Estate Value

Grow It or Gift It?

Personal financial plans are very focused on the size of your estate at the end of your life.  Plans on where to draw funds from and when to do so are often driven by having the maximum estate available for your heirs – be it your children, family or charity.

But Grow It isn’t the only option.

The other Canadian option is to give gifts while you are alive.  Let’s look at some pros, cons, and actions that come from choosing the Gift It approach.

Pros

You get to see the benefit of your gift during your lifetime. In our scenario, seeing our children experience the benefit of a financial leg up now is greatly preferred by us instead of them receiving part of an estate when they’re 50-60 (assuming a long life for us) and set up in life.

Intentionally, proactively discussing this with your inheritors early and often will avoid any false hope on waiting for a future estate.  Rather it may indeed further encourage them to make it on their own, as most of us with savings have done.

Also, there is no gift tax in Canada, with some exceptions around property.  This is a great Canadian advantage that many countries do not have.

Cons

Once the gift is given, you lose control of what happens with it.  If your unique situation suggests the probability of an unwanted outcome from giving up control, then maybe gifting isn’t for you.

An estate, once taxed by CRA, is distributed to the beneficiaries for them to control, like the transfer of control with gifts, just at a later timing.  The exception is discretionary trusts where the estate names a trustee to direct distribution.

Action

Once you have emotionally committed to Gift It while now rather than transfer through your estate later, you need to intentionally work through the timing and size of gifts with your financial planner.  A proactive plan gives you the best chance to ‘go to zero’, meaning end up with near-zero estate when your life ends.

It’s the same effort you’re putting in now to ensure there’s enough until the end, just with a smaller buffer.

The additional key action of the Gift It approach is to discuss this with your inheritors early and often.

Summary

The important information is that you have a choice - Grow It or Gift It.

For you and yours to Be Prepared for the future, know your choices and be intentional on your decisions.

CPP Timing

‍ ‍To Defer or Not?

This is a different type of blog - it is an actual, verbatim written discussion between a bank financial advisor (Advisor) and readers of this blog (Readers in italics), modified only to ensure anonymity:

Advisor: I just wanted to share some of my thoughts with you two.  I think that I need to communicate some of my concerns with your choices otherwise I wouldn’t be doing my job and I’d be doing you a big disservice.

‍ ‍

Readers: Firstly, I appreciate your comments and I value your input. I take it as a sign of our friendship that you are concerned about our decisions.

Sorry it took me a few days to respond. I had to look again at the reasons and the calculations we did to arrive at our decisions.

Having said that, we are comfortable with the direction we have chosen. Much of our research is based on the book “Retirement Income for Life” by Frederick Vettese.

‍ ‍

1.In my 25 yrs of doing retirement planning for my clients and having a retirement planner construct a plan, I’ve never had them recommend to clients to defer and take their CPP at age 69.  I think you are also deferring your OAS to age 69 as well and again you’re the first clients to do this as well.  It doesn’t mean you’re wrong and I know you’ve done a lot of your own research on the topic.  So instead of taking $ 1507 CPP for you now and $ 743 OAS also for you now, you are deferring this $2250 p/m amount now to get 33.6% bonus in 4 yrs.  I think you’re thinking is “well that’s 8.4% p/yr annualized for 4 yrs” and you feel a certainty with that fact. 

‍ ‍

The reasons to defer CPP and OAS and to draw the RIF and LIF monies down sooner are both insurance against the risk an extended period of reduced investment returns and the risk of a long life. I believe you that most people don’t do this, as this is not the traditional strategy. Many industry experts and professional associations endorse these enhancements but there is a great divide between the academics and the practitioners in the field.

‍ ‍

2.Generally the only time it may make sense for a client to wait until 69 yrs old I guess would be if they are in great health and expected to live a long time.  Another reason may be that perhaps the client may still be working at age 65 and thus will defer these pmnts so not to taxed on these pmnts as increased income.  Another reason may be that the clients have monies in a non-registered (investment) acct and are in the highest tax bracket and figure they might as well wait, get the bonus, and not pay extra tax now. 

‍ ‍

If one of us passes early, this will cause an income gap to our target income, but this can’t be solved by taking CPP early. The gap will be small enough that it can be managed with a little tinkering.

