Happy New Year
We hope everyone had a fun and safe holiday with friends and family. As we move through the first month of the new year with our resolutions in mind, we have gathered a few articles to help you get a good head start on your financial goals.
Please feel free to give us a call to book a portfolio review. We would love to help you get started on your financial plan for 2014.
Peter, Claudio and Joanna
2013 - Year in Review
by The Perspective - January 2014
2013 was the Year of the Snake. It was the year that US President Barack Obama signed the American Taxpayer Relief Act of 2012 preventing the "fiscal cliff". It was the year that Pope Benedict XVI became the first Pope to resign since Gregory XII in 1415, and his successor Pope Francis became the first non European Pope in 1200 years. It was the year that saw Canadian Mark Carney take over as the Governor of the Bank of England, and also saw England celebrate the birth of Prince George of Cambridge who became third in line to succeed Queen Elizabeth II. It saw the death of Venezuelan President Hugo Chavez, and former UK Prime Minister Margaret Thatcher, as well as South Africa's beloved "Madiba", Nelson Mandela.
In Canada, 2013 saw the introduction of the ninth Governor of the Bank of Canada in May when Stephen Poloz replaced the aforementioned Mark Carney, as well as the revival of David Bowie's "Space Oddity", sung by astronaut Chris Hadfield in his historic role as Commander of the International Space Station. It was also the year we bid adieu to notable Canadians such as Loblaw's pitchman Dave Nichols, Cape Breton's first lady of song Rita McNeil, newspaper man Peter Worthington, Glee Actor Cory Monteith, former Alberta Premier Ralph Klein and Canada's legendary toe tapping patriot Stompin-Tom Connors.
In contrast 2013 was not the year of the "Selfie" as altruists pronounced it to be, rather, it was the year of the "Taper". Tapering is the term that went viral in May when US Federal Reserve Chairman Ben Bernanke suggested that the Federal Reserve may taper its bond-buying program known as Quantitative Easing (QE). Since December 2012, QE has called for $85 billion in government bonds to be purchased by the US Federal Reserve monthly, in the hopes that this increased liquidity stimulates the economy.
Part of the rational for QE was also to provide stability to financial markets, however, as "Taper-talk" continued to focus on when the Fed would reduce their monthly bond purchases, volatility increased. Tapering speculation finally ended in December when the Fed announced its intention (in early 2014) to reduce the amount of QE from $85 billion to $75 billion a month. In response equity markets initially faltered at the news, but quickly regained strength as investors realized that this announcement indicated that the world's largest economy had finally regained its footing.
As 2013 developed so to did financial markets, especially in the last quarter of the year which saw the S&P/TSX Composite rally by 7.3% (Guardian Capital LP) in the fourth quarter and 13.0% (Guardian Capital LP) for the year. Although growth in Canada was strong on an absolute basis, foreign equity markets posted even more impressive results, led by the Japanese Nikkei Index, which returned more than 50% (Guardian Capital LP) and the S&P 500 Index which was up nearly 32.4% (Guardian Capital LP) during 2013.
So while the Year of the Snake was dominated by "The Great Taper" as well as the answer to the question posed from YouTube's top song of 2013 "What Does the Fox Say", the question now is what will dominate the "Year of the Horse". And while questions remain about the strength of the US economy, continued European contraction and economic restructuring in Asia, China and Japan, perhaps the New Year will bring a continued sense of optimism. As always optimism must be measured against one's goals and risk tolerances.
How to make your financial plan work for you
by Dave Dineen - January 2014, brighterlife.ca
Is your financial plan a living, breathing document that reflects your changing goals and situation, or is it gathering dust in a drawer?
There it was in the junk drawer, beside a thingamajig, under an expired pizza coupon: the family's financial plan, their best hope for achieving their goals and dreams.
I found it the day we moved into the house. But it was clear the previous owners had forgotten their financial plan long before they moved out. An old Halloween candy had glued several pages together and somebody had used the plan's fancy cover, several times, to get a pen working.
What exactly is in a financial plan?
Typically, a written financial plan fulfills these two important purposes:
- It lists your short-term and long-term goals, ensuring they are measurable (e.g., stating dollar amounts, frequency, deadlines and priorities)
- It itemizes how you should save, invest, borrow and insure to help achieve those goals
So a financial plan isn't something you tuck away, let alone forget in the junk drawer. It's an action plan that you need to use regularly, to make it work for you.
That's quite different from the way you handle other important long-term documents such as old tax returns, birth and marriage certificates, mortgage documents, your home's lease or deed or your will. Those, you store away somewhere safe where you can find them if you need them, but you don't expect to need them very often.
It's your plan, not your advisor's
Your financial plan is about your life, your goals and your finances. So don't assume it's your advisor's job to keep it up to date, or to make sure you stay on track.
Your advisor provides important help and advice, along with professional knowledge and experience on what your comprehensive financial plan should include, but you're accountable for it. Never forget that. If it's a joint plan, neither you nor your partner can afford to tune out.
Use it when making decisions
Want to buy a car? Downsize your home? Renovate? Change jobs? Your plan makes important assumptions about how much you will:
- Be taxed
So it makes sense for you to check your financial plan before making big decisions that will affect your earning/spending/saving/investing/taxes. Here's an example of what I'm talking about: When we added a screened-in deck to our house, we decided to go over our original budget. But our financial plan indicated that, to pay for the deck, we would have to withdraw more from our retirement savings that year than originally anticipated. Because we didn't want to do that, I decided to do some part-time freelance work to keep our short-term spending/earning in balance. Our financial plan allowed us to take control of the situation and make an informed choice. Without it, we might have inadvertently risked depleting our retirement savings too early.
