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Why Manulife IncomePlus is Not for the Average Retiree

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Why Guaranteed Retirement Income Benefits is Not for the Average InvestorRecently, “guaranteed retirement income” products like Manulife Income Plus and Sunwise Elite Plus have exploded in the Canadian market. Manulife IncomePlus generated almost $3.4 billion in assets for Manulife Financial, Canada’s largest insurer between 2006-2008, and it is worth a closer look.

What are guaranteed retirement income investments like IncomePlus?

What happens with products like IncomePlus is that you have a retirement portfolio that guarantees a minimum annual flow of income for life (starting at age 65) and a guarantee against losing your investment money. Once you invest $50,000 or more, IncomePlus guarantees that you can withdraw 5% of that investment annually for life. The investment pool is “adjusted” every three years to reflect increases in market value. Sounds tempting? The catch is that any financial product that offers a guarantee comes with high fees that erode your returns.

What are the fees associated with IncomePlus and why are they so high?

IncomePlus is built on a foundation of Manulife’s segregated funds, which are mutual funds with various insurance guarantees attached. Segregated funds charge a higher fee than mutual funds (although this is often justified due to the insurance component), but IncomePlus also charges additional “guarantee” fees. According to personal finance columnist Rob Carrick, the “total fee load can be as much as 3 to 3.5% for some funds. By comparison, the largest Canadian balanced funds these days have MERs that are at least a full percentage point lower.”

There are two main problems with IncomePlus:

1.      The guarantees against market losses are mostly a waste of money for any investor who has a time horizon longer than 10 years, because the 10 year return almost always is higher than 0% except for very aggressive portfolios.

2.      In addition, the 25 segregated fund choices for IncomePlus are predominantly conservative choices with bond, balanced and asset allocation funds, but no pure equity funds. Paying higher fees for a guarantee would only have been justified if there were higher levels of risk and reward, but not for these conservative options.

IncomePlus can be appealing to investors who are extremely risk averse and invest only in GICs, as the return for IncomePlus might be higher – but not if interest rates go up meaningfully. But for the common investor, this product is not appealing. It deters investors from getting significant gains (due to the fees) and the forced conservative investment options. While this might not be a concern during a year of poor market returns, you will very likely do much better for the long run by avoiding these high fees.

A much better approach is to generate income from a well-balanced portfolio, combined with tax and estate planning for a much lower fee. To learn more about Canadian Retirement Income Investments, click for our free guide below.

For help finding better alternatives to Manulife Income Plus, please contact me at 1-888-816-8927 x221 or by email at tedr@tridelta.ca

Ted Rechtshaffen MBA, CFP
TriDelta Financial

Am I Ready for Retirement?

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Are you financially and emotionally ready to retire? What are the things you should consider when thinking of retirement? Here, we discuss some of the necessities for determining “retirement readiness.”

Goals for Retirement

When deciding to retire, the first step is to have your own fine-tuned vision of what retirement looks like. What are your goals for the next life stage? To better understand yourself, you might consider filling out a goal-setting questionnaire, such as this True Wealth Questionnaire that we frequently use with our clients.

The purpose of our easy goal-setting questionnaire  is primarily not financial, but mostly about measuring where your life is today and what you want your future to look like.

Financial Ability

Once your lifestyle vision is sorted out, it is time to shift the focus to the financial planning side. Try to estimate a financial plan that projects the next 30 years or so.

Consider talking to a financial planner to get a good sense of what your lifestyle will be like in retirement if you retire today, or at a certain point in the future. A comprehensive financial plan will expand on other issues too, like how much you can afford to help Three steps to knowing when you are ready for retirementyour children or grandchildren, or how to support your favourite charities. Based on your financial ability, you might get a “green light” for retirement, but it doesn’t mean you should retire.

Personal Considerations

Of course, financial ability is not the only concern for retirement.

For many of us, our jobs are an important part of our identities and can be very difficult to give up “cold turkey.” Also, retirement can significantly alter the balance and routine that currently exists with your spouse or partner – sometimes in a bad way.

Another issue is how to fill all of your free time. Without a plan that reflects your retirement vision, hobbies and goals, the free time can lead to depression. Eileen Chadnick, a certified coach and principal at Big Cheese Coaching in Toronto, says it is a mistake to plan for a life of full-time leisure, “Seven days of fishing gets stale very fast. The balance paradigm shifts in retirement. The key is to determine what the right balance is for you”

The issue of retirement has become much more complicated than simply aiming for a financial number. Much like other things in life, a successful and happy retirement takes planning – both financial and emotional.

If you want to read more, here’s an article that talks about all the things you can do in your free retirement time. It’s enough to get anybody excited!

How Much Can I Afford to Donate to Charity?

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Like many Canadians, you might be wondering “How much can I afford to give to charity? How can I budget for charitable giving? Is there a smarter way to give?”

The average donation to registered charities in Canada in 2008 was less than $700 in households with gross incomes of more than $100,000. A Fraser Institute Study called, “Generosity in Canada and the United States” revealed that in Ontario, we were giving only 45% as much as those in New York.”

