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TriDelta Insight Q1 – Managing through change

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Overview

The world is a difficult place to navigate in the best of times, and Q1 2022 was certainly not the best of times.

In this quarterly review, we will look at:

  • Interest Rates and Inflation
  • TriDelta’s current view on stocks, alternative investments, bonds and preferred shares
  • Some personal finance highlights from the recent Federal Budget – including Flow Through Shares

Q1 proved a difficult three months for many stock, bond, and preferred share markets globally but did also give rise to some positives and opportunities. While March was largely a positive month and provided a recovery from the first two months of the year, the U.S. had its first negative quarter in two years while Canada remained positive. Canada’s outperformance can be attributed to our greater concentration in Energy and Materials sectors which outperformed the broader markets. Notably, the US indices have less concentration in these sectors while our lower concentration in higher growth tech sectors provided further protection from the market turbulence.

Source: Bloomberg.

Q1 Market Returns

Interest rates and Inflation

The economy is at a delicate moment in which high inflation could become entrenched. That has created a new urgency to raise interest rates, itself a source of risk for markets and the economy. Central Banks around the world have signaled more aggressive steps to fight inflation and here in North America we are no different as both the Bank of Canada and U.S. Fed raised rates in March with further expectations to do so throughout the year. There has also been a focus on reducing the size of balance sheets in recent months with the U.S. Fed stating they intend to cut their bond holdings by about $95 billion a month – nearly double the pace implemented five years ago when they last shrank their balance sheet. Financial markets now expect much steeper hikes than previously in the year. Higher rates from these Central Banks will heighten borrowing costs for mortgages, auto loans, credit cards and corporate loans. In doing so, they hope to cool economic growth and rising wages enough to rein in high inflation, which has caused hardships for millions of households and poses a severe political threat to those in power.

We are still positioned for higher inflation and higher interest rates but are open to buying into sectors that may be oversold. We continue to place a premium on active management in the face of immense uncertainty and volatility. The two TriDelta equity funds have performed well in comparison to global equity markets, with what we view as much less risk. The TriDelta Pension Fund was up 0.86% on the quarter, while the TriDelta Growth Fund returned -0.44% for Q1. This outperformed our benchmarks (which include Canada, the U.S., International and Emerging Markets) by 2 to 3 percentage points on the quarter. Outside of Canada, major equity markets globally fell as much as 5% to 15% in some cases.

TriDelta equity view – what we are doing and why

Three risks dominated headlines this quarter: the Omicron wave, the spike in inflation/Fed rate hike fears, and the war in Ukraine. Due to these concerns equity markets had a difficult quarter with high growth companies and those exposed to the Ukraine conflict suffering the most. The focus has continued to be on quality as investors have prioritized profitability, stability and realized growth. Coupled with a strong balance sheet there are companies which are still well positioned despite the risks moving forward.

The move in commodities has also been notable over the past three months. Energy, in particular, had a great move to the upside, justifying the gains in the equities and helping the TSX manage this tough quarter. Prices have been driven higher because of the lack of capital provided to this sector over the past few years and the sanctioning of one of the largest commodity-producing countries.

Into the remainder of 2022 TriDelta Funds continue to be nimble and active to take advantage of attractive opportunities.

  • We continue to view this as a rangebound market and are focused on adding equities when oversold and trimming when overbought.
  • In the funds, we are becoming more concerned about the cyclical sectors and have been trimming some cyclical exposure and adding to underperforming sectors like technology, consumer discretionary and financials.
  • The world seems to be coming to the realization that the transition to clean energy will not happen over night and we will need a period of transition. Energy has been the leader, but we should also see strength across the materials sector going forward.
  • There has been a common theme among many multi-national companies who have stressed the need to reorganize their supply chain to help insulate themselves from the issues currently being experienced. This will have a significant impact on these businesses and has been dubbed “de-globalization” by many influential investors and business leaders.

 

 

TriDelta Alternative View – what we are doing and why

The Alternative asset class provided greater insulation relative to being invested in a typical stock and bond portfolio.

On Real Estate,

  • Real Estate continues to perform well and include critical inflation protection and steady yields.
  • Many of the partners we work with were able to pass along the added costs of inflation to tenants in 2021 with some increasing rents 10-20% in some areas.
    • Property types with short lease durations can reset lease rates more frequently and are in a more advantageous position to grow cash flow. Concurrently, lease structures offer inflation protection with built-in rate increases tied to inflation.
  • North America continues to be a top performer while Europe and Asia have struggled.
  • Moving forward North American Residential and Industrial Facilities are poised for further growth while high quality Office Space may be well positioned to attract tenants. We also share the view that the fragmented Self-Storage market offers an attractive opportunity.

