Think of Your Money as a Business

By Evelyn Jacks

An interesting way to think about investing on an after-tax basis is to bring a strategy and process to the use of your money. Think of your money as a business, especially if your investable assets are in the high net worth range (over half a million dollars.

What is your vision for your capital? How would you like it to grow? How will you measure results over the longer term? This questions can help you develop a thinking process around the results you want. Following are some additional thoughts on developing a strategy and process for your investment activities.

By Evelyn Jacks

An interesting way to think about investing on an after-tax basis is to bring a strategy and process to the use of your money.  Think of your money as a business, especially if your investable assets are in the high net worth range (over half a million dollars).

If you did this, what would you say is your vision for your capital?  How would you like it to grow?  How will you measure results over the longer term?  These questions can help you develop a thinking process around the financial results you want.  Following are some additional thoughts on developing a strategy and process for your investment activities.  

Strategy.  As people age, the amount of money required to fund needs and wants generally grows—to a point.   In the early years, the emphasis is on basic survival; later on consumer wants; still later on self-actualization—that enviable stage when the client’s resources allows for the caring of others.  At the end of life, health vulnerability can come into play—for yourself or your loved ones.    

And so the purpose or use of your money, changes with different lifecycles.  Readiness is key when it comes to those uses of money, which we at The Knowledge Bureau have broken down into four stages: 

  1. Non-Discretionary Spending
    • The funding of basic needs–food, clothing, shelter
  2. Discretionary Spending and Saving
    •The satisfaction of consumer wants; and savings for emergencies
  3. Creation of Capital
    •The use of money as a building tool: to earn income and create wealth
  4. Management of Sustainable Wealth
    •The preservation of sustainable wealth from one lifecycle to the next

What stage are you in today?  How is this influencing your investing and spending activities?  What should you do be doing differently to prepare for Stage 4?

Remember:  It’s Your Money. Your Life.  Let us know what you think.

Next time:  Planning and measuring your wealth

Evelyn Jacks is President of The Knowledge Bureau, a national educational institute focused on excellence in financial education, and a member of the federal Task Force on Financial Literacy.  For information about self study courses and books visit www.knowledgebureau.com.

Your Good Thoughts on Pension Reform Needed

If you are interested in some good thoughts on Canadians and retirement, you should check out research by Jack M. Mintz, Research Director and Palmer Chair in Public Policy, School of Public Policy, The University of Calgary. Jack, who spoke at The Distinguished Advisor Conference in Monterey (see www.knowledgebureau.com/dac) released a research paper in December 2009 to the Department of Finance overviewing the adequacy of Canada’s Retirement Income System. Amongst many findings, you might find these as interesting as I did:

  • On amount of savings required by Canadians. Low-income Canadians need a higher level of replacement income to avoid poverty. Some middle- and high-income Canadians may need even less than 60 percent of their pre-retirement income to sustain an adequate standard of living (for example, the OECD suggests 50 percent for individuals with incomes over $90,000 in Canada, twice the median).

If you are interested in some good thoughts on Canadians and retirement, you should check out research by Jack M. Mintz, Research Director and Palmer Chair in Public Policy, School of Public Policy, The University of Calgary.  Jack, who spoke at The Distinguished Advisor Conference in Monterey (see www.knowledgebureau.com/dac)  released a research paper in December 2009 to the Department of Finance overviewing the adequacy of Canada’s Retirement Income System. Amongst many findings, you might find these as interesting as I did:

  • On amount of savings required by Canadians. Low-income Canadians need a higher level of replacement income to avoid poverty. Some middle- and high-income Canadians may need even less than 60 percent of their pre-retirement income to sustain an adequate standard of living (for example, the OECD suggests 50 percent for individuals with incomes over $90,000 in Canada, twice the median).
  • On poverty and the adequacy of CPP/OAS/GIS. Canada has one of the lowest poverty rates among elders in the OECD countries, and that our public pension system, that is, OAS/GIS, CPP/QPP and provincial top-up programs are ensuring that low-income Canadians are able to achieve high income replacement rates, even exceeding 100 percent. Due to high replacement rates from public pensions, those earning $20,000 achieve a replacement rate of about 90 percent, even with low levels of RPP/RRSP savings. However, low income earners will require more money to avoid poverty in the future.
  • On Participation in Registered Pension Plans (RPP) vs. no RPP . Contrary to the impression that individuals without private pensions are not saving enough in RRSPs, some very recent evidence has shown that Canadians with RPPs or employer-sponsored plans have somewhat less retirement income than those without RPPs.  How can this be? It seems that non-RPP holders tend to have other assets to support their retirement.  In addition, they tend to be more likely work after the age of 65.  It’s the RPP holders, therefore need more help in saving to expand wealth to draw on in retirement.
  • On the Role of Financial Advice. This should be somewht worrisome to financial advisors and their clients, too.  The report suggests that retirement income adequacy depends not only on your ability to save money, but also on the investment performance of retirement funds.  Of course that makes sense.  What is new from a research point of view, is that Canadians may not be well served in the retirement marketplace by their financial advisors. The research suggests that active management does not provide returns on a consistent basis any better than passive management–and this appears to be true for both pension plans and mutual funds. Once taking into account active management costs, passive managed assets would provide superior returns, according to the report.

