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    Manage RRIF rules carefully – or you could run out of money

    Planning for retirement can be challenging. Attempting to balance your need for current income against the risk of outliving your savings is hard enough and, as it turns out, the federal government is not making things any easier.

    Back in 1992, the federal government was running a significant deficit and needed cash. To help rectify this problem, the Income Tax Act mandated that at age 71, Canadians must convert their registered retirement savings accounts into Registered Retirement Income Funds (RRIFs). Seniors had to begin drawing a minimum amount out of their RRIF every year, which was taxed upon receipt. This measure was implemented to help the federal government manage their cash levels and remove the deficit.

    Fast forward to today and the RRIF rules have not changed, but the landscape certainly has. In a recent report by the CD Howe Institute, it was noted that today the average 71-year-old male can expect to live almost 30% longer than in 1992, whereas women can expect to live 15% longer.

    Not only are we expected to live longer, but the investment yield environment is vastly different today than it was in 1992 when the average yield on government of Canada bonds stood between 7.2% and 8.5%. In 2014, this range has fallen drastically to between 1.1% and 3.1%.

    Longer life expectancy is a good thing, but it means we must plan to spread our retirement savings over a longer time horizon.  If the minimum withdrawal schedule implemented in 1992 were to be updated to reflect today’s longer lifespans and lower interest rates, RRIF withdrawals would start at 2.68% at age 71 and rise to 3.76% at age 85.  Instead, the mandatory minimum withdrawal begins at 7.38% at age 71 and rises to 10.33% at age 85.  The odds of living long enough to see the real value of your RRIF depleted are much higher in today’s environment.

    RRIF july20141 1024x638 Manage RRIF rules carefully – or you could run out of money
    Source: “Outliving Our Savings: Registered Retirement Income Funds Rules Need a Big Update”. Robson, William B.P & Laurin, Alexandre. C.D. Howe Institue. 2014.


    This can be problematic for seniors who use the minimum withdrawal rate as their annual spending budget. Too often people make the mistake of assuming that this rate is sustainable and will provide them with a lifetime of income. As a point of reference, in our retirement planning assumptions, we generally use a 6-7% annual withdrawal rate assuming retirement at age 65, otherwise one may risk depleting their capital. (Keep in mind that if one retires earlier, 4-5% may be a better rule of thumb to use as the maximum annual withdrawal amount.)

    How can you avoid the potential downfalls of inflated RRIF minimum withdrawal rates?

    1. Seek professional help.
    2. Do not assume that RRSPs alone will adequately fund retirement.  Build savings elsewhere – such as in Tax-Free Savings Accounts (TFSA) and non-registered accounts.
    3. Plan for added tax payments on rising RRIF income.

    Seniors, with the help of wealth management professionals, are advised to create their own retirement plan specific to their personal financial situation. The majority will likely use a portion of their minimum withdrawal from their RRIF to fund their lifestyle and transfer the remainder into a non-registered investment account to maintain savings for future spending.

    There are roughly 200,000 Canadians who are over the age of 90. In 25 years that number is expected to triple. Canadians who are beginning to think about retirement should seek professional help so they can effectively manage their savings to provide security and peace of mind throughout their retirement years.

    How to protect your investments from a market downturn

    At our investment meeting this week, one of my colleagues shared the news that he had received a call late the night before from a prospective client confirming his decision to hire us to manage his portfolio. While that itself is not news we’re thankful to say, what was interesting was the voice mail message the investor left, saying, “The market seems a bit high so I’m moving my money over to you guys to put to work in your more diversified platform.”

    Although we may be biased, we think there is merit in what he says — and we applaud his foresight. Too many investors (even professional ones!) have a tendency to extrapolate current investment trends well into the future. That is, they buy in after markets have been performing well only to sell out of fear when they turn bearish. In other words, they buy high and sell low. Frequently-cited research by DALBAR shows that over the past decade, investors have cost themselves potentially 4% per year in returns by doing the wrong thing at the wrong time.  In this business, one must be vigilant about not letting emotion drive decision making.

