Financial Advisors

Canadian Financial Summit 2020 Speakers

Over 35+ Canadian personal finance experts are ready to help you become your own advisor.

Financial advisory is one of the topics we touch most here on the Canadian Financial Summit. As markets become more turbulent and complicated, and risk rises, more Canadians are considering shifting from a pure DIY strategy to some version of a hybrid strategy that includes the help of a fee-only financial advisor.

HERE’S A SNEAK PEEK AT WHAT YOU’LL SEE WITH A FREE TICKET TO THE CANADIAN FINANCIAL SUMMIT

Some of the most popular questions we get from people are

Do I need a financial planner? (Even if I know my stuff around investments?)

 

How do I choose a financial advisor? And does it necessarily need to be someone who is a Certified Financial Planner (CFP)? 

 

How much should I pay for financial planning? Is the help of a financial advisor worth it?

These questions, and more, have been covered extensively at this year’s Canadian Financial Summit. The Canadian Financial Summit is a FREE annual, virtual, summit intended to help attendees get practical, usable, information in plain language by Canada’s biggest experts.

Speakers 2021
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YOUR ALL-STAR FINANCIAL ADVISOR SPEAKERS
Jason Heath, CFP and chief advisor of one of Canada’s top rated financial advisory firms with 96% positive feedback on Google Reviews, talks about “Common Financial Planning Mistakes and Uncommon Advice.” From investing mistakes to maximizing RRSPs, CPP, and OAS, get a comprehensive understanding of financial planning.
JASON’S SESSION CANADIAN FINANCIAL SUMMIT 2023

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Andrew Dobson

High Net Worth and Investment Planning Specialist Andrew has been providing financial advice for individuals, families, high net worth, ultra high-worth clients, and corporations in his former role as a Senior Financial Planner for BDO Canada and now as a fee-only, advice-only financial planner (CFP) at Objective Financial Planners. He has extensive experience in banking, lending, investment sales, and advanced financial planning.  Andrew has an Honours Bachelor’s Degree from the University of Toronto and his industry related education includes the Certified Financial Planner (CFP), Personal Financial Planner (PFP), Chartered Investment Manager (CIM), and Fellow of Canadian Securities Institute (FCSI) designations. He is currently working toward his Trust and Estate Practitioner (TEP) designation. Andrew has volunteered as an item developer and peer reviewer for various courses offered by the Canadian Securities Institute.

Nancy Grouni

Corporate Financial Planning Specialist Nancy had a 20-year career as an investment and insurance advisor with two large wealth management firms, building and presenting client financial plans and investment portfolio reviews, before becoming a fee-only financial planner. She specializes in financial, tax, and estate planning for incorporated business owners and professionals, sole proprietors who are considering incorporation, and retirees with investment holding companies.  As a Certified Financial Planner (CFP), Nancy has been interviewed, and contributed to, a variety of publications and financial websites such as the Globe & Mail, Yahoo! Canada Finance, and the Financial Post.

Video Transcript

Hello everybody

It is great to be back here at the Canadian Financial Summit for another year. Today I’m gonna be talking about, , conventional advice, challenging that advice, particularly with a focus on investment and retirement planning

But we’re gonna talk about personal finance in general. Um, just a little bit of background. Uh, I guess, , for those who don’t know me, my name is Jason Heath. I’m an advice only financial planner

Uh, used to refer to myself as a fee only financial planner, but I find now there’s many people that are fee only, fee-based

It’s kind of hard to distinguish what’s what advice only meaning that I don’t sell any products, don’t sell mutual funds, don’t sell insurance. Um, I, , and my company, , we just sell our time with a focus on personal finance and in particular, retirement planning. I’ve been doing this for quite some time

I remember when I first got started, I was, , in my twenties and I was very, , concerned, you know, who is going to listen to this young guy talk about money? Um, I would always wear a, a jacket. I would always wear a, a tie. I grew a beard

I wanted to look older. And 20 years later, I’ve just, , become older, , as we are all prone to do. Um, I do a lot of writing out there in the media in particular for the financial post, for Money Sense and for Canadian Money Saver. Um, I studied economics at Europe University, thankfully got into, , I guess personal economics, personal finance, where I can mix and match, , money and the, the personal side of sort of, you know, helping people through money decisions. I’m a certified financial planner

It is the, , primary, , financial planning designation that is recognized, , within Canada and around the world

And I run a company in Markham, Ontario called Objective Financial Partners. Uh, but we work with clients all over Canada and all around the world

Um, I wanna start off talking a little bit about investing and investments

And maybe just as a, a starting point. Um, I think this is kind of, , an interesting, , , sense of, you know, expectations that people have, , about the, , future

And I think it’s really important also to take a look to the, to the past, , to understand, you know, what’s a reasonable rate of return expectation going forward. And this was a, a recent survey that was done by Natixis in the us

