Playing it safe won’t help investors net enough savings to retire.

As Canadians enter the home stretch of the annual RRSP season, a CIBC poll has uncovered a disconnect between the rate of return investors think they need to retire and their actual behaviour. A whopping 45% of 1,000 adults polled by Harris/ Decima did not even know what annual rate of return they need to meet their retirement goals. And 57% of those who did know nevertheless chose low-risk guaranteed investments that CIBC Asset Management president Steve Geist says are unlikely even to keep pace with inflation. Geist worries this ignorance of likely rates of return is being used as an excuse to bail on making substantive investment decisions. “They think that by taking no risks they are playing it safe, when in reality they are falling further behind.” Just adding a percentage point or two to returns can have more impact than the annual contribution. Few have a concrete “magic number” to project their retirement income. “It’s a moving target as time passes,” Geist said in an interview, “I thought more people would have a handle on what sort of range they expected.” While 7% think they could attain their objectives with a return under 3%, they’d be lucky to get even that from money market funds, 5-year GICs or savings bonds. Government of Canada bonds currently yield only 1.2%, GICs 1 to 2% depending on the term and money market funds a paltry 0.75%. Those are all negative real returns after inflation. The problem with a 3% return is you need a ton of capital to generate a liveable income. If you wanted $90,000 a year from an instrument paying 3% a year, you’d need a $3-million portfolio to generate it. Those hoping for $60,000 a year would need $2-million at 3%. I’d venture to say only a tiny minority of Canadians have that much capital. Worse, if it’s interest income outside registered portfolios, the income may be highly taxed at the top marginal tax rate (on the order of 46%). The other danger is that if investors think they can get only 3% and therefore need an unachievable level of capital to fund financial independence, “they may just give up and not bother to save at all,” says Warren Baldwin, regional vice-president for Toronto-based T. E. Wealth. The flip side is those with small portfolios and short time horizons may feel tempted to take excessive risks to achieve their unrealistic goals, trying to compensate by going further out the risk/reward continuum. CIBC found 8% think they’ll need an annual return over 10%, which can only be generated by stocks and fairly aggressive ones at that. This can backfire and inflict unwanted losses. Geist says there are three factors at play: the level of the RRSP contribution, the return and time. “If you’re weak on any one, the other two must make up for it. If you’re weak on two of them, you’re in a bad spot: you have to extend the time horizon, pick up the pace on contributions or attempt to generate a better return.” Baldwin agrees there is no free lunch and no such thing as an accelerator pedal on portfolios. He often straightens out clients who think they can push the envelope on risk merely because they have a long investment time horizon. “Nope, just as driving too fast down an icy road can leave you hung up in a ditch, so too can your entire portfolio be sidelined by a too-aggressive mix.” As always, a balance between these extremes is best. The classic balanced blend of stocks, bonds and cash is more likely to generate more realistic annual returns of 3% to 9%. CIBC found 10% shooting for 3% to 4.9%; 11% aiming for 5% to 6.9% and 8% with their eye on 7% to 9.9% returns. In his book Master Your Retirement, Winnipeg-based financial planner Douglas Nelson says for every pecentage of additional return investors desire, they will increase their risk level threefold. Realistic returns for an ultraconservative portfolio two thirds in bonds is 4 to 6%, Nelson says, while a growth portfolio two thirds in equities will have expected annual returns of 6 to 8%. Baldwin uses 5% as an expected annual return, assuming inflation at 2% and 3% real growth. In more normal markets, he might pencil in 6%. Ten or 15 years ago, advisors used 8% in projections, which clients thought was too low, Baldwin says. “Now if we use 6% or 7%, people feel that’s too high.” Natalie Jamieson, Oakville-based investment advisor with RBC Dominion Securities, also uses 5%, based on annuities paying 6% these days. Most clients expect only single-digit returns. Warren Mackenzie, president of Toronto-based Weigh House Investor Services, assumes a 5.25% return on balanced portfolios, although until the European crisis is resolved he’s not banking on 5.25% in 2012. However, “over the next five to seven years it is a reasonable number.” Most client statements seldom show investors total portfolio returns, which is why Weigh House created a tool for calculating portfolio returns between certain start and end dates. It can be found at www.showmethereturn.ca. Investors should ask advisors for detailed financial plans showing the rate of return necessary to achieve their goals, then choose an asset mix consistent with that objective. They should “take no more risk than necessary to achieve their goals but they must take at least the amount of risk necessary to achieve those goals,” Mackenzie says. “If they run out of money when they’re 85, the pain will be the same regardless of whether they took too much or not enough risk. For people with 20 years to go to normal life expectency the risk of losing purchasing power due to inflation is one of the biggest risks.” Evelyn Jacks, author of Essential Tax Facts 2012, says it’s important to look for the right combination of returns from various investment sources. Tax considerations can determine whether they should be held in registered or taxable accounts. “A strong influencer of returns is tax efficency because not all income sources are taxed alike. Many investors don’t understand how interest, dividends and capital gains are taxed differently in nonregistered accounts.”