The reason for this is simple:

Most Canadians don’t have the confidence or knowledge to be donating larger amounts of money because no one has ever taken the time to explain to them how much they can afford to donate and the benefits that come along with it.

I believe that if Canadians had a better handle on what they could afford to donate, in many cases they would be comfortable giving more.

To help with this, TriDelta has put together a free and easy online tool called the Donation Planner, which answers the basic question:

“How much could I afford to give?”

The donation planner looks at how much you can afford to donate to charities each year, how much this will save you in taxes, and what your estate will be worth AFTER these donations.

In many cases, the number will surprise you.

 

How much Can I afford to Donate to Charity?

Avoid These Inflexible Investment “Traps”

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Canadians are voluntarily putting billions of dollars into financial investment “prisons” – where the money is locked in for years, without much flexibility! There are other good alternatives available for investors; however, most people simply don’t know enough about these financial traps.

Here are three examples of financial prisons that you should avoid:

1) The mutual fund deferred sales charge (DSC)

What is the advantage of having to hold money in a fund family for   seven or eight years for fear of a financial penalty? Why buy a DSC version of a mutual fund when there is usually a no-load fund available that is probably just as good? At the Investor’s Group Dividend Fund, if you want to take your money out as cash in the first year, there is a 5.5% penalty! You have to invest for seven years before the penalty decreases to zero.

As an alternative, you could buy the RBC Dividend fund or a similar fund, with no load and a five-year return that is 2-per-cent better than the Investors Group fund – and best of all, no penalties for not “locking in” your money.

RESP-Mutual-Funds-GICs

Photo: Marlon Bunday

2) RESP scholarship funds

If a seven-year sentence sounds long, how about 18 years? That is what you are voluntarily doing when you set up an RESP using a scholarship plan. These plans can be beneficial, but only if you are willing to do the time, meaning that you are committed to a payment every year (often for 18 years). If you want to leave the plan, you face significant penalties.

A better alternative is any other type of RESP plan, where once you open an account, you can choose to contribute or not, can choose what to invest in, and have real control over your money. This can be set up at any bank or brokerage firm.

3) Five-year GICs

At one time, low market risk was the appeal for investors “locking up” their funds for five years. In today’s world, the rates are simply not worth it. Accord to the CIBC website, you can get 2.1% in a five-year GIC. High interest savings accounts like People’s Trust offer the same 2.1% interest, but you can take your money out at any time. You are better off with this type of alternative.

Just remember: as an investor, you have many options when it comes to choosing where to put your money. Make the flexibility of your funds a top priority when choosing your investments, and you can successfully avoid “investment traps” such as these ones.

If you liked this article, read about another type of investment to avoid: the guaranteed retirement income plans.

Why Should I Use a Tax Professional in Canada?

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Have you ever wondered about the benefits of using a professional tax preparer in Canada?

We asked the same question to a highly rated local company and received the following response:
Tax laws can be complicated and change frequently. Your unique situation also changes year to year. Using a professional tax consultant ensures you pay as little tax as possible.  They can dig into your financial situation and are trained to find all the applicable credits available and ensure fast accurate filing.

Over the years, Canada Revenue Agency (CRA) has changed the way they process, monitor and verify the accuracy of the individual returns. They continue to improve their ability to automatically process and validate tax returns as they are filed. They have also improved their ability to verify if a taxpayer has included all pertinent financial transactions in their annual tax return. It is more important than ever that you include all income, deductions, and credits applicable to your unique situation. A tax professional will work with you to ensure this happens.

A tax professional will also review:

  • Your revolving life situation, which results in new or different credits/deductions. Marital status, dependants, even taking care of your parents, can provide opportunities to minimize your tax liability.
  • Programs such as the Home Renovation Tax Credit and Pension Income Splitting must be calculated and reported correctly.
  • Which spouse should claim the Child and Children’s Fitness Tax Credit
  • Your ability to split Capital Gains/Losses and other Investment Income with your spouse.
  • Fees paid to your tax professional are also considered tax deductible.
  • They might show how  you can donate “in kind” to charity. You should consider donating appreciated securities directly to your charity of choice and eliminating all tax on any accrued capital gains.
  • You will be encouraged avoid getting a tax refund. If you get a large tax refund each year, consider applying for a reduction of tax at source using CRA Form T1213.

Benefits of Using a Tax Professional

Establishing a relationship with a financial planner and tax professional means that you will have a team looking out for money saving opportunities that apply to you. You will benefit from their specialized skills and have the ability to discuss life changes to determine how your financial and tax situation may be affected.

[VIDEO] Depending on your Company Pension Plan for Retirement?

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If you have a defined benefit pension plan from your company, this is most likely a big part of your retirement plan.

However, there are many things you need to consider before depending only on your company for your post-retirement bills. To begin with, how secure is your company; will they be in business for 30 years? What age do you think you will live to? Can you opt out and build your own retirement “pension package” using preferred shares and corporate bonds?

In the following video, I discuss pension decisions with Financial Post columnist, Jon Chevreau. It is a couple of years old, but contains relevant, timeless information:

 

If you liked this video, visit our YouTube channel for more financial planning videos from TriDelta Financial.

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