policy has all the similarities of a mutual fund with an important exception.  Because these investment products are offered by insurance companies, they include built-in guarantees to protect either 75% or 100% of the capital in the event of an upheaval in the markets at the time of maturity or death. The two values, both the current market value and guaranteed value, are compared to ensure the higher amount is paid.

For example: Let’s assume five years ago you invested $100,000 into a segregated fund policy which offers 75% maturity and 100% death benefit guarantees. Today, the current market value may be $125,000; the maturity value remains at $75,000, and the death benefit is $100,000.  Because of the opportunities in the markets, you are optimistic that your investment will be lucrative but you feel comfortable with the guarantees in case the trend changes.        

Generally, the guarantee is determined on a 10-year holding period.  Some segregated fund policies may allow the option to lock in any market gains. Once you accept the higher value, you reset the market value as well as establish a new guarantee.

Segregated funds have been around forever. Perhaps “forever” may appear as a bit of an exaggeration but more than thirty years can seem like an eternity. In other words, segregated funds are not new.  Most likely, mutual funds may have stolen the limelight from segregated funds because mutual funds’ management expense ratios (MERs) are lower.  The higher MER fee (upwards of 1%) with segregated funds is the cost for the added insurance protection.  If this allows you to feel at ease, then the extra cost may be worth it.  You honestly do not see the fee since this insurance premium is included with the other management expenses associated with the normal operation of the funds.  The total MER costs are subtracted from the rate of return of the investment.

When considering investments options, determining the right strategy for you may require some investigation.    Whether you are choosing GIC investments, mutual funds, or a segregated fund policy, you are looking for the best alternative built with your intentions in mind (not someone else’s.)   

• If the value of your estate is significant, one consideration may be to bypass the probate process using segregated funds to distribute a portion of its value directly to beneficiaries. 

•  If you know that inflation is currently at 2.00%, you may not be satisfied with earning an average interest rate of 1.60% in GICs (Guaranteed Investment Certificates) even though these investments offer principal protection. 

• If you can’t ride the market’s roller coaster and tolerate investment fluctuations, you may desire the guaranteed protection of principal offered by a segregated fund policy.

Endorsing one product over another is only an appropriate strategy if it’s appropriate for you.  Just because one product is right for one person doesn’t necessarily mean it fits the needs of another.  Be informed about the investment options available so you are able to make the best decision for your circumstances.  

To read more about the difference between segregated fund policies versus mutual funds, you may click here to read Canada Life’s brochure, Intelligent Investing Design Your Future or Advocis® publication, Segregated Funds Come with a Guarantee. Other helpful information on segregated funds can be found at Get Smarter About Money.  

Do You Take Your Income for Granted?

 

Are you one of many who may be taking your pay cheque for granted?  The reality is we never know when that pay cheque may be the last for an unknown length of time.  Most of us have recently heard of someone who no longer has a job because of the current drop in oil prices.  Companies made tough decisions to let go of long-term employees.  Both executive and labour positions vanished from the companies’ landscapes. No crystal ball can foretell when conditions might improve making job losses unavoidable, some temporary, others permanent.  These new realities can be frightening times for people who are now relying on a reduced “income” funded through employment insurance programs to cover day-to-day expenses and debt payments. If savings are limited, then withdrawals from registered investments may be necessary.  Only a few may have a severance payment to rely on until they find other work.

Believing that you will always have a job which provides a consistent income to support your needs and wants can be a false belief.  When you believe that nothing will happen to cause you to be unemployed, you may be deceiving yourself. The truth is you can always find another job.  The unknown factors are how long it will be before you find a job and what kind of income you will earn.

Think for a moment beyond job loss. If I have heard about others’ unfortunate life events, I know you have too: the ugliness of a divorce, an unexpected illness, or the devastating death of a loved one.  All these unexpected unwanted circumstances impact finances.  

The reality is anyone can face a dire situation. Think about this. 

You know a major life event can send your emotions reeling. The last thing you want to concentrate on is finances. Your attention is on coping with the actual event, surviving, and helping others through life’s drama.

