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Worried about your retirement? You can simplify your life by shortening your investment horizon – The Globe and Mail

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Stock market investors have been in for a rough ride in the past couple of months. Even though the markets have recovered somewhat, forecasts abound for much lower stock prices over the next year or two. How do you cope with this possibility if you are getting close to retirement?

One remedy is to shorten your investment horizon, otherwise known as the period over which you have investments to manage. Imagine if you only had to worry about what your investments were going to do over the next five years instead of the next 25.

But how does a shorter investment horizon jibe with a desire to enjoy a healthy income throughout your retirement years? Turns out these two goals are not as incompatible as they seem.

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Let’s consider two married couples, the Thompsons and the Singhs. The accompanying table shows what the Thompsons and the Singhs have in common.

A Tale of Two Couples

Thompsons and Singhs
Current age of each spouse65
RRIF assets per couple$500,000
Asset mix in the RRIF (equities/bonds)60/40
Investment return in year one of retirement-9.80%
Investment return in year two-1.80%
Investment return in years three to 250% to 4%
CPP pension as a % of the maximum90%
OAS pension as a % of the maximum100%
Income drawn from all sources in year one$62,000 per couple
Change in income target up to age 702.2% a year
Annual change in income target, ages 70-79; 80-88; and after 881.2%; 0.2%; 2.2%

SOURCE: FREDERICK VETTESE

Notice how bad their investment returns are going to be during their retirement years. The return in the first two years comes in at a close second (after 1973-74) as the worst two-year return in the past 75 years. The return over the longer term is only marginally better.

The Thompsons elect to receive their Canada Pension Plan and Old Age Security benefits immediately. To reach their income target of $62,000 in Year 1, the rest of their income must be drawn from their registered retirement income fund (RRIF). All these figures change slowly in subsequent years as the income target gradually rises. The first accompanying bar chart shows the end result.

The Thompsons can maintain their income until the age of 88, at which point the RRIF assets run out. The Thompsons therefore have an investment horizon of about 24 years (from the age of 65 to 88), which is a long time to be worrying about the stock market.

The Singhs take a different tack. They wait until 70 to start their CPP pensions, at which point the starting amount will be 42 per cent larger in real terms. In addition, they redirect $100,000 of their $500,000 in RRIF assets to an insurance company to buy a joint life annuity. Their projected income is shown in the second bar chart.

The Thompsons have a long

investment horizon

CPP &

OAS pensions

Income

from RRIF

Target

income

$100 thousand

Investment horizon for the Singhs

is much shorter

CPP,* OAS,

annuity

Income

from RRIF

Target

income

$100 thousand

* CPP starts at age 70

JOHN SOPINSKI/THE GLOBE AND MAIL

SOURCE: Frederick Vettese

The Thompsons have a long

investment horizon

CPP &

OAS pensions

Income

from RRIF

Target

income

$100 thousand

Investment horizon for the Singhs

is much shorter

CPP,* OAS,

annuity

Income

from RRIF

Target

income

$100 thousand

* CPP starts at age 70

JOHN SOPINSKI/THE GLOBE AND MAIL

SOURCE: Frederick Vettese

The Thompsons have a long investment horizon

CPP & OAS pensions

Income from RRIF

Target income

$100 thousand

Investment horizon for the Singhs is much shorter

CPP,* OAS, annuity

Income from RRIF

Target income

$100 thousand

* CPP starts at age 70

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: Frederick Vettese

You will find that the Singhs are drawing more income than the target from the age of 82 and on and they never run out. By 90, the excess income is about $15,000 a year since they are getting so much guaranteed income from government sources.

What is noteworthy is that most of the Singhs’ RRIF income is concentrated in the years before the age of 70, which makes their investment horizon about five years. That is because they are drawing their RRIF down rapidly in those years to replace the CPP pensions that they decided to forgo until 70.

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While not shown in the chart, they still have substantial RRIF assets left after 70, more than $200,000 in fact by the age of 90. (They are still required to draw a certain amount of it each year, but I am ignoring it in the chart since they can withdraw it, pay income tax and then redeposit the balance into a tax-free savings account.)