They asked investors all over the world, Canada, , in the, , red rectangle here, you know, what are your long-term return expectations? And the average Canadian investor, , said that their long-term return expectations for their investment portfolio is about 10.6% on average

They asked the same question of financial professionals, you know, financial advisors, financial planners, investment advisors, pension fund managers, you know, what’s a reasonable long-term return expectation? You can see, , their answer was 6.5%

That represents a 63% expectations gap

But investors are expecting a massive excess return beyond what financial professionals think they should be expecting. Uh, the crazy thing about this particular, , survey was they asked retirees the same question, retirees had an even higher investment return, , expectation 11.1%, 70% gap relative to what the professionals think they should expect. Um, we started with the future. If we looked the past, you know, what are historic rates of return? Um, as of December 31st, 2022, , Canadian and US stocks. You can see here the 10, 20 and 30 year investment returns. Uh, these are annualized returns, reinvested dividends, , does not take into account any investment fees. Um, but over 30 years, , and even over 20 years, you can see sort of eight point a half to 10% is what stock markets have, , have given us. The Toronto Stock Exchange, , representing Canadian stocks, s and p 500 us, , stocks. Uh, the anomaly is this 10 year return for the s and p 516% in Canadian dollars. That’s an annualized rate of return. Um, even despite, , a poor year in 2022. I think it’s gonna be hard, , to replicate that over the next 10 years. But historically, you know, eight, nine, even 10% rates of return for stocks. The thing is, when investors invest their money, most of ’em are in a hundred percent in stocks

Most of ’em have investment fees that they pay. Um, you know, that’s a relatively high rate of return expectation. My governing body, , FP Canada suggests 6.5% for US stocks, 6.2% when we’re running long-term financial projections. So, , again, I think it’s just important for people to have a reasonable expectation of profit going forward into the future. But, , I thought this was kind of, , interesting, came across it, , recently. So, sticking, , on the theme of investments, I’m gonna get controversial here

I’m gonna talk about dividends, , dividends, just that everyone understands what they are there. Um, when the after tax profit that a company earns is paid out to a shareholder, , the board of directors is who decides if and when there’s going to be a dividend paid

Most big publicly traded companies that are fairly established pay quarterly dividends, and the board of directors, , you know, typically they try to increase the dollar amount of those dividends assuming the company is profitable. Um, but effectively what it is, is when a company is unable to reinvest the money into the business, they don’t have an acquisition, they don’t have, , you know, something they can, , buy or, or do with the money within the company. They pay it out to shareholders

’cause they might as well

That’s what tends to happen with businesses once they get to a certain point by comparison, you know, you tend to have companies that are in the growth phase reinvesting or needing to keep that cash in order to, to reinvest. But, you know, $1 retained and, and reinvested versus $1 distributed in dividends. You know, you can have two companies that are equally profitable just because one company pays it out as a dividend and, and one company keeps it and tries to reinvest in growing the value of that company. The company with the higher dividend, paying out more to investors isn’t a better company. It’s not more profitable

It’s not necessarily likely to, to generate a higher investment return over the long run

So I think it’s just important to to understand, you know, dividends aren’t, aren’t magical. They’re not free money. It’s just, , money that’s being paid out to shareholders that’s not being reinvested in the business. Uh, you tend to see certain stocks in certain sectors, you know, banks in, in Canada, telecom companies, utility companies, , that you know, can’t, , reinvest, , all of their profit into growing

They may be limited in terms of their ability to grow, and, , that’s why they tend to pay out higher dividends compared to other sort of growth type companies. Uh, I think it’s important to note that banks, telecoms, utilities, just as an example, these sectors make up less than a quarter of the s and p 500

So for a Canadian investor, if they’re really, really focused on, on dividend investing, they may end up with a, a very versified portfolio compared to what you see if you look south of the border. And, , that can be detrimental as well

Uh, the other interesting thing about dividends, when you take a look, , to the, , various tax rates, , you know, Ontario is the biggest province in the, , in the country

I know we’ve got viewers from all across, , Canada. Uh, but the, the tax rates tend to be pretty similar if you look at the top tax rates

And it doesn’t matter whether you, you go with the top tax rate or sort of a more moderate tax rate, the story tends to be pretty similar

Interest in foreign dividends are taxed at a fairly high, a fairly high rate of tax. Canadian dividends get, , preferential treatment, and that’s why some investors in taxable investment accounts will focus on Canadian dividends. But capital gains actually have the best, , outcome. You know, investing in stocks that pay lower dividends and have more of their return come from capital growth and appreciation. Effectively, you end up with a, a, a more tax efficient investment portfolio

And the other thing with capital gains is you can, , to a certain extent choose when you trigger those capital gains

So for an investor with a taxable portfolio, I might argue that, , there’s a benefit to having a bias towards capital gains. Um, anyways, the whole point is dividends. They’re not magical. They’re good, they’re not great. Um, you know, I wouldn’t go out of my way to build a portfolio of dividend stocks if you happen to end up with some great, I think a diversified portfolio, , both by sector and geographically is way more important