On Private Credit,

  • Private Credit returns remained favourable and, in many cases, offer protection from rising interest rates. Loans from these managers tend to be shorter term which offers them the ability to provide new financing terms to reflect the increase in interest rates.
  • These managers continue to see increased deal flow and expect further opportunities as traditional bank lenders restrict capital to small and mid-size businesses. Moving forward, we see this as an ample opportunity.
  • Borrowers continue to look to the private markets due to its relatively greater speed and certainty of execution, after many were burned by public markets and banks pulling back capital during more uncertain times. Equally, borrowers value the adaptability and partnership of private lenders.

Yields on Private Credit and Real Estate remain much more favourable than investing in traditional bonds.

Source: BofA Securities, Bloomberg, Clarkson, Cliffwater, Drewry Maritime Consultants, Federal Reserve, FTSE, MSCI, NCREIF, FactSet, Wells Fargo, J.P. Morgan Asset Management. *Commercial real estate (CRE) yields are as of September 30, 2021. CRE – mezzanine yield is derived from a J.P. Morgan survey and U.S. Treasuries of a similar duration. CRE – senior yield is sourced from the Gilberto-Levy Performance Aggregate Index (unlevered); U.S. high yield: Bloomberg US Aggregate Credit – Corporate – High Yield; U.S. infrastructure debt: iBoxx USD Infrastructure Index capturing USD infrastructure debt bond issuance over USD 500 million; U.S. 10-year: Bloomberg U.S. 10-year Treasury yield; U.S. investment grade: Bloomberg U.S. Corporate Investment Grade.

TriDelta bond view – what we are doing and why

While we remain at historically low interest rates and ultimately view increased interest rates as necessary, the Central Banks walk a thin line with very little room for error. Here at TriDelta we share several views moving forward:

  • Central Bank logic is twofold – (1) to rein in inflation (which is evidently no longer transitory) and (2) to raise rates surrounding a strong economy.
    • Many perceive them to be too late on this front; we agree in terms of the underlying economic conditions, but not on inflation as, unlike other periods of outsized inflation, the drivers are largely structural, such as the inefficient deployment of physical capital and labour forces due to the COVID mitigation measure, the shifting landscape (including work from home), economic warfare, and ESG shifts are raising costs.
  • Lowering the demand for money through raising the price of money does not address these long-term supply issues. This is occurring while the underlying economy, particularly in the U.S., is already slowing.
    • Consumer demand has softened into 2022; corporate spending was already reduced; mortgage rates are up 1.75% year to date in the U.S.
    • Coupled with fiscal support being withdrawn this year poses a significant risk to the economy.
  • While it is possible to have a recession without monetary tightening, the opposite does not hold true; monetary tightening always happens with a recession.

In recent updates we have continued to share our preference towards using a tactical approach to bonds and owning short term bonds for their greater protection in a rising interest rate environment. As you can see in the chart below this has proven the correct approach.

Source: Purpose Investments

We continue to view bonds as an important component of a diversified portfolio and advocate for a focus on being selective and tactical in our approach.

On Bonds,

  • Central Bank intentions are clear, but they will not likely be able to raise rates as much as intended before underwhelming economic performance and falling markets derail their efforts.
  • We believe we are at or near the highs in government bond yields.
  • As opposed to 2021, the 1-5 year bonds represent the best value in our opinion as the yield curve has become exceedingly flat.
  • The outlook for riskier bonds is uncertain. Spreads have widened in the high grade and high yield spaces and are likely to continue to do so as corporate bond supply is continuing to be issued while the extent of an economic slowdown has not been fully recognized.

TriDelta preferred share view – what we are doing and why

Preferred shares have had a volatile start to the year, with many cross currents in play. Down roughly in line with bonds, Rate-Resets have outperformed Straight preferred shares by about 3%. This is a continuation of 2021 when Rate-Resets outperformed by a large margin. Many institutional preferred share investors have shifted out of the space and back into traditional yield markets or into equity opportunities.

In our 2021 Q4 update we referenced one of the challenges in the preferred share market being that the market is shrinking as banks and some oil and gas names redeem issues in favour of cheaper financing via specialized bonds. Perhaps shockingly, the first three months of 2022 saw several new issues into this challenging market at yield “concessions”, rendering existing preferred shares relatively expensive.

