Brian Mallard and Associates

There is a difference between an event and a trend. An event is an occurrence, especially one that is particularly significant, interesting, exciting or unusual. A trend, on the other hand, is a general tendency, movement or direction. So, now that I have provided a definition of the difference, you might ask what does this have to do with the price tea in China or the price of gas at the pumps.  

Unless you live on a deserted island or ride a bicycle, the price of gas at the pumps has risen by about 20% over the past two months. When the price of a commodity goes up, it usually has something to do with a reduction in the supply or an increase in demand. I can tell you that there has been no substantial disruption in either the supply of crude oil or the production. What there has been is a potential disruption in supply if current events in the Middle East result in the destruction or shut down of the Libyan oil production infrastructure. In other words, if Muamar Gadaffi determines he will be ousted as the president and blows up everything, Libyan oil production would be shut down for an extended period of time. Remember, both sides in this dispute have stated that they will not blow up oil production facilities. Fear of this event has led to speculation of its certainty and speculators have pushed the price up to take advantage of the fear component.

I have no way of knowing if this is going to happen but I can tell you how much effect it would have if it did. Libya is the 18^th largest oil producer in the world. It represents about 2% of world production. Most of this production goes to Europe. If all of the production was blown up, the other producers would have to increase production by about 2%. This is not a significant increase.

I have heard commentators in the media speculate that the price at the pumps could reach $1.30 a liter by the summer. It might if there is a major disruption in other Middle East producers such as Saudi Arabia but there appears to be little indication that this is likely.

The last time oil spiked up to $140 per barrel was in the summer of 2008, reaching $147 on July 11th. I can remember hearing these same clairvoyants prognosticate that the price would continue to rise to over $200 per barrel. I thought they were nuts and I was correct. The price actually fell drastically to a low of $30.28 per barrel on December 23rd, 2008 . During this same period the price at the pumps went up to about $1.40 per liter and then fell to a low of 73 cents. The price declined so rapidly because demand fell due to consumers deciding to drive less and the great recession resulted in substantially less economic activity.

It would not surprise me to see a trend similar to the one in the aforementioned period. Oil prices could continue to go up if the Libyan crisis is not resolved. This event will eventually be settled. Oil production will likely continue regardless of who is running that country. They need the revenue. Economic conditions will settle down and oil prices will come back to earth. It is quite likely that the world will return to the trading range of between $60 and $80 per barrel. The price at the pump will revert to about what it was before this event. Then the clairvoyants will move on to their next “crisis” that will have “permanent” impact. I will examine that situation with same degree of skepticism that I view their current comments regarding this one.

I made the mistake of watching the Academy Awards on Monday. It was a mistake because I rarely go to movies and had no idea whom the people were and what movies they were honoring. The reason that I bring this up is to point out a misconception voiced by one of the people who won an award. He felt the need to point out that the economic meltdown in 2008 had been a financial meltdown brought about by nefarious CEOs of banks and the like. He pointed out that none of these people had been put in jail and that this was some monstrous injustice. I remember his point but cannot recall what category he got the award for. I think it might have had something to do with embellishment or dramatization.

I am not saying that banks and bankers are blameless but they were really bit players in this mess.  I recently put up a link to a very thoughtful and well researched economic paper by Dr. Ross MkKitrick, Economics professor at the University of Guelph. If you are wondering what happened and who is to blame check out this link. It is fascinating. For those of you whose eyes glaze over at the mere mention of the topic of economics, go to page 28 and read who he pins the blame on and what we can do to prevent this from ever happening. Interestingly, he does not put any of the blame on the banks generally but rather singles out an insurance company, AIG, and their financial products group for 20% of the blame. He places the majority (50%) of the blame squarely on the shoulders of two administrations in the US; Clinton and Bush. This was not a failure of capitalism; it was social policy trumping economics. If you read it, this paper will help you know what happened so you can recognize bad social policy and understand the consequences.

Life insurance is designed to help you provide for those you love most long after you are no longer with them.  It is designed to provide a lump sum of tax free cash that can be used how you best need it.  It can create a steady stream of income to replace your lost earnings as well as clear your family’s debts.   It can bring fairness into the passing on of your estate or it can be used to reduce the tax burden of your estate.  Lastly, it is a means whereby families can more efficiently increase the wealth of each succeeding generation.