Imagine what it would be like if your cheque was suddenly reduced by 50% today.  The panic surges. The financial pressure weighs heavily on your mind. Your world spins out-of-control.  

I don’t believe in projecting fear to scare you into action but if you consider saving a small portion from each pay cheque then I’ve got your attention. If you realize you should focus on the important rather than the unimportant “stuff” then you will be prepared financially for life’s consequences.

So should you be saving – setting ‘some’ money aside for emergencies? The answer is, “Absolutely!”  If you believe that “the only thing that relieves pressure is preparation,” you will save.   This key message came from Tom Kite, an official PGA Tour champion, who knew the importance of preparation for relieving pressure when competing in golf tournaments. People who prepare relieve pressure whether they are delivering a dynamic presentation, writing a major exam, or rehearsing for an important job interview.  The success lies in the preparation. Saving for emergencies is no different.  

Don’t take your income for granted and believe that your income will always be at the same level.  Don’t waste the money you exchanged for your labour.  Believe it or not, your money is not yours to keep. Be a good steward because others are depending on you.  Your family needs your financial support; the utility companies expect to be paid for the services you use; and your bank or credit union relies on you to pay back the money you borrowed. 

Saving even “a little” money at a time will eventually become “a lot” of money over time.  Seize the opportunity to tuck away money from each pay cheque with automatic transfers to an “emergency savings” as discussed in the previous blog, Are You Prepared for Any Emergency?  When you incorporate this activity into your financial plan, you will create security while providing a sense of peace knowing you are prepared for life’s unexpected events.

Personal Income Tax Rate Changes

Since the election of the new federal government, the Liberals upheld their promise to lower the tax rates for middle-class and implement a new tax bracket for wealthy Canadians earning greater than $200,000. 

As the image of the ladder shows, your tax bill climbs along with your income. Everything is relevant to the amount of money you earned.  We all pay the same tax rate for the first $45,282 of income earned.   Every Canadian starts from the bottom and works their way up. The difference is where your income stops.

If your income is above the first tax bracket, the good news in 2016 is the Federal Tax rate has been lowered from 22% to 20.5%.  The bad news is you are still paying 20.5% in Federal taxes once your income exceeds the first bracket.  The valuable news is you can save essential tax dollars for each dollar of contributions invested in an RRSP (Registered Retirement Savings Plan.)

 

 I often encounter people who still say that RRSPs don’t work.  The rationale behind the advantages of RRSPs relates to the philosophy about a glass being seen as half full or half empty.  You can choose to be the optimist or the pessimist. If you truly want to be the superior optimist, you can add a unique spin and rationalize that regardless whether the glass is half full or half empty, there’s room for more wine. Wine can be as sweet as saving money from being taxed. 

Here’s how . . .

Money invested into a registered investment will reduce taxes.  You are technically deferring the taxes from being paid at a time when your income is at its highest.   Eventually when the funds are withdrawn, whether you chose the optimal time or whether you are mandatorily forced to begin withdrawals at age 71, here lies the expectation that your income may be in a lower tax bracket when you retire.  Not to mention, you have sheltered the earnings from taxation in your RRSP investments over the years which attributed to the growth.       

At age 65, you will be rewarded with two additional tax credits, the age and pension income amounts, to offset your tax bill.   The added bonus may be your ability to split your retirement income with your spouse to equalize your incomes and take advantage of each person’s tax credits.  Technically, as shown in the graph below, the first $20,599 of an individual’s income is looked upon as the tax-free zone since these credits offset taxable income.

 

Federal Tax Credit 2016	Federal Tax Credit	Sask Personal Tax Credit
Basic Personal Amount	$11,474	$15,843
Age Amount	$  7,125	$  4,826
Pension Income Amount	$  2,000	$  1,000
	$20,599	$21,669

 

In an attempt to sharpen your perspective, consider RRSP savings as the income that will one day replace the pay cheque you receive today.  If saving taxes today can reward you with a rich income in the future, you may wish to seize the opportunity to retrieve valuable tax dollars. 