Moving forward there are important trends we continue to watch closely.

On Preferred Shares,

  • Higher rates should be a positive for Rate Resets and Floaters.
    • Wider credit spreads are not, and resets will likely take their cue from corporate bonds.
  • The shrinkage of the market is still a tailwind, and the recent selloff represents an opportunity.
  • We continue to hold our allocation steady and pick away on further weakness while being comfortable with near term volatility.
  • The rate pressure is the greatest challenge for Fixed Rate Preferred Shares but most of the backup should be behind the market.

Some personal finance highlights from the recent Federal Budget

  • Very few negatives.
  • No change to capital gains taxes.
  • Flow Through Shares were largely left alone. These continue to be a great tax savings opportunity for those with taxable income of $275,000+ or those with a Corporation where you are drawing out $400,000+. Be sure to talk to your Wealth Advisor if you are in that category.
  • There may be some changes to Alternative Minimum Tax in the Fall. It will be focused on those with taxable incomes over $400,000, who are currently paying less than 15% of Federal taxes.
  • New Tax Free First Home Savings Account in 2023. This is meant to provide savings room for up to $8,000 a year and up to $40,000 in total, that can be used for a first-time home purchase. While this isn’t a negative at all (other than the tracking and implementation of another tax- sheltered account), it will likely have very little impact for younger people in saving and putting in down payments on a first home.
  • There are all sorts of other details in the Budget, but these are the ones that would likely affect some of our clients.

In conclusion

The World is particularly complicated at the moment. In times like these, our general tilt is towards companies making solid profits, with reasonably low debt ratios, especially those with hard assets like real estate and commodities. Rate reset preferred shares and shorter term bonds, along with some higher yielding alternative investments, should work well in an increasing rate environment.

As always, we are here to help. If you have any questions, please don’t hesitate to contact your Wealth Advisor.

Hear a recording of today’s (March 12th) TriDelta Investment Conference Call

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After markets closed today, TriDelta Financial did an investment conference call to outline what we were doing heading into

2020, what signs we are looking for today to reinvest some funds, and what we might be investing in.

You will hear from:
Ted Rechtshaffen, MBA, CIM, CFP, President and CEO
Cameron Winser, CFA, Senior VP, Head of Equities
Paul Simon, CFA, VP, Head of Fixed Income

 

 

We hope that the call will give you a little comfort during a very uncomfortable time.

If you have questions about your personal situation, please don’t hesitate to contact your Wealth Advisor.

 

Thank you,

TriDelta Financial

Making the most of an RESP

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With kids heading back to school, education planning and registered education savings plans (RESPs) are at the forefront of discussions that financial advisers are having with many investors – whether these clients have children in a postsecondary institution or saving for them to go into one in the future.

The RESP is an enticing vehicle for investors because the federal government provides a 20-per-cent matching grant through the Canada Education Savings Grant (CESG), which is subject to both an annual maximum of $500 and a lifetime maximum of $7,200. The unused CESG accumulates each year a child is alive, even if no RESP is open. And if no contribution was made in a year of the child’s life, a double contribution can be made to reach back for a year of the grant. There are no annual limits on contributions, but there is a lifetime limit of $50,000.

When investors contribute toward a child’s RESP, conventional wisdom tells us that they should take advantage of the free money in the 20-per-cent CESG. But is that always the right decision? Let’s consider three scenarios for contributing to the RESP, assuming a 5-per-cent annual rate of return:

Scenario 1: The investor contributes $2,500 a year, beginning when the child is first born, to the maximum of $50,000. The RESP receives $7,200 from the CESG and produces total income and growth of $43,654. The total value of the RESP when the child is 19 years old is $100,854.

Scenario 2: The investor contributes $50,000 into the child’s RESP in the first year of the child’s life. The RESP receives only $500 in CESG, but produces income and growth of $83,492 for a total RESP value of $133,992 when the child is 19 years of age.

Scenario 3: The investor contributes $16,500 into the child’s RESP in the first year, then contributes $2,500 a year thereafter until reaching the lifetime limit of $50,000. The RESP receives the full CESG of $7,200 and produces income and growth of $62,386. The total value of the RESP when the child is 19 is $121,486.

What this shows is that front-loading RESP contributions is more valuable than receiving the government grant. Of course, for many people, putting $50,000 into an RESP in the first year of a child’s life is unfeasible, but the more that could be invested at once earlier on, the better.

