What are Segregated Funds?

You may have heard of Mutual Funds before. Mutual funds are a form of a pooled investment which inside may hold a series of bonds, stocks, other funds, or a series of other investment vehicles. Each fund will have an associated risk level associated with it from low to high risk. 

What you may not heard of are segregated funds. Essentially, what segregated funds are, is the insurance company's answer to mutual funds. The purpose behind segregated funds is the same as mutual funds, they provide a diversified investment vehicle that can be tailored based on risk tolerance. It's possible to have a mutual fund and segregated fund which both contain the exact same investment holdings, however, they work differently.

The first major different is that segregated funds (as I mentioned) are an insurance product. One of the big features of segregated funds is the potential for creditor protection. This feature may be specifically appealing to those who are self employed or professionals who may work independently because it could provide protection should a bankruptcy occur.

Another appealing benefit to segregated fund policies is their death benefit guarantees. Depending on the type of contract you have entered into, you may find that up to 100% of a segregated fund, minus any withdrawals are guaranteed if you die or if a certain time period has elapsed. There are also options which would reset the death benefit guarantee at certain intervals as it grows over time. This guarantees your original investment AND locks in the growth of your investment. This is a huge benefit that a lot of clients see value in as no matter where the markets are, they are always guaranteed that their principal amount will be there.

One last benefit of a segregated fund policy, is that since there are named beneficiaries, and since you are essentially locked into an insurance contract, when you do pass away, your investment bypasses probate. This allows your beneficiary to have access to your funds in a timely manner. Mutual funds on the other hand work differently. They are not an insurance based product, and do not have the same features of these segregated fund policies.

I would like the opportunity to sit down with you and see if segregated funds are right for you. Do they fit your current situation? Do you already have segregated funds? Call me today at (905) 475-0122, ext. 411 or contact me by email at Scott.Loney@Freedom55Financial.com or by leaving a message in the box to the right.

Pay Yourself First!

When I say 'pay yourself first' I am not talking about buying that new pair of shoes, or the latest gadget. The way I like to think of paying yourself is through a me tax; and think of that me tax as being paid to The Government of YOU!

What do you do after you get that money deposited into your bank? Go to the mall? The grocery store? Gas station? You are not alone. 98-99% of Canadians today get their paycheque and immediately go and spend their money on their needs and their wants. Then if there is any money left over, they put their money into some sort of a savings plan. You may remember from my prior post on the first cornerstone of financial planning we talked about two separate people; Person A and Person B. Let's look at these two people again.



Like I just discussed, we can see that Person A receives their paycheque and immediately spends their money on their needs and wants, then if there is any money leftover they then save.

However, Person B is who I strive to get all of my clients to become, it doesn't happen overnight, but through taking baby steps we will be able to move you more and more towards the financially independent Person B.

Every paycheque we are all used to seeing a certain percentage of our income deducted by the wonderful government, after all the other deductions we may have (CPP, EI, benefits etc.) we are finally left with our take home pay. Person B receives their paycheque and immediately takes a percentage off the top (like to government) and deposits it into some sort of a savings plan; this is why we refer to it as a me tax; think of that account as 'The Federal Reserve of You!'. 

The most effective way to set this up is so it is virtually automatic; the timing should be perfect here. What I like to do is set up your withdrawls so that they happen the same day you get paid. That way, the money is deposited, then withdrawn, and you barely even realize it was every there!

So I challenge you, set up a plan to pay yourself first! Better yet, call me and we can set up a rock solid plan! If you are already doing this, great! You one of very few people who are doing this! But where is your money going? Is it truly the best option for you?

If you would like to contact me, please send me a message in the box to the right. You can also reach me at Scott.Loney@Freedom55Financial.com or by phone at (905) 475-0122, ext. 411.

"The Costly TFSA Blunder that People Keep Making"

Cornerstone Two: Retirement

Retirement is something most of us dream of and everyone looks forward to. From stopping or scaling down your work and travelling, to just relaxing at the cottage, everyone has different retirement dreams. However, what you do now determines how your retirement looks in the future. The plan you put in place will ultimately determine whether you are golfing on the beach in Florida, or mini putting at a miniature scale putting green.

If you are in your twenties and are reading this PERFECT! You are going to learn what you can do now to set yourself up for your dream retirement. If you are well into your working career and are reading this thinking about how much you procrastinated, it may not be too late, we just have a lot of catching up to do.

The first huge impact on how we save for retirement is inflation and the effects of inflation on not only the goods we purchase, but also how inflation erodes your money. To illustrate the effect of inflation I will use arguably the most debated topic of gasoline.

In August of 2000, the average price of fuel across Ontario was 70.3¢ per litre.

In August of 2014, the average price of fuel across Ontario is 139.2¢ per litre.

*http://www.energy.gov.on.ca/en/fuel-prices/fuel-price-data/?fuel=REG&yr=2000

Using these two numbers, we can see that in 14 years, the average price of fuel has risen 198% and almost doubled in price! Think if everything rose that much, what we would be paying for everything!? Now think how much of an impact that would have on your savings you are putting away today.

