Halloween finished up and I can’t help but wonder if Trump and China are both putting on masks to have better rhetoric but lack substance and follow through. With the election coming up I also wonder if Trump will look for a deal that lacks the follow through of his original intentions that required an agreement to ensure enforceability. The communication is inconsistent and not well telegraphed. While there will always be risks, remember that humans always endure and overcome. We are a species that hinges on solving problems and we will continue to do that even if it looks scary in the short and medium term.

Below these summaries is a case study that breaks down the numbers on whether to invest in RRSP’s or outside.

Markets

  • Canada: Strong on jobs, weak elsewhere
    • Canadian TSX was down 1.05% for October
  • US: Strong on jobs, weak elsewhere
    • US S&P 500 was up 2.04% for October
  • Germany: Industrial production up, inflation is weak
  • China: Looking better
  • Overall take: the outlook seems to be improving and money is likely on the sidelines waiting to be put to work which is also a potential positive driver

Top Story: Several US trading brokerages eliminate commissions completely… but they sell your information.

Managing Investments

US seems to be the most economically sound country with great upward prospects and a fair floor economically. Trade issues continue to be a concern and while interest rates have decreased recently, financials seem to be undervalued but also at risk if interest rates continue to head lower. Should the global economy turn around then I would expect industrials to outperform and utilities to underperform. The Canadian currency will likely remain strong as global investors look for yield which puts foreign assets at risk. We continue to currency hedge where possible.

Wealth Management

When it comes to managing investments, financing a mortgage or looking at estate planning with life insurance strategies I always consider these two basic questions:

  1. How much cash do you need?
  2. When do you need it by?

I’ve redone the tkdale.com website that shows scenarios of how these questions are put to use with investments, retirement planning, mortgages, rental properties, estate planning and annuities.

Life Insurance

Have you thought about what inflation does to a life insurance contract? Over 20 years, a $1,000,000 life insurance contract will be eroded, assuming a 2% inflation, to $672,971. Sure you will likely have paid off most of your mortgage but you may have other debts and end of life considerations or you may want to think about estate preservation and wealth transfer by putting wealth inside an insurance policy.

Mortgages

When should you utilize debt? When you have an investment prospect that provides a better risk/return profile or you want to leave tax deductible debt in place and pay off non-tax deductible debt first… provided that you don’t have a better opportunity for investing elsewhere.

Time Blocking

I run an extremely busy life but it doesn’t feel that way. I watch the markets constantly, digest economic news as it happens, trained for and ran an ultramarathon, redesigned the website and continue to build the business through marketing and referrals.

Time blocking is a key component to accomplishing this. Watching BNN or business news all day long is not productive. Checking in 3 times per day with the data and headlines is enough to digest the data and also get a birds eye view of what’s happening to make educated decisions.

Take time to workout, market, respond to emails and then focus on those tasks without being distracted. It’s about being efficient and productive. It’s also about protecting my time from things that don’t add value.

Try time blocking this month!

Case Study

Let’s look at the hypothetical client who is looking into year end and is wondering if they should be putting money into their RRSP’s or not.

For salaried employees, the answer most often is yes! For business owners, the answer is maybe and will dive into them another time.

Let’s look at the salaried person today:

For those salaried people out there they often think about the affect of retirement when an RRSP become sizable.

There are three scenarios:

Overview:

Let’s take 20,000 per year invested for 15 years with an average return of 5%, income tax rate at 53%, eligible dividends at 32%, capital gains at 24%. Let’s assume a 34% tax rate in retirement.

Keep in mind that this does not consider money that has already been accumulated.

1. RRSP’s

Note: End Values are the values at the end of this 15 year scenario.

RRSP End Value: $431,571

Withdraw at a 4% rate = $17,263 less taxes assuming a 34% retirement tax rate = $12,084 net income

BUT! Let’s assume that you reinvest your tax savings into a non registered portfolio.

Non registered End Value: $212,881

Assuming a 56% reduction on the $20,000 put into RRSP’s gives a $10,600 tax refund per year. Assume that it gives an after tax return of 4.04% and ignores capital gains as the timing of buying and selling a stock plus the accrued gain or loss will be arbitrary and guess-work.

At a 4% draw, this gives you additional income of $8,515

Total Income from using RRSP’s is $20,599

 

2. Non-tax sheltered accounts

Again, this is a tricky one because I won’t be able to factor in capital gains because the timing of buying and selling a stock plus the accrued gain or loss will be arbitrary and guess-work. Let’s just assume that the dividend yield is 3% without capital gains and that there are not taxes upon withdrawal.

This will have an End Value of $401,664

At a 4% draw this will have an approximate income of $16,067

3. Holding company or trust

Many people may be thinking about how to structure their assets from an estate perspective and if that is you then we should have a conversation together with your accountant or one that I can recommend to find out if a holding company or trust is right for you.

2018 and 2019 brought about many tax law changes with respect to holding companies, operating companies and trust. You will want to get up to date advice from someone who is well versed and up to date on the impacts of these laws and how to work with them to your advantage.

Summary:

With using registered accounts this scenario provides $20,599 in income for the retiree.

When using non-registered accounts this scenario provides $16,067.

One factor to consider is the Old Age Security Clawback. Further analysis will need to be done that factors in other sources of income such as pensions and other assets.

Until next time,

Trevor Dale, CFA

Disclaimer