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January 1999

Commentary - Hans H. Mathisen

    As we enter the last year of the 20th Century, I'm enclosing LIFE LETTER for January, 1999 (Jeans RRSP Income Options -Part 2). This issue is a continuation of the December, 1998, edition, The facts stated in the enclosed LIFE LETTER is but a sad commentary on Canada's economy and the Canadian equity market. It must be assumed that all a RRIF will safely earn is 6% annually over a long period. So, realistically, an annuity is a better deal, even at today's historically low interest rates, But, remember, we live in Canada, and the Canadian equities' performance is very poor ... read on...

   THE STOCK MARKETS -- According to the World Market Update from AGF Group of Funds, Canada is the only country in the Industrialized world which had a negative stock market performance in 1998. Even Japan and Hong Kong did better than we did. You'd have to be invested in Latin America, Emerging Markets or India in 1998 to do worse than we did in Canada last year. (It hurts our egoes and our wallets when we lose).

Question: So what should an investor do in order to get out of Canada?

Answer:   There are several Canadian Mutual Fund companies which have top-performing U.S. and European funds. Invest in those funds.

Question: And what about the 20% Foreign Content Rule for RRSPs?

Answer:   There are 100% RRSP eligible Funds available which allow your RRSP money to participate in the growth of the United States and Europe.

    As the time of the year approaches when most of us review our RRSP portfolios, I encourage you to contact me in order to find out how 100% of your RRSP portfolio can get out of Canada. In this way, the growth of your RRSP investments are more likely to be on the positive side of the ledger. This year and for many years into the next millennium.



Hans H. Mathisen

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Jeans RRSP Income Options (Part 2)

    Jean Johnson, age 67, will have to choose one of three RRSP income options when she's 69. She must either cash it in, convert it to a Registered Retirement Income Fund (RRIF) or purchase a Life Annuity. Last month's Life Letter explored the first two choices.

    By age 69 she should have $205,000 in her RRSP. Cashing it in will expose this whole amount to income tax at the top rate in the year received, so Jean rejects the first option.

    She would like to draw $18,000 annually from these savings for as long as possible, so wonders how long a RRIF would provide it. If she were to draw $18,000 each year, and it earns an average 6% annually, there'll be nothing left in Jean's RRIF by her 89th birthday..

    She could try to obtain a higher return, or reduce her income needs. But, regardless of the rate of return, and the income she wants, eventually her RRIF will be empty, because a greater percentage of it must be withdrawn every year until it levels out at 20% of her RRIF balance.

So her principal concern about a RRIF is will it last as long as she does?

    A Financial Post article entitled Life annuities a good bet right now pointed out that when a RRIFs withdrawal rate exceeds its annual return, recipients must encroach on capital. Increased withdrawal requirements and lower interest rates accelerate this process. As each withdrawal eats into capital the interest income from it is reduced, so more capital must be taken in each successive year to make it up, rapidly exhausting the RRIF.

    Jean is in good health, comes from a long-lived family and knows that life expectancies are increasing. She expects to live to see 100 and wonders if a Life Annuity is a better solution.

    A Life Annuity is the only option that guarantees her an income for the rest of her life. But will it provide enough? Well, almost. It will guarantee her $17,778.65 every year for as long as she lives. Should she die within the first ten years, the income will continue for the balance of the ten years. The downsides are: this may not leave much for her adult children and she will not be able to direct its investments.

    Those who want to leave more for their heirs, says the Financial Post article, "should focus more on their own long-term financial needs and less on their kids". Jean is not interested in leaving money to her children, so the fact that there may be little left for them from her life annuity is not a concern.

    The fact that she can no longer control its investments does not concern Jean either as it frees her from worries about interest rate and stock market fluctuations. Or as another Financial Post article says, "With an annuity everything is set and there are no further decisions to be made."


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