Montreal's senior monthly since 1986

Feb '10

Columns

Congratulations, you’ve outlived your money

As investors belatedly clamour to reevaluate the risk exposure in their portfolios, it may also be time to rethink just how long retirement will actually last in the 21st century.

“You do hear people say ‘I didn’t expect to live this long,’” attests Montreal Financial Security Advisor Stephen Laing of Sun Life, who’s had to put more than a few sobering forecasts into clients’ hands. “The sad fact is that people are already outliving their money.”

Sadder still are those who’d be in good shape were it not for chasing “top performers” – but a serene and evenhanded approach isn’t always an easy sell in a bull market, he contends: “Greed gets in the way of good decision-making – somebody else is getting a better return, grass is greener, plans get put aside...” And as rosier and rosier projections compete for attention, he notes, people start ignoring the proviso that “past performance is no guarantee of future results.” Laing takes issue with the way statistics are used to market some securities. “People have to be very careful when they read that kind of information,” he says, pointing out that it’s taken from numbers that represent a snapshot in time – the choicest slice of the performance graph.

A sound and durable strategy, he maintains, will use “very conservative numbers” as a baseline, and map out alternate scenarios, including (especially) dire ones. “Sometimes people need to look at extenuating circumstances, and see what impact it’s going to have on their income or their asset base. Using software we put the dots together, and do a projection, and work out a cashflow for the year. There’s nothing set in stone,” he says. “It’s theirs to do with what they want. But they can see, physically, in their hands, whether they need to worry or not. Sometimes it will mean looking at going back to work to maintain your standard of living.”

The demands on the client are “not too complicated,” he professes, “other than the fact that one should have some idea of how much one needs to live on.” Some arrive with expectations skewed by inexperienced, starry-eyed advice – the kind that says next year’s growth will make up for this year’s capital depletion – and actually have to be reminded: “If you’re taking out money, and not replacing it, over time, when you need it most, naturally, it’s dissipated.”

Investors in this situation, he maintains, need to consolidate into “products that hedge against the downside” with less stock market exposure.

For investors with the opposite problem – too much taxable income from pensions, savings, and other assets – Laing touts a new tax change for RRIF recontributions, allowing investors to put back up to 25% of the mandatory minimum they have to take out for 2008. This government-mandated percentage, based on age, is required to be withdrawn and taxed annually, which he argues “can add up to a substantial amount on income you’re not using.”

The paperwork isn’t ready-made, and Laing advises “writing a letter of direction to the institution, indicating the amount being recontributed, and the certificate or fund or account that’s receiving the money, signed and dated with a cheque,” before the deadline of March 1, 2009.

Stephen Laing can be reached at stephen.laing@sunlife.com or 514-866-5811 x 2212.

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Death policy mitigates risk

Everybody knows we’re living through difficult times. People are carefully reevaluating their investments and reassessing their retirement needs. With portfolios so badly devastated, I’m receiving more calls about clients purchasing life insurance policies. The basic idea is that the policy will replace the investment savings that have been lost in the current financial turmoil.

Life insurance guarantees that monies will be available on the death of the insured therefore making certain that the surviving spouse maintains their quality of life and is not held hostage to any unprecedented negative economy or worldwide crisis.

I am often asked if it is hard for people aged fifty plus to obtain life insurance. Generally speaking, the insurance company evaluates your profile. After obtaining blood and urine samples, which are standard, they may ask for an ECG or complete physical. It is also common for the insurance company to refer to your attending physician to confirm various medical information highlighted in your application. Other issues they look at are your build, driving record and family history as well as smoking habits. Past history such as a criminal record or alcohol or drug abuse are also considered. This information is assessed by an underwriter at the insurance company and a decision is made as to whether to offer insurance or not. Sometimes a decision is levied that carries a substandard risk which translates into an additional premium charge on the basic cost of insurance.

Each applicant is evaluated uni­quely. People who have endured major illnesses such as cancer or heart attack may still be eligible for insurance. It’s important when going through the application process that all pertinent information is properly disclosed to the insurer. If the insurer uncovers additional information after the policy is issued, they do reserve the right to rescind their offer. While this rarely occurs, it underscores the importance of being honest.

I can state that after 18 years in the business, every death claim I’ve seen submitted – and they’ve been numerous – has been resolved satisfactorily.

To summarize, life insurance is a guaranteed future payout of a lump sum of money. Take the market risk out of your retirement portfolio by adding a life insurance component.

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Protector, provider, paymaster

While traveling on a cruise holiday a few years ago, I noticed that one of the most popular T-shirts for sale was a simple stylized kind with the slogan “Bank of Dad” boldly emblazoned on top of a bank machine. I thought it to be quite amusing, however my 12-year-old daughter was even more amused and insisted that I purchase it.