    Let’s face it, the last few years have been good ones for investors.  The media has been full of stories of the Dow Jones Industrial Average making new highs. Stock markets have been strong throughout the world, and that has people feeling good about their investments. The data shows us that volatility is down, which indicates investor complacency. We haven’t seen a meaningful market correction since 2011. It’s nice when you have the wind in your sails. However, to further that analogy, what will happen when a storm blows in? The pundits are warning of the next market correction. Have you heard of the Swoon in June? What’s next, the Slide in July? What rhymes with August?

    As risk managers, we are always concerned about protecting capital. It is interesting that recently we have had more conversations with people, like the above-mentioned investor, who have done well with their investments over the past few years by taking higher risk, and are now looking to protect what they have gained. They are coming to us for a more diversified and conservative approach than is commonly available.

    We welcome the opportunity to put our experience and expertise to work for these people, and we hope we can save them some angst and pain if and/or when the “Scourge in September” comes along. Will you be ready?

    Why the deep freeze is good for your portfolio

    car in the snow21 150x150 Why the deep freeze is good for your portfolioApart from the Olympics, the most popular shared experience these days is talk about the weather. To be specific, the bitter cold that has hit most of Canada – and given rise to the new and now popular term, ‘polar vortex.’ However, there is a silver lining to these snow-filled clouds – and not just for those who enjoy winter sports.

    Demand for natural gas has risen appreciably with the decline in temperatures. And that’s good for investors like ourselves who took a contrary view back in 2011 when the commodity was deeply out of favour. At the time, in North America, natural gas was trading at approximately $1.80 per one million British Thermal Units (BTUs) and producers’ stock prices were depressed.

    But for investors who took a longer-term view, a different picture was emerging. One that held the potential for significant profit.

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    Is the U.S. market due for a correction?

    Is the U.S. stock market poised for a correction? Is January’s decline of 4% the start of a bigger correction?

    These are perfectly understandable questions. In fact, we hear them repeatedly when meeting with our clients here at Newport Private Wealth. And they are being heavily debated within our Investment Committee and by investment experts whose opinions we value. After all, the S&P 500 has increased by almost 50% in the last two years including 30% in 2013.

    The pessimists are arguing that:

    • the S&P 500 has increased for five consecutive years and a six-year streak has only happened once before (1982-89); and
    • market returns after two consecutive years of double digit returns have typically been modest; and
    • the stock market is expensive at 16x earnings.

    (Source: BMO Nesbitt)

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    Risk management is a hard sell!

    Equity mutual funds are getting a late Christmas gift this month: they are finally able to drop return data from 2008  from the calculation of their five-year performance numbers. Why is that important?

    In 2008, global equity markets fell between 30-54% (as if we need reminding!). Given that mutual funds generally report one, three, five and ten year historical performance, dropping 2008 from their critical five-year returns will optically improve the numbers, no question. But what does it tell us about risk? Those better five-year numbers might attract some investors to a level of risk they don’t want — and perhaps don’t understand. Let’s look back for a moment.

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    Future looks bright for Vision Critical

    vc blog 150x150 Future looks bright for Vision Critical Rarely do we write about specific investments in this blog, however, a recent post by Wellington Financial about one of our private investments caught our attention and we thought to share it with our readers.

    Vision Critical’s $10.5M secondary clears the deck for potential IPO.

    Vision Critical is a fast-growing Canadian tech company that has become a major player in global market research solutions. The company was founded in 2000 by noted entrepreneur, Dr. Angus Reid (former founder of Angus Reid Group, Canada’s largest research and polling group) and his son, Andrew Reid.

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    10 tax saving tips to do before year end!

    clock 150x150 10 tax saving tips to do before year end!With the arrival of December, our attention often turns to holiday preparations — but it’s not too late to save money on your taxes if you act soon.

    Here are ten tax planning ideas to consider before year end:

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