‍ ‍

3.So by waiting until 69 yrs old, you will be drawing more monies from your RIF and LIF accts.  You will be paying withholding tax for your RIF and LIF withdrawals in 2026 and withholding tax on withdrawal amounts above your minimum pmnt amount for 2027 and thereafter.

‍ ‍

As we joked this weekend, love paying higher taxes as this means you have higher income!

4.Please note that your OAS is only payable to you while you are alive.  So if I take OAS at age 69 and I pass away at age 72, my spouse will NOT get receive any OAS pmnts after my death.  There are no back pmnts or retroactive pmnts.  For CPP in the same scenario, if I take CPP and pass away at 72 yrs old, my spouse will only receive her CPP + some of my CPP to a maximum of $ 1507 in 2026.  So if my spouse was already getting CPP of $ 1000 and I passed away, then her CPP would only be increased to $ 1507.  I hope this makes sense. This is very important.  My spouse will also receive a one-time CPP death benefit pmnt of $ 2500.

‍ ‍

Yes, it will suck if I die at 70 having never taken any CPP or OAS. But the household spending will reduce by about 30% and my spouse will have the benefit of her increased CPP and OAS due to the deferral.

5.So basically you are waiting 4 yrs to get a larger monthly amount on CPP and OAS, but if you pass away before approx. 82 yrs old, then you’d have been better to take the CPP and OAS at 65 yrs old. 

‍ ‍

Looking at it from an estate point of view this might be true, but we will have benefitted from decreased stress in the case of low market returns.

‍ ‍

6.You suggested that by deferring OAS and CPP to age 69 that you would be creating more certainty.  I’m not sure that’s really the case though.  You will be reducing your RIF and LIF accts faster than you normally would and you run the potential of really gaining very little if one of you passes away before approx. 82 yrs old.  So the extra 33.6% in returns you’d receive by waiting to age 69 yrs old would be certain, but again it all depends on how long you live for after 69 yrs old.  Nobody knows how long we’ll live for.  The general rule is if you have a shortened life expectancy, then take your CPP earlier. 

‍ ‍

I get that if you want to have more money left in the bank when you die, but that is not our goal. Our goal is a high enough income to do the things we want to do without the stress of worrying about whether we will have enough income when/if we grow old. 

‍ ‍

So no stress.  I just wanted to share my thoughts with you and make sure you had all the information.  Hope this helps.  Any questions, please let me know.  If you want to do a Teams call to discuss, we can plan that.  

‍ ‍

Would be happy to discuss this over a pint if you like, but I think we are happy with the path we have chosen.

For additional resources, I recommend the Retirement Income for Life book mentioned above and covered in the Decumulation blog last summer.  You could read The CPP Paradox: Why Canadians Are Taking Less Money on Purpose.  There is also considerable information online via Google and YouTube, including Why Delaying CPP is a Smart Move, ironically posted by a large Canadian bank.

I hope this blog is helpful to you and/or someone you know.  Invest in yourself with knowledge.  Be Prepared.

Conflict of Interest

Do Your Own Research

I was recently talking with a couple in our reader group who shared a real-life example of a situation where their research brought them to a different conclusion than what was provided by their friend and financial advisor, employed by one of Canada’s big banks.  This example provided some confirmation of the pitfalls section in the Financial Advisors blog post last fall.

‍ ‍

These readers were kind enough to share the written correspondence around this example, evaluating when to take or defer CPP payments in retirement.  The detailed points and counterpoints quite thoroughly cover both sides of the decision-making process around when to take CPP.  So much so I see it as invaluable to anyone at or near their irreversible CPP decision-making moment.  As a result, I plan to post the back and forth, in an anonymous format, as the next blog for everyone’s benefit.

‍ ‍

There was only one topic left unspoken in the correspondence between our readers and their friend, the advisor:

‍ ‍

How is The Advisor Compensated

‍ ‍

Investment advisors at major Canadian banks are primarily compensated by a percent of your assets they have under management (AUM) or occasionally by fee-based method.  In the case of AUM, the bank is receiving ± 1% per year of all funds you have invested with them.