So, here are three thoughts for you:  Why not consider a broad collaboration amongst all stakeholders to the retirement income adequacy issue ? Over the next five years, for example, government could slowly increase the contributions of the CPP, which helps employed and self employed people, but not by breaking the backs of small business contributors.

We could then consider eliminating restrictions of age and income for RRSP and TFSA purposes, so that tax assistance is available to all people—even those without required contributory earnings or earned income. This would allow the savers to contribute as much as they want towards their retirement in peak earning years, in whatever vehicle they want, leveraging any tax savings from an RRSP contribution to increase their CPP, TFSA or other non-registered savings rate levels?

Finally, let’s talk about what changes are needed within the financial services industry to reduce fees to retirement savings investors.  Perhaps regulation could streamlined?  What other costs could be cut to the financial services business to make financial products and advice more affordable?

What do you think?  Remember, it’s Your Money. Your Life.

Evelyn Jacks is President of The Knowledge Bureau, a national educational institute focused on excellence in financial education, and a member of the federal Task Force on Financial Literacy.  For information about self study courses and books visit www.knowledgebureau.com

How does the CPP Compare to Other Investments?

The issue is: mandatory or voluntary? Do required contributions to a retirement plan really make more sense than shopping around for the right investment–both at contribution and withdrawal time?

Let’s take a look at the affordability of mandatory contributions to the CPP, from a tax and survivor viewpoint. It’s been my experience that many people don’t understand the current options well. For example, did you know:

  • CPP retirement benefits: income can be split during your lifetime with an assignment to a spouse to save tax dollars at age 60. Many people miss out on after-tax cash flow because they are unaware of this provision.

The issue is:  mandatory or voluntary?  Do required contributions to a retirement plan really make more sense than shopping around for the right investment–both at contribution and withdrawal time?

Let’s take a look at the affordability of mandatory contributions to the CPP,  from a tax and survivor viewpoint.  It’s been my experience that many people don’t understand the current options well.  For example, did you know: 

  • CPP retirement benefits:  income can be split during your lifetime with an assignment to a spouse to save tax dollars at age 60.  Many people miss out on after-tax cash flow because they are unaware of this provision.
  • CPP disability benefits:  Most people don’t know the income qualifies for RRSP contribution purposes, which can further enhance retirement income, and that taxes on disability benefits received can be saved with CRA’s lump sum averaging
  • CPP death benefit:  This is a flat amount of $2500, never indexed;  which may not be a great return on investment  for those who don’t live long enough to collect CPP retirement, disability or survivor benefits.  As a minimum this death benefit should be indexed and “leave a representative legacy”, more accurately reflective of actual contributions.
  • CPP survivor benefits:   If you are single, there is nothing left to your estate once you die other than the unindexed lump sum death benefit of $2500.  The maximum monthly survivor benefit available to the surviving spouse or common law spouse in 2010 is (under 65)  $516.57  and $560.50 for 65 and over ; however, see the important note below. 

Note:  that at age 65 or greater 60% of the contributor’s retirement pension is available if the surviving spouse is not receiving other CPP benefits.  If they are, the survivor benefit is combined with your retirement benefitThe most that can be paid is the maximum retirement pension for one person.  So if you both worked at the maximum contributory earnings ($47,200 for 2010) the survivor will not get anything more for the spouse’s contribution to the plan!

What do you think about this?  Remember, it’s Your Money. Your Life.

Next time: Your Good Thoughts Needed on Pension Reform.

Evelyn Jacks is President of The Knowledge Bureau, a national educational institute focused on excellence in financial education, and a member of the federal Task Force on Financial Literacy.  For information about self study courses and books visit www.knowledgebureau.com

CPP Reform: Minister Flaherty Right to Tread Carefully

In last month’s Knowledge Bureau Poll, tax and financial advisors from across Canada were split on their opinion on whether or not the Canada Pension Plan (CPP) premiums should be increased to help more Canadians who are employed or self employed, save for retirement.

