How the Bank of Canada’s rate cut may have added $100,000 to your pension in one day


When the Bank of Canada lowered the overnight interest rate by 0.25% this week, the obvious benefit is for those with variable rate mortgages. They will see an immediate benefit in lower interest payments on their mortgage.

Another group who just received a big win may not even realize it: If you have a pension plan, and especially if you have ever thought about taking the cash value of your plan, you just saw an increase in potential value. In some cases, the rate cut could have added as much as $100,000 in wealth in one day. This option to ‘take the cash’ is usually open to those who are retiring or leaving their employer. Sometimes the option ends when the employee turns 50 or 55.

To understand how this wealth boost works, and how much your wealth could go up, can get a little complicated. The best way to explain it is to pretend that you want $50,000 of income per year and go from there.

You could buy a GIC to pay out $50,000 of income per year, and depending on the interest rate of the GIC, you could determine how much you need to invest: At 10 per cent interest, you could buy a $500,000 GIC. At one per cent interest, you would need to put in $5 million for the same return.

In the pension plan example, if they are committed to paying you $50,000 a year, then at today’s super low interest rates, your pension plan must set aside a lot more money to cover off $50,000 a year — just like the GIC example. Here is where your wealth potentially just grew:  In many cases, you have the ability to ask your pension plan for this lump sum of money (often called the commuted value), rather than taking the pension as a monthly payment.

Below is a chart for the Bank of Canada Five-Year Bond Yield over the past 26 years. The highest yield was 11.6 per cent, in March 1990. The lowest yield happened this week at 0.7 per cent.


Imagine this chart represented an opportunity to lock in a lifetime rate for a loan. If you could choose any time to lock it in, this week would be the best time.

A commuted value of a pension works the same way. You are essentially locking in a value for life, and an important determinant of that value is interest rates.

Put another way, if you were ever going to take the commuted value of your pension, now would be one of the best times in history to do so.

For those who like the idea of a monthly payment guaranteed for life, you can purchase a pension any time by buying an annuity. Having said that, in many ways, at today’s low interest rates, now is perhaps the worst time to purchase an annuity.

One potential strategy is to take the commuted value of your pension today, when you would receive the largest amount. In a few years, if interest rates rise meaningfully, you can take your funds and buy an annuity that will pay you a higher monthly amount than you would ever have had with your existing pension.

The decision of whether to receive a pension in monthly amounts for life as opposed to taking a lump sum is a complicated matter. What I would suggest is that your pension plan does NOT want you to take a commuted value lump sum today. It will cost them too much.  Based simply on that, you may want to take a good look at whether that option is open to you, and whether you might want to take it.

Reproduced from the National Post newspaper article 17th July 2015.

Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
(416) 733-3292 x 221

Why we overprotect ourselves from the stock market


armourThe price of safety in a low-rate world is high.

Even legendary investor Warren Buffet lamented recently the sad misfortune of those who parked their money in cash equivalents or fixed income investments, saying they have have missed the party over the past nine months as Wall Street rocketed to all-time highs.

“It is brutal. I don’t know what I would do if I were in that position,” Mr. Buffett said at Berkshire Hathaway’s annual meeting in Nebraska. “I feel sorry for people that have clung to fixed-dollar investments.”

Take the GIC, the best five-year rate among major banks is 2.2% at RBC. If held in a taxable account, the after tax return could be as low as 1.1%.

Over the past 12 months, an investor that was 60% invested in the TSX and 40% invested in the S&P 500 would have earned about 8% after fees compared to an armoured up investor who would have earned 2.2% locked into a five-year GIC.

And yet there is still $134-billion invested in GICs of five years or more as of December 2012, data from Investor Economics suggests.

Much of this was invested at rates a little higher than 2.2%, but there still remains some serious money invested at low rates, and the expectation is that much of it will be reinvested right back into GICs when it comes due.

A recent poll by Edward Jones found that a full 11% of Canadian investors don’t even know what they own. But of those that do, most are stubbornly holding on to cash and GICs and plan to add more of the same to their portfolios in 2013.

I believe a five-year GIC is an investing mistake today for two reasons.

1. People avoid stocks because of a fear of losses, even though over five-year periods, the chances of meaningful losses are very low, and there is a reasonable chance of significant gains.

2. Many people – especially retirees, feel that their investment time horizon is much shorter than it actually is. If they view their investments over a longer time horizon, then they might see that losses in diversified stock investments almost never happen.

A recent study from investment firm Franklin Templeton tries to better measure this fear. The study suggested that while 60% of Canadians think that the stock market will go up in the next year, half of Canadian investors indicated that they will be adopting a more conservative investment strategy in 2013. This compared to less than one quarter (22%) who will get more aggressive.

Investors often overprotect themselves from the risks of the stock market.

If we look at five-year periods since January 1950 the TSX would have outperformed a 2.2% return roughly 90% of the time. If you factor in fees of 2%, it still would have done better than a 2.2% return about 80% of the time. The worst five-year return was minus 1.9% or minus 3.9% including fees of 2%. The best five-year return was 25.8% after fees. So the five-year range was an outperformance of 23.6% down to an underperformance of 6.1%.

So it is true that you could do better in a GIC about 20% of the time (not factoring in taxes), but the downside is not too deep, and the upside you are giving up is significant.