For full article at original source here.

You’ve saved for retirement most of your adult life and now it’s time to begin drawing on your stash.

Where to start?

You might have a pension – a defined-benefit plan indexed to inflation, or a defined-contribution plan tied to financial markets. You might have money coming in from the Canada Pension Plan and Old Age Security. Then there’s your registered retirement savings plan, your tax-free savings account and your investment portfolio. Those whose income is very low will qualify for the Guaranteed Income Supplement. How to draw on this money most efficiently depends largely on your income tax bracket, both now and in the future, financial planners say. “The rule of thumb is to pick a path that gives you the least bite from the taxman,” says Warren Baldwin, regional vice-president of T.E. Wealth in Toronto. If you are in between careers and planning to ease into early retirement, your income may well be lower or the same as it will be when you begin getting full government benefits at age 65. This presents a planning opportunity. “It’s a balancing act between withdrawing income now at a modest tax rate or keeping the (RRSP) tax deferral going and paying tax at a higher rate later,” Mr. Baldwin says. In most circumstances, the conventional rule still applies, says Ross McShane, director of financial planning services at McLarty & Co. in Ottawa: You draw on your non-registered portfolio first, then your TFSA and finally your RRSP/RRIF. But with more people opting for buyouts, early retirement or second careers – events that lower their tax rate temporarily – opportunities abound for “smoothing” your income over your lifetime to minimize taxes. Here are some strategies worth considering for people in different tax brackets.

High income

Suppose you have more money in your RRSP than you will spend in your lifetime. When you die, the money will pass tax-free to your spouse if you are married. When your spouse dies, or if you are single, the proceeds of your RRSP will be treated as income in the year you die and taxed at the top marginal rate of 46.4 per cent. To enjoy more of your wealth, you might retire earlier than you otherwise would so you accumulate less money, financial planners say. “If you see you are going to have a lot of income coming out of your RRSP, maybe you can take some action now to minimize the impact,” says Howard Kabot, vice-president for financial planning at RBC Wealth Management. “You could stop working and melt the RRSP account down so that when you started withdrawing the minimum amount of money from your registered retirement income fund (at age 72) your income would not be as highly taxed,” Mr. Kabot adds. If you retire in your mid-50s, for example, you can draw from your investments and savings until your government benefits begin. The same might apply if you have reason to believe you won’t live as long as the actuarial tables indicate. “You could pay a large part [of your RRSP] to tax if you die prematurely,” Mr. McShane notes. If you are below the top marginal tax rate, you could avoid a big tax hit on your estate by shifting money gradually from your RRSP to your tax-free savings account or your non-registered portfolio. This way, more would be left for your beneficiaries. Health issues could also be a reason to begin receiving Canada Pension Plan benefits at age 60 rather than 65 despite the hefty penalty.

Middle income

Suppose you have a work pension as well as an RRSP and government benefits. You want to keep your income below the threshold (about $67,000) at which Old Age Security benefits start to be clawed back through income taxes. “If you have a couple or an individual in the early stages of retirement, they might want to dip into their RRSPs and pay a bit of tax today knowing their taxable income will be low enough later to preserve the full OAS,” Mr. McShane says. Even before you retire, if you find yourself in a lower tax bracket – perhaps as a result of being laid off, taking a buyout or early retirement – it might be an ideal time to de-register some savings. “The key is understanding how your tax brackets are going to change over time,” Mr. McShane says. Another reason middle-income earners might want to tap into their RRSPs may be lifestyle, Mr. Baldwin says. People are retiring earlier and travelling or embarking on new ventures, so they want to spend more money in the early years. As they get older, they likely will spend less, so their demands on their RRSPs/RRIFs will be lower. People who don’t have company pensions may want to convert a portion of their RRSP to a RRIF ahead of the (age 71) deadline to take advantage of the $2,000 federal pension tax credit, Mr. McShane says. The idea here is to shift enough money from an RRSP to a RRIF to create a tax-free income stream of $2,000 a year for each taxpayer – twice that for a couple. The main consideration for low-income earners with no work pensions will be to take advantage of the federal Guaranteed Income Supplement. This can be an issue for low-income people with RRSPs, however modest in size. Money withdrawn from an RRSP to supplement government benefits could push a person beyond the GIS threshold. Similarly, when the RRSP is converted to a RRIF and mandatory minimum withdrawals begin (at age 72), the income could wipe out part or all of the GIS. This is not the case if the savings are in a TFSA because money withdrawn from a TFSA does not affect income-tested government benefits.

For full article at original source here.

After years of running their own company, Cameron and Carol find their priorities are shifting. She is 65, he is 55.