It is hard not to notice that the Singhs receive substantially more lifetime income than the Thompsons with much less effort. The real point, however, is that the Thompsons have an investment horizon of nearly 25 years compared with a little more than five years for the Singhs.

That longer investment horizon exposes the Thompsons to no end of potential trouble. The next black swan might be a pandemic or it might be something else, but anything that happens after the age of 70 is of little concern to the Singhs, at least not financially.

In summary, the Singhs are so much further ahead than the Thompsons because they transferred a great deal of risk to both the government and an insurance company, and also because they protected themselves against potentially poor longer-term investment returns.

Now that the Singhs have shortened their investment horizon so dramatically, it raises the question of whether they should expose themselves to market risk at all. Maybe they should simply put their RRIF money in a guaranteed investment certificate or a bank savings account instead for the next five years. They might not get a very high return, but at least they won’t lose money. In the process, they would eliminate investment risk entirely rather than having to worry about a financial meltdown for another five years.

The Thompsons do not have this option since their investment horizon is so long. They are forced to continue taking their chances with stocks because they otherwise have no hope of eking out a better return. The question is, why would they bother when a less risky path is open to them?

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Frederick Vettese is former chief actuary of Morneau Shepell and author of Retirement Income for Life; an updated and expanded edition will be released in October.

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Foreign Investment Review – A Warning In The Time Of COVID-19 – Government, Public Sector – Canada – Mondaq News Alerts

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Canada:

Foreign Investment Review – A Warning In The Time Of COVID-19

To print this article, all you need is to be registered or login on Mondaq.com.

The Canadian government, concerned about the impact of
COVID-19 on corporate valuations, has issued guidance that it will
pay particular attention to foreign direct investments of any value
(meaning, even investments that are not subject to review under the
Investment Canada Act (the “ICA”)).  The
government’s announcement does not amend the ICA, nor any
thresholds for review.  But it does issue a warning that the
government intends to use the tools it has to review investments,
including the national security review provisions under the
ICA.

While the enhanced scrutiny is to apply to any acquisition
of an interest in a Canadian business involved in public health or
the supply of critical goods and services to Canadians or to the
Government of Canada, all foreign investments by state-owned
investors, regardless of value, or private investors assessed as
being closed tied to or subject to direction from foreign
governments, are also considered targets for such
review.  

One can expect that Canadian companies involved in
manufacturing needed supplies to address COVID-19 healthcare
requirements (for example manufacturers of personal protective
equipment), or companies involved in vaccine research or other
health technology would be of particular concern.  As to
critical goods and services, we can look to the Government’s
own Guidance on Essential Services and Functions in Canada during
the COVID-19 pandemic for assistance.  In that guidance, the
Government cites energy and utilities, information and
communication technologies, finance, health, food, water,
transportation, safety and manufacturing. 

The first real test, however, of the Government’s
application of its enhanced review will be a gold miner, TMAC
Resources Inc., which operates the Doris gold mine in Nunavut’s
Hope Bay.  In a deal announced two weeks ago, China’s
Shangdong Gold Mining Co. Ltd. will pay just over C$207 million for
TMAC, which has been struggling financially.  TMAC is listed
on the Toronto Stock Exchange and has lost significant value since
its IPO.  Control and the majority equity interest in Shandong
is owned by the Chinese Government.  Whether Shandong can
establish that the acquisition is of net benefit to Canada, and
particularly so with such declared enhanced scrutiny, remains to be
seen.  There has been certain concern expressed by the
security community in Canada about Beijing’s control over
critical metals and minerals.  Gold is, in volatile financial
circumstances, a safe haven investment. 

As a general caution, foreign buyers should consider the
guidance from the Canadian government on the ICA.  Foreign
investment is still recognized as beneficial with a compelling case
for the transaction.  But at the least, potential acquirors
should be alive to the potential for a greater degree of review,
and should consider the time-frame for review and when to submit an
application for review, including a pre-closing notification under
the ICA. 

Originally published May 25, 2020

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

POPULAR ARTICLES ON: Government, Public Sector from Canada

COVID-19: Cross Country Update (May 11, 2020)

Miller Thomson LLP

Today Prime Minister Justin Trudeau announced support for large and medium-sized businesses so they can keep their workers on the payroll and survive the COVID-19 pandemic.