Um, , I think this is kind of cool. If you look back, , this shows rolling periods, , one year rolling periods and five year rolling periods. Going back to 1935

Um, US stocks in blue Canadian stocks in red, a balanced portfolio in green bonds. In yellow, you can see the different, , one year returns, the highest one year returns here up top, and the worst or the lowest, , one year losses down to the bottom. And, , as you would expect, you know, if you have a balanced portfolio over a one year period, you would tend to have, , lower, , highs and, and not as bad lows or, or losses. Uh, diversification and, and holding bonds in your portfolio tends to make things, , a little bit, , less volatile. Um, bonds, you can see here, the worst one year return minus 14%, I think that was probably in 2022

If not, we were, , pretty close to it. Um, if you go out over a five year period, , the range of returns tends to be much smaller. Uh, these are annualized rate of returns for what it’s worth. So US stocks, the best five year annualized rate of return was 31% annualized. Um, I think one of the key lessons here, you can lose money on bonds over a one year, , period. Um, you know, you can lose money over a a five year period. A, , stock portfolio, that’s all US stocks, all Canadian stocks, certainly you can lose money as well, and that has happened historically. Um, but a balanced portfolio. Interestingly, the worst five year annualized rate of return for a balanced portfolio over the last 87 or 88 years, , was 0.9%, but 1% annualized

So if you have a, a five year period that you’re investing money for, , balanced portfolio is very unlikely to have a a negative rate of return

If you’re investing for, for one year. You know, certainly if you’re in stocks, you can have a, a great return, you can have a poor return, even in bonds, you can have a, a negative rate of returns. You’ve gotta be careful. Um, this is kind of interesting down to the bottom

This is the percentage of periods with positive rates of return. Uh, about 79% of the time US stocks are up about 74% of the time. Canadian stocks are up over a one year period, 86% for a balanced portfolio

But you can see as you go out five years, stocks, bonds, balanced portfolios, you know, a long-term investor, , tends to make money

And, , to the extent you can have exposure to stocks over the long run, you’re more likely to have, , , a larger, , return from your investment portfolio. So, , real estate, you know, this is very timely. Uh, depending where you live in the province, there are people who have, , done very well in real estate, those who have done, , less well

Um, if you look back in the us, , real estate, , information, , for residential prices goes all the way back to 1890

And if you, , took a hundred dollars of residential real estate back in 1890, and you looked at how much that a hundred dollars has grown in real terms, what was the real home price index? And what that means is if you take away inflation, how much has that a hundred dollars grown? So between 1890, that a hundred dollars has only grown to about $111. Effectively, real estate in the US residential real estate has, has kept pace with inflation and maybe increased slightly more

That’s kind of what you would expect. ’cause cost of living incomes, you use your income to buy real estate. So, you know, in a, a normal real estate environment, you’d expect, , cost of living increases and income increases to, , line up with, with home price increases. Um, on the right hand side of, , the two charts here, I think this is kind of interesting

If you look at the United States, , going back to 1975, you know, what has been the increase in, , home prices in black incomes in blue, they’ve gone more or less lockstep. I mean, things got a little bit, , out of whack here, , in 2007, 2008, sort of leading up to the great financial crisis in the us. Um, home prices dipped, , pretty significantly there thereafter

But over the last, you know, almost 40 years home prices and incomes in the us , have also moved more or less lockstep on the right hand side here, Canada, you can see in blue incomes have gone up at a pretty similar pace to the United States, but what has differed over the last 20 years in particular has been home prices

They’re just completely divorced from, , income growth for the last 20 years. Um, and, you know, a lot of people point to population growth and immigration as, as being a big contributor to, , home price increases in Canada

And I mean, there, there are some, , merits to, to, , , you know, population growth in certain centers in particular having an impact

But you’ll see in gray population growth in Canada compared to the US has been pretty similar, home prices, income population growth between the two countries

The only outlier is home prices in Canada over the last 20 years

And I just point this out to, to say, you know, at some point, you know, most things reverts to the mean, and what is it gonna be? Incomes rising significantly in Canada. Is it gonna be home prices declining? Is it gonna be a period of time where home prices go sideways while incomes catch up? I don’t know. Um, but I’m definitely having a lot of conversations these days with people about high interest rates and, , the worries about the real estate markets

So just to point out that, you know, real estate has performed very well over the last 20 years, but that doesn’t necessarily mean it well over the next 20. Um, the chart on the left here is kind of cool

What this looks at is the price to rent ratio over the last, you know, 23 years. And, , a number of, , countries you can see. Um, price to rent, maybe just to explain that actually. So if you take the price of a home, an average home, you divide it by, , the, the rental income that that home could earn. That’s the price to rent ratio