A couple of years ago, Carol had a health scare. While she still does a bit of office work for the company, she and Cameron would like to spend more time together travelling throughout Europe in their camper, which they leave with friends there. Cameron is planning to work part-time consulting, retiring fully in five years. Fortunately, they have quite an array of income sources to draw from. Carol gets Canada Pension Plan and Old Age Security benefits as well as $10,000 a year in salary from their company. Cameron is drawing a salary of $60,000. When he retires, he will get CPP and OAS as well as a U.K. pension (at age 66) for a total of about $15,000 a year. They also have substantial savings. Their question is one many Canadians share: How to spend their savings in the most tax-effective way. Their goal is to travel for six months of the year, returning home to Southwestern Ontario for the rest of the time. We need help to decide how we should draw down our various investments to minimize our taxes, not only now but after we have both retired,Cameron writes in an e-mail. They want to increase their spending substantially “from about $72,000 to $90,000“ to give them the footloose lifestyle they long for.

We asked Warren Baldwin, regional vice-president of T.E. Wealth in Toronto, to look at Cameron and Carol’s situation.

What the expert says. If Carol and Cameron spend $90,000 a year, they will run out of savings by the time Cameron is 76, Mr. Baldwin calculates. That assumes an inflation rate of 2 per cent a year, a 5-per-cent average annual return on investments and that they do not sell their house to raise additional capital. If they keep their spending pretty much the same as it is now “about $72,000 a year“ they will be okay, the planner says. With inflation, that number will have risen to nearly $89,000 a year by the time Cameron is 65.

First off, Cameron should take money from his non-registered portfolio to repay the line of credit for the car. To preserve as much of their savings as possible, the couple should attempt to balance their assets to better equalize their respective incomes and avoid the OAS clawback, Mr. Baldwin says. Because Carol’s income is quite low, it may make sense to withdraw some of her RRSP assets to take advantage of her low marginal tax rate.

Over the next five years, while Cameron is still working part-time, he should consider contributing to a spousal RRSP for Carol so she can withdraw the funds later on, again, taking advantage of her lower income-tax bracket. This would avoid loading up Cameron’s income level to the point where he might be subject to OAS clawback, the planner says. The spousal RRSP should be completely separate from Carol’s own RRSP. They should also try to mix in some amount of dividend payments out of their company that could be taxed at a reasonable tax rate and not push her income to the point where she faces OAS clawback, Mr. Baldwin says. This will be a balancing act.

Since Carol does not have income that qualifies for the pension income tax credit, she might want to set up a registered retirement income fund this year of about $50,000 (from her RRSP) so the withdrawal for 2013 will be close to the $2,000 of income required for the credit, the planner says. Carol must take care that she withdraws money from her personal RRSP rather than the new spousal one Cameron sets up because of the three-year rule that restricts the withdrawal from spousal RRSPs, Mr. Baldwin notes. Otherwise, the income will be taxed in Cameron’s hands. In order for Cameron to maximize spousal RRSP contributions, he needs to earn income for as long as possible.

When Carol converts her remaining RRSP assets to an RRIF at age 71, she may well decide to base the minimum withdrawal on Cameron’s age, making it lower, which is also advantageous. Mr. Baldwin suggests the couple consider a more detailed estate planning review that might include testamentary trusts in their wills to reduce taxes and create income-splitting opportunities for their estates. He also suggests they draw up a proper investment plan using low-cost managed funds or exchange-traded funds to cut their costs and boost their returns.

Client situation

Carol, 65, and Cameron, 55

The problem

How to draw on their various retirement savings pools in a tax-effective way.

The plan

Cameron collects a salary from their company for as long as possible and contributes to a spousal RRSP for Carol. Meanwhile, Carol withdraws enough money from her own RRSP to set up an RRIF to take advantage of the pension income-tax credit. Additional withdrawals from her personal RRSP would supplement her income now while lowering her RRIF withdrawals later.

The payoff

Preservation of their hard-earned capital and a secure retirement.

Monthly net income

$6,000

Assets

Cash $3,500; U.K. investments $380,000; stock $5,000; investments held by corporation $270,000; TFSAs $18,000; his RRSP $270,000; her RRSP $175,000; residence $410,000. Total: $1,531,500

Monthly disbursements

Property tax $330; utilities, insurance, maintenance $600; auto expenses $670; groceries $625; clothing $150; line of credit payment $410; gifts $100; charitable $100; travel, including food, gasoline, etc. $2,000; dining out $100; sports and hobbies $280; other personal $200; dentists, prescriptions, drugstore $175; telecommunications $50; U.K. pension contribution $200. Total: $5,990

Liabilities

Line of credit for car $18,000

For full article at original source here.

Winter 2012

Occupying possibly a third of your lifetime, retirement today is more a progression of stages than a single destination and must be planned for accordingly. In the first of a four-part series, we examine the retirement spring—a time for tilling the fields and planting the seeds for a fruitful retirement.