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Should Mark and Meredith invest their surplus or pay off their mortgages? – The Globe and Mail

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Mark and Meredith, seen here, should catch up on their TFSAs first, lower the extra payments on their original house and invest the difference.

Lars Hagberg/The Globe and Mail

As a military couple, Mark and Meredith have relocated seven times in the past 10 years, so they’re looking forward to moving back to their original home – now rented out – when they eventually retire.

Mark, an officer with the Canadian Armed Forces, is age 44 and earns about $142,400 a year. Meredith, an employee at the Department of National Defence, is 47 and earns $72,660 a year. Her income has suffered from long spells in places where no work was available. They have a 12-year-old daughter, two houses and substantial mortgage debt.

Mind you, they’ll be well-fixed when they retire from the military. At the age of 55 Mark will be entitled to a defined benefit pension, indexed to inflation, of $116,000 a year plus a bridge benefit of $12,838 to the age of 65. From 65 on, he will get $134,623 a year.

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At 58, Meredith will also be entitled to a DB plan: $35,427 a year plus a bridge benefit of $988 until she’s 65. After that, she will get $39,315 a year.

First, though, they want to pay off their mortgages. They’re not sure which one to tackle first or whether they would be better off investing their surplus funds. “My husband thinks that it would be better to invest extra dollars [in financial markets] because our mortgage interest rates are low,” Meredith writes in an e-mail.

We asked Robyn Thompson, president of Castlemark Wealth Management Inc. in Toronto, to look at Mark and Meredith’s situation. Ms. Thompson is also a certified financial planner.

What the expert says

Mark and Meredith have $2,715 a month in surplus cash flow that they can use for debt repayment, investing, or increased lifestyle spending, Ms. Thompson says. They are using $1,000 of this to make prepayments to the mortgage on their original family home, now rented out.

In addition to their two properties, they have investment assets in their various accounts totalling $305,515, with 60-per-cent equity, 30-per-cent fixed income and 10-per-cent cash. Both have unused RRSP room that they are carrying forward to reduce taxes payable on their retiring allowances (a taxable, one-time payment on retirement in addition to their pensions) – $80,000 for him and $25,000 for her.

The couple would like to retire at the age of 55 with an annual after-tax income stream of $72,000 in today’s dollars (or $106,234 at retirement, indexed at 2 per cent), the planner says. When they do, they plan to move back to their original house and rent out their current residence.

Complicating matters is the fact that they have, at different times, declared one property or the other as their principal residence, Ms. Thompson says. “This will create a taxable capital gain on the property that is eventually sold,” she notes.

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For example, renting out part or all of a principal residence changes its use to an income-earning property. So capital-gains tax may apply for the period during which the property was used to earn income. Mark and Meredith would still be able to claim the principal residence exemption for the period in which they used the house as their primary residence.

“It is therefore critically important for Mark and Meredith to keep detailed records of when and how each property was used along with receipts for any improvements made, no matter how minor,” Ms. Thompson says.

Given their substantial income and relatively modest living expenses, Mark and Meredith will be able to achieve their short- and long-term financial goals, the planner says. “They have some catching up to do with their tax-free savings account contributions and prepayments toward the mortgage, but they are in a rock-solid financial position,” she adds.

The couple’s investments have done well, delivering an annualized rate of return of 8 per cent going back to 2013, Ms. Thompson says. The value of their portfolio shrank somewhat in early 2020 as a result of the stock-market meltdown triggered by the COVID-19 pandemic, the planner says. “But they have a long time horizon and view the market downturn as a short-term event.”

Their portfolio consists mainly of Canadian and U.S. large-cap, blue-chip stocks, exchange-traded funds and a small mutual-fund allocation. They use an investment adviser to whom they pay 1.65 per cent a year. The adviser does not provide planning or tax services.

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The registered education savings plan for their daughter is allocated 50 per cent to fixed income and 50 per cent to equities. Using a 4.5 per cent expected rate of return and a 2 per cent inflation rate, at their current contribution rate the RESP will grow to $73,028 by the time their daughter starts university at the age of 18.