Critical illness insurance protects your finances from the big three illnesses: cancer, heart attack and stroke.  It provides a lump sum of tax free money that you can use for whatever purpose you deem fit.  It may be used to increase your treatment options, it may be used to replace income during treatment, it may be used to prevent you from withdrawing your retirement savings (which, if registered, are taxable), or it may be used to allow your spouse to take time off from their job in order to be by your side.  Ultimately the point of this insurance, like any insurance, is to provide you with a level of financial security.  When the worst happens it is worth more than just the dollar figure to know you don’t have to worry about where the money is going to come from; getting well can be your whole focus.

Disability insurance and Group health and disability insurance, at its core, provide you some measure of wage protection in the event that you are not able to work.  For a large part of your life, excluding childhood and retirement, your single biggest asset is your job.  Without income everything starts to fall apart; you must sell off assets, not always for a fair price, you have to curtail your lifestyle and often you must give up some of your dreams.  Disability insurance provides a way of cushioning your fall and allowing you the income to realize a portion of your former wages, thus protecting both you and your family from the terrible scenario of having no income which leads to forced sales and liquidating assets in a dizzying downward spiral to penury.

Insurance should be an integral part of your financial security planning and we have the resources and expertise to advice on all sorts of insurance needs, from family protection to corporate protection, and mortgage insurance to estate planning. 

The following link provides an interactive life insurance needs analysis (figure out how much and what type you need).  It is useful as a place to start but the best place to get insurance advice is from an insurance professional.  http://www.aegoncanada.com/Video/Life/en/Transamerica_LifeScripter.swf

Within our world of investing we certainly have no lack of options. But, when you think of what you should be investing inside your TFSA do all of these options apply or should some have a higher priority?

First let’s list what the primary investment options are for our TFSAs. While I will not list everything possible, I will list the most prevalent choices I’ve seen utilized during the previous three years’ deposits (TFSAs were first made available to Canadians in 2009). They are as follows:

1. Savings Accounts

2. GIC

3. Mutual Funds – low risk Bond Funds, Balanced Funds, Canadian, US, or International Equity(stock) funds, or higher risk Precious Metals Funds or Emerging Market Funds.

4. Individual stocks and/or bonds

Which of these choices are best? Which of these are the right choice for you?

Answer: As always the best answer is that it depends upon your goals and time frame BUT you should keep a few basic principles in mind before deciding on your time frame.

1. If you invest $5,000 every year for 10 years into a Savings Account earning 1%/year how much will you saved in taxes over the 10 years? Answer: very little. You would have deposited $5,000 x 10 years = $50,000. If the TFSA is earning even 1%/year your gain was a total of $50 the first year. Tax on the $50 is at most $23(if you are in the highest tax bracket) or $12 if you are in the lowest tax bracket. So, you would have saved somewhere between $12 and $23 in taxes in year 1. Wow!   Moreover, after 10 years of investing in this TFSA your gain was ~$2,800. So, IN TOTAL, YOU SAVED IN TAXES, somewhere between $700 and $1,250, depending on your tax bracket. Keep in mind, this is over a period of 10 years!

2. If you invest in something that averages 6% annually, how much tax do you save?

The growth on this same $5,000 deposited annually over 10 years becomes almost exactly $20,000(instead of $2,800 above). So, now you save somewhere between $5,000 and $9,000 depending upon in which tax bracket you are. The tax savings is more than 7 times as much in just 10 years!

3. If you invest in something that averages 8%/year the tax savings is obviously much greater over 10 years. After 10 years, at 8%/year the gain is ~$28,000. This means the tax savings will be somewhere between $7,000 and $12,600. These numbers do start to have a little significance!!

In addition, if you run the numbers out further, over 15 -25 years the differences become even more substantial.

