The changes, to be phased in starting in 2011, would mean higher payouts for those who wait beyond age 65 and less for those who collect earlier.

In 2010, the maximum CPP retirement benefit is $934 monthly at age 65. Under the proposals, those who defer their pension would see benefits increased by $78 each year to reach $1,326 monthly by age 70. Those who start early would lose $67 each year and receive only $598 monthly if they collect at the first opportunity at age 60.

Actual benefits will depend on individual contribution history and are adjusted for inflation every January. A second significant change affects those opting to take benefits early. Currently, in order to qualify for CPP you must stop work or reduce earnings for at least two months.

That test will be dropped in 2012. Instead, those who collect early and continue working will be required to contribute to CPP at the same time, as will their employers. This will mean a higher pension the following year. Contributions will be optional for those aged 65 and older.

The “Rule of 72” is a simple formula that can yield powerful insights. For example, Canadians are not getting paid very much to hold cash. The average bank savings account in Canada is paying 0.83%. At today’s average savings account interest rate of 0.83%, it would take 87 years to double your money

Some are paying a bit more, some a bit less, but by and large, bank accounts aren’t the way to grow your savings. They are good for security and for quick access to cash, but not much else. However, by investing at least some of your savings, you can grow your wealth.

Last year, many Canadians decided not to invest. Market turmoil from late 2008 and early 2009 created a deep mistrust, and a sense of fear. However, from the month of March 2009, the markets staged one of the biggest comebacks in history.

The key is to remember that investments benefit from time, and from playing the averages. In the short term, investments such as equity and balanced mutual funds can go down. Over longer periods, the results have generally been reasonable.

The 15-year average annual return for a Canadian equity-focused balanced mutual fund is 6.77%. Using the Rule of 72, with a 6.77% return, you would double your money in 10.6 years. The lesson from this example is important: even taking into account two very serious stock market downturns in the past 15 years – the dotcom bubble burst and the credit crisis of 2008-2009 – balanced funds delivered in the long term.  It pays to be an investor.

The good news is that if you think you’ll be in line for a refund, you don’t have to wait. Your district tax office can authorize your employer to deduct less tax from your pay, to reflect deductions that typically trigger a tax refund — things like RRSP contributions, charitable donations, deductible support payments, and childcare expenses.

You might also qualify if you will be making a large RRSP contribution or “catch-up” contribution early in the year, or if you expect to have significant carrying charges, rental losses, or legal expenses incurred to collect child support and/or  allowable business investment losses.

If you’d like to make this request, you may contact me via phone or e-mail for the necessary T-1213 tax form.

1. Budget. If you analyze where your money is going, you can find expenses to cut and the dollars will add up.

2. Pay yourself first. Just as we manage to pay our bills as they come in, we should also put money into our RRSPs every month.

3. Start a pre-authorized chequing plan (PAC). To help you save, consider setting up a PAC. This simple investment strategy lets you set aside money on a regular basis to purchase mutual funds. Amounts as small as $50 per month can be deducted from your personal bank account and invested in your RRSP.

4. Open a Tax-Free Savings Account (TFSA). You can put $5,000 annually into a TFSA. And you can have access to your investments in a TFSA at any time and never pay tax on the money it earns.

5. Pay down your mortgage. Make a few extra mortgage payments every year and you’ll not only pay it off years earlier, you’ll save thousands of dollars in interest.

6. Get a financial checkup. Set regularly to determine if your financial goals are still in sync with your investments.

7. Check your insurance. When was the last time you looked at your home, auto and life insurance? Are you covered adequately and have you shopped around to make sure you’re not overpaying?

8. Do you have a will? Review and update your estate plan annually to make sure it reflects your age and family circumstances, and protects your family from unnecessary taxes.