In just a single generation, our picture of retirement has changed dramatically. Only in the 1950s did life expectancy at birth in Canada finally stretch past age 65 making life after work a reality for many. According to the latest numbers from Statistics Canada, on average a male born in 2008 could expect to celebrate his 79th birthday, while a female born in the same year would likely reach age 83. Furthermore, those making it to the retirement age of 65 will have another 20 years of retired living on average and stand a good chance of living even longer. As a result, our view of retirement has evolved from a short period of respite at the end of a working life to a succession of four phases, the duration of each dependent on factors such as age, state of health and financial circumstances. Like the seasons of the year, each phase is marked by defining characteristics, activities and distinct challenges.

The Retirement Spring

Around February, avid gardeners turn to seed catalogues and planting guides to begin re-imagining the garden for the coming year. They decide what to keep and what to change, researching new additions and ordering seeds. As the weather warms, they are busy working their plan, pruning, planting, fertilizing and mulching so that when the heat of summer arrives, they can relax and enjoy what they have created. The retirement spring echoes the gardener’s spring as the period when the heavy lifting is done in terms of retirement planning. Although you may start earlier, as you enter your peak earning years in your 40s, 50s and 60s, you should also be entering your prime retirement planning years, getting yourself ready for retirement, both financially and philosophically.

Creating Your Retirement Vision

Philosophically, you have some important questions to answer and your answers will influence the financial aspect of your plans. Do you intend to leave a significant inheritance or would you rather use up all of your money during your lifetime? This will have a big impact on how much you need to save. What will your lifestyle in retirement look like? How will you spend your time? Lifestyle, activities, hobbies and travel will directly affect your income needs. Will you stay where you live now or would you like to live somewhere else? Money freed up from moving to a smaller residence can be used to supplement your income in retirement. Will you spend considerable time outside of Canada?

Residency requirements can have implications for taxes and government benefits such as health care. Do you and your partner have different visions for retirement? Now is the time to work out any conflicts so that your financial plan lines up with your retirement plans.

Accelerate The Page of Savings   

On the financial front you need to determine your anticipated living expenses, the amount of income you will need for retirement and where that income will come from. At this stage, make extinguishing any outstanding debt, such as mortgages, a priority and pump up your RRSP by catching up on any unused RRSP contribution room and maximizing annual contributions. When children leave home or you pay off your mortgage, any additional discretionary income can be put towards your retirement savings, either by taking advantage of Tax Free Savings Accounts and/or other non-registered investment opportunities. Remember to revisit your need for life insurance. You may need less if you no longer have debts, or more if you have certain estate objectives.

Have the Right Mix for Growth   

Most people won’t be able to achieve their retirement goals without investing their savings to grow. At a minimum, you want to have your money appreciate above the anticipated long-term rate of inflation, conservatively pegged at 3%. However, if you are comfortable investing in a well-diversified balanced portfolio, you can assume a long-term rate of return in the 7% range. Even with the uneven investing results of the past few years, a balanced portfolio made up of 60% equities and 40% fixed-income securities has had an average annual rate of return of 8.4% for the 20-year period ending June 30, 2011. What’s most important is that the composition of your portfolio accurately reflects the amount of risk you feel comfortable taking on. If you have a secure pension from your employer, you may want to take more risk with this money. On the other hand, you may want to invest more conservatively if you have no pension and must rely on your savings for income in retirement. In either case, don’t let pessimism over short-term market performance have you sitting on the sidelines in cash. If you have a long-term investment policy suited to your goals and objectives, it is designed to accommodate the temporary market downturns that will happen from time to time.

Fine-Tune your Plan Annually

This is not the time to put your retirement plans on autopilot. As you zero in on retirement, you need to fine-tune your plan at least on an annual basis. If you find yourself with additional discretionary income, be careful not to ratchet up your lifestyle with spending that is not sustainable in retirement. Occasional expenses may come up, such as a child’s wedding or the arrival of a grandchild, which can affect your retirement plan on a short-term basis. You may want to help your children get started in life with a financial gift but you will need to assess how this will impact your plans. In addition, elderly relatives may need your help either providing care or through financial support. As well, unplanned events such as the death of a partner, divorce, failing health or a change in your employment circumstances will require a re-think of your retirement plan.

With thoughtful planning, attentive follow through and ongoing oversight during the retirement spring, you can be like the gardener who eagerly awaits the green shoots of spring becoming the colourful blooms of summer, and have a rewarding retirement to look forward to.

Best practices for ensuring your income tax return adds up.

Each year Canada Revenue Agency electronically analyzes approximately 25 million income tax returns and selects some for further scrutiny. Getting tapped for a review can simply be the result of random sampling or for reasons that include higher than usual deductions, discrepancies between the income that you report and information slips filed by employers and excess RRSP contributions. There’s no way to guarantee CRA won’t choose your return for review but here are some tips for making sure you are ready.