A full 52% of respondents thought that this was a bad idea, but 48% of the voters thought CPP premium levels should be increased to improve retirement prospects for Canadians. The poll results are particularly enlightening in view of the national conversation on the subject of retirement adequacy under review by the Department of Finance through the Consultations on Canada’s Retirement System and the Task Force on Financial Literacy.

In last month’s Knowledge Bureau Poll, tax and financial advisors from across Canada were split on their opinion on whether or not the Canada Pension Plan (CPP) premiums should be increased to help more Canadians who are employed or self employed, save for retirement. 

A full 52% of respondents thought that this was a bad idea, but 48% of the voters thought CPP premium levels should be increased to improve retirement prospects for Canadians. The poll results are particularly enlightening in view of the national conversation on the subject of retirement adequacy under review by the Department of Finance through the Consultations on Canada’s Retirement System and the Task Force on Financial Literacy

Finance Minister Flaherty is right to tread slowly on the issue of hiking premiums, given the economic times.   Here are some additional thoughts for the debate; I would welcome your thoughts:

  1. Increasing CPP Premiums for Employees:  The CPP is a contributory plan so the questions to be considered by ordinary Canadians should include:  can I afford to give up more of my gross earnings on CPP premiums?  If so, how much?   Are these mandatory deductions from my pay, together with over-withholding of income taxes leading to my end-of-year refund, one of the reasons why saving for retirement is difficult and inadequate for me?   
  2. Increasing CPP Premiums to Small Business:  CPP increases will also be borne by small business, who may not have the capacity for this type of increased expense in volatile economic times.  Some would say, such increased source deductions are “job killers.”  Are you a small business owner?  Do you think you can afford to contribute more to the CPP for yourself and your employees? 
  3. Using the Tax Refund, Smartly.   What do you think of this idea:  Should governments allow additional voluntary contributions to the CPP–at the contributor’s option–including an election to transfer part or all of the tax refund to the CPP?  The average tax refund is close to $1500 these days.  A direct transfer of this amount to the CPP may go a long way towards funding retirements without cutting any further into the bi-weekly “milk budget.”

Your thoughts count. It’s Your Money.  Your Life.

Next Time:  How Does CPP Compare to Other  Investments?

Evelyn Jacks is President of The Knowledge Bureau, a national educational institute focused on excellence in financial education, and a member of the federal Task Force on Financial Literacy.  For information about self study courses and books visit www.knowledgebureau.com

Making Financial Decisions: It pays to have a long term view (Part 2)

In my blog last week, my message to you was “ In the end, it’s what you keep that matters.”

So you can stop thinking emotionally about your investing activities, today. Instead, from a “Real Wealth Management” perspective we want to anticipate how much money is available now and in the future when we need or want it. This requires three skill sets:

  1. Always Include a Tax Filter. To understand the amount of cash flow that is available, we must be able to measure income and capital on an after-tax basis at all times. Measuring wealth “before tax” can over-exaggerate the true amount of capacity one may have to use money when and how we need it.

In my blog last week, my message to you was “ In the end, it’s what you keep that matters.”

So you can stop thinking emotionally about your investing activities, today.   Instead, from a “Real Wealth Management” perspective we want to anticipate how much money is available now and in the future when we need or want it. This requires three skill sets: 

  1. Always Include a Tax Filter.   To understand the amount of cash flow that is available, we must be able to measure income and capital on an after-tax basis at all times.  Measuring wealth “before tax” can over-exaggerate the true amount of capacity one may have to use money when and how we need it. 
  2. Measure Active and Passive Income.    If one of the primary purposes of wealth is to have enough financial resources to replace your actively earned income from employment or self-employment, then we must have a plan to build income sources that stem from invested capital.  Your money is your business, and therefore needs to be managed with strategy and accountable purpose.  
  3. Liquidity and Purchasing Power.    Will cash flow be available in the future when needed?  What will it be worth?  You may need to focus more on this in making investing decisions today, if you think the costs of fees, interest, taxes and inflation may rise.

It can certainly help you greatly to be assisted by a professional services community that follows an inter-advisory, client-centred process for managing your family’s wealth.

But in the end, it’s your money.    You’re the boss of it.  Thinking about the flow of your money over the long term, and on an inter-generational basis, can help you think about current market volatility over several economic cycles, rather than just the current one.  Your decision-making will likely be different through such a lens.

NEXT TIME:  USING STRATEGY AND PROCESS FOR THE USE OF YOUR MONEY

Evelyn Jacks is President of The Knowledge Bureau, a national educational institute focused on excellence in financial education, and a member of the federal Task Force on Financial Literacy.  For information about self study courses and books visit www.knowledgebureau.com

Making Financial Decisions: It pays to have a long term view

Does your relationship to your money define you? It’s an important question, because your emotional attachment to money can significantly influence your investing results.