‍ ‍

What’s the Conflict of Interest

‍ ‍

It is for the financial benefit of the advisor and their employer the bank to have more of your funds stay with the bank longer.  This directly conflicts with the strategy of delaying CPP payment five or ten years, as it means you will be taking more funds out of the bank sooner.  Note this also applies to OAS, albeit to a smaller degree.

‍ ‍

Our friendly advisor identifies to our readers he has never in 25 years recommended to defer CPP payments.

‍ ‍

Is the Advisor not a Good Friend

‍ ‍

No, quite the contrary.  I believe they are genuinely providing the best information they have available to their friends and clients.  Yet the conflict of interest remains and remains unspoken between the advisor and the reader.  How very Canadian to not discuss an uncomfortable subject.

‍ ‍

What’s the Conflicts’ Source

‍ ‍

I believe the conflict can be sourced back to the friendly advisors’ employer, which in this case is a large Canadian bank.  The bank stands to benefit from all their clients taking CPP sooner, in turn leaving more investments and increased total fees with the bank for more years.

‍ ‍

It is reasonable to assume senior leadership at a large bank would bias advisor training towards increased investments and fees for their bank, at the expense of some individual clients.  As a previous employer, I understand this only makes sense, as the bank is doing what’s best for itself and its shareholders.  In fact, if the client is also a shareholder of the bank, they are effectively in conflict with themselves.

‍ ‍

The result is this unavoidable conflict of interest between what’s best for the bank and what’s best for the individual client.  And it pays out repeatedly in meetings between individual advisors and their clients.  There’s nothing personal, it’s just business.

‍ ‍

What Can We Do

‍ ‍

We can be aware this conflict exists between our banks, insurers and other financial institutions.  We can Be Prepared to discuss and challenge advisor recommendations by doing our own research and always remembering it’s our decision to make, not theirs.  I compliment our example readers who did their research and made the decision that is best for them!

Financial Planning Software

‍ ‍

A Tool for the DIY Approach

‍ ‍

A key ingredient to developing anyone’s financial plan is the software tool used to forecast your incomes, expenses, assets and debts into the future.  Without the forecast, it’s very difficult to effectively make good decisions about your financial future today.

‍ ‍

We can access these forecasting tools in three primary ways:

‍ ‍

·         Through our advisor, where the advisor or their specialist operates a software planning tool, complemented by their professional planner training and paid for through part of your ongoing fees (maybe $10,000, $20,000, or more per year) paid to their company

‍ ‍

·         Through a fee-only planner, where you work with the specialist who operates a software planning tool, complemented by their professional planner training and paid by you for an up-front specific fee ($2000 to $5000 every few years) for the agreed service

‍ ‍

·         By ourselves, where you select one of a few software’s available for Canadian DIYers, complement it with self-training on the planning information relevant to you, and purchase your own software ($40 to $200 per year)

‍ ‍

We have in the past accessed through an advisor, a fee-only planner, and are now using the DIY approach.  As a result, we needed to purchase a software tool.

‍ ‍

Over the last year, I identified several applicable software’s and trialed many of them.  These include Adviice, MyOwnFP, Canadian Retirement Planners Software, and MoneyReady.  I’ve settled on Adviice as the most user-friendly and best value for cost.  Note there are also many free retirement calculators, but they are seriously limited relative to the software I trialed. 

‍ ‍

Considering DIY

Many of us DIY home and yard maintenance, leveraging YouTube for the necessary training.  Some of us DIY auto repairs, even cabin building.   Do you do it to save money, save time and/or because you like the challenge?

‍ ‍

A 2002 article says about 25% of Canadians DIYed (filed) their own taxes.  By 2023, this article suggests roughly 50% of us now DIY our own taxes.  I assume this growth is tied in part to the user-friendly and high value cost of the software being used.

‍ ‍

Did I mention, the CRA tax code is way more complex than a household financial plan.  If you can learn to do your own taxes, you can certainly learn to do your own financial plan.

‍ ‍

DIY without Training?

It is very important to consider the training aspect.  DIYers aren’t professionally trained.  But it is not a big challenge to become trained, as you only must learn that which is relative to your situation.  If you go down the DIY route, I speculate you may need 50-100 hours of self-training geared to your unique situation.  YouTube is a great resource.  The pro needs over 1000 hours because they must be able to address every possible unique scenario from their hundreds of clients.