On the Plus Side

Although this may seem obvious, be sure to report all of your income whether it was earned in Canada or not. Start by checking your T4 against your end-of-year pay slip in case your employer made a mistake and get any errors rectified before you file. Remember to account for stock options if exercised (not always reported on your T4), other employment income such as director’s fees, professional fees and consulting fees as well as any severances. Don’t overlook rental income, even if the income was just for renting out your vacation property for a few weeks, and include support payments if you are receiving them. Make a point of following up on investment accounts for tax reporting slips to capture all of your investment income. File a T1135 if you have more than $100,000 invested outside of Canada, including $100,000 or more in U.S. stocks in a portfolio, or a foreign rental property worth $100,000 or more. The penalties for not filing a T1135 are substantial! In addition, capital gains resulting from transactions in a U.S. dollar account must be converted to Canadian dollars prior to reporting using the exchange rate on the transaction date.

Note that if the issuer amends any of your income reporting forms after you have filed your return, your income taxes will be reassessed for the period affected. When this happens, check any reassessment to make sure the government hasn’t doubled up by counting both the original and the revised income reporting slips.

On the Minus Side

If CRA is taking a closer look at your return, they will want to see proof of any deductions claimed and expenses eligible for tax credits. Keep receipts for all charitable donations, political contributions, child care costs, support payments and RRSP contributions as well as interest costs relating to borrowing for investment purposes. It’s always best to keep loans for investment purposes separate from other borrowing for easy tracking. Make sure you have supporting documentation for all tax credit-worthy costs, including eligible child fitness and art activities, transit passes, medical expenses and education and tuition costs. To transfer tuition costs to a parent, the student must complete Schedule 11 of their tax return and the corresponding provincial form. CRA can look back to the previous six tax years so hang onto your documentation for at least that long.

Summing Up

Even when it was unintentional, being found to have not reported income or claimed more than you should in deductions and tax credits can make you more susceptible to reviews in the future. A couple of areas that can often trigger a review include RRSP overcontributions, expenses related to rental income, self-employment expenses and any deduction or claim that appears out of the ordinary for you or someone in a similar situation. The golden rule when filing your income tax return is that if you can’t back it up, don’t try to claim it. In addition, besides having your return add up ethically, make sure it adds up literally – simple errors in arithmetic are one of the most common reasons for reassessment.

Don’t Sweat It

Why worry your way through a CRA review? When you have your T.E. Wealth consultant prepare and file your income tax return for you, in addition to adhering to the best practices outlined above, we look into all reassessments and reviews for you. We can also review past returns and, if you have made any errors, we will refile on your behalf. Ask your T.E. Wealth consultant for complete details.

Canadian and American Citizen? Make Sure the IRS Doesn’t Want You

• As a U.S. citizen or green card holder, you must file a U.S. income tax return (joint if you have a spouse) even if you live in Canada.

• Remember to include your worldwide income on both returns so that any income tax you pay in one country can reduce the tax you are required to pay in the other.

• With your U.S. tax return, be sure to file the Report of Foreign Bank and Financial Accounts (Form TD F 90-22.1), which reports the high balance for the year on any non-U.S. bank account. Note that if you have more than US$50,000 in foreign financial assets and live in Canada, completion of a Statement of Specified Foreign Financial Assets (Form 8938) is also required. Failure to file these forms could result in severe penalties.

If you are a dual citizen or hold a green card, be sure to discuss your situation with your T.E. Wealth consultant.

After experiencing what has been called a lost decade in terms of investment returns, it would be unusual if investors weren’t discouraged. The average return from a balanced portfolio (60% equities/40% fixed income) from 2000 to 2010 was 3.8% per annum, primarily from bonds. And the current state of economic affairs doesn’t offer much in the way of encouragement. Interest rates remain at historically low levels; the yield on mid-term Government of Canada bonds hovers around 2.6%. Economic growth in the developed world will be weighed down for years to come as governments seek to slash deficits through reduced spending. Aging populations place growing demands on the public purse and de-leveraging continues by governments as well as among consumers. Emerging markets, while still likely to experience higher GDP growth relative to the developed world, still do not have sufficient domestic consumption to offset lower demand from the developed world. The one bright spot is inflation, which has remained in check for the better part of two decades, and the low rates on long-term bonds indicate that this is not expected to change soon. So where can the long-term investor look for returns?

Dividend-Paying Stocks Will Continue to be Important         

In the past year, there has been considerable media coverage promoting investing in dividend-producing stocks. Proponents of this approach point out that most of the growth in the S&P/TSX index in the last few decades was on a total return basis, whereby dividends are included. They say that with dividend-paying stocks it doesn’t matter if the stock price declines because you “get paid to wait” with dividends for the price to come back up. But the classic dividend trap is to buy a stock for its current dividend, only to see the share price stagnate and the dividend cut because the company isn’t growing.