9. Pay off your credit cards. To help you get started, look at the monthly interest charges on the card and then consider all the better uses you have for that money

With a Tax-Free Savings Account (TFSA), if you are over 18 years old, you can save up to $5000 each year.  You won’t get a deduction, like you would with the RRSP, but you do get a nifty bonus.  Any investment return you get – interest, savings, or capital gains – is not taxed, not while it builds up inside the plan, and not when you withdraw it.  This is a great companion strategy to help pay for education, plan for retirement, and buying a home.  You can even set up a TFSA to help you budget for Christmas presents and annual vacations. 

If you felt the crunch of the recession this year, and weren’t able to make a TFSA contribution, don’t worry.  Any unused room from this year will carry forward.  So if you only made a one-time $50 deposit into your TFSA, you still have $4950 in contribution room that carries forward to 2010.  This means you have a total of $9950 of contribution room for next year.  If you don’t contribute at all in 2010, you will have contribution room of $14,500 in 2011. 

You get the idea.

Another important item: if you are saving your TFSA for future use, the withdrawals won’t affect any income-tested benefits.  The Canada Child Tax Benefit, Old Age Security, and the Guaranteed Income Supplement aren’t altered when you make a withdrawal. 

If you are thinking about making some big personal and financial changes next year, the TFSA is definitely a good starting point.  Keep in mind, though, that you need to put together a financial plan, and find out where the TFSA fits in, in order to get the most out of it.

For the past several years, only Nova Scotia, Newfoundland & Labrador and New Brunswick have operated under the HST. Quebec introduced the Quebec Sales Tax (QST) in 1992, which quite closely resembles the HST. In 2009, both Ontario and British Columbia introduced plans to harmonize their respective provincial sales taxes with the federal GST to create an HST, effective July 1, 2010. In Ontario, the new HST would have a combined tax rate of 13 percent and would include the current general Ontario RST rate of 8 percent and the federal GST rate, currently set at 5 percent.*  As a result, a greater proportion of Canadians will be subject to HST. This paper will discuss what harmonization means to consumers and more specifically, how HST will affect your mutual fund investments.

* In British Columbia, the new HST would have a combined tax rate of 12 percent and would include the current B.C. Social Service Tax (SST) of 7 percent and the 5 percent federal GST rate.

How does Harmonization affect Canadian mutual fund investors?

Mutual fund investors pay a management fee on their mutual funds in order to obtain the benefit of professional money management advice and other services. Since professional money management is considered a service, mutual fund investors currently pay 5 percent federal GST on the management fee and certain operating expenses of the investment funds. These costs are included in the Management Expense Ratio (MER) of each particular mutual fund. As a result of the HST, investors will now be required to pay an additional provincial tax on management fees (and certain other expenses of the MER) where it did not apply previously. Therefore, this will result in a proportional increase in the MERs of mutual funds and an additional cost to investors. Higher taxes on mutual funds will result in lower returns to investors.

Using Ontario as an example, assume a mutual fund has a pre-tax MER equal to 2.28 percent1  and earns an 8 percent rate of return. Under the current rules, the MER is equal to 2.39 percent when GST is applied2. In this case, the investor would receive a net return of 5.61 percent. If the HST legislation is approved, the MER will increase by a further 0.18 percent to 2.57 percent. As a result of the additional taxes imposed by the government on mutual funds, the investor’s return would be reduced to 5.43 percent.

In other words, this tax increase imposed by the government will directly result in a lower net return to the investor. The following chart summarizes the implications to investors on investments returns because of HST.

1 MER is comprised of a 2.00% management fee, 0.25% fixed administration fee plus 0.03% other fund costs

2 It is assumed that GST/HST is only applied on the management fee and fixed administration fee

Without HST

Rate of Return 8.00%

Less Total MER:

Pre-tax MER 2.28%

GST (5%):  0.11%

8.00% Rate of Return minus total MER (2.39%) = Net Return 5.61%

With HST

Rate of Return 8.00%

Pre-tax MER 2.28%

GST (5%): 0.11%

Ontario RST 0.18%

8.00% Rate of Return minus total MER (2.57%) = Net Return 5.43%

What is the rationale for the HST?