If the RESP is maximized and additional educational savings are desired, two other methods can be used to save for a child’s education. First, if the child is 18 years of age or older, she will have contribution room in her tax-free savings account (TFSA). Thus, contributions could be made to the child’s TFSA to supplement the RESP. Second, if the child is under the age of 18, an informal trust could be used to save for her education. (A note on taxes: If the contributions to the informal trust come from the parents, then income from the account will attribute to the parents for tax purposes, but capital gains will not.)

When it’s time for the child to draw down on the RESP, the account is divided into three sections: contributions, CESG, and income and growth. The contributions could be withdrawn tax-free; but the the CESG and the income and growth must be withdrawn as an Educational Assistance Payment (EAP), which is taxable to the child.

There are no restrictions on withdrawing the contributions once the child is attending a postsecondary institution. The EAP does have some additional rules. The main ones are that the child must provide proof of attending a qualifying institution and that the withdrawal is limited to $5,000 in the first 13 weeks when the child begins postsecondary education.

Those restrictions aside, it’s best to maximize the EAP withdrawals over the contributions wherever possible. Any remaining grant is repaid to the government and any remaining income or growth is taxable to the subscriber (parent) as an Accumulated Income Payment (AIP).

The AIP not only has the detraction of being taxed at the subscriber’s marginal tax rate, but also carries a 20-per-cent tax penalty on top of that. The 20-per-cent tax penalty is taken off the top and then the remaining 80 per cent is included as income to the subscriber. The only ways to avoid this tax penalty and retain the value of the assets in the RESP are for the investor to transfer up to $50,000 of these assets to his or her registered retirement savings plan, if he or she has the contribution room, or to another child under a family RESP plan.

Having these EAP payments taxed in the child’s hands is the most advantageous. Even if the child is working while she’s in school and has income in excess of the basic personal amount, her education credits will be enough to offset any taxes owing from the RESP, in most cases.

As much as it’s advantageous to maximize the EAP, in the case of a family RESP, the subscriber must ensure he or she doesn’t exceed $7,200 of CESG withdrawal per child. Each child is permitted only $7,200 of CESG as a maximum. Thus, if more than that amount is withdrawn from the CESG for the older child, the government will demand repayment and take the overpaid grant funds back from the RESP. That, in effect, means those assets are lost to the younger child.

The RESP is a great savings tool. Understanding its intricacies will help to maximize its value. On the flip side, failure to do so could be a costly mistake for investors and their children.

Reprinted from the Globe and Mail, August 28, 2019.

Matthew Ardrey
Written By:
Matthew Ardrey
VP, Wealth Advisor
matt@tridelta.ca
(416) 733-3292 x230

Buying Low: Investing Strategy in Frothy Times (from the Globe and Mail)

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When stock markets have risen significantly, often some of the best investing opportunities is in the sectors that have been unloved and overlooked. Lorne Zeiler, Portfolio Manager and Wealth Advisor at TriDelta Investment Counsel was one of three portfolio managers asked where to look for value investments today by Globe and Mail reporter Joel Schlesinger (February 28, 2017).

As stock markets reach new heights, especially in the United States, investors might be recalling the adage “what goes up must come down.”

But by the same token, what has been down – the unloved, undervalued and overlooked – usually bounces back, eventually. With that in mind, consider these investments.

Health-care stocks

Even though the U.S. equity market has experienced a record-breaking runup, health-care stocks still have attractive valuations, says Lorne Zeiler, portfolio manager and wealth adviser with TriDelta Financial in Toronto.

“The sector was held back in 2016 due to concerns of increased regulation affecting drug pricing, first by a potential Clinton presidency and then from comments by President-elect Trump,” Mr. Zeiler says.

But these fears are likely exaggerated, he says. Earnings are forecast to grow by 8 per cent in 2017, and stocks are trading at about 15 times forward earnings around their five-year average, while nearly every other sector trades significantly higher.

Here are two stocks to consider:

  • AbbVie Inc.: The maker of Humira, a popular drug to treat rheumatoid arthritis, AbbVie has a “strong pipeline of new medications expected to be approved” soon. Moreover it has a decent dividend yield of about 4 per cent and trades at less than 12 times estimated forward earnings. One concern is that the company is heavily reliant on the performance of Humira, which makes up half of its sales.
  • Abbott Laboratories Ltd.: This diversified company earns revenue from generic pharmaceuticals, medical products and nutritional supplements such as Ensure. Abbott is forecasting good earnings growth due to its expanding sales of diagnostic technologies and recent acquisitions. “Risks to the stock price include pricing pressure from competitors and foreign exchange, particularly for its emerging-market sales,” Mr. Zeiler says.