 

 

 

The All Important Question

 

Most people want to know: “Do I have enough to retire?”  The answer is always the same, “It depends…”

It depends on how much you have saved; what your sources of retirement income are, and when you will stop working. Yet the most important question is not, “Do I have enough to retire?” The most important question is “How much do you spend now and what will you spend in retirement?”  Believe it or not, most people do not know the answer.

 

This piece of information is vital to the development and success of your financial plan.   I relate your lifestyle needs to a heartbeat.  Life stops when a person’s heart stops beating.  You can imagine that if you don’t have enough money to support yourself in retirement, your life will feel as though it has stopped. You will feel doomed and be limited in the things you can truly afford. You certainly don’t want that. 

One thing is certain; you can’t borrow money to retire.  “I’d like $250,000 for my retirement, please.”  This may sound like a grim reality. The truth is you could be living on less in retirement if you don’t take the time to calculate what you spend today.  

In the summer of 2013, David Aston’s column, How Much Money will You Need to Retire, appeared in MoneySense.  In my client meetings, the chart below is used to quiz people when they don’t know how much they spend.   I ask if they can pick themselves from the different classes:  Basic, Average Middle, Upper Middle, or Deluxe.



 

 

The truth is until anyone actually tracks their expenses, they feel clueless.  A couple said they thought they spent only $2,000 each month until they tracked their expenses.  Can you imagine the shock when the total was closer to $5,000?  For most people, the shock comes when they realize how much money is going out in comparison to money coming in from their earnings.  

Hang in here as I prepare to swing totally off topic for a few minutes.  

Kevin Hall talks about the origin and significance of the word “Coach” in his book, Aspire.   Here’s a little history lesson.

In old Hungary, along the Danube River between Budapest and Vienna, there was a village by the name of Kocs that produced the world’s finest horse-drawn vehicles.  Skilled wheelwrights fashioned these conveyances with spring suspension to comfortably carry royalty over the bumpy river road that connect the two great cites. These carriages borrowed their name from the small township where they were skillfully designed and came to be known as “coaches”.

Originally crafted for aristocracy, coaches carried important people to their desired destination in luxury and ease.  Their compact, sturdy, and elegant design far surpassed any mode of transportation that had come before, and coaches soon became the rage of fifteenth-century Europe.

Over time, other forms of transportation adopted the term “coach.” Passengers traveled far reaches of the western frontier of America by stagecoach and railway coach.  In Europe a motor coach became synonymous with a luxury car or travel bus. 

But however far-reaching and prevalent the word has become since the first coach rolled out of production in Kocs, the meaning has not changed.  A “coach” remains something, or someone, who carries a valued person from where they are to where they want to be.

The reason I shared the meaning behind the word, “Coach”, is for you to think of a CERTIFIED FINANCIAL PLANNER^® professional as a coach - - your coach.  When your coach says it’s important to track your daily spending, it’s not because you have nothing better to do. You need to be aware that this is where the answer lies to the important question, “Do you have enough for retirement?”  You are a valued person. As your coach, I want your retirement to be enjoyable for you.

The different titles for coach (i.e. guru, mentor, guide) all describe the same role as Kevin Hall points out.

One who goes before and shows the way.  Coaches point out the sharp turns, potholes, perils, and pitfalls of the road being traveled.  They steer clear of dead-end streets and unnecessary detours as they safely navigate us to our desired destinations.  Whether they are leading or teaching or showing or guiding or mentoring, they are coaches.  And they are indispensable in helping us find our path and purpose. 

I love the parallel of a CERTIFIED FINANCIAL PLANNER^® professional and a coach.  Juggling your finances to accomplish your goals and dreams can be challenging.  That’s why having a financial coach makes your life journey successful. Together we will find the answer to determine whether you have to: work longer, save more, or spend less in order to have a successful retirement. OR maybe simply discover that “Yes, you do have enough.”    

Creating A Well That Never Goes Dry

You may be approaching retirement and feeling cheated that you don’t have a pension plan simply because you are self-employed or your employer doesn’t offer one.  Did you know you can create a pension income for life? Throughout your lifetime, you may have been building equity in your business or contributing regularly to a Registered Retirement Savings Plan (RRSPs).  One of the challenges you may face is creating a lifetime income.    