So price divided by rent

And if price and rent were increasing at the same pace, you would expect these lines here in the chart to go sideways. Um, in Japan, you can see actually the price to rent ratio went down

In other words, prices went down by more, , than rents. Rents actually stayed steady. Prices went down, , in Japan. And, you know, 23 years later, the price to rent ratio was pretty similar, similar to what it was in 2000. Um, a number of other countries the us, Germany, UK prices have risen at a higher rate than rents. Um, New Zealand and Canada are way up here

You can see prices have gone up really significantly relative to rents

And what that suggests is that a rental property may not be as, , lucrative an investment today as it was 20 years ago

Prices are relatively high, rents are relatively low. Um, and I think Canadian real estate investors, you can’t paint every single property in every single city with the same brush

But, , Canadian real estate investors need to be careful because rents are relatively low, , compared to prices

And even though rents have gone up significantly and caused a lot of problems, , in, you know, with affordable rents, , rents relative to the cost of purchasing a home have, , have not really kept pace

So just wanna warn real estate investors to, to be careful, , about purchasing residential real estate in Canada. Uh, anyone who is treating their home as an investment, I’d be more inclined to treat it as a place to live and, , a place that, you know, might keep pace with the, the cost of living, , going forward. But, , I’d be careful about speculating that real estate price growth, we’ve seen over the last 20 years is gonna happen over the next 20. And, , you know, be a big, , sort of contributor to your financial wealth. May maybe it, it, it might, it’s, you know, hard to predict these things, but I would be, , cautious generally. So RSPs, R S P contributions, , I, I think it’s important if your income is below $50,000, I think twice about contributing to an R S P. So this is your taxable, , income. If you make an R S P contribution, you might save tax. Um, but in the long run, it might hurt you

You might save less tax today than you will pay back taking those R S P withdrawals in the future. So, , just to point out that, you know, I, I think somebody needs to have an income significantly above $50,000 to really justify R S P contributions

One exception might be if you’ve got a company matching contribution

So if your employer will match your contributions to an R S P i’d, I’d take that free money all day long. Um, as long as you don’t have, you know, high interest rate debtor or something else really extraordinary

Um, if you put $10,000 into an R S P and then put your tax refund into A T F SS A, most people don’t do that part. But if you did, , and then you compared it to putting $10,000 into A A T F Ss a 10 years down the road, if you were to withdraw the R S P pay the income tax, and if your tax bracket was the same, you would have the same combined after tax R S P and T F SS A as if you just put the same $10,000 into A T F S A in the first place. So really, the the thing that can make you come out ahead and, you know, support R S P contributions over T F S A contributions would be if you’re in a high tax bracket now and a low tax bracket later

So if somebody’s got, you know, well over $50,000 of taxable income, they’re putting money into their R SS P today, there’s a much higher likelihood in the future, they’ll be able to pull money outta their R S P to lower tax rate and have that, , high, , tax today, low tax later scenario that, , can make you better off. If not, if your income’s below $50,000, I think it’d be more inclined to focus on T F S A and and non-registered investing. Um, there’s a new F H S A account, , first home savings account available. Uh, I think it’s a great option

Interestingly, parents can gift money for a contribution

If you’ve got an 18 year old child, you can give them money. There’s no, , tax issues with, , doing that. Uh, contributions to an F H S A account are tax deductible, and you don’t need to claim the deduction in the year that you make the contribution. You can actually carry it forward to a future year

So you could have, , somebody that’s at university, they’re not, , paying much tax or any tax they can contribute to an F H S A and save that tax deduction for the future when they’re working

Fhsa have tax deferred growth, you put money in there, it grows tax deferred, and you can take a tax free withdrawal if you use it within 15 years to buy, , an eligible, , home that you’re going to live in

You can put in up to $8,000 per year up to $40,000, , in total. And whatever that grows to over up to 15 years, it could be, you know, hundreds of thousands of dollars potentially you can withdraw to use for a first, , home purchase. Um, this isn’t much a, a, a novel concept. Um, you know, some of the other things that, that we might, , touch on today

But I did wanna speak a little bit about rifts and, , liras and lifts, because I find there’s a lot of misunderstanding about how these accounts work. So when you contribute to an R S P, it grows over time and it can’t stay tax deferred forever. Eventually, somebody with an R R S P needs to convert their account to a RIF or registered retirement income fund, and there’s withdrawals that you need to take by no later than age 72. Um, if you have a Lira account, a LIRA account is a locked in retirement account, it generally comes from a pension plan. Uh, a lira is an R S P, but just locked in with restrictions on how much you can take out. There’s maximum withdrawals that you can take every year, but a lira gets converted into a L when you need withdrawals or when you want to take withdrawals. A life income fund

So an R S P is to Arif what a lira is to a L account. Um, I’m a big fan of income smoothing. If you retire at a relatively young age, taking withdrawals in your fifties and sixties, I, I feel , especially if you’re in a relatively low tax bracket earlier in retirement, you know, using up those low tax brackets can be advantageous, can help you keep your T F S A account, , maxed out or minimized the withdrawals that you’re taking from your T F SS A