It amazed me how she understood, although in jest, the significance of the traditional male role of providing for a family and the expectations that her needs would be met. Granted, that role has changed somewhat over the years but still, for most of us men, it is a reality. That role often continues even when our own children are grown and still depending on us financially for one reason or another. When hardship comes calling who else can you depend on but good old Dad?

Unfortunately for some of us, the role of provider can be seriously impacted due to an unexpected event such as illness, accident, or in the worst case imaginable, death.

Fortunately there are some very simple solutions to ensure that everything will be covered should the need arise.

It is always a good idea to have adequate disability, critical illness, and life insurance. As we go through life our needs change and we should periodically review each component to ensure that the family’s well-being will be looked after. In fact, as we approach the retirement years, there are some new innovative products that take all the worry and risk out of whether you will outlive your retirement money, thus ensuring that the “Bank of Dad” never runs out of cash!

As Father’s Day approaches, sit back and enjoy how much you are appreciated by others and what impact your efforts have made in the lives of your children and significant others, and don’t forget that this is a day to relax and treat yourself.

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Pension splitting's nasty surprise

Chris Charlton, NDP critic for Seniors and Pensions, went after the Tories during Question Period June 4 over their promotion of pension splitting for seniors as a way to increase after-tax income.

“I don’t think they ever really thought this program through,” she says, citing one example of a couple who saved $2000 on their taxes by pension splitting, but ended up paying $5400 more for one spouse’s nursing home care as a result of the adjustment in their disposable income.

This scenario is, according to Charlton, not uncommon, and costly to redress. “To add insult to injury, they’re being made to pay a 5% penalty to re-file for an adjustment to their return. I’m asking the government, at a minimum, to waive the penalty, since seniors can’t afford accountants to save them from the government’s false advertising.”

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Will US housing crisis affect Canada?

The US housing crisis hit the headlines last year when thousands of American homeowners were faced with the harsh reality of not being able to keep up the high repayments on their homes. Tragic scenes of people moving out of their homes became commonplace. The worst affected have been holders of ‘subprime’ mortgages, typically lent to borrowers with shaky credit. According to the Mortgage Bankers Association, some 5.82% of all mortgages are now delinquent, the highest since 1985. Adjustable rate mortgage loans (ARMs) represent a disproportionate share of the foreclosure starts and while subprime ARMs represent 7% of the loans outstanding, they represented 42% of foreclosure starts during the fourth quarter of 2007. RealtyTrac, a company that tracks foreclosures, has over 650,000 foreclosure properties available for resale. The areas worst affected are in the Midwest, where the subprime bust is battering an industrial economy already in long-term decline, but even more economically robust states such as Florida and California are feeling the impact.

The knock-on effects are significant: since the process of repossession takes a year or more, delinquent borrowers have little reason to look after their homes, which then reduces the value of other properties nearby, and a glut of repossessed houses dampens prices by adding to the supply of homes for sale. It is not only borrowers who lose but also lenders, with major mortgage lender New Century Financial going bust in February of this year and HSBC issuing its first profit warning in its 142-year history as a result of losses incurred on subprime loans by its American division.

According to Jean Freed, MBA, a Montreal financial advisor and consultant, there were three principal causes of the crisis. Buyers overborrowed on homes they couldn’t afford. Lenders approved risky borrowers and then divested that risk by selling the mortgages on the financial markets. Another factor was predatory lending, where people were seduced into believing that if they stretched themselves for about three years they could make a financial killing and, with the resultant profit, buy another home outright.

Could this happen in Canada? While the mortgage market is equally unregulated here, and ‘no document’ mortgages are available whereby a self-employed person can declare their earnings without documentary proof, Freed considers it unlikely that the same phenomenon will occur in Canada. As to the impact it may have on Canadians, anecdotal evidence suggests that rental prices are now much higher in Florida – a favoured haunt for snowbirds. But for those seeking to buy, now is the time to secure that condominium at a very reasonable price. Freed emphasizes, however, that with much of Florida located on a flood plain, buying flood insurance is an essential. As for the broader effect on the Canadian economy, the housing market is starting to slow in Canada, and exporters to the US are likely to see a decrease in demand. Freed’s view is that while there are downsides, the overall impact is unlikely to be severe in Canada.

Jean Freed, MBA offers financial consulting services for small business and wealth management strategies for investors. For more info visit jfreed.ca.

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How to choose a real estate agent

You’re ready to place your home on the market and you need an agent. Here’s advice on how to choose a pro:

Referral

Speak to neighbours, family, and friends about agents with whom they have had dealings or check out which agents and brokers are active in your neighbourhood.