‍ ‍

Your 50-100 hours and one scenario vs their 1000 hours and hundreds of scenarios puts you in a position to have an equal or lower error rate and save the money you’d otherwise spend.  Remember, only 50% of us are still paying accountants to do our taxes, while the remaining 50% are getting it done and saving the difference.

‍ ‍

As an additional level of safety, I’d also suggest when implementing DIY software you should reference against the most recent plan delivered to you from a professional.  This will give you baseline confidence to believe you aren’t missing anything as you trial and consider transition to DIY.

Is it for You?

If you have the right combination of motivation to save costs, a willingness to learn on your own time, and an interest in your personal finances, DIY may be a Be Prepared solution for you.  You can always try it and revert to your previous approach if it doesn’t fit.  What do you have to lose?

Debt

The Bad and the Ugly 

In the last blog, I reviewed what I see as ‘Good’ Debt.  Today’s discussion will focus on Bad Debt, Ugly Debt, and some financial strategies I would apply if I had a ‘do-over’, restarting as a 25-year-old. 

The Bad 

A bad (or not as good) debt is a purchase you NEED to make, but you don’t have the money to pay for all of it now.  For example, you need a reliable car to get you to work, you need to move for a job.  Even though you are purchasing for a ‘need’, not a want, you still need to be able, comfortable, and diligent in paying this debt off; the sooner you do so the better because this debt is draining away your income.  Before assuming the debt, ask yourself, can I function without this purchase (answer should be no), and can I pay it back (answer should be yes).   If you can live without it, or you will have difficulty paying it back, this becomes an ugly debt. 

The Ugly 

What is ugly debt?  One of the worst advertisements I remember seeing was for a credit card company.  The message was people ‘deserved’ a vacation and therefore should take one even if they hadn’t saved for one and couldn’t afford it.  And the ad then had people putting the vacation on the credit card as the ‘solution’.  This is good marketing, but a terrible, ugly idea. 

If it is something you don’t need, something you can’t afford (you can’t pay for it today), going into debt to get it is ugly debt.  What makes this debt even uglier is much of the time it is carried on credit cards, which charge 20%+ interest.  This is like dealing with a legal loan shark.  Avoid any ‘buy now, pay later’ incentives, unless you can pay now. 

A quick google look shows credit card ‘balance’ in Canada at $4500 per consumer.  The US is $7000 per borrower.   Assuming this is the balance after the monthly payment has been made, it is ugly debt.  If your credit card balance is paid in full every month, you are not really carrying any debt, and may get cash back, so this can be good, but only if you always make full payments each month.  How much credit card debt does the average Canadian have? - MoneySense 

‍ ‍

A Few Good Strategies  

If I had a do-over today, what would I do financially?   I have applied some of the following, but not all.  I believe if one applies as many of these as possible and does them as early in their financial life as possible, they will be soon secure in their finances. 

‍ ‍

1.       Make up a budget.  Know what your earnings are each month and know where you are spending this money.  If you can’t plan it and measure it, you can’t control it. 

‍ ‍

2.      Pay yourself first, savings should not be an afterthought.    In your budget you should know how much you spend on the big items (lodging, food, transportation, etc...)  You should also ‘know’ how much you need to save this month.  Make these savings a priority.  Pay yourself each month, and if the money goes automatically into a separate account, it is even better.

‍ ‍

3.      Have 3 months of ‘survival’ money saved and accessible (in easily cashable investments).  If your monthly cost for minimal survival (shelter, food, payments and work) is $3000 per month, save as much as you can monthly to build up $9000.  I know it is tough, especially when you are starting out, we didn’t get this in place until quite a few years after we were married.  This amount will help you to navigate many of life’s issues without requiring debt.  The loss of a job, a car breakdown, a health scare....  many of life’s challenges and costs will fall into ‘3 months of living’ threshold, and if you can afford them without debt, you will be far ahead financially. 

‍ ‍

4.      Invest.  The best way you can get to a place where your ‘money is working for you’ is if you save and invest.  One can spend the money they make and ‘live for each moment’.   I understand the alure of this approach, however, this enslaves one to a frugal retirement.   I believe a better approach is to live so you can save and invest and thereby be able to retire knowing you can then do a whole lot of ‘living for the moment’.  

