Made-in-the-U.S.A. Global Trade Tariff Turmoil

"History may not repeat itself but it often rhymes."  Mark Twain

Today's primary concern is that from a historical perspective, the last time the U.S. unilaterally enacted tariffs on incoming goods was the Smoot-Hawley Tariff Act that was signed into law by Herbert Hoover in 1930. Of course these events occurred well before my time but being a bit of an investment historian geek it's clear that knowing what happened in the past can be instructive in today's environment. Spoiler alert. The results of those tariffs was a disaster for both American and international business and trade.

My second concern is the general feel of the advice I'm reading in some of today's financial blogs and articles, many which seem to suggest that today's U.S. tariffs won't last for long or just stay the course and don't worry about it. Meanwhile,  American Republicans are saying they're ready to double down on the tariffs they've just enacted. Read into those differing messages what you will.

So, should you be taking some kind of corrective action with your current investments?

To paraphrase a previous post from 2012: Financing My Retirement Part One "Like with most things financial, unfortunately there are no one size fits all solutions because everyone's family, finances, current and future needs and wants are quite different from each other. Professional investment prescriptions can depend on many things, including health, ages, assets, current income, how much income you want and the estate outcomes you want and can afford."

Along these lines, we offer professional investment advice and solutions that provide investment safe havens, principal guarantees and income streams that are guaranteed for life.    

Please feel free to reach out with any questions you may have.

Should you have a savings plan that's similar to having your own Defined Benefit Pension Plan?

As the Canadian postal workers union (CUPE) continues to negotiate with Canada Post over their contract and in particular the issue of phasing out of Defined Benefit (DB) plans in favour of Defined Contribution (DC) plans as was recently discussed on the CBC, I've been wondering why we're not hearing any discussions about guaranteed retirement income solutions that are already a huge market for many Canadians without DB pensions and have been available through a variety of Canadian insurance providers right across the country for many years.

In our practice we speak with many Canadians who have saved and/or are saving for retirement and find that most people have the common desire to have at minimum, a rock solid core retirement income that's guaranteed to keep them in the lifestyle they prefer. I would suspect that the postal workers union and their members probably have the same goals in mind.


From the outside looking in, the main problem in this dispute appears to be that even though DB plans are often the best guaranteed retirement income solutions available for employees the financial risks of DB plans are considered too high for most of today's corporate managers to take on. So the compromise of a simple DC plan offers similar ongoing financial support for workers but eliminates the corporate capital requirements required by pension regulation and future retirement income risks of employees away from the corporation.

A few of the key differences between DB plans and some of the available guaranteed income plans such as with variable annuity plans also known as GMWB's are:
a) savers maintain access to their savings in the event they need the money.
b) plans can be portable when people change jobs.
c) some plans offer lifetime income that is based on deposits plus 4-5% during your savings years (or market value which ever is higher).
d) lifetime retirement income might not be indexed to inflation.
e) savers can choose from a wide variety of investments.

Guaranteed income for life solutions that combine some of the DC plan attributes with some of the DB plan attributes such as these are often a good compromise that suits a majority of retirement income needs.

That's because in our experience we find that clients who integrate guaranteed income solutions into their financial plans tend to do so for a variety of common reasons. These often include such things as:

a) peace of mind comes from having a core part of retirement income that's provided for life that's above and beyond meagre CPP and Old Age Security (OAS) payments.
b) as a passive supplemental guaranteed income above small or insufficient existing DB plans in order to guarantee anticipated lifetime income needs.
c) create as close to a DB plan equivalent with RRSP's, RRIF's and DC plans as possible so the requirement for taking on additional investment risks are reduced or eliminated in savings years and most importantly, during retirement risk zone years.
d) smooth out or eliminate the negative effects on incomes that are often caused by volatile markets or savings that would otherwise be exhausted when needed during retirement years.















It's also important to note that the various guaranteed for life income solutions currently available are implemented to suit the specific needs of groups, couples and individuals on a case by case basis.

Volatile Markets, Retirement Income and the Risk of Time

Is a retirement income that’s guaranteed for the rest of your life important for you?

Studies show that over 60% of pre-retirees are most comfortable if their RRSPs and other savings would be 100% guaranteed to provide an income for life, regardless of market conditions.  

For safety and short term needs many people leave money in bank accounts, GICs and term-deposits. Savings of this kind are generally safe, but are growing at a rate that is barely keeping up with inflation. In many cases these savings may not be growing fast enough to meet longer term financial goals. 

It’s not that market risk or volatile markets are necessarily bad. In fact, higher risk tends to bring higher rewards with some investments. It is also technically correct that over time, securities markets outperform many other investment savings choices. But market rewards are gained at random times that don't match income requirements.


For those who will be taking income from savings  - an erratic or poor sequence of returns  5+ years before and or during early retirement years in particular can be financially devastating.