And something that, , I, I think is a, a legit consideration for, , a couple. For example, if you have, , one spouse who dies at a relatively young age, the survivor is often in a, , much higher tax bracket because you’ve got all income and retirement on one tax return instead of two and RSPs and, and LIS and Lyfts, these tax sheltered accounts the year that you die on the second death

Or if you’re single and you don’t have a spouse to leave your account too, , tax payable can be over 50%

So I think there’s an advantage in retirement to trying to draw down these tax sheltered accounts and, , , not paying too much tax on either the first or second death

Um, pension income. Splitting pension income, and I think this is important once somebody is age 65, if they take an R R S P withdrawal, , it goes on their tax return. And that’s said, if they convert their R S P to a RIF or their lira to a lift, those withdrawals are considered eligible pension income and they’re eligible for pension income Splitting

Pension income splitting is where you can move up to 50% of your withdrawals over onto your spouse’s tax return

When you’re preparing your tax filing

It gives you the opportunity to do some retroactive tax planning, which can minimize your combined income tax. Um, at age 65 R and lift withdrawals also qualify for the pension income amount. The pension income amount is, , a withdrawal of, depends on the province, but generally $2,000 that you can take out tax free or close to it from a RIF or l if you don’t have any other eligible pension income

So if you’ve got a defined benefit pension plan that pays you a monthly payments, that will already give you this $2,000 tax free amount. Um, but for people who just have RSPs and LS converting those accounts, if it makes sense at age 65, could give them $2,000 that can come out tax free. Um, and annuities, , you know, getting more popular these days, but you can use money in your RSPs and is to buy an annuity, which is where you take a lump sum of money, take it to an insurance company, and based on your life expectancy, they’ll make a monthly payment to you for the rest of your life. Um, it’s a real simple way to basically buy a pension with your registered retirement savings. And, , again, I think higher interest rates in particular, which causes the monthly annuity payments to be higher, , will make annuities more popular on a go forward basis

So will C P P be there when you need it? You know, I hear, , a lot of misinformation about CCP C P P, , Canada Pension Plan, , the social security in the us, which is sort of the equivalent of the Canadian C P P, , they recently warned that without significant intervention over the next 10 years or , , they may need to decrease benefits by 20%

And I think some of those concerns about Social security translate, , here to Canada. And just that everyone’s clear, C P P, the government doesn’t control C P P, they don’t have access to C P P. Uh, it’s managed, , the, the, the money that that is used to pay those pensions, it’s managed by the Canada Pension Plan Investment Board, the C P P ib

Uh, and every three years, the chief actuary tries to figure out based on population, immigration, life expectancies, contribution rates, all of these various things, you know, is the C P P gonna be around

And the most recent, , tri-annual, , report, , suggested the C P P should be viable for the next 75 years

So I think C P P is something you can count on being there

It’s not going anywhere. There’s even enhancements that are, , have been, , introduced over the last, , , four years since 2019, , with an additional enhancement coming in 2024

So, you know, one thing that, that I find with C P P and I talk about this a lot, , you know, it’s important to understand how the pension works

You can start it as early as age 60. You can defer it as late as age 70

If you’re entitled to the maximum pension, , in 2023, under 65 this year, you would receive about $15,700

The average C P P recipient only gets about $9,700, mainly because they don’t have the 39 years of maximum contributions that are required either because they, you know, were below the, the contribution limit, or they had years where they, they weren’t working or they were going to school retire

Meant before 65 is, is, you know, potentially, , something that can impact your, your 39 years of maximum contributions

And if you start your C P P early, there’s a 7.2% annual discount in your pension

If you take it before age 65, if you defer it after age 65, there’s an 8.4% annual increase in the, , pension calculation. And if you look at when the, you know, -called break even is if you added up all the cumulative payments that you would receive if you started at age 60 versus age 70. Um, you know, the break even is, is typically, , between age 75 and and 80. And what I mean by that, if you looked at starting at age 60 versus 61, 61 versus 62, and you looked at all the various break even ages where your total payments would, would cross over and you’d benefit if you lived past that age, that break even occurs between 75 and 80. However, if somebody starts C P P at age 60, they get the money in their hands earlier, they can invest the money or they can leave other money invested

And if we were to use a 3% discount rate, you know, effectively assuming that somebody could invest the money at a 3% after tax rate of return, you know, the break even gets pushed back to 77 to age 82, you’d have to live past age 82, for example, to, , to be better off after, , adjusting for, you know, the, the benefit of receiving some of that money earlier

A lot of people would say 3% problem, that’s a low rate of return, even at a 5% discount rate. You know, if you live past age 84, if you live well into your, , mid eighties, you’re probably gonna be better off deferring your, your C P P