Emerging markets

These generally fast-growing economies have faced a laundry list of problems, says Navid Boostani, a portfolio manager and co-founder of ModernAdvisor, a robo-advisory in Vancouver.

“Slowing growth in China, political turmoil in Turkey and Brazil, and economic sanctions against Russia have all been headwinds,” Mr. Boostani says. “But we think the bad news is already priced in, and long-term investors have a unique opportunity today” to buy low.

Here are two exchange-traded funds (ETFs) for investors who want to tap into emerging-market growth:

  • Vanguard FTSE Emerging Markets All Cap Index ETF: Rather than playing one particular market, this fund provides exposure across the board. It charges an industry-low management expense ratio (MER) of 0.24 per cent (for the TSX) with a distribution yield of 1.24 per cent. Most importantly, this sector has room to grow. “Both [emerging market] currencies and equities are trading at close to historical lows,” Mr. Boostani says. A bumpy ride could lie ahead, though, as the U.S. becomes increasingly protectionist and its dollar increases in value, pushing up borrowing costs in developing nations.
  • PowerShares DB Base Metals Fund ETF: Another play on emerging-market growth is to invest in commodities, and this ETF provides that exposure without the complications and barriers that retail investors face in buying futures contracts directly. Investors in this fund get access to a basket of futures contracts for base metals such as aluminum, zinc and copper, all key to industrial and manufacturing growth. “Commodities came off of a five-year bear market in 2016, with industrial metals leading the charge,” Mr. Boostani says. “The bulk of demand growth is expected to come from robust economic activity in China.” Commodities tend to be very volatile, however, so they should make up only a small portion of a well diversified portfolio, he adds.

Playing volatility

Mark Yamada, portfolio manager and chief executive officer of PUR Investing in Toronto, cites two ways to capitalize on volatility. For those who can handle large swings in price, China has been unloved of late. Yet it offers a lot of upside, he says. At the opposite end of the spectrum, consider low-volatility equities, such as banks, utilities and consumer staples, which have fallen out of favour recently as investors set their sights on recovering energy and other commodity related stocks.

Two to consider:

  • iShares China Index ETF: China is the largest of the emerging markets, so it has great influence on the world economy. “China has been in the doldrums, albeit with 5- to 6-per-cent GDP growth,” he says. With Mr. Trump pushing an America-first agenda, likely increasing barriers to global trade rather than removing them, “the Chinese will benefit,” Mr. Yamada says, filling the void in global leadership for free trade. Moreover its growing middle class is increasingly driving the Chinese economy, meaning China will rely less and less on U.S. consumption. Still, the Chinese marketplace can be a pricing rollercoaster, he notes.
  • BMO Low Volatility Canadian Equity ETF: If the ups and downs of emerging markets make you queasy, consider a low volatility approach that focuses on steady parts of the equity market. Many experts have been down on low volatility stocks of late, arguing that they are overvalued and will be outperformed by growth stocks with greater volatility. But Mr. Yamada contends that high volatility stocks do not add value to portfolios over the long term as much as their low volatility counterparts. This BMO ETF offers investors a diversified basket of Canadian banks, utilities and other defensive stocks. And while it may have “lagged the S&P TSX Composite for the past year because it was underweight energy and minerals … it is a great long-term core holding.”

 

Lorne Zeiler
Contributed By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

Financial Facelift: Couple with high incomes needs tighter budgeting to meet their goals

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Below you will find a real life case study of a couple who are looking for financial advice on when they can retire and how best to arrange their financial affairs. The names and details of their personal lives have been changed to protect their identities. The Globe and Mail often seeks the advice of our VP, Wealth Advisor, Matthew Ardrey, to review and analyze the situation and then provide his solutions to the participants.

gam-masthead
Written by: DIANNE MALEY
Special to The Globe and Mail
Published Friday, Sep.02, 2016

Rose and Ron are feeling squeezed financially despite their high income. Ron, who will be 37 this year, makes $120,000 a year in marketing, while Rose, who will be 40, earns $175,000 working in the health-care field. But they want to renovate their basement and send their children to summer camp. Then there’s the $2,890 a month in child-care expenses and the $2,600 a month in mortgage payments.