Remember, a dividend is simply a return to shareholders of the company’s excess cash. Giving this cash to investors means that it is not being reinvested in productivity, innovation and expansion for future growth. By only focusing on companies that pay dividends, you can miss out on some of the great growth stories from companies that don’t pay dividends. In addition, dividend-paying stocks tend to be found in more conservative, non-cyclical sectors, a potential limiting factor for diversification. We’re not against investing in dividend-paying stocks; they have an important role to pay in a well-diversified portfolio. But the focus, when investing in equities, should be on buying good businesses first. If the stock also pays a dividend, all the better.

Selective Exposure to Emerging Markets     

Emerging markets are expected to continue to offer opportunities for above-average growth but these opportunities bring about higher portfolio risk. Rather than investing directly in these economies, we favour gaining exposure through the shares of established multi-national companies that do business in emerging markets. As the home base of these companies is typically in the developed world, investors are assured of the transparency and regulatory oversight associated with established markets while still having a stake in emerging market growth. How much of your portfolio is allocated to these more volatile investments will depend on your investment objectives as outlined in your investment policy statement.

For further discussion of emerging markets, see Investment Commentary, December 2011 on tewealth.com  

Corporate Bonds in the Mix

Bonds have done a great job of propping up portfolio returns over the last decade. But with interest rates expected to stay low, returns from government bonds are likely limited to the coupon rate. Corporate bonds have the potential to enhance fixed-income returns as they typically offer higher yields because they come with higher risk. Generally, government bonds are considered lower risk because governments can raise taxes to meet debt obligations. However, in Europe today we are seeing governments in a tight spot, unable to meet debt obligations while reluctant to hamper anemic economic growth by raising taxes. In some instances, corporate bonds may actually be less risky than government bonds. The key here, as is the case with every investment, is to be selective and know the risks.

At any point in time, given the prevailing economic conditions, there will always be some investment opportunities that can offer greater growth potential than others. At T.E. Investment Counsel, we are always on the lookout for new opportunities that fit with the long-term investment strategies in place within client portfolios. In our view, dividend-paying stocks, emerging markets equities and corporate bonds will continue to be important avenues for potential future growth within the context of a well-diversified balanced portfolio. As always, it is critical that these opportunities are evaluated in keeping with the objectives as outlined in your investment policy statement and are only incorporated in your portfolio when they can contribute to achieving your investment goals.

Growth in the economy has the potential to be constrained by debt, whether it comes from countries reeling in spending through austerity measures, consumers reducing debt on household balance sheets or tighter lending as a result of uncertainty in the financial markets and the European sovereign debt crisis. Collateral requirements could increase along with stricter loan covenants. Both corporate bond markets and equity financing already reflect higher risk premiums.

Mild Recession in Europe Likely      

The European debt crisis continues to be a dark cloud over the global economy. Italy, Portugal, Ireland and Greece have hit the fiscal wall. Italy is the pivotal country in this ongoing drama because of the size of its outstanding debt obligations. There is elevated risk of a failed refinancing and an Italian fiscal solvency crisis in 2012. European banks lack the capital to absorb big investment losses on their bond portfolios and more support from the European Central Bank to the bond market will be required if the crisis intensifies. The impact of a mild recession in Europe, which is likely already underway, on Canada and the U.S. will be tolerable but anything more severe could be problematic and the situation will need to be monitored closely.

Governments Grapple with Deficits         

Global economic growth is not expected to accelerate anytime soon as Europe faces years of fiscal austerity and there will be additional fiscal tightening in the U.S. Under the existing legislative structure, U.S. defense spending faces a 10% cut in 2013 and the Bush tax cuts will automatically expire in 2012 for Americans of all income levels. If America’s fiscal position is to stabilize, even more spending cuts will be required. Ontario’s large budget deficit, estimated at $16-billion for the current fiscal year, has also attracted warnings of a credit rating downgrade. Previous fiscal stimulus measures in Ontario will be replaced by increased government belt-tightening in 2012 and 2013.

Modest Growth Ahead for Canada and the U.S           

A year ago, the outlook was for an accelerated economic recovery in 2011 and a stronger self-reinforcing expansion in the U. S., neither of which happened. Looking ahead to 2012, the outlook for Canada’s economy is reasonably positive and the New Year has begun with underlying economic momentum. Canada’s composite indicator index shows a substantial advance and the economic indicators for the U.S. are stronger than expected.

In Canada, a real increase in GDP of around 1.8% in 2012 seems likely, down from the estimated advance of 2.3% in 2011. This is a result of fiscal tightening that will show up earlier in Canada than in the U.S., and a possible slowdown in the world economy. Slow growth in the U.S. and a high Canadian dollar will continue to dampen Canadian exports. In addition, housing starts in Canada are likely to decline in 2012 as high-rise condo starts adjust to lower levels. However, low-rise single detached starts are expected to remain somewhat stable, as unsold inventories of low-rise new homes are relatively low, indicating a balanced market. And in the U.S., housing construction shows early signs of revival. As a result, lumber is one of the few commodities that could move against a declining trend in overall commodity prices. Slower growth in the world economy points to a moderation in both energy prices and base metals prices. Even so, Alberta and Saskatchewan will be Canada’s growth leaders in 2012, as both will benefit from on-going natural resource development projects.

