Monthly Archives: August 2015

Random thoughts – keeping you on your toes

Wrong Handed

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Studies show that about 10% of the worlds population is left handed and it is believed that this percentage is relatively constant right back to the stone age based on the study of cave paintings from that period – determining how many are painted by left handed cave men, estimating the population and extrapolating the percentage.

Examination of handedness through time is of course not an exact science with a lot of estimation involved including analysis of ancient artifacts so it is not possible to prove this statement through the ages but statistical science is relatively mature today and 10% is a fair number.

One of my daughters is left handed, as am I, and many years ago she wrote an amusing essay about her handicap – being left-handed.

She had a point.  Given the majority of the population typical uses their right hand predominantly, most simple tools are designed for that orientation –   things like scissors, computer mice, baseball gloves, guitars, even most doors.    Left handed persons are often at a disadvantage.

Studies have shown for example that lefties are more likely to have a fatal car accident in North America because while driving when alarmed by something (typically causing an adrenaline surge the tendency is to pull down on the steering wheel with your dominant hand.  If you are left handed this brings you into the oncoming traffic lane.  Bang, head on collision – more likely to be fatal.

That being said, scientists have also gathered evidence linking left-handedness and intellectual creativity.  Their studies show true left handed persons tend to be more intelligent and eloquent than right handed persons.  Unfortunately most of these studies were conducted by left handed scientists.

And to the point of this post!

I read a fabulous quote the other day that put handedness in perspective for me, and I share it here.  This probably says it all.

“If the left side of the brain controls the right side of your body, and the right side of your brain controls the left side of your body, then left-handed people must be the only ones in their right minds. ”   –  W.C. Fields.

Random thoughts – keeping you on your toes

Provincial Pension Plans – Really

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As some of you will be aware the government of the Province of Ontario is planning to introduce a mandatory pension plan for those that work at companies without a plan or are self employed.

Employees at companies with a pension plan that meet the provinces basic criteria (as to payout amounts on retirement) are exempt from the provincial plan.

The federal government does not support this move and won’t assist with administration of the plan through the current CRA tax collecting processes so Ontario will be up against extra costs to set up and administer their plan.

What does this mean?

Once Ontario’s plan is up and running the Canadian pension landscape will have the following possibilities for individual incomes post retirement (i.e., when you have no income from employment/self employment).  If you don’t stop working for an income these options do not necessarily apply.

Here are the possibilities (assuming other provinces have not followed suite).  (note disability incomes are not considered)

ALL CANADIANS (outside of Ontario)

1)OAS  –   everyone who has lived in Canada more than 10 years

2)CPP –  everyone who earned an income (employed or self employed)

3)Company Pension –  this is selective and will depend on whether you have worked for more than 2 years (vesting period) for a company with a pension plan.  These plans can be defined contribution or defined benefit and have various requirements for contribution during your employment ( from $0, employer contributes everything to a percentage of your income shared with an employer contribution – that could be linked to amount of your contribution or not)

ONTARIAN

Could have all of the above in addition to the following, however, if they do not have 3 above they will at least have the following:

4) OPP  –  you contribute, Ontario contributes if you are not employed in a Company with a pension (so if you switched jobs you could have this income and #3 above)  This applies to self employed as well.

What does this mean/ Do we care?

Quebec has long had very different tax laws around exemptions, contributions and other stuff so a province doing their own thing financially like this is not unique.   The real question is the cost to an Ontarian reasonable versus the benefit.  In other words is there value to this program.  I have read good arguments on both sides.

For me, I consider a retirement planning is a personal obligation and on the whole governments should stay out of it.  (This is probably classified as a conservative view on the political spectrum.)

Random thoughts – keeping you on your toes

“It’s On Sale”

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I experienced one of my pet peeves today, and made a bit of a pest of myself.

I was buying a roll of screening material to use as a replacement for a basement screen that had been shredded by a prairie gopher.   The gopher fell into the window well and could not escape the way it came (falling in) so tried to exit through the window.  The screen was easy work but unfortunately it met it’s match with the glass.   I had to dispose of the body and then of course fix the screen.

