Commentary - Hans H. Mathisen
"Will it or won't it?" - asks LIFE LETTER for September. A lavish life style is rarely indicative of true wealth.
LIFE LETTER MATURE - —“Yes, Virginia, there are death taxes in Canada” reminds us that taxes can be postponed, but eventually the Canada Revenue Agency will get their share. “The 183 day rule” outlines how to calculate the number of days spent in the U.S. in order to avoid having to file an income tax return in that country.
THE STOCK MARKETS - As of September 30, the last day of business for the third quarter of 2013, the S&P TSX was up 2.61%. The Dow Jones gained 15.02%, and Nasdaq grew 26.26.10%. In Europe, Germany’s DAX was up 13.28%; France’s CAC grew 14.37%; and England’s FTSE 100 gained 9.43%. In Asia, Japan’s NIKKEI was up 34.91%, and Hong Kong’s HANG SENG grew 2.13%.
It’s obvious that the action has not been in Canada the first 9 months of 2013. Let’s have a peek at how the future looks for the major economies:
Canada’s economy rebounded strongly in the first quarter of 2013. GDP grew at a 2.5% annual rate, exceeding even the most optimistic forecasts. Forecasts for the remainder of the year are still rather positive. The economy keeps expanding at a steady pace, albeit still a rather modest one, and the nation’s economic growth is among the strongest in the G-7.
It’s worth noting that while the S&P TSX Index was up by 2.61% for the first 9 months of 2013, no Equity Fund clients of Mathisen Financial, Inc. is invested in earned less than 8.0% for the same period. That’s more than three times better than the index, and it certainly beats Fixed Income!
The U.S., the world’s largest economy, is expected to grow at 1.5% in 2013, picking up to a 2.6% pace next year, according to the International Monetary Fund’s recent report.
China’s forecasts are for 7.6% growth in 2013 and 7.3% in 2014, says the IMF.
Europe’s contraction will be 0.4% in 2013, and the European single-currency block is expected to return to growth next year, albeit at a tepid 1.0% annual rate.
Japan, battling years of deflation and stagnation, is showing “an impressive pickup” in growth, thanks to the Bank of Japan’s easing policies and the government’s stimulus, according to the IMF.
The Global economy is expected to grow 2.9% in 2013 and 3.6% in 2014. “Four years after the Great Recession ended, global growth remains in low gear”, the IMF said in its World Economic Outlook report, released October 8, 2013.
So, how should we invest our money in view of the forecasts above?
It appears that our money should be invested in large U.S. companies like Wal-Mart, Apple, General Electric, General Motors and many other mega-corporations that do a lot of business in China. This is the only way we, the small investors, can particfipate in China’s 7.3% economic growth. As the firms mentioned above earn a pile of money in China, the price of their stocks go up. We need our funds to own these mega-corporations.
Why life insurance?
Life insurance is initially purchased for any of a number of reasons. As time goes by, however, many people question why they are still carrying their policies as the original purpose may no longer apply. Here are the three basic uses of life insurance:
Estate Creation - When Ralph and Alice bought their first life insurance policies, they arrived at the amount of coverage with the help of their insurance advisor. The advisor used what is known as a Capital Needs Analysis (CNA) to arrive at the proper amount of insurance. A CNA measures how much of an estate needs to be created in the event of the death of either Ralph or Alice so the survivor can maintain their standard of living.
The CNA has three parts:
1. Cash needs at death - This includes final expenses (funeral & burial, legal & probate, taxes); mortgages and other debts; child or home care costs; education funding; emergency fund; and, special bequests and charitable funding.
2. Income needs at death - A calculation is made to determine how much income the survivor needs for their standard of living. Existing sources of income are deducted from this amount to arrive at capital needed to replace any income shortfall.
3. Cash available at death - There are some plans in place already that can contribute to Ralph and Alice's estate to offset their needs. They used life insurance to create the rest of their estate.
Estate Conversion - Ralph is a part owner in a business. He has built up substantial value in his shares and wants them to contribute to his estate value on death. However, Alice does not want to be a part owner of the business nor does Ralph's partner, Ed, want her as a partner.
Ralph and Ed each bought life insurance to allow them to convert the value of their shares to cash for a surviving widow. Let's say Ralph died. There would be enough life insurance proceeds available for Ed to buy Ralph's shares from Alice.
Estate Conservation - Ralph and Alice want all of their estate to go to their children on death. As they grow their estate, they also increase the amount owing their silent partner - the taxman.
In their case, they have postponed tax liabilities growing in their registered retirement plans, Ralph's business and their lake cottage. Some estate assets can pass to a surviving spouse without a tax bill, delaying the final expense until the second person dies. They can't forget the funeral and legal bills.
Ralph and Alice can use the life insurance policies they originally bought to create an estate to conserve their estate. The tax bill will still have to be paid, but their children can use the proceeds from the life insurance, dollars that were paid for with pennies.
This article is for information purposes only and is not intended to provide specific insurance or income tax advice.
Life insurance – because it’s the right thing to do.
Call Hans Mathisen today at (306)242-7042.
Copyright © 2013 Life Letter. All rights reserved
Will it or won't it?
Will and Cathy were the envy of the neighborhood. Their home was the largest on the block and had a swimming pool in the back yard, complete with hot tub. They each drove new luxury imported vehicles, Will an SUV and Cathy a sedan, and replaced them every three or four years. Every winter they went on a two week all-inclusive vacation and always flew first class. Will and Cathy prided themselves on always wearing the latest fashions and their two children were always dressed very fashionably as well.
Everyone thought that Will and Cathy were wealthy. They mistakenly thought so themselves. Nothing could be further from the truth.
A lavish lifestyle is rarely indicative of true wealth - usually it’s just a show of good cash flow that’s being consumed. Let’s take a look at some of this “show” of wealth:
Large home with swimming pool - Will and Cathy really did live in their “dream” home. However, in order for them to get into it, they got the biggest mortgage they could get based on the purchase price in an unusually low interest rate environment. A pool is an expensive luxury, to install and to maintain, and in most areas of Canada actually takes away from future re-sale value. The home consumes a lot of their earned income every month.
Luxury foreign vehicles - Wonderful to drive, but expensive to maintain. Plus, they depreciate in value just as quickly as a domestic vehicle. Contrary to what what the salesperson said, they don’t really “hold their value” over time.
Exotic vacations - Very enjoyable, but they are nothing but a consumption of income.
Expensive clothes - Great to wear, look at and be seen in, but again, a big consumption of earnings.
We all have basic needs - food, clothing and shelter. Anything above the basics is simply lifestyle. Lifestyle does NOT contribute to wealth; it is simply a show of consumption. This is not to say that we shouldn’t have a nice lifestyle, but don’t sacrifice the accumulation of wealth for the so called “good life.”
There are only two things that can generate an income - a person at work or money at work. All too often, it is falsely believed that the earned income will always be there, and a lifestyle is lived based on that income or even beyond it.
Will and Cathy eventually realized that they really weren’t accumulating any real wealth. They started asking themselves a very important question before allocating any of their money beyond their basic living needs - will it or won’t it contribute to our wealth?
The truly wealthy tend to avoid the instant gratification so prevalent today. It makes more sense for them to wait until they have built up an income producing asset to the point where its cash flow covers the cost of the lifestyle expense.
Plan for true wealth – because it’s the right thing to do.
Call Hans Mathisen today at (306)242-7042.
Copyright © 2012 Life Letter. All rights reserved
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