Longevity risk is another factor.  People are living longer which means savings need to be able to last longer and longer periods of time.

So time can be a critical factor when protecting savings that are earmarked to draw down as income.  

Thankfully there are a variety of guaranteed investments that take the risk of time out of your future financial plans.

To discover whether these guaranteed investment options meet your unique circumstances, some common questions to discuss might include:

•           Can lifetime expenses be covered by your current pensions, savings and government                  retirement benefits?
•       If the market drops 20% (or any number you'd wish to explore) during income years how          long will savings be expected to last?
•          Will there enough money to take care of dependants?
•       How do future travel plans and other bucket list items fit in?
•          If we eventually need to convert a nest egg into a guaranteed-for-life income stream, what          are the best available options and do they suit our needs?
•         Are long-term care costs factored into this equation?
•        After we’re gone, will we have enough to cover the needs of our survivors, bequests and           the charitable legacies that we wish to leave behind?

Knowing that we'll never run out of money for the rest of our lives is very helpful for most of us who like to sleep well at night. Control and access to our investment savings in case of emergencies are also important for many.                                                                               

Of the contractually guaranteed for life income solutions available today, some plans may also offer additional benefits to suit various circumstances such as:

•       Guaranteed growth of future income during savings years.
•       Plans that allow you to participate in the upside of the markets while also guaranteeing an         income for life.
•       Income payments that are guaranteed for life!
•       Other guarantees. For RRSPs and RRIFs in particular, your initial investment is the                   guaranteed minimum you'll be able to withdraw over time,  even if the market value  drops       below your initial deposits.
•       Control and access over your investments anytime. Just in case. 
•     Loss of control options that will pay a higher contractually guaranteed for life income are          also available when suitable.
•       Joint accounts, for the purpose of guaranteed income continuation for a surviving spouse.
•       Avoid probate. Note: If your wish is for your estate to avoid probate delays, taxes and fees - in most Canadian provinces, it is unnecessary to set up joint accounts with these types of guaranteed investments.
•       Transfer of residual proceeds to your beneficiaries can be delivered over time and/or as lump sums, as you see fit.

If you’d like to learn more about taking the risk of time out of your retirement income plans, I invite you to contact me today to help you discover if guaranteed investments are the right fit for you.

Please note: As an independent Certified Financial Planner and expert on guaranteed-for-life income solutions, I have personally invested in some of these solutions since they are also a perfect fit for my circumstances.

Jack Bergmans CFP

Certified Financial Planner/ Founding Partner 

Life Insurance & Estate Consultant

Bequest Insurance

jack@bequestinsurance.ca

Phone: (416) 356-4511 

Linked In

Should you consider getting life insurance before the rules change on Jan 1 2017?

Life insurance is commonly thought of as a simple estate planning tool. Yet it can also make a very powerful investment tool due to its favourable tax treatment.

Deposits and cash growth in life insurance policies are generally tax-free within certain limits, as are death benefits, which makes life policies used as investments very valuable.

On January 1, 2017 the part of the Canadian Income Tax Act governing life insurance policies will be amended to more accurately reflect changes in mortality rates (people are now living longer). It will also place additional limits on life insurance deposit amounts considered tax exempt.

If you decide to take advantage of life insurance for investment purposes and estate planning before these tax changes take place, your life policies will be grandfathered and provide you with the ability to invest more money tax-free than life policies purchased in 2017 and beyond.

There are many situations whereby you should consider investing in life policies before December 31, 2016. A couple of key situations include:

•  Your business is growing. Insurance taken out on the owners can create or strengthen succession plans to insure the business won't suffer when key people are unable to continue working for any reason.
•  You own properties whose value has grown beyond the capacity of your estate to cover estate tax obligations. It's possible that capital gains taxes will not allow you to have your estate assets distributed in the way that you’d like. Life insurance can be purchased to cover big tax hits such as these, and allow you to leave more to loved ones and charities.  

If you've already set aside specific funds to go to beneficiaries such as your spouse, grandkids, kids, community causes and charities, Bequest Insurance’s Generosity Multiplier™ can mobilize those funds to guarantee that your beneficiaries receive even more than you hoped, at no additional cost to you.

Rates of return on our Generosity Multiplier™ are based on age, and since none of us are getting any younger and tax changes are coming on January 1st, this could be the perfect time to contact Bequest Insurance to learn more about how you can reduce your taxes and leave more to meet your personal or business needs!

Should you consider buying prescribed annuities now to avoid 2017 tax increases?

Living longer than people in previous generations is great but more and more people are now worried about the possibility of outliving their savings. 

Because of this, guaranteed-for-life income solutions are becoming a vital investment component for many Canadians. 