And, , you know, I think it’s, , important to, to look at life expectancy, not only your individual life expectancy. I mean, that’s probably the most important consideration. But the average Canadian, , , in 2000, , 22, died at age 83. Um, although we’re gonna come back to that life expectancy concept, I wanna talk a little bit more about that. But, , all this to say that I think a lot of people would benefit from deferring their C P P to age 70. It’s controversial topic

A lot of people say, I paid into the C P P, I wanna get my pension

I don’t wanna wait. Um, but you know, one of the best ways to come out ahead is if you’re in good health considering deferring your C P P if you’re able to do . In, in, , , 2022, , about a third of people started their C P P at age 60, but a third at age 65, almost nobody deferred to age 70

Um, o a s old age security pension, it’s kind of C P P, you can start it earlier or later. Um, little bit different from C P P, though. You can’t start it as early as age 60

It’s only between 65 and and 70. And, , right now, the maximum old age security is about $8,400. Uh, if, , somebody has, , lived in Canada for 40 years, , after the age of 18, , if you’ve lived in Canada for most or all of your adult life, this $8,400, , pension is awaiting you at age 65. Um, there was a couple of years ago, a 10% increase that was introduced

So once you make it to age 75, , there’s a, a 10% bump in your old age security pension, which is kind of nice. Um, there’s a 7.2% annual increase if you wait after age 65 and defer as late as age 70. By comparison, CPP is 8.4%. So if somebody’s kind of on the fence, you know, do I defer my pensions or not? Um, C P P is more lucrative to defer. You could always hedge your betts, start old age security earlier

C P P later break even is kind of similar. You know, in your mid eighties, if you expect to live to a hundred, I’d strongly consider deferring your C P P and old age security. Um, and there is this concept of old age security clawback. This, this o a s recovery tax

If you 2023 income exceeds about $87,000, which is fairly high income in retirement, then you lose part of your old age security, , 15 cents on the dollar for, , every dollar. Your, , net income on your tax return exceeds this 86, 900 $12 figure

So I mentioned life expectancy, , and the average Canadian, , dying in, , 2022 at age 83. I, I find it’s really important for, , considering retirement planning to, to look at, you know, the whole concept of, of life expectancy. And, , again, when you hear that life expectancy is age 83, what that really means, generally anyways, is that that’s the age at which the average person died

So in 2022, the average death in Canada occurred for an 83 year old, , individual. However, that’s skewed down by people who die at a relatively young age once you make it to an older age in the first place, 65, for example. Lots of numbers in this chart

But if you focus on the red boxes, a 65 year old, , man has a 50% chance of living to age 89

And, , a female has a a 50% chance of living to age 91. That’s a lot longer than that

Age 83 life expectancy, right? Once you make it to age 65 in the first place

And, , a couple, a male, , and a female, , who are a couple, have a 50% chance of one of them living to age 94

So oftentimes when we’re engaging in retirement planning with clients, we’re running numbers and projections out to age 95

And I think that, you know, considering the average 65 year old will live to age 90, you know, 89 for men, 91 for a woman, , you know, going back to these breakevens, you know, mid eighties, , would, would be your breakeven age. If you live past that, you’re better off deferring your old age security at age 70

I would argue that most retirees should be deferring their C P P and old age security, even though, you know, only a handful, , on a percentage basis do

Um, I, I find this is a really helpful concept for anyone who’s thinking about, , and approaching retirement. Um, just, you know, some rough numbers, simple numbers

If you’ve got a hundred thousand dollars salary, depending where you live and your tax deductions, , you might have about $75,000 after tax income

And a lot of people, I find, think, geez, well, going into retirement, I need to have a hundred grand, , of income that I can spend $75,000

But I think it’s really important to, to look at some of the extraordinary items and really figure out what your retirement expenses might actually be. So if we, you know, stick with a sort of a notional person who has a thousand dollars, , per month mortgage payment, not, probably not in Toronto or Vancouver or a lot of places these days, but simple numbers, again, a thousand dollars mortgage payment, a thousand dollars that they’re putting into retirement savings, that’s 24 grand per year of their $75,000

It’s really temporary. You know, if your mortgage is gone and you’re no longer saving for retirement, , by the time you retire, you know that $24,000 of expenses disappears in your living expenses might only be $51,000

That might be your permanent expenses that you need to plan to cover in retirement. And to cover $51,000 a year in, in living expenses, you might only need $60,000 of pension and R S P RIF income. You know, you might only have eight, nine, $10,000 of tax at that level of income. Again, depending on tax deductions, tax credits, province or territory that you live in. Um, and if your, you know, quote unquote, income is coming from non-taxable sources, non-registered investments, T F S A withdrawals, you might need less than $60,000 in order to cover $51,000 of expenses

So I think it’s really important to start with determining what your expenses are that you’re going to be incurring in retirement, backing out the temporary or extraordinary stuff. And then obviously, you know, look at the duration, , of how long you’re gonna need to fund those expenses for somebody retiring at, at, you know, 50 is gonna need a lot more money than somebody retiring at, , at 70

