All posts by Financial Independence Hub

Is an RRSP right for you? Not necessarily

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By Michael Wickware, CMO, Planswell

Special to the Financial Independence Hub

We’re all accustomed to seasonal advertising. Real estate listings in the spring, back to school sales in late summer, holiday sales in the fall, and at the start of every new year, financial industry ads urging you to contribute to your RRSP.

The traditional RRSP season is driven by two main factors:

1.) The rules say you have the first 60 days of each new year to make a contribution that can be applied to your previous years’ tax return.

2.) RRSPs are lucrative for banks and financial advisors, because you’re likely going to keep paying them fees every year from now until retirement.

You might ask, “Isn’t it also driven by the fact that RRSPs are a great way for Canadians to save money?” The billboards, posters, banners and sales pitches certainly seem to suggest as much. I may be a marketing guy, but I work at a financial planning company, so I know it’s not quite that simple.

Unless these advertisers actually know about your personal financial situation, how can they be so sure that an RRSP is the right answer for you? Does absolutely everybody need to contribute to an RRSP, or is there some nuance these Mad Men might be missing?

In my search for answers, I had one major advantage. Planswell has built more than 100,000 financial plans for Canadians. Every plan is based on analyzing dozens of data points about things like goals, income, assets, debts, investments, insurance and more. In other words, I know more than any bank or ad agency about what individual people actually need to get ahead financially.

I asked our engineering team to dig into the data, and what we found definitely challenges the conventional wisdom:

An RRSP was wrong choice 52% of the time!

I didn’t think an RRSP was the best choice every time, but the gap between what the marketing campaigns are saying and what people actually need is a lot wider than I expected. It turns out the annual RRSP ad blitz, backed by all the biggest financial institutions in Canada, has been giving bad advice to half the country.

We decided to dig deeper, and found several reasons why an RRSP may not be the best choice for you. Here are three of the top reasons:

1.) It won’t always maximize your tax savings

An RRSP is not meant to avoid tax completely: just to put it off until you retire. The idea is to reduce your taxable income while you’re working and in a relatively high tax bracket, then pay the tax when you’re retired and in a lower tax bracket. But if you’re already in a low tax bracket, this strategy doesn’t work. And, if you’re early in your career and expect to be in a higher tax bracket in the future, you might be better off letting your RRSP contribution room accumulate until you can use it for a bigger benefit.

2.) You have shorter-term priorities

An RRSP is a long-term retirement investment. You don’t want to be paying fees and taxes and losing contribution room by taking money out early. That means you should make sure that your short-term needs are covered first. For example, if you don’t already have an emergency fund set aside or if you’re planning to buy a home or make a major purchase within the next few years, you may not want to lock your savings away in an RRSP now.

3.) You could miss out on bigger opportunities

Let’s assume an RRSP makes sense from a tax point of view and that you have your short-term needs covered. You’re good to go, right? Not necessarily. Continue Reading…

The multi-generational shift in the workplace

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Joseph De Dominicis

Special to the Financial Independence Hub

While there are a number of interesting workplace trends expected in 2019, there is one main theme leading employers will be focused on: adapting to a generational shift in the workplace. When it comes to their Human Resources (HR) programs, employers will need to focus on providing employees with a consumer-grade user experience at work, and using data and technology to provide integrated, personalized and flexible pension, benefit and wellness programs.

Millennials largest generation in workplace since 2015

The workforce and employee needs continue to change. Since 2015, millennials have outpaced baby boomers as the largest generation in the Canadian workforce, with the millennial mindset now defining corporate culture[1]; generation Z entered the workforce[2], placing new demands on employers as they look to adapt to changing motivations; and with Canada’s aging population, those leaving the labour force outnumber those about to join[3].

In 2019 and going forward, employers need to evolve their programs to fit the new archetype of an employee.

At a conference I attended recently, one of the speakers used the example of a day in the life of an individual to demonstrate how technology is influencing almost every part of their daily routine. This is the experience for most working Canadians; however, there is an evident disconnect upon entering the office.

Need to integrate apps & technology

For example, an employee may wake up and check their Apple watch and ask Siri or Alexa to play the weather report. While taking an Uber to work, the employee orders coffee from the Starbucks app, which is ready for pick-up on the way to the office. The disconnect then happens when that employee arrives at work; programs are not integrated, need to be accessed across a number of systems, are not technology friendly and the information being received is generic across all employees.

When it comes to program development, today’s employees are looking for programs that are delivered to them in the same way they receive information from the platforms and services they interact with in their personal lives – integrated onto one mobile platform with tools and content in one place, and recommendations tailored to their personal interests.

Developing flexible and personalized programs has become especially important today as the workplace is made up of four generations. Organizations have learned that a single approach will not work for all generations; programs need to be developed with flexibility in mind, allowing an employee to customize their plan based on their stage of life: allocating dollars towards health, wellness and saving programs best suited for their specific situation (e.g., paying off student debt versus planning for retirement).