The HST provides a single tax base and consistent administration across federal and provincial governments. Without it, there are multiple tax bases, each with their own set of rules and processes.  One of the fundamental differences between GST and a separately operated provincial sales tax is the ability for businesses to recover sales taxes paid on inputs required in the course of providing goods and services to consumers. Under the GST, businesses are reimbursed for any GST paid on inputs while they are not reimbursed for any provincial sales tax. Therefore, the added costs of provincial sales tax becomes embedded in the prices paid by consumers on goods.

The adoption of the HST will help remedy this situation and allow businesses to recover not only the GST paid on inputs, but also the provincial sales taxes. This will help reduce costs and allow businesses to be much more competitive in Canada and internationally.  In addition, harmonization will simplify the sales tax collection process and significantly reduce administration and compliance costs associated with the collection and remittance of sales taxes to the government.

Summary

The HST can have a positive impact for the Canadian economy and for many industries, especially in manufacturing. Unfortunately, the same benefits will not apply universally to all industries, particularly to investment managers where cost recovery on inputs is minimal. More importantly, the HST represents an additional cost to investors and can impair investor savings. Mackenzie Financial Corporation, among other fund companies, strongly opposes the proposals as they currently stand.  Government should be encouraging investors to save for their retirement and should not impose additional tax on savings. Accordingly, Mackenzie is actively engaged with industry groups and government officials working diligently to promote alternative strategies that would protect your savings and those of investors like you.

This article was prepared by Mackenzie Financial Corporation for Andray Domise, Independent Financial Advisor, who is an Investment Professional with International Capital Management.

Read the rest at Investment Executive

Have you ever thought about going back to school as an adult, but wondered how you would be able to afford it? In this post, we look at using money from an RRSP to finance a Lifelong Learning Plan. Click here for a comprehensive overview.

What is the Lifelong Learning Plan?

In 1998 the Federal Budget contained a new education funding plan called the Lifelong Learning Plan (LLP), which allows people tax-free withdrawals from an RRSP to finance post secondary education and skills training, either for themselves or their spouse, under certain conditions.

How the LLP works

Withdrawal limit: Individuals can withdraw a maximum of $10,000 in a single year from their RRSPs. More than one withdrawal may be made in a given year from any number of RRSP accounts, provided that the annual limit is not exceeded.

RRSP owner: Either the student using the funds, or a spouse must be the owner of the RRSP.

Full-time program only: LLP withdrawals must be used to finance full-time education or training of at least three month’s duration.

Disabled student: A disabled student, who is entitled to the federal disability tax credit, can qualify as a student under the LLP, whether or not he or she is studying on a full-time basis.

Repayment rules: LLP withdrawals must be repaid over a 10-year period, without interest, in equal or greater amounts – and can be repaid in less than 10 years if so desired. The repayment must be made no later than 60 days after the fifth year of the first withdrawal. Amounts not repaid must be included in the RRSP holder’s taxable income in that year.

Participation frequency: There is no limit on the number of times an individual may participate in the LLP. However, an individual may not participate in a new LLP before the end of the year in which all repayments from any previous participation have been made.

Canadian residents only: Recipients under the plan must be Canadian residents. Amounts outstanding under the LLP will generally be included in income for the year if the recipient dies or becomes a non-resident of Canada.

RRSP deduction: No deduction will be allowed for an RRSP contribution made less than 90 days before its withdrawal under the LLP. Due to this, any existing pre-authorized contribution plans should be suspended until after the LLP withdrawal.

Who can benefit from the LLP?

• A student who has had summer jobs for several years, and contributed annually to an RRSP (or whose parents have contributed on behalf of the child.)
• A child who works in a family business and has contributed to an RRSP
• A person who has been in the workforce and is going back to school to enhance his or her career
• A person who has decided to change careers but requires more education to do so

This article was prepared by Mackenzie Financial Corporation for Andray Domise, Independent Financial Advisor, who is an Investment Professional with International Capital Management, Inc.