Within the available choices of guaranteed-income solutions, prescribed annuities provide much higher annual take-home income than you'll get from other typical guaranteed savings choices due to both their structure and the overlay of significant tax benefits. For example*:

A 60 year old in the 40% tax bracket using $100,000 in savings to provide income for life :

Scenario 1: 2% GIC is purchased

Gross Income: $2,000

Taxable amount: $2,000

Net Annual Income: $1,200

Scenario 2: 5% Prescribed Annuity purchased

Gross Income: $5,000

Taxable amount: $1,054  (if purchased in 2016)

Net Annual Income: $4,578 

*Please note that this example is for illustration purposes only.

Your annual taxable amount is set for life when you purchase prescribed annuities.  If this same 5% prescribed annuity is purchased in 2017 the taxable amount is expected to increase from $1,054 to $1,450. 

It is also important to consider how various retirement income streams might lower or even eliminate your income tested government benefits such as your Old Age Security pension (OAS). For the 2016 taxation year OAS clawbacks begin when your total annual taxable amount (not your total income) exceeds $72,809.  OAS benefits are completely eliminated when your net income (including your OAS income benefit) is just over $118,000.

Prescribed annuities provide the benefits of higher incomes and low taxable amounts. This often a win-win-win for people looking for higher incomes, lower income taxes and getting the most from their income tested government pension plans.

You may now be asking yourself these questions:

• How do prescribed annuities or other guaranteed-for-life income options work?
• How is prescribed annuity income guaranteed and for how long?
• What is the value of my prescribed annuities to my estate, spouse and other beneficiaries when I die? 
• Are annuities suitable for me? Would they be suitable for my dependants?
• Are there guaranteed for life income annuities that allow me to access my capital just in case I need it? 
• Should I get prescribed annuities now to avoid tax increases coming in 2017? 

As always, please feel free to contact us anytime. We make every effort to answer these and any other questions you might have within one business day.

Best Regards


Jack

Will I have enough income?

For those of us who don't have a defined benefit plan to rely on when we retire (or have a plan that won't be enough to satisfy our financial needs) we require different investment strategies to fulfill our family's financial needs that will last throughout our retirement years.

In addition, low interest rates are making our investment decisions even more challenging because it takes significantly longer for our savings to grow and a much larger savings base from which to pay our expenses. Some people can afford to take more risk by investing in assets like mutual funds that are not secure, but if you are relying on this money to pay your way as you approach your retirement years is this really a good idea?

The short answer is a qualified maybe. Here's why.

For years we've been told by people who sell riskier investments that taking on a 'balanced approach' or just a little more risk means you'll get a higher return on your investments. They also tell us that when the market goes down it's a buying opportunity because the markets will recover and in time we'll get better over-all returns. The idea is that the longer you are invested, the higher the probability you will end up with above average returns.  In general this is good advice when you have a time horizon of many many years and/or you have invested excess money you won't need to depend on.

In his book Pensionize Your Nest Egg, Moshe Milevsky calls the five years before retirement and the five years after retirement the Retirement Risk Zone. During this time the most basic problem with risky investments is that there are no rate of return guarantees. Market corrections will occur at various random times before, during and after the risk zone years and these corrections will decrease the value of your nest egg. As you take money from your savings and your capital erodes at the same time, it becomes a very serious negative compounding problem that can spiral to zero values extremely quickly. 

In a very basic example of this, let's say you've just retired and have $100,000 in savings which then grow to $105,000. You then start withdrawing an expected $5,000 a year. The market corrects by 20% and your savings become worth $80,000. Do you stop taking income and wait for the market to recover? How long will that be for? Can you afford or even want to wait?  (Today the S&P/TSX60 is about at the same level it was in 2008!)

Though the future is unknown you know that the average return of the S&P/TSX60 over the past 10 years or so has been a little under 5%. If that rate of return continues your savings would grow to somewhere around $78,500 before you take out another $5,000. Leaving you with $73,500.  And so on until the next correction. I'm sure you can see that, unless you stop taking income for a period of time, it's unlikely your savings will ever catch up and you'll run out of money much faster than you'd care to worry about.

If you wish to avoid this kind of risk or this has already happened to you what are some of the more common solutions available?

Like with most things financial, unfortunately there are no one size fits all solutions because everyone's family, finances, current and future needs and wants are quite different from each other so proper solutions really depend on the outcomes you want and can afford. 

In general though, if your retirement income is too low for your needs, or you'd prefer a higher after-tax income, it's time to explore whether your nest egg should be rearranged somewhat to provide a higher after tax income stream and to do so without taking on any risk.  

In my practice, I find that it often makes sense to initially explore whether it makes sense to create a core income that's guaranteed for life. When it is appropriate, guaranteed income for life is really something that you can rely on and can effectively plan around.

Next...Financing your retirement living.

Jack Bergmans, Certified Financial Planner/Founding Partner
Bequest Insurance
Personal financial planning for life!™
jack@bequestinsurance.ca
Books:
Ripple Effect
Multiplying Generosity