They have two children, ages 5 and 2. Their expenses – which they track loosely – seem to eat up nearly every dollar they make.

“How do we put aside enough money for both our kids’ education and our RRSPs while still meeting our monthly obligations?” Ron writes in an e-mail.

“Currently, we do not save any money each month for emergency funds,” Ron writes. “I’m worried that if we have a major home issue, we won’t be able to cover the costs,” he says. “How do we curb our spending? It feels like there’s a never-ending stream of expenses.”

Earlier this year, Rose set up a professional corporation. “With the corporation, how would it be best to shelter income and withdraw it when needed?” Rose asks.

We asked Matthew Ardrey, a vice-president and wealth adviser at TriDelta Financial in Toronto, to look at Rose and Ron’s situation. Mr. Ardrey holds the certified financial planner (CFP) designation.

What the expert says

Fotolia_76895572_XSaThe couple’s three short-term goals are mostly in hand, Mr. Ardrey says. They have borrowed against their house to pay for the basement renovation. With a rate of 2.2 per cent a year and payments of $1,200 biweekly, their $170,000 mortgage will be paid off in five years.

As for retirement savings, Ron and his employer contribute to Ron’s defined contribution pension plan, so he has no extra RRSP room. Rose’s corporation offers a more tax-efficient way of saving for retirement than an RRSP, but more about that later.

They are saving about $2,000 a year to their children’s registered education savings plan (RESP), mainly through gifts. If they top this up to the annual maximum of $5,000 for their two children, they will have enough to pay for a four-year degree for each child, assuming an annual education cost of $20,000 a year for each child, adjusted for inflation, Mr. Ardrey says. “As there is no surplus in their budget, these savings will need to come from a reduction of other expenses.”

As well, they would like to raise their travel budget to $1,000 a month and send each child to summer camp starting when they reach Grade 1. The eldest starts two years from now. The cost initially is $2,500 for Grades 1 and 2, and escalating from there as the children get older.

“By the time they have both children in camp, they will have paid off their mortgage and the funds will be readily available without any further budget constraints,” Mr. Ardrey says.

A major concern for the couple today is budgeting. They have a lifestyle with more than $3,000 a month in discretionary spending alone, plus $1,000 a month in travel costs, the planner says. To achieve all of their short-term goals, they will need to make some adjustments to the expense side of their budget or find a way to increase their income. “The crucial years will be the next five until the debt is paid off,” Mr. Ardrey says. “As they are tight against their budget, they will need all of Rose’s income from the corporation to make ends meet.”

Rose can take dividends instead of salary from her corporation, which will save some tax. Her children (in trust), husband and mother are also shareholders. She might also be able to pay dividends to her mother (depending on her mother’s income), which could further reduce her tax bill.

After five years, when the mortgage debt is paid off, Rose will be able to reduce her draw from the corporation by $50,000 a year and they will still be able to meet their budget, Mr. Ardrey says. This will allow these funds to be taxed at the lower tax rate of a CCPC (Canadian-controlled private corporation) and accumulated for retirement inside the corporation.

When Rose retires, these savings will create a future dividend income stream of $65,000 per year, assuming equal payments from her corporation starting when she retires at 65 and lasting until she is 90. At that time, Rose should look at the income of her adult children to determine if there is any tax advantage to paying them the dividends instead of her, the planner says. “She would pay their reduced tax bill and then take home the larger after-tax income amount.”

When they retire, the planner assumes Rose and Ron will begin collecting maximum Canada Pension Benefits at 65. Their Old Age Security benefits will be clawed back because of their high income. He assumes the rate of return on their investments is 5 per cent a year and the inflation rate that affects their expenses is 2 per cent. He further assumes that they both live until the age of 90.

They plan to spend $85,000 a year in retirement, very close to their spending today once savings, debt repayment, child care and travel expenses are removed, Mr. Ardrey notes. They would like to spend an additional $20,000 a year on travel, inflation adjusted, in today’s dollars, from when Ron retires till he is 80.

Based on these assumptions, they will not only meet their retirement goal, but have a substantial financial cushion. They currently have retirement investment assets of about $1.4-million, and with contributions and growth over the next 25 years those assets will grow to more than $6.5-million, the planner says. They will be able to spend $178,000 a year in current year dollars on an inflation adjusted basis over and above their travel budget. In addition, at the age of 90 they will still own their house.