Schedule a regular review
Your plan will need updating from time to time. Book time in your calendar every six to 12 months, to consider whether your plan needs a tune-up. That review includes checking whether your assumptions about income, spending and investment returns are on track. Maybe your plan needs tweaking to reflect something unanticipated (the furnace needs replacing; your hours at work have increased). At our house, we review our plan (often with our advisor) every January 1 and July 1, when I update our net worth statement.
If you decide your plan needs revising, meet with your advisor to have it updated, with your buy-in and input. If you have a spouse, ensure this is a joint decision.
Ask yourself these three key questions
Where to keep it
- Do you and your spouse know where your financial plan is?
- Do you understand what it's telling you to do?
- Is it up-to-date, reflecting your current goals and situation?
Keep it somewhat handy, though you don't need daily access to it. We keep ours in a distinctive folder in the top drawer of our desk, where my wife and I can both refer to it. It's not in a box in the basement. It's not forgotten amid old bank statements. And it's certainly not in the junk drawer!
Do you have tips to share about how you use your financial plan?
Bright Ideas:Talk to your advisor about your plan when you're:
- Retiring (or un-retiring)
- Changing jobs
- Buying/selling/refinancing a home
- Growing your family
- Paying off your mortgage
- Making employment or lifestyle changes due to poor health
- Retiring in five or 10 years
- Thinking of starting to draw income from CPP/QPP/Old Age Security
- Thinking of withdrawing from your RRSP
- Wanting to start pension income
- About to become debt-free
- Sending your kids to post-secondary school
- Having trouble paying your debts
View original article here.
Should you consider a spousal RRSP?
by Brighter Life - January 2014, brighterlife.ca
According to some studies, being married can be good for your health and even help you live longer. But did you know that it can also lead to a tax break?
Contributing to your common-law or married spouse's registered retirement savings plan (RRSP), can help build your partner's retirement nest egg. At the same time, you can lower the amount of tax that you pay collectively.
A tax break now
That's because when you contribute on behalf of your spouse, you get the tax deduction. So if you earn significantly more than your spouse, you will get a bigger tax break by contributing to a spousal RRSP, than your spouse would by contributing to his or her own RRSP. Whether you contribute to your own or to a spousal RRSP, your contribution counts against your own RRSP deduction limit - the maximum RRSP contribution you can claim as a deduction on your income tax return for the current year. Your spouse's contribution limit is not affected, however, by your contribution to a spousal RRSP.
A tax break later
There can also be a tax break down the road, during retirement. Let's assume once again that you are the spouse with the significantly higher income and - as an example - that you've decided that you need to withdraw a total of $5,000 a month, as a couple, from your RRSPs. Thanks to the additional funds you have contributed, your spouse will be able to withdraw a bigger share of that $5,000 from his or her RRSP, which will allow you to withdraw less from yours. Here's how this could result in an income tax reduction for your family in total:
|Total income tax|
|You withdraw the entire $5,000 per month x 12 = $60,000, taxed at 26%||$15,600|
|You withdraw $4,000 per month x 12 = $48,000, taxed at 26%||$12,480|
|Your spouse withdraws $1,000 per month x 12 = $12,000, taxed at 15%||+ 1,800|
* This is only an example; consult a tax specialist to see how it can best work for you.
Spousal RRSPs are subject to a number of rules. After you've made a spousal RRSP contribution:
- The money belongs to your spouse. He or she controls the account and when the money is withdrawn, it's taxed as his or her income as long as certain conditions are met.
- You can contribute to an RRSP until the RRSP owner turns 71. So, if you are over 71 and can no longer contribute to your own RRSP, but your spouse is younger, you can both still benefit. If you still have earned income and RRSP contribution room, you can keep putting money in a spousal RRSP and defer your taxes while your spouse's RRSP grows, until he or she turns 71.
Early RRSP withdrawals can be costly
It's important to remember that spousal RRSPs are meant for long-term retirement savings, not short-term tax shelters. That's why the government imposes a penalty if you withdraw money within three years of contributing to a spousal RRSP.
Generally speaking, if your spouse withdraws money from his or her RRSP, it's taxed at his or her rate. But if your spouse withdraws money within three years of a contribution from you, you will have to claim that withdrawal as your taxable income, not your spouse's. Contributions must remain in the spousal RRSP for the remainder of the current year, and the next two calendar years to avoid being counted as income for the contributing spouse. The date is based on calendar years, not three years from the last spousal RRSP contribution.
For example, let's say you've contributed a total of $40,000 to your spouse's RRSP, $5,000 of that within the last year.
- If your spouse withdraws $9,000 this year, $5,000 of that will be taxed as part of your income, since you contributed that amount in one of the two calendar years before the year of the withdrawal.
- The remaining $4,000 will be taxed as part of your spouse's income.
When you're considering a spousal RRSP, it's important to look at your and your spouse's current financial circumstances, and project what they might look like at retirement. As everyone's financial circumstances are different, it's always a good idea to consult a financial professional.
View original article here.
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Toronto, Ontario M5M 4M1
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