© 2009 Mackenzie Financial Corporation. All rights reserved.

How much do I need to retire?

The answer to that question depends very much on the lifestyle you envision in retirement.

Perhaps you want to travel the world or trade your expensive house in the city for a smaller one in the country, and just enjoy yourself. But no matter what your goals are in retirement, financial planning at this stage forces you to admit that your retirement is almost here and you have to make some critical decisions. For example, have you considered gradually moving to a more conservative portfolio. An independent financial advisor can walk you through a new strategy and introduce you to ideas that fit with this period of your life.

For a complete analysis of investing in your 50s click here.

Your retirement checklist

Here are some questions to ask as you move closer to retirement.

• How many years before I retire?
• How much money will I need on a monthly basis?
• What are my guaranteed sources of income in retirement?
• How much money do I have in investment assets?
• How much money will I need to generate from my investment assets?
• How much more money do I need to save?
• How can I invest to reach my ultimate savings goal?

Developing your retirement strategy

It’s important to sit down with your financial advisor and develop a plan of action that answers a number of questions, including: how much time is left before you retire, how much money you’ll need and how comfortable you are with risk. Striking a balance between what’s ideal and what’s realistic is your challenge.

For example, on the one hand this is your last opportunity to build your assets through aggressive saving and investing. On the other hand, with retirement quickly approaching you may want to protect the wealth you’ve already accumulated.

Setting your course to retirement

To figure out the ideal proportion of investment growth versus income that you’ll need, you’ll have to decide when you want to retire, or more specifically, when you need to rely on your money (rather than work) to support you. The most difficult part of devising an investment strategy is being realistic about how much risk you want to take. Your advisor can help run some scenarios to see how you may react. The key is to be honest. Don’t take more risk than you can comfortably handle.

Building an investment portfolio in your 50s

Until recently, equity funds may have dominated your portfolio. That’s a good thing since historically equities have offered average annual returns of about 8%. The problem is, from one year to the next, you never know what will happen in the markets.

As you get closer to retirement, you need to be able to count on the money in your portfolio. You don’t have the luxury of time to recover from significant stock market losses. But swinging to an ultra-conservative stance could also backfire. A portfolio that’s 100% in fixed income and cash – while less volatile compared to equities – may not generate sufficient returns to fund a rewarding retirement.

For many of us, the best strategy is the middle road: a mix of stocks and bonds to provide income and growth opportunities. In fact, many of the first mutual funds sold to investors took this balanced approach, and balanced funds remain popular to this day. Your financial advisor can help you determine the optimal asset allocation, after looking at your personal situation, your appetite for risk and the amount of time you have to invest.

Cash flow in retirement

A good way to get monthly income – rather than through a straight withdrawal – is through investment funds that make monthly payouts. These can be in the form of fixed or variable distributions. With a regular, monthly income stream, you can better plan your finances and support your lifestyle. Your financial advisor can recommend an appropriate income fund.

Creating your retirement investment portfolio

When you start seeing each of your investments in context of your investment strategy, the choice of what to actually invest in becomes easier. You’ll see how each element of your portfolio contributes something different toward your overall investment goals. Work with your financial advisor to develop a consolidated view of all your investments. Your asset allocation – the portions you will divide into equity, fixed income, cash and other assets such as gold and
commercial real estate – will depend on your investment strategy.

What if you’ve fallen behind in your retirement plan?

Studies show that many of us haven’t saved enough for retirement. If you’re in your early to mid-50s and have several years until retirement, here are some suggestions for catching up:

Boost your savings. Figure out where you can cut expenses to save more. You’d be surprised how the changes you make can translate into extra dollars for retirement.

Add to your RRSP or employee pension plan. Make catch-up contributions for those years you didn’t contribute. As well, be sure to contribute to any plan where your employer matches contributions – this is free money.

Raise your risk. If you’ve switched your portfolio into bonds, consider switching a portion back to equities to provide some growth. Be careful not to increase investment risk beyond your comfort level.

