May 2011
May showers, bring June flowers......



As the seasons change and continue keep us on our toes, you can look forward to an interesting  Canadian Summer.  This year has brought us highs and lows and we welcome visits from all our clients to address and celebrate the challenges we come into. 
We hope you enjoy our May 2011 newsletter and encourage you to share it.  We welcome your feedback, since your suggestions drive the content of what we present to you each month.  As always, we endeavour to provide such a high level of service, that you are proud to refer your family, friends and colleagues. 
Thank you

The Economist's case for raising the retirement age to 70

An article by Jonathan Chevreau - The National Post


The cover story on the newest edition of The Economist, published online Thursday and probably not in "dead-tree" editions until early this week, is entitled 70 or bust!

The influential weekly British newspaper argues "current plans to raise the retirement age are too timid. Governments must go much further."

By further, it means raising the retirement age to 70, which is a good half-decade beyond the "traditional" retirement age of 65 and 15 years longer than the magic 55 enjoyed only by a handful of fortunates who joined Defined Benefit pension plans early in life and stuck with it.

The lead editorial blames "demography and declining investment returns" as factors conspiring to keep workers chained to their desks longer than most expect or hope.


It notes the life expectancy of the typical 65-year old has improved by four or five years since 1971, a prospect that hit home this week in news stories about centenarian teachers who have collected pensions for more years than they paid into them.

That's not mentioned by The Economist's package of pension stories but there is another oblique reference to Canadian pensions. A sidebar notes the most siblings to reach pension age were 7 sons and 12 daughters born to the Theriault family in Canada between 1920 and 1941: all were still collecting Government pensions in 2007, at which point their ages ranged from 66 to 87.

In another telling sidebar, it says the first American to receive a monthly Social Security cheque was Ida May Fuller, who paid in just $24.75 and had received $22,888.92 by the time she died at age 100.

Secure DB pensions eclipsed by risky DC ones

There's familiar coverage of the steady decline of Defined Benefit pensions and the corresponding rise of Defined Contribution plans that put more market risk on the shoulders of workers. It concludes workers will need to "fend for themselves," particularly the massive middle class.

It ruefully reminds us the rich don't need to worry about retirement while the poor will be supported by the state. Those in the middle used to rely on lifelong employment with firms hosting DB plans but few can do so in modern times. Unfortunately, the amount most have saved in DC pensions or their equivalent (the Canadian RRSP or American IRA) has been woefully inadequate, and what little has been stashed away has suffered from disappointing investment returns.

3 reasons for working longer

Hence the inevitable if depressing conclusion: keep working. The magazine suggests Europeans should raise the retirement age to 70 by 2040 while a slightly younger America could afford to "keep it a smidgen lower."


Society reaps three big advantages by raising the retirement age: workers get more years of relatively higher wages; the government gets all that extra income tax revenue on those earnings and simultaneously pays out less in benefits; and the economy grows faster.

The challenge, it concludes, is to have high enough state pensions that the elderly who failed to save can survive "without penalizing those who have been thrifty. That is the least people deserve in return for toiling until they are 70."

That goes right to the heart of the pension debate now occurring in the Canadian election. All three major parties promise to hike the Guaranteed Income Supplement for poor seniors who failed to save. Meanwhile, at the other extreme, the Conservative government is trying to help those who do work and save by doubling contribution amounts in Tax Free Savings Accounts.


The DB vs DC pension debate is also central to the election, since the Liberals want to expand the DB-like Canada Pension Plan but also offer an RRSP-like publicly administered DC plan. The Conservatives want to make it easier for smaller companies to offer workers "pooled" Registered Pension Plans that will likely be DC-like.

No doubt many will conclude private-sector taxpayers should keep working till 70, even as politicians and public-sector workers enjoy full retirement a good ten years before that.

Why renting is beginning to look like a great deal

An article by Rob Carrick - The Globe and Mail


The housing market has entered a period of stability - those who think the market will fall and those who think everything's fine have neutralized each other.

And so we have a resale home market that is headed more or less sideways in terms of sales activity and showing only mild price increases. At least, that's with the crazy Vancouver market set aside.


How do I know when I've saved enough to buy a house?