Back to my local Canadian Tire store where I was making this purchase I decided to also get another garden gnome.  I collect them and when presented with the opportunity, well you know how it goes. (What are garden’s for if not as homes for gnomes).

When I got to the checkout, the cashier was very friendly and commented how cute the gnome was and that it was too bad they never went on sale.

Pet Peeve time

“I brought it here to pay for it because I want to buy it .   I said.  “If it is not on sale why is it on the shelf”

She laughed ( I guess she did not yet realize how serious I was) ” Oh you can buy it, just not at the sale price”

“If I can buy it and it is on sale, it should be for the price marked on the shelf where I found it”

The cashier got that, oh not another one look and explained ” The sale price is a lower price than the one marked”

“So” said I ” if this product is being sold at a lower price some other time why do I have to pay a higher price now?

I could see the cashier was regretting getting into a conversation with me and wondering what to say when I gave her the easy out, just completing the transaction, thanking her and leaving.

The story has a funny end though, the cashier asked me if I was okay taking my Canadian Tire money electronically.  I said okay and she gave me the card and said I had to register at home on the internet – “You do know what the internet is?” she said.  And I thought bazzinga, she got me back.

Technically Speaking

Everything in the merchants store on display and marked with a price is on sale.  I always struggle when told an item which is in fact “on sale” is not on sale.  Just a pet peeve I guess.

I should note, no need for a rush of comments,  I do understand the commonly understood use of the term “on sale” in context.  Really though we should be more clear using terms like – reduced for quick sale,  price reduced, etc.  Or I guess I should just live with it.  I could tell the cashier at Canadian Tire was not impressed.

Random thoughts – keeping you on your toes

Why Money?

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The basic worth of things is determined by demand (desire to have it), supply (whether it is available) and resources (you have what is required to acquire the thing you want – basically a good or a service).

Believe it or not these 3 simple things are the fundamentals of economies around the world.   We would not be human though if we did not add massive complexity to this.

It all starts with Barter

In the barter world you can substitute goods or services in every category.    For example I desire wheat to make spaghetti (demand).  Wheat is available, lots of farmers have wheat warehoused and just waiting for me (supply).  The farmers don’t have tomatoes but I do (resources.)  Put these three things together and you have a barter transaction.  I give the farmer tomatoes from my home garden (keeping some back for my spaghetti sauce).  The farmer gives me wheat, transaction concluded and everyone gets what they want.  One question about this though is was it a fair trade?

Over time, civilized beings that we are, we substituted the resource part of the barter transaction from a good or service to money.

What is money worth?

Back to my post’s of the last two days,  money’s value is dependent on how much you have (how hard it is to get), how badly you want to use it (desire for a good or service) and how readily the good or service you want can be acquired (is it easy or hard to find).

Basically the value of money is in our heads, collectively, in economic groups, like say a county.  So unlike a real resource used in barter money is only worth what we think it’s worth.

Digression

What I mean by a real resource with real worth is for example; a tomatoes base real worth is that it sustains life.   Money does not do that, if you have money but can’t find tomatoes to buy you will still die, having money or not.

Some basic Economics

If our economic group (our country) decides to put money into the system that usually results in inflation (there are lots of ways to put money into the system – see my earlier post on the fractional reserve system for an example).    That is as more money is available (i.e., resources) we are willing to use that money to get more of what we want and as the ability to acquire more (increasing demand)  tends to limit supply, prices go up.   Also though more hunting/gathering occurs to increase supply to meet the demand.  Positive economic activity rises.

Now reverse this, the supply of money diminishes, less is used to acquire things (i.e., reduced demand) , so less things are produced, economic activity drops, this is often called a recessionary cycle.

This recessionary cycle results in less money overall in the economics group, lower demand, lower prices and this is called deflation.

Usual Disclaimer

These ideas I have been discussing over the last couple of days have been presented in a very simplified format.  My plan is to post on a number of financial concepts and over time build in (build up to) more complex concepts.  I believe simple explanations will help to build a solid framework for these concepts that can be built on.

Please do comment on these posts; questions, challenges are welcome and they will help guide future topics.