For example, George and Mabel recently sold some farm land.  They are reluctant to invest their money into mutual funds. Because they had taken risks throughout their farming career, they are not willing to gamble with the money from the farm sale. Yet they are unsettled about today’s low GIC (Guaranteed Investment Certificate) interest rates.  They simply want a comfortable retirement and to be able to fulfill their retirement dreams.  Their biggest concern is outliving their income. They are both healthy at 65 and know they have a very good chance of living beyond 90.  

Situations like George and Mabel’s are common.  Looking for suitable investment options can be a difficult task.  It’s like trying to find a comfortable pair of shoes that fit and feel right for the activities you are planning.   But here lies the answer. You could have more than one activity planned for your retirement.  You don’t wear dancing shoes for golfing; you don’t wear gardening shoes for travelling.  This means one thing: you have different shoes for the different activities.  This is also true with your retirement investment products.

Let’s say you are committed to the idea of having a guaranteed income stream for life.  You simply don’t want to outlive your income.  In other words, you don’t want the “money” well to run dry.  You may also like flexibility. You are not sure exactly when and how much you will spend on travel in any given year or whether the desire to own a new vehicle has even made your dream list.  Having money on hand to pay for these luxuries is important.  

The blog, Can Investing Really Be Easy, describes how to diversify your investments appropriately using asset allocation.  From a slightly different perspective, now the discussion is about diversifying your investments into different products.  Product allocation isn’t something new.  People may actually be implementing this strategy unknowingly by having multiple investment products.  Others may believe in using only one investment product. It’s about matching the right strategy and the right product to fit your unique situation.

For those who are uncomfortable about investing and are primarily focused on an income for life, the solution may be the purchase of an annuity with a portion of either non-registered or registered investments.  In essence, you are trading a lump sum of cash for an annuity which will provide a series of income payments guaranteed for a specific period of time or a lifetime.  You may have seen Sun Life Financial’s Money for Life television commercial. This is exactly how you create an income for life . . . with the purchase of annuity.   If your primary fear is running out of money, then considering an annuity might be a good fit for your needs.  The path then branches further to determine the right type of annuity for you.  This decision cannot be taken lightly.  It’s a conversation you want to share with a CERTIFIED FINANCIAL PLANNER^® professional.

In my encounters with clients, the scenarios are complicated.  We have had to decipher what they really want from their retirement nest egg.  Are they more concerned about providing a lifetime income for themselves or are they more concerned about preserving the principal for their children?  They are sometimes confronted with a tough choice.  Depending on their desires, then other products, like insurance, may be introduced into their financial plans to satisfy multiple needs.  All of these are relevant to cost and whether the clients are insurable.

Your retirement is intended to be your most enjoyable time of your life.  Your retirement should provide you with freedom to do the things you have longed to do without the hassle of worrying about finances. Creating the appropriate financial plan with the right investment products equals the ideal retirement lifestyle of your dreams. It’s time you stopped feeling cheated.    

The Dangers of Coasting: 5 Ways to Get in Gear

Has anyone asked you lately for your opinion on a specific subject?  Do you remember how you felt? I felt honored when Caroline Horcher, Manager of Public Affairs from FPSC (Financial Planning Standard Council), asked me to comment on this statement, “If I’m generally moving in the right direction, my financial goals will take care of themselves.” From our conversation, Caroline generated a five-point guide to help people get in gear towards their goals, dreams, and aspirations.  Below you will read excerpts and the five tips derived from our interview. 

The Dangers of Coasting: 5 Ways to Get in Gear

“If I’m generally moving in the right direction, my financial goals will take care of themselves.” Are you guilty of this financial planning misconception?

Coasting—even in the right direction—doesn’t necessarily mean being on track, says Delores Moskal, a CERTIFIED FINANCIAL PLANNER® professional based in Yorkton, Saskatchewan.

Delores says that not having specific goals is like driving at night without headlights. “You kind of know the road and can steer your vehicle in the right direction, but you’re never really sure.”

“You’re moving along, but you might get to the end of the road and find out you’re at the wrong destination,” she says, “whether that means you can’t buy your dream house, fund your children’s education or rely on your retirement income.”