So, you say, get me 8% Guaranteed and I will heed this advice!! Yes, it would be nice but it isn’t possible in today’s marketplace. But, I reply, where do you even have a chance of getting 6% or 8%? Well, we know with savings rates being as low as they currently are, it is impossible to get even 3% there. Even in GICs, it is very difficult to get 4% unless you lock in for 5 years. Mutual funds and individual stocks or bonds at least present you with the possibility of getting 6-8%, or even more. Yes, granted, they could also get you less if you reflect back on 2007 or 2008. But, I suggest, if you are in TFSAs for the long term, which is the recommended way to really save on taxes, your investment in a mutual fund or individual stock or bond has a much greater probability of earning a decent rate of return, i.e. somewhere between 6 and 8%, assuming it is invested in something that has at least a minimum of 25% stocks inside it.

BUT, you say,  you only want to use your TFSA for the short term. Cut this long term discussion. If that is the case, I suggest you consider how much are you really saving in taxes and is it worth it to deposit and withdraw frequently from a TFSA(where there are certain restrictions placed on re-plenishing your TFSA within a given calendar year). Maybe you should just do these shorter term savings outside your TFSA in a simple non registered account and save your TFSA for longer term investments when you have the funds. The $5,000 annual deposit limit carries forward and accumulates even if you don’t use it.

1. Where Should Your Money be?

RRSPs, TFSAs, Life Insurance, Non Registered Mutual Funds, Stocks,  Bonds

This article is written primarily for those of you who are planning on retiring within a few years or who have already retired. If you are not retired yet, or are very near retirement age, or even early in retirement, you might be wondering if you should be putting money into RRSPs, into Non Registered Investments, Life Insurance, or into TFSAs?

Assumptions:

•     you have no consumer debt
•     you have no significant debt of any type
•     you have life expectancy of at least ten more years
•    you will be receiving CPP and OAS as you reach the appropriate age.
•    you have money in RRSPs or RRIFs, possibly are receiving some monthly income from a RPP, have some non-registered money(GICs, Savings Account, mutual funds, stocks, and/or bonds)

RRSPs — yes or no?

It really is a pretty easy answer: Yes, if your income is higher in the current year than it will be during future years and no, if it isn’t.

TFSAs – yes or no?

Absolutely yes. Finding the money to invest inside a tax sheltered savings vehicle like a TFSA is a must. Why? It is tax protected for you for as long as you live and the value even passes on tax free and estate fee free to your named beneficiary.

Very simply—There is no better deal!

Life Insurance – yes or no?

Yes, if you have some extra money you will definitely not be spending and want to leave some tax-free, probate-free funds to your named beneficiaries. The additional benefit is that unless you live well beyond life expectancy, the net value of your estate will be greater to each of your beneficiaries than if you would just have left the funds in a non-registered investment and paid the tax on the gain each year.

To best answer the question—where should your money be —-      it comes down to understanding the following scenario. Many of you have been, or will soon be, the Executor/Executrix of one of your parents’ estates. Wouldn’t it have been great if your parent’s estate would have consisted exclusively of the proceeds from a life insurance policy and/or a TFSA?

Why you ask?

Very simply, it would have passed tax free, estate fee free, and, as importantly, ‘hassle free’, to each named beneficiary. Very simply, it couldn’t be easier! The reality is, however, TFSAs have only been here for a few years(2009) and the amount we are permitted to contribute to them is only $5,000/individual/year so no one can have accumulated a whole lot of money in TFSAs as of yet.

In addition, your parents, in all likelihood, didn’t have a lot of money that they definitely knew they would never need, so it was virtually impossible for them to have any sizeable amount of money inside a life insurance policy.

But, if we can turn the clock ahead a few years, won’t it be easier for our Executors to administer our estate if as much as possible is in our TFSAs and life insurance policies?

Bottom line recommendations:

1. Whatever money you definitely will not be needing should be used to purchase a life insurance policy. Or, if you already have one, you could dump extra money into it in order to enhance its’ tax free value to your named beneficiaries. Remember—it is the after tax death benefit value that matters, not the cash value.
2. Maximize your TFSA each year, regardless of your age. If you don’t have the money, use other sources such as your non-registered investments or your RRIFs(provided you don’t enter into  another tax bracket when you withdraw the funds. Invest these for the long term.
3. Leave the rest of your money tax protected until you need it. This could be in the form of RRSPs or RRIFs. You could also use the ‘Class’ Structure of Mutual funds offered by most fund companies at this point in time. While these have only been around for a few years and do not guarantee they will have no annual distribution, history has shown that they have significantly less distributions than do regular mutual funds.