Money of course is neutral—it has no feelings and it doesn’t care*. When you identify your emotional connection to your money; and learn to deal with it objectively, you can move from a “present orientation” in your thinking towards a “future vision” for accumulating more capital (saving rather than spending), taking better care of it (stewardship) and sharing it with family members (reciprocity).

Does your relationship to your money define you?  It’s an important question, because your emotional attachment to money can significantly influence your investing results.

Money of course is neutral—it has no feelings and it doesn’t care*.  When you identify  your emotional connection to your money; and learn to deal with it objectively, you can move from a “present orientation” in your thinking towards a “future vision” for accumulating more capital (saving rather than spending), taking better care of it (stewardship) and sharing it with family members (reciprocity).

This is important because you may think you want to get rich more quickly these days, given all the market volatility.  In reality, it’s important to keep your eye on the ball. 

Most people simply want to be affluent.  I like to define affluence as having three main outcomes: 

  • Independence, resulting from the use of your financial skills
  • Peace of mind, resulting from use of your financial knowledge
  • Confident and purposeful decision-making, behavior which enables you to live and retire in dignity, with enough resources to cover both needs and wants. 

 Most important, thinking about affluence over time, rather than just for today, requires an afer-tax focus.  In the end, it’s what you keep that matters.  

*This quote from “Money and Emotion”, which is the subject of Ron Thiessen’s session at the Distinguished Advisor Conference November 14-17

Evelyn Jacks is President of The Knowledge Bureau, a national educational institute focused on excellence in financial education, and a member of the federal Task Force on Financial Literacy.  For information about self study courses and books visit www.knowledgebureau.com

2010 Federal Budget

About Evelyn Jacks

The March 4, 2010 Federal Budget was a cautious document in a post-financial crisis environment, delivering no additional tax increases for most Canadians, and some interesting tax changes. In particular, families, students and investors are affected positively, while executives and business owners have seen the last of tax loopholes surrounding stock option benefits. Are you affected? Check out our Budget 2010 tax tips below.

Medical Expenses

More and more people are having cosmetic surgery and in some cases the costs will be tax deductible. A good example is reconstructive surgery required after an accident or an illness, like cancer. However, for expenses incurred after March 4, 2010, the cost of medical or dental services, or any related expenses, provided for purely cosmetic purposes, will not be deductible. This includes the cost of botox, liposuction, hair replacement or teeth whitening.

About Evelyn Jacks

The March 4, 2010 Federal Budget was a cautious document in a post-financial crisis environment, delivering no additional tax increases for most Canadians, and some interesting tax changes. In particular, families, students and investors are affected positively, while executives and business owners have seen the last of tax loopholes surrounding stock option benefits. Are you affected? Check out our Budget 2010 tax tips below.

Medical Expenses

More and more people are having cosmetic surgery and in some cases the costs will be tax deductible. A good example is reconstructive surgery required after an accident or an illness, like cancer. However, for expenses incurred after March 4, 2010, the cost of medical or dental services, or any related expenses, provided for purely cosmetic purposes, will not be deductible. This includes the cost of botox, liposuction, hair replacement or teeth whitening.

Tax Tip: Medical expenses are often under-claimed. From glasses and dental work to hearing aids and their batteries, a host of medical expenses can be claimed in the best 12 month period ending in the tax year but is subject to a 3% net income limitation or $2,011 (whichever amount is less) for 2009.

Tax Changes for Single Parents.

If you are sharing custody of your children with an ex-spouse, or receiving benefits as a single parent you’ll be interested in two new provisions:

  • Joint Custody of Children: Effective for payments received after June 2011, where a child lives more or less equally with two individuals who live separately, each of the individuals will be eligible to receive 50% of the amount of any Canada Child Tax Benefit, Universal Child Care Benefit (UCCB) and GST Credit received in respect of the child.
  • Tax Tip: Each parent should invest these benefits in the name of the child to build up a great education fund, but also to avoid tax on resulting investment earnings.
  • UCCB for Single Parents: Beginning in 2010, where the UCCB is received by a single parent, the parent may elect to include it either in their own income or in the income of the child who was claimed as an “eligible dependant”; that is one who qualifies for an equivalent-to-spouse tax credit. Where that child has little of no other income, this election will eliminate the tax on the UCCB. In addition, if the child invests the UCCB, resulting investment earnings are taxed in the hands of the child.
  • Tax Tip: Be sure to invest the tax savings the parent earns from this reporting change; possibly in an RRSP to leverage the tax results. Child benefits should be invested in a separate account in the hands of the child.