 

Random thoughts – keeping you on your toes

Supply and Demand

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Continuing to explore the theme I started yesterday,  about why we pay what we do for things, today we’ll explore the concept of supply and demand and how it affects what things are worth.

My example of a pub lunch that cost $4.00 in 1977 and $15.00 raised the question of why I would be willing to pay so much more some 38 years later, for basically the same thing.  Part of the answer is I could afford it easily.

Another part of the price equation is demand. For the pub owner the more people that want to buy the lunch the more likely he (or she) is to raise the price.  It’s pretty intuitive that demand is linked to price however it really is a complex relationship and demand is driven by far more than just price.

 

Lets Consider Desire (Demand) and Availability (Supply)

In fact if the purchaser has more  funds (e.g., through inflation) they can afford to pay more.  In this case it is possible desire for the product is driving the purchase decision as opposed to cost.  (Think, ” I want it”).   Additionally, as we know, affordability can be enhanced by borrowing, in these cases the purchase ultimately costs more (the interest on the loan) but we get it now and satisfy our desire.  Clearly cost was not the prime factor in the decision.

Desire is also linked to availability.  “It’s the last one I better snap it up regardless of price”  or “There are ton’s of those on the market, no hurry to buy, let’s wait the price will probably go down”

A key to successful product marketing is to raise desire.  That is help you understand the reasons you need a thing – a low price can be one of these reasons.  In conjunction with desire it helps to give impression of urgency (hurry before they are gone).

The underpinning of the purchase though is definitely affordability.  This is why things can cost more, because not only did the price go up but incomes rose as well so we can afford it (inflation affects both cost and revenue).

How about branding?

A product’s brand is just a label for what people think about the product.  That is things like reliability, value, quality.   Consider two automobiles – a Ford and a BMW.  Both are just molded tin on wheels that take you places – basically perform the same function but the brands have very different impressions and these contribute to demand (also the availability of the product from the automakers) and thus drives the price.

What’s Next?

Tomorrow’s  post will continue on this theme focusing on the impacts of deflation and recessions on the pricing, supply and demand.

Random thoughts – keeping you on your toes

How much is something worth

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Out of curiosity the other day I decided to check the purchasing power of my annual income of my first job (in the 1970’s) with today.  My starting salary for a management training role for a university graduate was $9,800.   According to the purchasing power calculator at “buyupside” this would be about $41,000 in 2014 dollars.

A check of “payscale.com” shows a starting level income of $34,000 to $48,000  for a newly graduated BSc ( IT roles) .   The range quoted is based on 4 different role types.  (I have excluded Sr level and Mgmt roles and considered only the lowest end of the salary range for the other roles).

So, my first job’s measly $9,800 a year was right in the range of what a new BSc. might get in today’s dollars.  This is not an exact comparison as my first job was in Financial services not IT but it gives an indication of how things line up from 40 years ago to today, in terms of what things are worth.

This is just one example, but for me anyway the purchasing power of my annual income in my first job out of university maps to that of someone today with a similar degree.

So how is the worth of things determined.  I mean when I started work I bought my lunch at the pub next door to the bank branch where I worked for under $4.00 a day (including the beer).  Today an equivalent lunch (including the beer) would be $15.00.   Similar food and beer, very different assigned worth.  That is to say I am willing to pay $15 for the same thing I paid $4.00 for only yesterday (well 40 years ago but who is counting).

Why am I willing to pay the higher amount?  The most simple answer is because I can.  This is what purchasing power is about.   I have easily enough money to buy the lunch at today’s rate as I did back 40 years ago because I am paid so much more in today’s dollars.  This as we all know is inflation.

Whats the Point?

Fair question.  Today’s post is really just background for a series on the value of things, inflation, deflation and other economic calamities.

Check in  tomorrow more thoughts on these topics and deeper exploration of what the impact of changing buy power is.

Random thoughts – keeping you on your toes

Protecting Intellectual Property

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With the advent of the internet it is very common for people to share and access others intellectual property without the owners explicit permission.  A common example of this is multi-media files (ie., music, movies, pictures, books, etc) .

Is this wrong?  Is it a bad thing?

Let’s Explore!