Now for the mortgages. Mark and Meredith are paying 1.95 per cent interest on the $468,560 mortgage on their original home (rented out for $36,000 a year). Their current mortgage payment on the original house is $40,685 annually. In addition, they are making an extra payment of $1,000 a month, or $12,000 a year.

When the mortgage comes up for renewal next year, the interest rate could well be higher, the planner says. She assumes a 2.39 per cent interest rate at renewal. Instead of paying $1,000 a month, they could cut their prepayment to $500 monthly and redirect the surplus cash flow of $6,000 a year to their tax-free savings accounts, where they have unused contribution room. There the investments are forecast to grow tax-free with an expected real rate of return of 4.5 per cent annually, the planner says. “They will still have the property paid off by [Mark’s] age 55.”

As for the house they are living in now, they plan to rent it out for $2,000 a month after they retire. Rather than paying off the $215,000 mortgage, the planner recommends they continue with it, deducting the mortgage interest along with the other expenses. They could use the net cash flow first to contribute to their TFSAs and then invest any surplus in a non-registered, balanced portfolio.

“Meredith’s first inclination is to pay off the mortgage as fast as possible,” Ms. Thompson says. “This is not always the best option in a low-interest rate environment.” For Mark and Meredith, using cash flow to maximize TFSA contributions makes more sense at this point, the planner says. “With a properly diversified, balanced portfolio, the after-tax compounded annualized rate of return on their investments inside the TFSA is likely to exceed the compound interest payable on their mortgage.”

At Mark’s age 56, the first full year they are both retired, Mark and Meredith will have after-tax income of $169,160 a year. After-tax lifestyle needs and the mortgage payment on the rental will total $120,408 a year, giving them plenty of room to expand their goals if they choose to.

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Client situation

The people: Mark, 44, Meredith, 47, and their daughter, 12

The problem: Should they invest their surplus or pay off their mortgages?

The plan: Catch up on their TFSAs first. Lower the extra payments on their original house and invest the difference. Leave the mortgage on the second house when they retire.

The payoff: Making the best use of their money.

Monthly net income: $16,160 (includes gross rental income).

Assets: Cash $7,000; emergency fund $20,000; her TFSA $52,300; his TFSA $30,815; her RRSP $96,905; his RRSP $80,375; RESP $38,120; residence $450,000; rental $750,000; estimated present value of his DB pension plan $2.36-million; estim. PV of her DB plan $863,000. Total: $4.7-million

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Monthly outlays (both properties): Mortgages $4,570; property taxes $990; water, sewer, garbage $115; home insurance $150; electricity, heat $215; maintenance $895; garden $100; transportation $780; groceries $800; clothing $180; gifts, charity $315; vacation, travel $1,250; other discretionary $30; dining, drinks, entertainment $700; personal care $30; club membership $15; pets $15; sports, hobbies $120; other personal $450; health care $25; disability insurance $370; phones, TV, internet $130; RESP $200; TFSAs $1,000. Total: $13,445

Liabilities: Residence mortgage $215,000; rental mortgage $468,560. Total: $683,560

Want a free financial facelift? E-mail finfacelift@gmail.com.

Some details may be changed to protect the privacy of the persons profiled.

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Legault won't rule out another investment in Bombardier – Montreal Gazette

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QUEBEC — Premier François Legault has not ruled out another government bailout of struggling Bombardier Inc., which announced Friday it plans to eliminate 2,500 jobs because a slump in demand for business jets.

But Legault said if his government did proceed, it would not make the same “mistakes” of the former Liberal government, which chose to invest in the C-Series program and not Bombardier in general.

He said he also would obtain guarantees on the preservation of jobs, the head office and make sure the company’s executives not pay themselves fat salaries and bonuses.

The former Liberal government of Philippe Couillard invested $1.3 billion in Bombardier’s C-series program, which was later sold to Airbus. Quebec still holds its shares in the firm, which were valued at $700 million in the last provincial budget.

Legault Friday seemed to suggest in his remarks that the money is lost.

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