At A Glance

Economic growth

Growth in the U.S. and Canadian economies will be positive but remain subdued.

Inflation

Core inflation continues to be stable and within the Bank of Canada’s target range of 1% to 3%.

Interest rates

The Bank of Canada is not expected to increase interest rates until 2013. However, with banks focused on preserving capital, lending practices will become more conservative.

Canadian dollar

The Canadian dollar is closely related to commodity prices and both are down from previous peaks.

Employment

Employment growth has lost momentum as the Canadian economy shed 62,000 full-time jobs in the last three months of 2011, reflecting caution in hiring plans.

When your children blew through their allowance as if it was burning a hole in their pockets, you thought it was just a phase. Away at school, the calls for cash infusions kept coming and the credit card bills kept climbing. Sure you can afford it, but that’s not the point. With a sizeable inheritance coming their way, how can you make your kids more fiscally responsible?.

“One of the biggest issues I see with young people today is not having a sense of what is realistic for their financial situation. Too many assume that they can live their parent’s lifestyle now, without putting in the time and hard work to build up their earning power,” says Paul Gainor, Consultant with T.E. Wealth in Calgary. He explains that parents aren’t doing their kids any favours by always coming to the rescue. In this case, he recommends that the parents start by setting some limits.

As Paul explains, “An approach that we’ve been successful with is having the parents advance the children a lump sum, say for their post-secondary education or to help them get an independent start. Then we sit down with the children to discuss how to manage this money, creating a budget and plan for them to follow. Mom and Dad receive the statements so they know what is going on and can intervene before a small problem becomes a big one.” With this approach, parents are giving their kids an opportunity to prove themselves financially without totally removing the safety net. And a key advantage of going this route is that parents know where the money is going and can see the problem areas. Living on your own and having to live within your means can teach some valuable life lessons.

Coaching is often the key to solving this type of problem. Ken Stout, Vice President and Investment Counsellor with T.E. Investment Counsel in Calgary, has had clients who expect to leave a sizeable inheritance have their children sit in on portfolio review meetings so that they can see first-hand how wealth is effectively managed. According to Ken, “A big misconception among young people is that investing is akin to day trading, picking winners and avoiding losers in short succession. They don’t realize that successful investment management is a long-term process that balances risk and return to achieve your objectives.” He has worked with clients to set up “training” portfolios for their adult children, who are advanced a portion of their inheritance to see how they manage it.

As Paul points out, there are many money management teaching opportunities as your children are growing up. “Having an opportunity to earn money through work around the house or a part-time job encourages a strong work ethic. Budgeting and saving for the things you want promotes delayed gratification and a longer-term view. Getting your kids involved in saving for their education will ensure they have a financial stake in their studies. And parents can encourage saving over spending by matching what their child puts away,” says Paul.

Last summer T.E. Wealth ran a highly successful workshop to equip clients’ children who were heading off to college and university with some financial planning smarts. Often our consultants will sit down with a client’s child who is beginning a career to go over employee benefits and some basic financial planning. Not surprisingly, T.E. Wealth counts many two and three generations of families as clients.

If you’ve taken steps to help your children be fiscally responsible and you still have concerns, perhaps you need to review your estate plan. Paul suggests using testamentary trusts to safeguard the money you will leave behind. “Created on your death, a testamentary trust will appoint a trustee to ensure the money you leave to a child is managed according to your wishes. They can also be used to protect assets for any grandchildren if an adult child’s marriage breaks down,” explains Paul. He cautions that if it turns out that you will need to treat one child differently than the others, make sure you explain the situation to everyone affected.

How T.E. Wealth Can Help        

• At your request, meet with your children to discuss money management

• Set up and manage training portfolios for your adult children

• Establish a family trust for the education needs of grandchildren

• Review your estate plan and recommend strategies to address any concerns

By Kostas Andrikopoulos, President and CEO, T.E.Wealth. kandrikopoulos@tewealth.com  

Good companies become great companies when they listen to their clients and the best companies anticipate what their clients want and need and make sure they give it to them. At T.E. Wealth, we want to be seen as a great company in our clients’ eyes. So not only do we want to hear what you have to say and take what you tell us to heart, we are creating more opportunities for you to tell us how we can do better.

Measuring Service Excellence

In the latter part of 2011, we conducted a concise online survey among our investment clients to see how they were feeling about the service they receive from T.E. Wealth. The last time we surveyed clients was in 2006 through a comprehensive client survey and focus group effort. With the markets in turmoil and confidence down among Canadians, we felt these were conditions that would put our service to the test.