Compatibility

Interview more than one agent. Choose the agent who earns your confidence and makes you feel comfortable. Remember that your agent will represent you in the negotiations leading to the sale of your home, which should be accomplished with the least amount of difficulties and in the shortest timeframe.

Reality Check

If agents make promises that seem too good to be true, then you need to verify the claims. A good market analysis should enable you to determine a fair price for your home.

Support

An agent should represent his vendor through to the completion of the transaction, from the signing of the brokerage contract to the signing of the Act of Sale.

Ann Malka is an affiliated agent with Century 21 Vision and may be reached at 514-606-8784 or at annmalka.com.

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Signing a brokerage contract

Montreal realtor Ann Malka addresses some common concerns about contracting a real estate broker.

Who must sign the brokerage contract?

Your Deed of Sale and/or matrimonial regime determine ownership. Couples married without a notarial contract are governed under the regime of partnership of acquests, and must both sign the brokerage contract. Couples married with a notarial contract under the regime of separation as to property, when only one name is mentioned on the Deed of Sale, must also both sign the brokerage contract — one as the owner and the other as party to an Intervention of Spouse, indicating his or her assent.

Length of the contract

There is no minimum or maximum duration to a brokerage contract (except 60 days minimum in order to appear on MLS). When deciding on the length of contract to give your agent, consider the time of year and how long it will take your agent to properly market your home. Three to six months is the norm.

Inclusions/Exclusions

Prior to meeting your agent, decide what items will be sold with the property and what items you will be taking with you. Remember, things attached in a permanent nature are considered part of the property.

Pricing your home

Your agent should provide you with information on similar properties to yours that were recently sold, and those that are still active in your neighbourhood. The recently sold properties show you what buyers are willing to pay, and those still active make you aware of your competition.

Exclusive or MLS

Exposure is the key to maximizing the final sale price of your home. The Multiple Listing Service (MLS) provides information about your property to all the members of the Montreal Real Estate Board, as well as purchasers and realtors all over the world through www.mls.ca, at no extra cost to the vendor.

Disclosures

Be honest with your agent. If you know of any defects with your property, you must make your agent and purchasers aware of these problems in order to avoid legal disputes in the future.

Change of heart

Sometimes, no matter how informed and careful you are in choosing your agent, mistakes can be made. Most contracts can be cancelled at any time. Only those clearly marked “Irrevocable” are not easily terminated.

Ann Malka is an affiliated agent with Century 21 Vision and may be reached at 514-606-8784 or at annmalka.com.

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What to consider when purchasing a property

For many Canadians purchasing a home is the biggest investment they will ever make. The majority of most Canadians’ wealth is tied up in the equity of their homes. One of the advantages of owning a home is that the gains on a sale are tax free under most circumstances. There is much to consider when purchasing a property. Look for a qualified real estate agent, one with references who knows the neighborhood you are interested in.

It is important to understand how mortgages work. Talk to several financial institutions and/or a qualified mortgage broker. Pay attention to mortgage ratios (the ratio of your total mortgage payment to your total income). Do not forget to factor in your debt load.

Remember to get preapproved before you purchase. The process is quick and easy and facilitates the sale.

Make sure you are aware of your financial details.

Understand the impact of your credit history.

Create a budget that incorporates your mortgage expense plus any other unforeseen expenses that may arise including your existing financial commitments

Have questions ready regarding the property you wish to purchase.

Verify what similar properties have sold for in your neighbourhood of choice. There are many resources online that can provide this type of information.

Once you find a property that you feel is acceptable, determine your offer. Be prepared to negotiate and try not to go over budget.

Purchasing a property can be a very emotional time. Seek counsel from others that you trust.

For non-residential property or for rental or commercial properties, one must be aware of the impact on disposition that capital gains may trigger. In addition there may be recapture of depreciation that will add significantly to the amount of tax that must be remitted on disposition. One is best advised to speak to one’s accountant or tax professional in order to clearly understand if this investment is suitable.

Finally, it is recommended to insure the mortgage so that in the event of sickness or death, the obligation to the lender is taken care of. There are many ways to procure this insurance, either through financial institutions or through simple term life insurance which offers guaranteed rates of 10, 20, or 30 years. There are many advantages to purchasing the insurance with an independent life insurance broker:

  • You choose the beneficiary.
  • The premium does not change for the term of the insurance.
  • If you elect to refinance your mortgage with another institution, your insurance is portable and there is no need to reapply.
  • Policies are available that insure well beyond the age of 70.
  • The amount of the insurance will never decrease.

Ivan Cons can be reached online at imcfinancial.ca.

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