I believe that if most investors used a 20-year time horizon, they would see an almost 0% chance of losing money

Now, if you believe that losing any money at all is not acceptable then you would buy the GIC. The question is why would you be so fearful of losing any money? Based on the past 60+ years, if investing in the stock markets for five years, the downside risk is fairly small.

What if based on history the downside risk was essentially 0%? Would that make the investment decision better?

I believe that if most investors used a 20-year time horizon, they would see an almost 0% chance of losing money.

I am often told by 70-year-old clients they don’t likely have a 20-year time horizon. In many cases I think they do have at least a 20-year time horizon on at least a large percentage of their savings.

Let’s say a 70-year-old couple has $500,000 in savings. Based on their expenses and other income, they expect to draw out $15,000 a year from this savings. Since they are in a ‘draw down’ stage they believe they must now be conservative with the bulk of their investments.

If that $500,000 grows 5% a year on average, then the $500,000 will actually grow by $10,000 every year even with the $15,000 withdrawals. In their case, I would suggest that the time horizon is at least 20 years, and probably 30 years plus.

The odds are that at least one member of this couple will be alive in 20 years so these investments need to last at least that long. If they can achieve 5% returns and draw $15,000 a year, then they will have over $760,000 in 20 years. They will effectively have had $500,000 at age 70, and proceeded to never touch the principal for 20 years. Based on that logic, the bulk of that money should have been invested reasonably aggressively.

Once they both pass away, what happens to the money? It will likely be inherited by their children who may even pass it down to the next generation. Now you are looking at a 30-year-plus time horizon for this money.

Over 20-year periods since 1950, the worst performance on the S&P 500 (US Market) was 7.0%, while the best was 19.4%. For the TSX, the worst was 6.2% and the best was 14.1%. Even if you factored in fees as high as 2%, and chose to use the worst performance period, a $100 investment in the S&P 500 would be worth $265 in 20 years. This is using the worst period and factoring in a relatively high 2% investment fee.

Maybe it’s time to shed some of the armour.

Written by Ted Rechtshaffen, President & CEO of TriDelta Financial.
Reproduced from the National Post newspaper article 13th May 2013.

5 Investment Scams You Must Avoid


That salesman may seem nice but take some precautions before signing away your savings (Thinkstock/Getty Images)

Bernie Madoff got our attention. We wondered: could it happen to us?

The reality is that these scams are as old as time, and are going on right now. There are also ways to avoid them. Here’s how:

“We truly, truly believed this man.”

This was a quote from a recent victim of a 38-year-old real estate entrepreneur from Oakville, Ontario. Trusting someone takes time and is an important thing. The problem is that all victims seem to say the same thing. If someone seems honest and respected in the community, they probably are. However, don’t invest your money based on that. It has cost people billions of dollars. There needs to be something much more tangible beyond personal trust.

“The rates of return are so good.”

One of my clients made a comment about the GIC rates at Stanford International Bank in Antigua. They wondered if they should put some of their safe money there because they could get 5% and 6% rates on short-term GICs. The questions that need to be answered fully are always, ‘why such a good return? What is the investment in? What is so special about how the underlying investment is to achieve this extra return?’  If you keep asking questions and get clear answers, then it might very well be a good investment. The problem is if you are not in a position to know what questions to ask, it can be difficult to discern between a real investment and a not-so-real one. The other obvious sign to run is when you ask questions about the investment or its structure and you don’t really get straight answers.

“Can I see the value of my investments?”

This is another warning sign. In most Ponzi schemes, the value shown on a statement was a made-up number. The value behind the number was not entirely clear. Anytime you invest in something that isn’t publicly traded or held at a large financial institution, you are taking greater risk.

For example, if you own 100 shares of Royal Bank according to your custodian at TD Bank Financial Group, you can be pretty certain you actually own 100 shares of Royal Bank. You can then look on the public and open stock market and see the value of those 100 shares. If you have money in Stanford Bank (even though it was very large) in Antigua, you will get a statement showing a balance of dollars. You had better be confident in the banking regulator in Antigua that they have a strong enough system to ensure those dollars are actually there.

“First I put in $20,000. It did well, so I put in $50,000. It did well, so I put in $250,000.”

Humans are greedy by nature and it’s tough to overcome. When something appears to perform well, it is natural to want to have more money invested in it. If the investment is growing on paper, how certain are you that it represents a real number? The toughest scenario is when you put money in and take it out before making further investments. It is then real cash. It instills confidence. It builds trust. This is why Ponzi schemes are so successful. Unless there is a run on the money, as long as new money is going in, most investors can get their funds out. Don’t be fooled by an initial good investment by betting the farm.

“I trusted my gut feelings that this was a good investment.”

Don’t trust your gut. Trust your brain and do your homework. Your life savings are too important to risk on “liking the guy” or “they seemed honest.”At the end of the day, investment is always a balance of risk and reward. Always understand the true risks you are taking. If the cheque is written out to a small entity or person — please do a triple check before handing the money over. The next Ponzi scheme is being set up right now.

Do you have an additional tip for avoiding a scam? Leave a comment below or message us on Twitter or Facebook!

Ted Rechtshaffen is president and CEO of TriDelta Financial, a firm that provides independent financial planning and investment advice. This article was originally published in National Post.