About 25% of our investment clients completed the survey, with the vast majority of respondents placing us in the good or excellent category on a variety of measures from overall service, consultant expertise, proactive advice, investment management, financial planning and communication. What’s more, most of our investment clients would be comfortable or very comfortable referring us to others and most graded our service as better or much better than their other professional services relationships. Some companies would say, “Not bad” especially given the current economic and market conditions. But we say, “Not good enough.” If our goal is to deliver service excellence, then we have some work to do.

More Opportunities to Connect and Comment

In addition to the survey responses, many investment clients provided recommendations of what we could do to improve our service immediately. Others have indicated a willingness to share their opinions confidentially with a member of the senior management team.

We are also providing more ways for you to connect with T.E. Wealth and give us your perspective. T.E. Investment Counsel’s Lunch & Learn sessions bring clients and T.E.I.C. personnel together in an informal setting to discuss, question and gain insight into our investment program. Through monthly online consultant blogs, investment commentary and our Strategies newsletter, we provide our perspective on a wide range of wealth management issues and investment topics and we encourage all readers to post comments and share the articles with others.

Feedback Please!

According to Michael LeBoeuf, author of How to Win Customers & Keep Them for Life, just 4 percent of dissatisfied customers will actually complain, the rest just go away quietly – a missed opportunity to correct the problem and retain the relationship. In our recent survey, we also reached out to former investment clients to find out where we had not met expectations. Listening to both past and present clients can help us strengthen our relationships and the value we provide. So I encourage you to bring us your concerns and to let us know what we could be doing better, either by discussing your concerns with your consultant, Regional General Manager or by contacting me directly.

The Proof of the Pudding is in the Eating

I want to thank everyone who has participated in a survey, posted comments on our website or made a point of letting us know how we could improve. We value your perspective and take what you have to say seriously. But as the old proverb says, “the proof of the pudding is in the eating.” You have my assurance that we are acting on the insights you provide. Survey results and comments have been shared with all Regional General Managers. In each office across the country, specific comments are being addressed and local action plans, as well as national plans, are now under development. I hope that you will continue to let us know if we are making the grade or missing the mark in terms of service excellence and I look forward to keeping you apprised of our progress.

The Role of a Financial Divorce Specialist

Written by: Kathryn Jankowski, Vice -President, Financial Divorce Specialist, B.A, CFP, FDS, FMA, FCSI  

The mention of the Financial Divorce Specialist (“FDS”) designation conjures up various ideas and definitions. What does the designation have to do with the role of the financial planner?

Let’s start with what it is not. An FDS does not replace a lawyer, or negotiate the financial issues around a divorce with a soon-to-be-ex which are, all too often, assumed the responsibility of the FDS. So, what then, does a Financial Divorce Specialist do?

If we were to break it down there are up to three issues to be negotiated when divorcing: children custody, children access and division of the financial pie. When negotiating the financial piece the solution is not as simple as dividing half of every asset. What needs to be divided is net family property. Consequently, assets are allowed to be swapped. For example, RRSP assets can be floated over to the “ex’s” side of the balance sheet in favour of keeping more equity in the family home, especially if it’s an asset you intend to keep. Where an FDS’ expertise is important is how your financial future plans pan out once you give away your existing retirement funds. Have you done a financial budget? Can you afford to keep the house? Are you able to save for the children’s education? What do you need to reconsider with respect to re-writing your Wills and Powers of Attorney? What are your financial goals going forward, on your own?

Let’s look at an example. A wife I was working with had the option of either sharing her pension or paying spousal support along with an equalization transfer of non-registered assets. Through my calculations, we were able to ascertain that keeping her pension whole and opting to pay spousal support, with a cash offset, placed her in a better financial situation rather than sharing her pension.  Another wife wanted to keep the family house but she couldn’t afford to keep it on her own. Because the husband also wanted to maintain the family in the home, at least until the children had gone through high school, I calculated that she would be short about $30,000 in net income a year. As a result, the husband agreed that the wife could make up to $30,000 in income before affecting her spousal support. Imagine if she had not retained the services of an FDS and had kept the family home? The youngest child was still in grade 8 so the wife would have been in the house for 5 years with a deficit of $30,000 a year, amounting to a total liability of $150,000!

A focus on the financial piece of a divorce by an FDS provides objectivity, often when emotions are running high. Looking at your financial picture and what it would look like while on your own from a place of objectivity can cause the mind to open to new possibilities, especially if you are aware of the financial effects. Sometimes negotiations can get stalled because one person doesn’t fully understand the financial piece and can’t move forward to agree to anything in the proposed agreement. An FDS can help, through teaching and the sharing of knowledge, the spouse who is “stuck,” continue the negotiations with confidence. I’ve even had a husband hire me to help his wife as he knew she was less confident in her financial knowledge and no longer trusted his advice.

I have often heard people tell me that, because they have retained a lawyer, they don’t want to pay another professional in the divorce proceedings. My question back to them is, “Can you afford not to?”

Also, see my blog here for more information: http://kathrynjankowskis.wordpress.com/