I I think this is kind of a cool concept as well, just talking about retirement spending. A lot of times, you know, we, we assume that if somebody spends a hundred thousand dollars a year, that’s what they’re gonna spend forever. Um, ignoring inflation, of course, this is, , real, , spending of a hundred thousand dollars

So ignoring the impact of inflation that would otherwise push that spending up

Um, David Blanche, , did, , , wrote a, an interesting, , , piece in the Journal of Financial Planning back in 2014, , where he coined the, the term the retirement spending smile

And the concept anyways is that most retirees, , particularly the ones you get into your seventies, will spend less on stuff

You might go from, you know, say you’ve got two cars as a, as a couple, you might go down to one. Um, you know, you might not be buying the same clothes, , once you’re no longer working, you might not be traveling as much. You might not be doing, you know, sports or, or other activities you tended to, to do

So spending often declines in one’s seventies or eighties

Um, and if somebody lives long enough, depending on their health expenses might go up for other reasons

It might be because you’re no longer cutting your grass on your own or traveling on your snow. Um, you might have medical, , costs, healthcare costs, , long-term care costs that if your health is not good, causes your spending to spike later on

Some people see a decline in their spending that, you know, never really spikes depending how long they live and how, , healthily, let’s say they, they live. But, , this is, you know, sort of a more common, , retirement spending scenario, , that we, , that we tend to see

I thought this was kind of neat. I I came across this recently, a lot of people are familiar with the cons, but the 4% rule, , quick summary, , the rule is, , , suggestive of, , the, , ability for somebody to take 4% from their portfolio

Um, and if you envision a a hundred thousand dollars portfolio, just use a simple number

The 4% rule states that you could probably take 4% out in the first year

So $4,000 out of a hundred thousand dollars investment portfolio, and every year, increase that $4,000 by the rate of inflation

So it’s 4%, , of the, , portfolio value in the first year in index to inflation, the dollar amount, , thereafter. And over a 30 year period, probably not run out of money. And that’s based on, you know, taking a look at historical rates of return and, and projections. Um, in real life, I find the 4% rule, it’s, it’s interesting, but people’s lives don’t, , you know, work in a a straight fashion

You’ve got extraordinary expenses coming out of your portfolio

You’ve got pensions that are layering in starting at different points

You’ve got, you know, inheritances and downsizes, and it’s, you know, a little more complicated than, than the simple 4% role concept

Um, but I thought this was kind of interesting nonetheless, just to sort of prove, , a point. This is from Michael Kitsis, and he looked at a, a period from 1871 to 1988

I know the data is a little, , dated, to speak, but you know, that’s 117, 118 year period for a 60 40 balanced portfolio, 60% in stocks, 40% in bonds, and looked at all the different 30 year periods

That’s what all these crazy lines represent

And if somebody started with a million dollars after 30 years, there’s a ton of different outcomes over this 118 year period

Some of them good, some of them bad. The, , bottom 10% of outcomes, this is what everyone’s worried about. Like, what’s, what happens if there’s a really bad sequence of returns? I I retire, you know, going into a bear market and my portfolio does horrible, the bottom 10% of outcomes, you know, some of them are, are, you know, draw the million dollars down quite significantly. Um, but if you look at the top 10% of outcomes, it’s kind of crazy. You see, there’s a, you know, a couple that showing $9 million portfolio, a million dollars turns in $9 million, even withdrawing 4% per year

This 4% rule that you shouldn’t take out more than 4% per year

Um, but if you look at all these historical years and 30 year periods, there’s an equally likely outcome, 10% that you will end up with, you know, call it $6 million or more, six times your starting principle, , as to draw your, , principle down fairly significantly. And the 50 50th percentile, you know, basically the average outcome is that taking out 4% in the first year and increasing the dollar withdrawal, , to inflation every year thereafter, , almost three times, , as much starting principle is what the average 30 year period would’ve led to. And I guess the, the point, , of all this is a lot of times, you know, using rules this is, you know, questionable in, in the first place. But if you, , are, are conservative that you look at the worst case scenario, , you’ve got an equal chance of having six times your money compared to, you know, aggressively drawing down your investment portfolio

And this 50th percentile, I think is, is, you know, there’s, there’s research and there’s studies and information to show that most retirees don’t spend down their portfolios. In fact, you know, they tend to grow over time because they’re hesitant to spend

And when I think about the concept of risk in retirement, I feel there are different risks