There are some risks to consider, Mr. Ardrey says. The first is job loss. Though Rose, as a medical professional, wouldn’t likely lose her position, it is conceivable that Ron may lose his job. If that happens it may have a significant effect on their financial plan. Next is insurance risk. Rose has a healthy amount of coverage at more than $2-million, but Ron’s is much smaller at $652,000.

He also suggests some changes to their investment portfolio, which is 28 per cent in cash and 45 per cent invested in Canada. A better approach would be to shift their cash into fixed-income investments and diversify their equity holdings geographically.

Finally, the planner explores how to get funds out of Rose’s corporation tax efficiently. Because the corporation has multiple classes of shares, Rose and Ron can allocate dividends to themselves or their children. Providing dividends to adult children is one way to pay for education or other expenses tax efficiently, Mr. Ardrey says.We recommended Levitra to patients who have erectile dysfunction. Once the child is an adult, the attribution rules no longer apply. Thus, dividends can be paid to the adult child directly when they are in a low tax bracket.

Insurance can also be a useful tool, Mr. Ardrey says. Rose could insure her mother on a policy paid for and owned by the corporation. The policy benefit would be paid to the corporation tax-free. Any amount in excess of the adjusted cost basis would be credited to the capital dividend account (CDA) in the corporation and the funds in the CDA could then be paid out tax-free to the shareholders. If Rose’s mother is in good health, this policy would likely pay out close to Rose’s retirement. “This would provide her with a lump-sum, tax-free payment at or near retirement,” Mr. Ardrey says. “This is one of the most tax-efficient ways to get money out of the corporation.”

+++++++++++++++++++++++

The people: Rose, 40, Ron, 37, and their two children.

The problem: How to deal with short-term financial pressures and still save. Longer-term, how to take best advantage of Rose’s corporation to shelter tax.

The plan: Look for ways to cut spending now. Use corporation’s share structure to make dividend payments to adult children to help cover higher education costs. Consider using an insurance policy to generate tax-free income for Rose. Review insurance and investments.

The payoff: All their goals achieved with plenty of money to spare.

Monthly net income: $15,250

Assets: GICs $72,000; equities $899,000; his TFSA $61,000; her TFSA $30,890; his RRSP $166,000; her RRSP $188,000; market value of his pension plan $40,300; RESP $37,400; residence $882,000. Total: $2.4-million

Monthly outlays: Mortgage $2,600; property tax $580; water, sewer, garbage $70; property insurance $108; electricity $150; heating $145; security $35; maintenance $250; garden $400; transportation $560; groceries $1,250; child care $2,890; clothing $150; gifts $20; vacation, travel $750; dining, drinks, entertainment $880; miscellaneous shopping $250; grooming $250; sports, hobbies $125; subscriptions $15; uncategorized personal spending (children’s activities, house cleaning; gifts, vet bills) $1,500; dentist, drugs $70; vitamins $35; health, dental insurance $100; life insurance $475; disability insurance $250; cellphone $65; Internet $65; TFSAs $900; his pension plan contributions $350. Total: $15,288

Liabilities: Mortgage $170,000

Matthew Ardrey
Presented By:
Matthew Ardrey
VP, Wealth Advisor
matt@tridelta.ca
(416) 733-3292 x230

Financial Facelift: Couple in good shape to retire early, but spending plans need review

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Below you will find a real life case study of a couple who are looking for financial advice on when they can retire and how best to arrange their financial affairs. The names and details of their personal lives have been changed to protect their identities. The Globe and Mail often seeks the advice of our VP, Wealth Advisor, Matthew Ardrey, to review and analyze the situation and then provide his solutions to the participants.

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Written by: DIANNE MALEY
Special to The Globe and Mail
Published Friday, Jul. 15, 2016

Like so many people with defined-benefit pension plans, Norman and Lena can hardly wait to retire. He is 51, she is 50. They have two grown children.

Fotolia_100642283Norman works in manufacturing, earning about $93,700 a year. Lena works for the provincial government, earning $88,900 a year. Although their pensions will not be indexed to inflation, they give the couple choices that people without such plans likely don’t have.

The couple’s goals are to pay off the mortgage on their Greater Toronto Area home, retire and travel. They have a mortgage of $142,340 on a house valued at $750,000.

Should we be continuing to make such high mortgage payments to get that paid off, or should we be investing more money in our RRSPs?” Lena asks. Norman wants to retire in September 2017, while Lena would retire a few years later.