One approach won’t work for four generations

To develop these plans, employers should look to data and technology. Advanced technology, such as artificial intelligence and predictive analytics, will provide employers with the opportunity to customize programs for individuals at their unique life stages. Continue Reading…

10 surprises for Japan in 2019

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By Jasper Koll, WisdomTree Investments

Special to the Financial Independence Hub

2019 is likely to be a good year for Japan. While worries about U.S. and China recessions create global headwinds and uncertainty, domestic Japan is well placed to decouple from the global cycle and deliver rising employment and increased purchasing power for its people. However, there are bound to be surprises: that is, scenarios not captured by experts’ current quantitative models or the crowd’s consensus opinion. For Japan in 2019, here are the outlier scenarios that I personally worry about. Improbable as they may seem, any movement toward their far-out direction will force a true about-face in the current consensus. That’s why surprises are so powerful. Enjoy, and best wishes for a prosperous and happy new year 2019.

1.) The 2019 shunto wage negotiations result in a 4% pay raise, up from the 2% delivered last year

Japan’s economy needs a more powerful engine to drive domestic consumer spending. After years of wage restraint and company unions preferring long-term job stability over short-term wage gains, the labor market is now so tight that wage growth should start to accelerate. If I am right and the 2019 shunto results in a de facto doubling of the pay base, consumption-led growth could become a reality. The higher the shunto, the greater the chances of Japan decoupling in a positive way from a global downturn.

2.) Prime Minister Abe convinces China to join the new Trans-Pacific Partnership (TPP)

2019 is likely to see a turning point in Japan-China relations. After their successful summit in October 2018, Prime Minister Shinzo Abe and President Xi Jinping are committed to not just improved bilateral relations but also to assert a more credible joint leadership role in Asia. For China, nothing would demonstrate a true commitment to accountable Asian leadership better than joining the new multilateral TPP free trade agreement. For Japan, bringing China into the new TPP would irrevocably elevate its status as global leader and protector of multilateral rulemaking. Moreover, Abe would go down in history as the statesman who built a positive buffer for all Pacific nations against their fears of the unilateral rise of China: cooperative engagement, not unilateral submission.

3.) The United States moves from trade war to currency war as the Federal Reserve (Fed) is forced to cut U.S. interest rates

As U.S. recession risks rise, the probability of a U-turn in U.S. interest rate policy goes up: after four rate hikes in 2018, the Fed could actually start cutting rates by next summer. In turn, U.S. rate cuts will forcefully push down the dollar. Unfortunately, neither China nor Europe is in a position to tolerate this. China in particular is already very outspoken in its opposition to a new Plaza Accord (where Europe and Japan agreed to a U.S.-imposed weak-dollar policy in 1985). Make no mistake: the next U.S. recession is likely to trigger a global currency war (i.e., competitive devaluations). Importantly, it is no longer the U.S.-Japan but the U.S.-China exchange rate that will dictate global fortunes in 2019 and beyond.

4.) A Japanese mega-bank buys a major U.S. bank

Some good news for Japan: The fall in the U.S. stock market has lowered the price to buy American companies. Japanese banks have been eager to expand in the U.S. but were put off by the high prices and valuations of U.S. banks in the past couple of years. Now that the U.S. cycle has turned, Japanese bank CEOs may finally get their chance to act out their strong global ambitions and buy a “cheap” U.S. bank in 2019.

5.) The Bank of Japan (BOJ) and the Finance Ministry cooperate to sell the BOJ’s exchange-traded fund (ETF) equity holdings to Japanese savers

The BOJ owns almost 6% of the Japanese equity market through its buying program for ETFs. While justifiable as an emergency measure to help overcome deflation, the central bank’s de facto nationalization of equity capital has become counterproductive for many reasons. Continue Reading…

5 reasons why your business should hire accountants

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By Neil Coleman

(Sponsored Content)

Exceptional financial management is necessary for any company, whether large or small. As a business owner, you have your hands full with the operations and marketing strategies that should be implemented for the growth of your company. Fortunately, you can delegate finance and bookkeeping tasks to an accountant.

You have two options of hiring accountants for your enterprise. One way is to outsource it to a team of trustworthy certified public accountants (CPAs) like the experts from http://www.daviekaplan.com/. Another method is to hire in-house employees who can contribute their skills and previous experiences to monitoring this particular department.

Regardless of how you go about in recruiting accounting staff, here are the reasons why you should invest in them:

 1.) They help you maximize profit early on

Accountants are beneficial during the early stages of your company as they can advise you on what business model will be most useful for your venture and help you set attainable goals. They can also help calculate the pricing structure of your products and services to maximize profits. Moreover, accountants know the ins and outs of the banking system so they can set up your account successfully and determine if you need to open a merchant account.

2.) They organize your financial reports

Your  income statement or profit-and-loss account is a crucial financial document that showcases your business’ revenues and expenses during a specified time. By having an accountant onboard from day one, you can have the reports organized so that you can track your progress without difficulty.