To start, I will share a couple of quotes on the topic that resonate with me.

“He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.”   Thomas Jefferson

“My words and my ideas are my property, and I’ll keep and protect them as surely as I do my stable of unicorns.”   Jarod Kintz

When I write a book, or a song or video tape a story should I be able to charge money for the privilege of accessing my intellectual property creation (my ideas).

I would say yes; However, I should be free to choose  if I want to share freely  (light other peoples candles so to speak) or protect my unicorns and decide who get’s to play with them (usually for financial remuneration).

Civilized societies have long recognized the need to protect property rights, in a way it is the cornerstone of individual freedoms.  This is not to say the socialist/communist societies are not civilized, or maybe it is.

To enable the intellectual property owner to decide how they want their output shared (a book or song) we have created the  “copyright”.   This can be used to mark your book, music, movie, etc as requiring your approval for use – whether via payment of money or just ass kissing.  Of course you can always choose the Thomas Jefferson course and share freely to the enlightenment of others – like this blog post.  (Don’t you feel smarter already?)

Does the Internet Promote Theft?

If your copyright  property (say a movie) is freely available for download on the internet without your permission is that theft?  Well technically not until someone downloads it;  then, you betcha it is theft.   The interesting question is who is at fault, the person who made it available, the person who downloaded it or even in fact the people that created the internet which allows this kind of theft to occur relatively easy (and frequently).

Personally, I don’t think these questions are easy to answer (although many would disagree arguing both the up-loader and down-loader are complicit  while the internet is a thing so not part of the equation).

To complicate matters further if you don’t actually download the intellectual property but rather stream it did you steal it at all – is just viewing it theft.   If you enter a movie theater and watch the movie or crash a concert without paying are you stealing?

What’s the Impact 

Most interesting is the impact the internet has had on music, book, movie sales.  It has changed the way the items are sold, I am not sure it have changed how much get’s paid for.

It is true the ability to access property owned by others without permission (generally payment ) is made much easier via the internet, that being said sales and “legal” transmission of such content far outpaces theft of said content.    Basically the trading of books, music, and movies freely is not new (many people share their actual paid for copies of CD’s or records or books with others for no cost.) This free sharing occurred before the internet and continues to occur and though I have no metric to prove it the level of this type of sharing has not really changed that much, just the way it is done.

So does the internet enable theft of intellectual property?  Sure.  But has it really changed the fact most people continue to pay for intellectual property they acquire – I don’t think so.

Random thoughts – keeping you on your toes

Pension Plans, Savings and Income Products – Bringing it all together

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And finally, this post continues, and ends,  the theme I started three days ago about the basic tools and practices to reduce or even eliminate financial stress in retirement.

Retirement is about a lot of things.  The most predominant for most people is the end of  working for an income (from an employer or self owned business).   So income from employment stops, do you have any worries about that?

Every year or so, regardless of your current age it makes sense to do a quick estimate of your post retirement income.  I say quick, because there are ton’s of variables and the goal of this exercise is to get a ballpark idea of what your post employment income streams will be.  This gives you the chance to make changes as desired.  Basically you end up with informed decisions and associated actions.   – i.e., do nothing or do something.

Remember if you can’t control it – don’t worry about it and if you can control it, then go ahead and do something – again no worries cause you got it in hand.  Simply put, there are only two categories of things – those you can’t control, no point in worrying about them and those you can control and do so, no worries there.  In the end, you have no worries.

How does this Quick Estimate Work?

The first year takes the longest and then it is quick.  Even the first time should not take more than 30 minutes.   All you do is list your income sources and the amount you estimate each will provide.  Some people will have income from all these sources and in some cases multiple incomes within a single source type (e.g., you might have worked for 3 companies and have 3 defined benefit pensions coming when you declare retirement)

Based on my blogs over the last 3 days here is the list of the potential sources with instruction how to determine how much you get from each.  I am going to use acronyms where they apply and I am not explaining these sources as that is what the previous blogs did.

OAS/GIS/Allowance  –    The amount depends on the number of years as a legal Canadian resident and when you start to receive it.    Get amount estimate from Government of Canada Web Site

CPP –  This depends on your contributions to the plan.  Get amount estimate from your Service Canada Account   You will need to register if you have not done so already.