We asked Matthew Ardrey, vice-president and adviser at TriDelta Financial in Toronto, to look at Lena’s and Norman’s situation. Mr. Ardrey holds the certified financial planner (CFP) designation.

What the expert says

Though Lena must wait another nine years before being able to receive a full pension, Norman can retire as early as next fall with a full pension, Mr. Ardrey says.

One large question looms over this couple, the planner says: Can Norman retire even though they will still have mortgage debt? Likely, Mr. Ardrey concludes, but the priority is to pay off the mortgage. “If they maintain their current payment schedule,” he says, “they should be debt-free by 2020, which is only a few years after Norman retires.”

Norman and Lena use their RRSPs to save for retirement. She saves $2,600 a year and he saves $3,400 a year. They use their tax-free savings accounts for short-term goals, such as vacations.

When Norman retires at age 52, he will have a pension of $56,472 a year. That includes a bridge benefit of $16,080 until age 65, at which point his pension will be reduced to $40,390. When Lena retires at age 59, she will have a pension of $51,226 a year. That includes a bridge benefit of $11,830 until age 65, at which point her pension will fall to $39,439.

In addition, both do some work on the side, bringing in at least $2,100 each a year. In preparing his plan, Mr. Ardrey assumes they continue with these roles until their respective age 65. Because they are retiring early, Mr. Ardrey assumes they will get 75 per cent of the maximum Canada Pension Plan benefits; they will get full Old Age Security benefits. “Both of these pensions will be taken at age 65.”

He further assumes that the rate of return on their investments averages 5 per cent annually, that the inflation rate affecting their expenses is 2 per cent and that they live until age 90.

When they retire, they plan to spend $55,000 a year – close to their spending today once savings and debt repayment are removed, Mr. Ardrey says. In addition, they would like to travel, spending $10,000 a year from when Norman retires until his age 80.

Based on these assumptions, Norman and Lena should be able not only to meet their retirement goal, but have a substantial financial cushion,” the planner says. Once their debt is paid off, they can increase their spending by $27,500, to $82,500 a year, over and above travel spending.

Having this financial flexibility is important for the couple because they plan to retire so early, leaving a lot more time for life to present a problem that requires a financial outlay,” Mr. Ardrey says. As well, their budget is less than precise. Spending in some categories is high; in others, such as car expenses, clothing, gifts and vacations, it’s non-existent. He recommends they prepare a more detailed budget before the final retirement decision is made for Norman to ensure the target retirement expenses match what is actually being spent.

Finally, Lena and Norman should review their investment strategy. They have five RRSP accounts, one spousal RRSP and one locked-in retirement account (LIRA). “Though the spousal and LIRA accounts cannot be consolidated, the RRSPs can,” the planner says. Consolidating them would make them easier to manage.

Their retirement assets are invested in balanced funds and individual stocks. “An investment strategy that focuses on asset mix and disciplined investing would serve them better,” he says.

Their current asset mix is 23 per cent cash and fixed income, and 77 per cent equities. Mr. Ardrey suggests they shift their holdings at a rate of 5 per cent a year until they have 60 per cent equities and 40 per cent fixed income. “This,” he says, “will help with any volatility in the markets as they approach and enter the early part of their retirement.”

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The people: Norman, 51, and Lena, 50.

The problem: Can they retire early while paying off a mortgage without affecting their retirement spending goal?

The plan: Keep up the big mortgage payments so the debt will be repaid a few years after Norman retires next fall.

The payoff: A sizable financial cushion to buffer any expenses that might arise.

Monthly net income: $8,950

Assets: His RRSPs $176,820; his TFSA $4,800; her RRSPs $26,520; her spousal RRSP $14,275; her locked-in retirement account $7,576; commuted value of his pension plan $379,750; commuted value of her pension plan $311,690; residence $750,000. Total: $1.67-million

Monthly outlays: Mortgage $3,280; property tax $360; water, sewer $60; electricity $270; heating $125; car lease $420; grocery store $1,200; line of credit $50; dining, drinks, entertainment $850; grooming $125; club membership $125; pets $500; cellphones $185; TV, Internet $200; RRSPs $500; tax-free savings account $800. Total: $9,050. Shortfall $100

Liabilities: Mortgage $142,340; line of credit $5,500. Total: $147,840

Matthew Ardrey
Presented By:
Matthew Ardrey
VP, Wealth Advisor
matt@tridelta.ca
(416) 733-3292 x230
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