Try Delores’ tips to stop coasting and start accelerating toward your financial goals today.

1.     Target your destination: Many people put off setting specific goals, intimidated that the next step—actually having to start working toward them—might be difficult or stressful. It can seem easier to trust that everything is progressing fine without your attention. But don’t fall victim to this fear-based procrastination: make your goals inspiring enough that you’re willing to put in the time and effort.

2.     Use a GPS: Have an honest talk with yourself. Are you doing the best that you can with what you have? If the answer is no, or you’re not sure, consider getting the help of an expert. A qualified financial planner can help you devise a road map to your goals, immediately putting you in a better position to reach them and keeping you on course as you make progress.

3.     Chart your current location: To get where you want to go, you need to take an accurate snapshot of where you are right now. A financial planner can help you take into account all relevant areas across your financial life.

4.     Know your end point: One of the benefits of planning is that you can choose your ideal outcome, rather than seeing what happens automatically (or settling for the only option left). Be detailed in your goal setting and consult with your family to be sure you’re all on the same page.

5.     Pick up speed: There’s no time like the present to start to design your financial future and make progress toward your goals. The sooner you start, the sooner your dreams can become a reality.

It may seem intimidating or time-consuming to put a targeted focus on your financial goals. But when the real danger of coasting is that you might not reach your dreams at all, isn’t it worth putting in the time and getting the help you need?

Find this article and other valuable information at FinancialPlanningforCanadians.ca and Globe and Mail Financial Planning Special Feature websites.

What Are You Waiting For?

What causes people to wait especially when things are too important to ignore?  I do this.  You may well do the same.

When the second email arrived about a Toastmasters leadership training event, I knew I planned to attend yet I hadn’t bothered to register.  The stark question at the beginning of the email asked, “What are you waiting for?”   

Forwarding a prompt reply to an event is hardly a fair comparison to preparing your Last Will and Testament.  The fact is a vast majority of people do not have a Will in place yet the same question applies. What are you waiting for? The bottom line is death is eventually going to occur with or without you having a Will in place.  Don’t you want your wishes to be known to the people who matter the most? 

   

Dispelling the Myths

Are myths holding you hostage, preventing you from writing your will?  You may be under the impression that having a lawyer draft a Will is expensive.  This is not true.  In fact, this small expenditure may be the best money you spend to have peace of mind.  Every time you hear about an unexpected death -- a sudden heartache or a devastating traffic accident -- you make a mental note that your Will isn’t written.  Even if you have a Will, you may feel a tinge of guilt knowing your Will hasn’t been reviewed for many years.   

You might be the type of person who is superstitious, believing that once you write your Will, you are sure to drop dead. Contrary to what you believe, it’s not likely going to happen.  You need to plug in a belief, one which says that you will live for eternity since you alleviated the stress and anxiety of living without a Will.   

Your belief may be that if everything is owned jointly with your spouse and you have named a beneficiary on your registered investment, pension plan, and life insurance policy that there is no need for a Will.  This may be true and applicable in certain circumstances but you are still missing information.  What if your spouse passes away before you?  If this occurs, what if you are unable to write your Will because you suffer from dementia? What if you both pass away together in a car accident?  

 

Facing the Challenges 

The greatest challenge you may have is how to distribute your assets to family members while you attempt to be fair and equitable.  Because the challenges are so overwhelming, you may choose to postpone the decision and opt to do nothing.  This temporary strategy does not provide a solution. You take the chance of leaving everything you have worked to achieve in limbo.  Having life insurance is one way to create a fair and equitable estate. This strategy can only work if you are insurable when you apply for coverage.

Another challenge is waiting until your Will is perfected.  There’s a danger in postponing the drafting of your Will.  The reality is your life doesn’t stay the same which means that your Will won’t either and will require revising in the future.   A divorce, lottery winnings, the birth of children and grandchildren will change your intentions.  Therefore, you are not writing your Will on what may happen in the future.  It’s now! It’s not tomorrow, a month or a year from now.  You are writing your Will as if you have been hit by a city bus while walking to work.  If this was the situation, ask yourself: “Who gets what if I can’t tell anyone?”  Your Will speaks on your behalf.  