Company Pension (Defined Benefit)  –  The company has to provide you your estimated income at retirement age by law annually.  You can get this amount from that statement.  (Because it’s defined benefit no estimation needed)

Company Pension (Defined Contribution) – This requires an estimate of the amount saved in the plan on retirement.  Use this estimate to determine how much of a life annuity you could purchase (you might choose a RIF or LRIF but estimating based on an annuity is easiest to do and the most conservative so for estimation makes best sense.  If you go with a RIF or LRIF ultimately you may get more income from this plan).  Use the estimated savings to determine income based on current annuity rates from Canada Trustco annuity comparison website

Estimate Savings Use the amount saved so far (you get a statement on this each year) plus what you contribute each year (that’s on the statement) times the number of years to retirement,  plus use an estimate of annual rate of investment return times the number of years to retirement and the amount in the plan (the statement tells you the historic rate and I usually just use that).   This calculation is best done with a formula, just use google search to find one if you don’t have it on hand or use the calculator Service Canada provides – it’s really easy to use.

Note: if you had a defined contribution plan from a company you have left and chose a LIRA (rather than lump sum) use the amount in the LIRA, adjusted for investment income estimated to retirement date.

Income from RRSP –  This requires an estimate of the amount saved in the plan on retirement.  Use this estimate to determine how much of a life annuity you could purchase (you might choose a RIF or LRIF but estimating based on an annuity is easiest to do and the most conservative so for estimation makes best sense.  (If you go with a RIF ultimately you may get more income from this plan).  Use the estimated savings to determine income based on current annuity rates from Canada Trustco annuity comparison website

 Estimate Savings Use the amount saved so far (you should get regular statement(s) from the institutions where your RRSP(s) are held) plus what you plan to contribute contribute up to retirement,  plus use an estimate of annual rate of investment return times the number of years to retirement and the amount in the plan  (There are simple formula’s you can access through a google search on the internet to do the investment return calculation).

 Income from Investments – Estimate how much savings of after tax money (non-registered or TFSA) you will have at retirement.  Estimate your annual return and this is the amount of income you could withdraw from these savings without deprecating the capital.   For example you will have $750,000 saved and believe you can reasonably investing it with a 5% return so this  would be an income of $37,500.

Note:  If part of the amount earned is from a TFSA (if any) this portion  would be tax free so you you might want to calculate that separately.

And finally

Calculate the tax on this income as that will probably be the largest expense.  That just the marginal tax rate times the annual income,  and your actual amount of income to spend is determined.  For example if your total adds to $75,000 deduct 19% (the marginal tax rate on this amount today) so you spendable amount would be  $60,750.

If your estimated living costs in retirement (food, heat, light, entertainment, housing, etc) are less than $60,750 you are good to go.    If not, don’t worry cause you are in control and can make changes as needed.

Random thoughts – keeping you on your toes

Income Products for When You Re-tire

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No surprise, this post continues the theme I started two days ago about the basic tools and practices to reduce or even eliminate financial stress in retirement.

The first post and part of my second on this topic focused on pensions.  These are an obvious source of income and any citizen or legal resident who has lived in Canada at least 10 years and resides in Canada post retirement will get at least one pension (OAS). So,  a start to meet your post retirement income needs.  As noted you may be eligible for other pensions as well.  This being said pension income might not be enough.

After pensions (most of yesterday’s post) comes savings which can be either or both; registered (tax deferred) or unregistered (after tax).

Which brings us to today’s blog about financial products to turn the  saving into income to complement the pension income stream.  Of course income collection from the savings can be directly from the investments (no specific financial product) and I will talk about that a bit as well.

I was not planning on this being a four part series but I can see I won’t be finishing up until tomorrow with a summary of everything.   Then back to random musings.

Retirement Income Financial Products

Retirement Income Fund (RIF)

The RIF is used to maintain the deferment of tax on a registered product while taking a regular income over time.   The lump sum of a registered product can be transferred to a RIF without payment of tax.  This is you can transfer the funds from a RRSP; however, once the money is transferred annual withdrawals must start.  The minimum withdrawal amount varies with age from 2.86% at age 55 to  20% at 95 plus.    (There are charts showing the various rates by age.)