There’s obviously the risk of running outta money

That’s something everyone worries about

But I think there’s also the risk of not spending your money, you know, the risk of not enjoying your retirement savings, the risk of working too long, you know, to make sure you’ve got this big nest egg and, and not being able to spend it because of a, a health issue or because of a death or a disability, or, you know, any variety of other things. So in recent years, I’ve frankly have started to worry just as much about saving too much as, as not saving enough. Um, just to finish off here, I wanna talk a little bit about, , tax and probate. Um, capital assets, , , , non-registered investments, you know, real estate, private company shares, , RSPs, TFSAs, all of the typical assets that, that people own generally on the first death, , pass on a tax deferred basis to your spouse by default. So, , when you’re married or, or common law on the first death, there’s generally little to no, , tax that becomes payable

You, , really have to worry more about tax on the second death, or, , if you’re single on, on your own death, , you can’t just give assets, , interestingly to your spouse during your lifetime and pay less tax

A lot of times people will add, , their spouse’s name to a joint account, or they want to give money to the lower income spouse to invest, and that doesn’t work during your lifetime

There’s this concept of spousal attribution where if a high income spouse gives money to a low income spouse, , it gets taxed back to the high income spouse. Um, you can have a joint account, interestingly, often suggest that if you’ve got, , a, a spouse that has an investment account that they’ve been paying tax on and they’ve owned over the years, it’s not a bad idea to add for estate planning purposes. The other spouse, , jointly on the account just makes it a lot easier, , to deal with administratively. It makes it a lot more seamless, , upon death. Um, and you can have a joint account, and it doesn’t need to be taxed equally

So if it’s always been taxed in one spouse’s name, you can add the other spouse’s name and continue to report a hundred percent of the income to the, , original spouse if you’re inclined. Um, there’s generally no probate, , fees or a state administration tax, you know, depending on the province that you live, , when assets are held jointly with, , a spouse. So again, common estate planning is to own assets jointly with your spouse, assuming that you want those assets to go to your spouse upon your death. Um, interestingly, children holding assets jointly with parents. I mean, this is a common, , estate strategy that we see employed where, you know, children are joint on bank accounts or investment accounts or, or real estate. Um, but there has been case law, particularly this, , Pecora case, , a number of years back, that, , generally the default, , presumption is, , that children that are joint on an asset are holding that asset in trust for their parents unless it’s otherwise documented

So, , if you want a gift to go to a child or an asset to go to a child on your death, you typically need to make sure that you document it often with a gift letter

Um, and if you’re not, , , documenting it, if you’re not reporting, you know, investment income on investment portfolio equally, for example, on a, on a bank account or investment account that you own jointly with a child, , generally the, the child is, is assumed to be holding the asset in trust for the, , the parent

And there’s tax, , rules that, , you know, may not have been as much of an issue before this year that might require a trust tax return to be filed or, , a U h t an underused housing tax return to be filed in the case of a jointly held piece of real estate. So, , you know, this is sort of more complex tax and estate planning, but I guess the, the main takeaway is that if you, , want to add your children to, , assets jointly, or if a child, you know, is encouraging their parent to do it, get tax advice, get a state, , advice, you know, generally in the absence of, , you know, any, , sort of, , gift letter or, or documentation, you know, , assets held jointly when a parent dies, have to be distributed based on, , what’s in the, the will, those assets may actually end up being subject to probate if the parent is, you know, considered to, to be the, the true owner of those assets. So that’s another thing

Sometimes this can backfire from, , the perspective of avoiding or, or reducing probate. Um, there’s also risks, you know, for, for parents who are considering adding their kids jointly onto their assets, there’s a family law risk. You know, if a child goes through a, a divorce, you know, and their divorcing spouse says, well, you know, half of that account or half of that piece of real estate actually belongs to, you know, my spouse, the child of, of the parent who, who actually owns it, you know, could put assets at, , at risk, likewise with creditors, you know, if a child got sued, , and for parents, you know, I always flag the, the risk of elder abuse, you know, , even if it’s, it’s not significant or severe, you know, if you’re gonna add your, your child jointly onto, , assets, I mean, it’s giving them access to those assets, which may or may not be something that you want. So, , lots of stuff, lots of stuff that we talked about and, and touched on today

Um, you know, ranging from pensions to tax, to RSPs to stocks and, and real estate. Um, you know, I think these are all important things to consider as part of your overall financial planning

One of the big challenges that I find with financial planning is there’s a lot of interdisciplinary stuff

So somebody might be getting investment advice or tax advice or estate advice, but they all kind of work together. And, , either on your own or, or with professionals that you’re working with, it’s really important to ask questions to try to understand how the different pieces of the puzzle fit together. And, , you know, these are the sorts of things that I to make sure I flag for people and, and talk about that people try to apply them to their own, , personal finances. Um, thanks much for, for tuning in. This is, , , my personal, , or at least professional information and, , my great team at Objective Financial. Again, we work with clients, , , at our office in Markham, north of Toronto. Um, but frankly, these days the majority of our clients are outside of the greater Toronto area and in different provinces and territories and even other parts of the world

Uh, feel free to reach out if you have any questions, and thanks much to the Canadian Financial Summit and to all of the, , viewers for tuning in

 

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