As May ends and we approach the summer months, we hope you have a great (if smoky) weekend. Our May Planning Insights newsletter focuses on a few topics that we feel are of particularly timely importance given some of the client situations we’ve had come up so far in 2019.
50% of working Canadians currently without Disability Insurance
A recent survey conducted by Ipsos on behalf of RBC Insurance* exposed the fact that half of working Canadians have no protection in place if they were unable to work for reasons of health or injury. With Canadians currently at record levels of household debt, this means that 50% of our country is a few short months of decreased (or no) income from significant financial hardship.The survey found that the majority of respondents (57%) had not even considered the risk to their household of losing one or both paycheques. This contrasts with 91% of those same respondents saying that financial stability was of critical importance when disabled. There’s obviously a major disconnect here causing people to avoid discussing such an important aspect of their financial plan.One of our favorite analogies for disability insurance is the following. Pretend you’re just been laid off and you’re applying for two identical jobs. Which job would rather take:
JOB A:
While you are healthy, you receive an income (after tax) of $60,000.
If you are sick or injured you receive $0.
JOB B:
While you are healthy, you receive an income of $58,700/yr.
If you are sick or injured you receive $58,700/yr tax free.
Kind of a no-brainer, right? Unfortunately, many Canadians either haven’t had the discussion or aren’t even aware that they are exposed to a massive risk – the loss of their income. A lot of emphasis is placed on Term Life insurance and achieving the best investment return when Canadians discuss their financial plan, but consider this: if our above jobs were offered to a 34 year old male and he was disabled at 35, he would receive $1,761,000 in lost income protection by age 65.
He would also maintain his mortgage payments, his savings goals, providing for his family and otherwise remaining stable. If that was indexed to inflation at 3% (a common option), this amount jumps to $2,837,853. Pretty astonishing and a great highlight for how critical income protection really is.
The Power of Regular Contributions
Over the first 5 months of 2019, we’ve discussed in great detail the volatile markets at the end of 2018 and the remarkable rebound in the first 4 months of the year.
A question we frequently get is whether or not it makes sense to try to time the market for a large lump sum investment. The short answer is potentially, but rarely. While you may get lucky from time to time, hitting the markets during a sharp slump or downturn and getting out near a peak, it is nearly impossible to consistently and accurately time deposits and withdrawals from investments to coincide with peaks and valleys. Many of the most respected portfolio managers in the world (think Warren Buffet and Ray Dalio) don’t try to time the market in picking how their capital is invested; why should the rest of us?
Here’s an interesting example below. Given the choice of 3 portfolios which would you rather invest $10,000 in?
Most people would naturally pick A. But what if you spread those deposits evenly over the course of 12 periodic deposits? Believe it or not Portfolio C would actually give you the greatest return and Portfolio A and B would tie*.
The problem is that it’s impossible to know exactly how the market is going to perform so the simple solution is a strategy called Dollar Cost Averaging. This means that you set up regular periodic contributions (IE: monthly or biweekly) into your investment that are a specific fixed value. Most investments will allow deposits of as little as $25/mo on a periodic basis, meaning that the strategy is available to nearly every investor in Canada.
The concept here is that the lump sum investor trying to time their deposit might be unlucky or lucky from time to time, while the periodic investor is always buying a certain dollar value of their investment portfolio. As the value of that portfolio rises, they buy proportionately less but as it falls they now own proportionately more. This means that the periodic investor will generally see quicker recoveries from short term downturns (by consistently buying ‘cheap’ units or shares) and a general smoothing of those returns over time.
Given how markets are increasingly volatile, this smoothing effect is particularly attractive to many Canadians. A simple, easy to set up Pre-Authorized Chequing (PAC) means that we can start dripping your cash into the markets and capitalizing on the dips we’ve seen in 2018 and 2019. While investing lump sums is sometimes unavoidable, we also have strategies for carefully investing larger amounts of cash over a fixed period of time as well to help avoid the pitfalls of market timing.
If you want to revise or start your regular contributions to your investment accounts such as your RRSP or TFSA, please don’t hesitate to reach out.
*: https://retirehappy.ca/the-power-of-dollar-cost-averaging/
Wills, Personal Directives and Power of Attorney Documents
With summer travel quickly approaching we often see calls spike with individuals looking to write or amend legal documents. Summer travel and Christmas season tend to busy with travel and people are often looking to ensure their affairs are in order.
We thought we’d offer a quick reminder of what each document covers in case you or someone you care about has been putting off their legal planning.
Note: If there is no planning in place, estates in Alberta are governed by the Wills and Succession Act which can be found here:
http://www.qp.alberta.ca/documents/Acts/W12P2.pdf
Will: A legal document fully executed by an individual or testator, which disposes of a person’s property on or after his/her death. A will is where you dictate how your assets are distributed to those you care about and the the way you decide. This is where you get to determine who receives which assets, how they are to receive them (for example you may not want a child receiving their entire inheritance at the age of 18), and who has guardianship of your dependents. This is where you also set up testamentary trusts, can elect donations to charity, and make your final wishes known with regards to funeral or crematory services.
Personal Directive: A personal directive is a legal document, under the Personal Directives Act, that allows you to name the person(s) you trust to make decisions on your behalf should you lose mental capacity and list the areas in which they have decision-making authority (e.g., health care, residential issues). You can include instructions that you want followed (e.g., do not resuscitate), as long as it does not include anything illegal, such as assisted suicide or euthanasia. You can also outline your wishes about other important personal matters like the temporary care and education of children under age 18.
Power of Attorney: A power of attorney is a legal document between you and a person you trust which gives them authority to make financial decisions on your behalf if you’re no longer capable of making these decisions.The Agreement is written when you’re capable of making your own decisions, states when the person you trust will have authority, can start immediately and continue if you lose capacity or can start when you lose capacity
Up Financial currently offers discounted rates for existing clients with our in-house legal planning providers. If you have questions or you (or someone you know) needs their will updated, please reach out!
As always, we’re here to answer any questions you may have. Please do not hesitate to reach out!