Aside from the statement containing your profits and losses, these are two other essential financial reports that every business must have:

  • Balance Sheet: This gives you a glimpse of your company’s assets, liabilities, and shareholders’ equity. Assets are the valuable things owned by your business that are already in cash or can be converted to currency. Liabilities, also known as debts, are the amounts of money you owe others, whereas shareholders’ equity is the amount that you would end up with if you sold all your assets and paid off all the debts.
  • Cash-Flow Statement: This document details the company’s inflows and outflows of cash. It informs you if your company generates income or loses money during a period. Operating, investing, and financing activities can be found in this file.

These financial reports are vital for the compilation of annual reports. This document summarizes the performance of your business during the year and projections for the next twelve months. It includes audited financial statements that inform you and your investors about how well your company is doing.

3.) They save you from penalties

Your accountants can focus on the deadlines of government-mandated processes, such as taxes and social security contributions. The IRS can be exceptionally nitpicky about filing deadlines and audits. Penalties for delayed payments and filing can be such a burden. Save yourself from the stress of remembering all those deadlines by hiring a dedicated team of accounting staff.

4.) They lend a hand in making smart financial decisions

As a business owner, you have multiple roles to take on each day. Your employees would ask for solutions on company-related matters, such as who to hire among the candidates and what marketing strategies to implement this week. Continue Reading…

Are all Pension incomes created equal?

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Image Shutterstock

By Ian Moyer

Special to the Financial Independence Hub

Pension incomes are not created equal. They come in all shapes and sizes. They are as varied as the people who have accumulated them and who seek to use them. 

In this seemingly infinite variety, in this mathematical complexity, there is a common thread as far as advisors are concerned: delivering clients the most after-tax income possible. 

CPP, OAS, Defined Benefit Pension, Dividend Income, Interest Income, RRIFs, Part Time Employment Income, Corporate Dividends, TFSAs: These are just a few of the various sources of income individuals may have access to when they exit the workforce.  Upon retirement, decisions about what, when, and how much income to draw upon, move to the forefront.

Tax is key to coordinating multiple income streams

Coordination here is key as each of these sources of income is subject to different tax rates, different tax deferrals and different estate taxes. Tax is key, in other words.

Recent or prospective retirees need more than a competent advisor at this stage. Understanding the tax rates, tax deferral rates and the implications regarding OAS and Income Splitting is one thing. But accounting for these sources of income and the complicated ways in which they interact requires an algorithm.

The specialized software, Cascades, cascadesfs.com, performs these calculations, giving users informed withdrawal strategies. Designed by financial advisors in partnership with software developers, Cascades uses actual tax rates, not average tax rates, projecting for the duration of retirement, including longevity risk.

Because numbers require context to be meaningful, let us consider prospective retirees Bill and Anne Smith.

Case Study: a Couple in their late 60s

Retirement Plan: Bill and Ann are 68 and 67 currently. They have been retired for a few years but still have RRSPs and a LIRA and want to know if they should start using them for income or defer payments until age 71. 

Income Sources: Both have CPP and OAS. Anne has a defined benefit pension from having worked as a teacher. 

Investments: Bill has a healthy RRSP and Anne has a modest RRSP and a LIRA. They have maxed out their TFSAs and each have about $100,000 additionally in individual non-registered accounts. 

Total: 12 different income sources and investment accounts to manage for retirement income

Cascades provides direction in the following way. Users — whether they be Anne and Bill themselves, or their advisors — fill in a detailed online questionnaire, submit their responses and in under ten seconds they have a report. This report (an excerpt is shown at the top of this blog) automatically gives three potential strategies and shows which one works best. For Anne and Bill, drawing down and re-investing their registered accounts first is expected to save them over $75,000 in their estate compared to a complete deferral of their registered money. 

As far as Bob and Linda Sanderson are concerned, on the other hand, a Cascades report advises them to do just the opposite and ultimately predicts a savings of $125,000. Here’s how:

Quite different withdrawal recommendations for this younger couple

Bob and Linda are both 55 and currently working. They plan to retire in 10 years. They have a rental property they maintain that they plan to sell in 15 years and want to know how to plan for the long-term. 

 

Income Sources: Both will receive CPP and OAS. Bob will receive a small defined benefit pension. Both will earn rental income until sale of the property. Both will receive corporate dividends until age 80 from a holding company. 

Investments: Both have large RRSPs, nearly capped TFSAs, and a small amount of non-registered savings. Additionally, Linda has a small LIRA. 

Total: 18 different income sources and investment accounts to manage for retirement income.

Cascades proposes three withdrawal strategies and highlights the best plan. Using all of their non-registered savings before rolling over registered investments will save Bob and Linda over $125,000 in their estate compared to an early drawdown of their registered money. Cascades software is designed to help users do their due diligence on the matter of retirement planning. The results are specifically tailored to the retirement in question and they are reliable, informed and rigorously defined as they are by Canada’s vast and varied tax laws.

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Ian Moyer is the founder of Ian C. Moyer Insurance Agency Inc. and Cascades Financial Solutions Inc.