 

Getting It Done

You may be tempted to take matters into your own hands by drafting your Will using a Will kit.  Don’t do it.  With so many complex issues and unexpected scenarios, you should not underestimate the value of first-hand legal advice related to your life’s circumstances.  Even the most straight-forward life situation can have complex issues.  You don’t want to mess things up by drafting Will instructions yourself and having them misinterpreted. 

 One thing we can learn from the infamous holograph Will drafted by a dying Saskatchewan farmer is to not wait too long to write your will.   On June 8, 1948, Cecil George Harris was pinned under his tractor on a farm near Rosetown.  His greatest fear was that he might not survive so he etched his wishes on the fender of the tractor.  With a pocket knife he wrote, “In case I die in this mess I leave all to the wife.  Cecil Geo Harris.”   One might question, “What was Mr. Harris waiting for?” Surely with time on his hands, he may have thought the same thing.  In those ten hours before help arrived, Mr. Harris knew he needed to write a Will.  At least he wrote one … but he had time.  Some people may not have the time or the mental capacity to do so.  So again, I ask you, “If you haven’t written your Will, what are you waiting for?”  

You Have Everything You Need

Maybe you are looking at your financial picture and it is not exactly “picture perfect” but there is always hope.  Without hope, well then everything would be hopeless. With so many different pieces making up your world – finances, career, relationships and health – sometimes the best way to see your world is through a pair of binoculars that can widen your focus.

“An attitude of gratitude” can be the precise prescription you need to drastically change your life. Be grateful for your present income. Be grateful for your family.  Be grateful for your health.  Although these are concrete things you may see, touch and feel, others such as infinite power, endless possibility, and boundless opportunity may not be as obvious. These are the ones Stella Stuart shares.  With a new attitude, your world is bound to change. Stella Stuart sums her statement up with an all important question, “Why should I fear?”  With so many things going for you, you will realize there’s no valid reason to be afraid.   

Where am leading you? You are now one week into the New Year and I am curious how well you are sticking to your New Year’s Resolutions and following through with your goals for 2016. I’m here to tell you that the first thirty days will be tough slugging.  If you can make it through these days, the changes you are implementing will get a little easier.  I discovered a new truth (at least for me it was). Bad habits have to be replaced with good habits.  You can’t simply say “Bon Voyage” to your bad habit and hope you never see it again. The truth is you have to work at making your bad habits disappear.  This sounds so elementary.

You are reminded that “money does matter and so do your dreams.”  In 2015, the blogs shared different ways to make things happen.  “A year in review” might tweak your memory and enthusiasm.  

Here are some key highlights:

If you have concrete dreams, then you must turn them into SMART goals.

If you are serious about saving money, then take baby steps towards savings.

If you are serious about paying down debt, then plan to wage war on your debt.  

If you are considering retirement, you need to determine your sources of retirement income and lifestyle.  

If you are confused by taxes, gaining a better understanding can be achieved by reading It’s all in the Math.  

If you are thinking about purchasing a home, then consider all the factors involved with becoming a home owner.

If your spending is out-of-control, you might try implementing a “Cash Diet” to get back on track.

If you have difficulty talking to your partner about money, then you may learn more about what makes other people tick.

If your investments are held with different advisors, you may want to understand the benefits of having one advisor who can see your whole financial picture.

If you have never considered the benefits of life insurance, you may consider doing your family a favor.

If you need to better understand your RRSP Contribution Limits, reading “The Road to a Successful Retirement” may change your perspective.

If you need help improving your self-talk, then you could say “Good-bye to the Old and Hello to the New.”

Here’s the challenge.  Even if you think you can’t change, I want you to believe you can.  If you don’t feel ready for the change, then do it for the benefit the change will bring.  Don’t overthink.  Just Do It!  Do the very thing you told yourself you wanted to implement in the New Year. Start now and slug through the process until you arrive at the point where you accomplish your goal.

Congratulations for accepting the challenge because I know you can rise to the call.  Remember the message that will get you to the other side, "Behind me is infinite power. Before me is endless possibility. Around me is boundless opportunity. Why should I fear?"