Get a second job. You or your spouse may be able to take on a second job to earn extra income. Alternatively, one of you may be able to make more money by switching jobs.

Push back your retirement date. Working an extra year or two may help you meet your retirement target. Alternatively, you may continue to work part-time or on a freelance basis during retirement.

Downsize your home. Moving into a less expensive home, or renting, can provide you with a lump sum to help finance your retirement.

Rethink your retirement lifestyle. If there seems to be no way that you’ll be able to retire in the manner you envision, you have no choice but to live a more modest lifestyle in retirement. Be sure to talk to your financial advisor to see if they can provide ideas to bridge the gap between what you’d like and what you have.

This article was prepared by Mackenzie Financial Corporation for Andray Domise, Independent Financial Advisor, who is an Investment Professional with International Capital Management, Inc.

© 2009 Mackenzie Financial Corporation. All rights reserved.

The beauty of GICs is that they are straightforward and easy to understand. Because market values for GICs aren’t readily available, there’s a built-in discipline to commit to the maturity date. There’s no point in monitoring the financial pages every day, nor in worrying that you won’t get your money back. Once you’ve decided to put your money into, say, a five-year GIC, there’s really nothing to think about until it matures.

Short-term thinking leads to rash decision-making

The approach many investors take can be very different when it comes to mutual funds. That’s because with mutual funds there’s always the option to redeem or to switch into a different fund that appears more attractive. This can lead to the temptation to track the performance of mutual funds on a daily basis. Unfortunately, this focus on the short term can lead to rash decisions that are made without proper perspective.

It’s similar to driving in heavy traffic on the highway and being convinced that every other lane is moving faster than the one you’re in. You typically won’t get to your destination any faster by switching back and forth between lanes, although it can be tempting. And in the same way, it takes discipline to see beyond all the day-to-day fluctuations in the markets – but it’s still the best way to reach your financial goals over the long term.

Treat your mutual funds like they’re GICs

The secret to successful investing is to focus only on the information that’s relevant to you over the long term. While it takes far more self-discipline to invest in mutual funds, the potential returns can make it worthwhile. Cut back on how frequently you check the value of your funds, as it doesn’t matter how the markets perform on a daily basis. Invest in mutual funds in the same way that you invest in a GIC. Once you’ve made the decision to invest, it can be detrimental to start second-guessing yourself. Your advisor can also help you by ensuring that your investment portfolio is meeting your long-term objectives and by helping you filter the information that’s relevant to you.

Example: Trimark Canadian Fund - the benefits of thinking long term

Let’s take a look at how this strategy paid off for investors in the past. For example, the following chart shows Trimark Canadian Fund’s rolling five-year returns since inception (September 1981) through December 2007. As you can see, the Fund did not lose money over any five-year period. Instead, investors who took a long-term view and weren’t sidetracked by short-term market value were well rewarded – the average five-year rolling return annualized since inception was 10.99%.

(Note: The current 5 year average, as at Sep. 30 2009, is 2.7%)

Invest and leave well enough alone

Treating your mutual funds like they’re GICs can be the most effective way to ensure you stay on track to meet your long-term financial goals. That’s because, to be successful over the long term, you have to think long term. It’s as simple as that.

Mutual fund securities unlike GICs are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. The indicated rates of return are the historical annual compounded total returns, including changes in security value and reinvestment of all distributions, and do not take into account sales, redemption, distribution or optional charges, or income taxes payable by any securityholder, which would have reduced returns. Mutual funds values change frequently and past performance may not be repeated. Please read the prospectus before investing. Copies are available from Andray Domise, Independent Financial Advisor, or from Invesco Trimark Ltd. 
 
* Invesco and all associated trademarks are trademarks of Invesco Holding Company Limited, used under licence.
Trimark and all associated trademarks are trademarks of Invesco Trimark Ltd. © Invesco Trimark Ltd., 2008