You'll find no predictions here about whether or not a serious correction is ahead for housing prices. But I do have a question. Why are so many people still rushing to buy homes in an environment where the average price across the country is a little more than $371,000, with average prices in Vancouver at $786,311, Toronto at $456,147 and Calgary at $398,836?


Combine these high prices with the years of rising interest rates that lie ahead and you have a situation where affordability is declining and will continue to do so.

Some say there's a bubble in home prices. It's easier to make a case that we're in a home-buying bubble where people are purchasing homes at a rate that exceeds what could be considered sensible or rational.


Here are a few ways to tell whether a home purchase makes sense in today's market:

* The monthly cost of carrying your mortgage and other debts plus your monthly share of property taxes and heating is markedly lower than the maximum 40 per cent of gross monthly household income permitted by lenders.

* You have discussed with your lender how much your payments would be if interest rates rise either a little or a lot in the next several years, and you are comfortable with the results.

* You've got a good start on saving for retirement and can foresee being able to make at least modest contributions in your early years as a homeowner.

* If you have kids, you're able to regularly put money away in a registered education savings plan.

* You have a plan for finding the money to furnish your new home, take family trips and cover emergency expenses without going into debt.


Don't Listen to Agents

Do not base your thinking about your ability to afford a house strictly on what lenders or real estate agents tell you. They may have useful guidance, but their goal is to sell mortgages and houses. That's why the affordability measures they use pretend you live a world where there are no claims on your household cash flow other than those related to your home and other debts.

Being able to amass the minimum 5-per-cent down payment on a house does not mean you're ready to buy, either. In the real world of home ownership, 5 per cent is peanuts. By some estimates, the costs of buying a home - mover, property taxes and utility bill adjustments, legal fees and repeated trips to Canadian Tire or Rona could cost an additional 2 to 4 per cent of the value of your home.

Technically, being able to afford payments over a 30-year amortization gets you into the home-buying club. But a sensible, rational home purchase would be done with a 25-year amortization.


Let's say you're 30 and buying a home (people are doing everything later these days, which seems reasonable because they'll live longer). With a 30-year amortization, you'll be mortgage-free in a little less than 26 years if you pay on an accelerated biweekly schedule and don't make any lump-sum payments. That gives you just nine mortgage-free years before retirement to help your kids pay for college or university and top up your savings.


Now, about those lump-sum payments. Most mortgages give you some latitude to pay down your principal, but don't base your should-I-buy-a-house analysis on doing this. Life has a way of soaking up the extra money you imagine you'll use in the years ahead to make prepayments.


A final consideration in a rational analysis of whether to buy now is how long you'll stay in your home. The right answer: A long time. By moving out in, say, five years you could rack up moving costs that offset your gains in home equity.

Are you hung up on the idea that renting is bad and owning a home is good? The new rule is that renting makes a heck of a lot more sense than buying a house you can't really afford.


Did You Know That ....


First introduced to Canadians in 1966 the Canada Pension Plan (CPP) is instituting significant changes that could impact the age we plan to retire at as well as the cash-flow available to us in retirement. If you are interested in how these changes affect you and your retirement plan, read on. 


While alterations to the CPP is not new, these most recent changes (introduced in the 2009 federal budget, became law on December 15, 2009 with the passing of Bill C-51) will not affect the CPP benefits of anyone currently receiving a CPP retirement pension. They will however, affect the benefits of anyone planning to retire before attaining age 65 starting in 2012.


As a result, once these new changes come into effect in 2012, if you are between the ages of 60 and 65 and plan to apply for a CPP pension early your benefits may be reduced. For early CPP take-up there will be a reduction in benefits by .6% (up from .5%) per month for each month that the pension is taken before age 65 to a maximum reduction of 36% (up from 30%)


In an effort to encourage Canadians to work longer the federal government is also rewarding Canadians who elect to defer their CPP retirement pension after age 65 by increasing their CPP benefit. For late CPP take -up there will be an increase in benefits by .7% per month (up from .5%) for each month that the pension is taken after age 65 to a maximum increase of 42% (up from 30%). This increase will be implemented gradually over a three year period beginning in 2011.

Issue: 5
Financial Markets
In This Issue
The Economist's case for raising retirement age to 70
Why renting is begining to look like a great deal
Did you know.....
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Peter Bailey
Worldsource Financial Management
272 Lawrence Avenue West, Suite 203
Toronto, Ontario M5M 4M1