Affiliated with Sentinel Life & Sentinel Financial Management Corp.
January/February - 2000
Commentary - Hans H. Mathisen
Welcome to year 2000! LIFE LETTER for January deals with some basic planning strategies that pertain to personal finances, and even though we're 6 weeks into the new year already, the points covered are well worth keeping in mind.
LIFE LETTER for February deals with the income taxes you have to pay when you and your spouse are retired. By contributing to a Spousal RRSP now, the tax burden can be less for you and your spouse in retirement.
THE STOCK MARKETS - the TSE 300 Index had a great year in 1999. The total return for the 300 companies included in the Index was over 30%. but this "fabulous performance" has me worried: You see, if you take out the two best-performing companies on the TSE 300 Index (BCE and Nortel), the TSE 300 Index had a total return of 4.9% for 1999.
This brings me back to my favorite investment criterion: diversification. Canada only comprises 2.3% of the world's equity markets.
Indexing the Globe diversifies your investments around the world, while still 100% RRSP eligible. You don't have to worry about the "20% Foreign Content Rule". Many of my clients are now in "the 5-Way Split", as indicated on the enclosed chart of Ing Life - Fund Performance. Also: You have guarentees when you invest in this group of funds. Ask me.
For those who wee invested in "the 5-Way Split" for all of 1999, the annual return was a healthy 57.26%. (Hey, that even beats the TSE 300 Index performance for 1999!). By being invested in "the 5-Way Split", you're also invested in 87% of the world's ezuity markets. (The 13% you're not in are Emerging Markets. That's too risky for my taste). And 40% of your money would be in the high-tech sector through the NASDAQ Index and Information Technology.
If this approach to investing appeals to you, please give me a call. I'll be pleased to give you more information on a one-on-one basis.
Hans H. Mathisen
At 46, with few financial resources to show after a quarter-century in well-paid jobs, Kim decided to list a few money-management resolutions to create a better future. Here they are:
1. Buy less on credit. Hardly a month goes by without an offer for a new credit card arriving in Kim's (and our) mail. And it is far too easy to use them. Have you ever had someone in a checkout line in front of you make a credit card purchase for less than ten dollars? Want items are best paid for with cash. All too often we make these kinds of purchases impulsively only to wonder why the next day. And we forget that credit costs money in other ways. Carrying a credit card balance from month to month, for example, can easlily double or triple the cost of the item you purchased by the time it's paid for.
2. When you must borrow, get the best rate. It's difficult to avoid debt altogether. When you do have to borrow, the lower the interest rate the better. The difference between a 10% and an 8% four-year car loan for $20,000 is $839 in extra interest. Surely you have a better use for this kind of money. It makes sense to shop around for the lowest rate.
3. Pay off debts as quickly as possible. Especially credit card balances as they carry the highest interest rates. A typical department store credit card carries a 2.4% per month compounded interest rate. That's 32.9% annually! So a $1,000 purchase carried on a credit card for a year will actually cost $1,329. For a house mortgage, the shorter the payback period the better. $100,000 at 8% saves $30,157 in interest if paid over 20 instead of 25 years. And a 20-year mortgage payment is only $65.15 more each month.
4. Pay yourself first. Usually, we have too much month left over after the pay-cheque. If you wait to save money until after all the "other things" are paid for, there's never anything left. If you don't see it, you don't spend it. You can have an amount deducted from each pay cheque to buy Canada Savings bonds, transfer a specific amount each month from your chequing account to your savings account, make monthly deposits to you RRSP, deposit to your investment funds monthly or increase your Universal Life insurance deposits. You make loan payments each month. Why not make financial future payments the same way?
5. Plan for your future. The future will not take care of itself. We have to plan for long term things like education, retirement and major purchases. We must also plan for the financial emergencies that unemployment, a falling economy, disability, death, or rapid inflation can bring. We cannot rely on our employer, the government or a Fairy God Mother. We must take action ourselves.Want professional help to improve your own financial future? Call Today!
Beating Tomorrow's Tax Collector
Adam and Eve, like most Canadians, are unhappy about the amount of income tax they have to pay today. Therefore, they are both putting as much as they can into each of their RRSPs.
But they are also looking at their tax situation after retirement. Adam will be receiving a large pension income from his employer when he retires, but Eve will not. Adam's retirement income will be heavily taxed, while Eve's tax load will be comparatively light. The total tax will be heavier than if their incomes were equal.
For example, if they were to receive $60,000 of retirement income in just Adam's name, he would have an income tax bill of about $16,780 (in British Columbia). However, if they had retirement income of $30,000 each, their total tax bill would only be $12,278, a tax free benefit of $4,502. the advantage of such income-splitting is that it reduces income taxes by shifting income from a higher-tax individual to a lower-tax one.
How can they reduce Adam's post-retirement tax level? There are a number of techniques, but one of the easiest and most effective is the Spousal RRSP. Instead of contributing to his own RRSP, Adam contributes to Eve's RRSP but gets the income tax deduction just as if he had contributed to his own plan. The spousal RRSP and its earnings are Eve's property. It does not affect the amount that Eve can contribute to her own RRSP as long as she has the contribution room. This tax-saving tool is also available to common-law couples.
Separate RRSPs are usually set up to accept spousal and personal contributions because withdrawals from Eve's spousal RRSP in the year of contribution or the following two years would be taxed in Adam's hands.
Even if Adam is over the age of 69 and no longer able to contribute to his own RRSP, he can still make spousal RRSP contributions until the end of the year that Eve turns 69. He must have earned income or unused RRSP contribution amounts to be able to do this, though.
Because Adam is a member of a generous pension plan, he is limited in the amount he can contribute to RRSPs. This adds a challenge to planning for equal incomes at retirement. Non-RRSP savings can also be managed to foil future tax collectors. At retirement, these savings will produce income, just like their RRSP savings. Wouldn't it make sense to also have their non-RRSP savings accumulate in Eve's hands? This also minimizes taxes now as Eve is in a lower tax bracket and the ongoing income these investments generate will be taxed in her hands. This can be accomplished by Adam paying the household expenses and Eve saving in non-RRSP plans instead of splitting expenses and savings like they have in the past. To discuss this and other tax reducing strategies, please call.
Copyright ã 1999 Bowen Financial Inc. and Donald F. Pooley, Inc. All rights reserved. Illegal to copy without written permission.
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