While you can start a RIF as early as age 55 you must collapse the RRSP by December 31st of the year you turn 71, so in a sense if you are going to have a RIF it is sort of a must have at 72.

By December 31st of the year you turn 71, you can move the balance to a RIF or withdraw all the funds to non-registered accounts (there are penalties for not doing  at least one of these) .

If you don’t move the outstanding balance at that time to a RIF than you will be subject to a withholding tax on the full amount at the time of withdrawal. (The withholding tax rate varies depending on the amount withdrawn.)  The actual amount of taxed owed is adjusted when you submit your annual tax return and the some of the withholding tax could be refunded (or you may need to pay more).  Remember marginal tax rates are linked to the amount of income so collapsing all at once can have negative tax implications.

If you transfer the balance to a RIF and choose to withdraw at the minimum rate no tax is withheld at time of payment and you just pay the tax when you submit your annual income tax return (if any is due).  If you select a withdrawal rate from the RIF higher then the minimum, tax will be withheld from the withdrawals at a rate based on the amount withdrawn.

So in essence a RIF provides you a fixed income amount until you run out of money in the account or die and the balance is transferred to your estate.  (This is a bit more complicated when talking about how your spouse get these funds after you die potentially still tax sheltered but I am not going to get into that here).

I should note depending on how you set the RIF withdrawal rate and how much investment income the RIF is earning you could preserve the capital and depending on your rate of return on investment even grow it.

To clarify the about point about rate of return,  your investment options in a RIF  basically mirrors the RRSP options and in fact you can transfer your RRSP assets in kind so however you had the funds invested in the RRSP can be mimicked in the RIF.  That is initially anyway, but of course overtime some investments might need to be collapsed to meet the minimum withdrawal amounts.   (Although withdrawals can be made in kind too so you don’t have to sell anything but you do need to figure out the associated tax and pay that).

 

Life Annuities

These are a life insurance product.  They can be purchased with registered savings or unregistered savings.

Basically you pay a lump sum and based on forecast future rates of return and how long you will live the insurance company will pay you an annual income till you die (guaranteed).   So what the economy is like when you purchase the annuity, your sex and how old you are determine the monthly payout.   Also there are variations on the annuity products which include single and joint options as well as guaranteed minimum payout periods.

A simple example based on today’s rate for a 65 year old male is a $6000/ yr payment for each $100,000 purchase increment.

In this case you would have to live 16 years just to get your original purchase price back.  If you lived 20 years you would make $20,000,  which is a simple rate of return of 1% a year.   The longer you live the higher the return.

When registered funds were used for the purchase, the monthly payment from the annuity is fully taxed ultimately at your regular marginal tax rate (subject to withholding at time of payment and adjusted on your annual income tax return – just like your employment income was handled).

For annuities purchased with non registered or after tax saving there is a tax on the amount of interest income assessed to be earned on the original purchase amount (e.g.  the 1% in the above example – this rate of return is guessed at based on your normal life expectancy at the time of purchase) but the basic return of the purchase amount over time is tax free (because tax has already been paid on it).

The value of annuities is the income is guaranteed (like a pension) until you die.  The insurance company is basically assuming the investment and longevity risks.  In the case of RIF income when the savings are gone the income stops.  The longer you live the more likely this becomes.

Of course with a RIF you might have some money left for your estate.  Not so with an annuity unless of course you chose one with a guaranteed minimum payout period (these pay out at lower rates though)

Income Direct from Investments

You can choose not to purchase a RIF or an annuity and just withdraw the income from your savings as earned.  For example if you save $500,000 and have a 10% rate of return you could withdraw $50,000 a year in income without eroding your capital.  The investment income would be taxable of course.

AND NEXT

All three of these income vehicles have pro’s and con’s and if you can swing it a combination of all of them (i.e.,  pension, RIF, Annuity and self managed investments) is best (lowest risk, highest return) but more on that in my summary blog tomorrow.