With these strategies, you are/will be well on your way to avoiding the ugly and bad debt, and could be quickly pivoting to thinking, where is the best place for me to invest come money.

Debt

‍ ‍

The Good

A couple of weeks ago, Grant and I were talking about government and personal debt.  Grant (maybe foolishly) asked if I would put together a ‘Be Prepared’ segment on debt.  I (maybe also foolishly) said yes.

‍

I would like to focus on personal debt as I believe this has affected all of us in the past, maybe affecting us today, and could be something that we can positively affect in the future.  Also, I believe that since my wife Pat and I have already lived through many of these scenarios, this blog is more aimed at the next generation.  Finally, this blog does not mean I have always practiced what I preach.... Pat has been a great partner through the financial challenges we have faced; I have made plenty of mistakes, some I have learned from, some I am learning from, and some I may never get a handle on.

‍

I have always looked at debt as ‘good’ versus ‘bad’.   I’ll add an ‘ugly’ debt scenario, mostly because I believe there are pitfalls we (and our kids), can avoid in the future.  And my caveat is.... I am not an economist, and the history and results that I have seen do not guarantee the same results in the future, but I do hope they are similar. 

‍

The Good

‍Good debt...  it almost sounds like an oxymoron.   I see ‘good debt’ as debt is working for you, not against you.  If the eventual value of an asset is more than the total cost (debt and interest) paid to own the asset, this is good debt.  A great example is a mortgage to purchase a home.   Imagine purchasing a home for $500K today.  You have $50K down payment and require a $450K mortgage.  Your mortgage rate is 5%.  Let’s assume it stays at 5% for the entire 25-year amortization (total time to pay the mortgage back).  The total cost you will pay is:   

‍ ‍$50K down payment 

‍ ‍ $450K mortgage loan you need to pay back 

‍ ‍ $335K interest  

‍ ‍ $835K is the total you will pay for the home. 

‍

The value of the property in 25 years will almost certainly be worth more than the $835K you will have paid, so this is a good debt.  In the last 100 years, most homes in Canada have tripled in value over a 25-year period.  If the home you purchased even just doubles in value in 25 years, you would be ahead.  The above gain is not guaranteed and may not apply for every type of home in every location in Canada, but it is usually true.  As an example, the Average House Price in Canada peaked at over $800K in 2022, and now sits at $673K, a fall of 15%, which sounds bad.  The average house price in 2001 was $191,000, so even at today’s average, home prices have gone up 3.5X.  

‍

Like all purchases or investments, there are potential downsides to home purchase.   

·         You are tied to this asset.  It may be difficult/expensive to sell the house, so don’t think of it as a quick and easy investment to get in and get out. 

·         Purchasing your first home has many first time and extra fees (legal, real estate, taxes, insurance, furniture, tools, gardening equipment, etc...).  This is not as simple as ‘rent is expensive so I might as well buy’.  Get a good grasp of all the costs before you buy. 

·         You will need money for repairs, maintenance, and renovations, which hopefully come a little later in the life of your home, when you can afford these. 

·         There is a valid argument that renting and investing the extra money it takes to own a home is a better approach.  This is probably true, but requires a lot of discipline, since the temptation to spend this extra money instead of investing it is hard to resist. 

·         The value of your home will fluctuate.  I.E.  2007, 2019, and 2022 till today all saw downward slides in the price on homes in Canada, so it is important to make a home purchase with a long-term view, not a 3-year view. 

·         The banks in Canada do a very good job of ‘stress testing’ your ability to pay the mortgage debt, but you should still make sure you can afford to purchase a home today and know you can still afford it if the interest rates go up a couple of percent. 

‍ ‍

Here is a link to a great site for calculating anything mortgage related: Mortgage Calculators

‍ ‍

Other ‘good debt’ examples could be to open a business, to purchase rental properties or land, to pay for an education, to invest.  Doing an initial comparison of what you will pay including the debt, interest, and even income taxes (if borrowing to invest), compared to what you will gain, will help you determine if this is good debt.   

‍

In the next blog, I will describe what I see as Bad, and even Ugly debt, plus will review strategies I would definitely use if I was a 25-year-old and had the opportunity to relive my financial life.