Through inflation alone, in the next 20 years your expenses are expected to double. So if we look at a 25 year old today with expenses of about $1500 per month, their expenses by the time they are 45 (due to inflation alone) are expected to double to $3000. Then if we look at their expenses by the time they are at retirement age of 65, they are expected to double again (again due to inflation alone). We all know that your expenses fluctuate over time however, this illustrates what consequence inflation will have on your overall cost of living!

Now that I have scared you away talking about inflation, I am now going to talk about how we can use compounding to battle inflation.

Compounding is the ability for your money to make money. How does this happen? Well the way I like to describe it is to think about a snowball. You can start out with a small little snowball and roll it down a hill. That little snowball is still there, however as it rolls down the hill it is gathering more and more snow and growing larger and larger.

How does this relate to money? Think of a small amount of money, say $100. Now lets say that money is put into a fixed investment that earns 4% over 5 years. The chart below illustrates how that $100 grows.

Beginning of Year	End of Year
$100	$105
$105	$110.25
$110.25	$115.76
$115.76	$121.55
$121.55	$127.63

As you can see, not only is the interest applied to the original $100, but it is also applied to the end of year balance from the previous year. This is a small scale example, now lets look at the procrastinator who delays their retirement until they are well into their working career, for this we will look again at Person A and Person B.

Person A is 25 years old today and starts to put away $2500 per year into some sort of a savings plan. Over the course of their working career, assuming they retire at age 65, they will be putting $100,000 into a savings plan. Now, assuming a conservative 4% interest rate, we can say that their $100,000 investment is expected to grow to approximately $250,000. Thats $150,000 of unearned money. Meaning you didn't have to put any effort in to make that $150,000!

On the flip side, lets look at Person B. This person procrastinates and procrastinates their retirement then realizes by age 45 they have nothing in place for their retirement. So at this point, instead of putting away $2500 they start putting away $5000 per year. They are still putting away the same $100,000, however assuming the same 4% interest rate, their money is only expected to grow to $150,000. Thats a difference of $100,000 and about 60% more!

You might still be wondering and asking, well Scott, how does that work? To explain this let me go back to the snowball example.

Person A is young today and since they are young chipper and in shape, they can climb all the way to the top of the hill. They make a small snowball and roll it from the top. Since they have the whole distance of the hill to roll their snowball down, their snowball grows quite large.

Person B however is 20 years older. Since they are older and not quite as in shape as they once were, they can only climb half way up the hill. They make the same size snowball as Person A started with, however their snowball is rolling for a shorter distance and doesn't grow to nearly the same size as Person A's snowball does. 

Now that I have illustrated both the nasty effects of inflation and how you can use compounding to battle this, I have now concluded my talk about retirement. I hope that you have started your retirement savings, and if you have congratulations! If you have not, get something going. Every little bit helps. Maybe instead of buying all your coffee's at Starbucks, you can start to make them at home!

Start early and put time on your side. As I talked about in liquidity the government and our employers are giving us less and less so you are the largest part to contributing to your retirement.

If you would like to start your retirement savings now call me. We can work through your exact situation and create a retirement plan that will help you retire in Florida or at your new cottage, rather than in your backyard.

If you have started your retirement savings great! Let's still sit down and evaluate what you have. Let's have a look at what you are putting away and if that truly is enough to retire comfortably with. 

And finally, if you are retired, congratulations! Do you know if your money will last you for your whole retirement? What if I told you I can predict if and/or when that money will run out. Let's sit down and look at your current situation.

I can be contacted be email at Scott.Loney@Freedom55Financial.com or by phone at (905) 475-0122 Ext. 411.

Thank you and stay tuned!

What are TFSAs and how do they work?

I have met with a number of clients and at almost every meeting the topic of a Tax Free Savings Account (TFSA) arises. Almost every single client has heard of TFSAs however nine times out of ten they do not know how TFSAs work, so that led me to write this breakdown of the governments (fairly) new great tool called the Tax Free Savings Account.

TFSA Eligibility

TFSAs were introduced by the government to the Canadian public on January 1, 2009. In order to be eligible to open and contribute to a TFSA you must be a resident of Canada and must be over 18 years of age. Unlike registered retirement savings plans (RRSPs) however, there is no maximum age for TFSAs (RRSPs have a cut off age of 71, at which point the money must be transferred out of your RRSP).

Contributions

Each year, everyone entitled to a TFSA in Canada accumulates ‘room’ in their TFSA meaning your contribution limit accumulates year over year. The following shows an example of someone’s contribution limit assuming they were 18 when TFSAs were introduced in 2009.

Year	Contribution Room	Cumulative Contribution Room*
2009	$5,000	$5000
2010	$5,000	$10,000
2011	$5,000	$15,000
2012	$5,000	$20,000
2013	$5,500	$25,500
2014	$5,500	$31,000

            *Cumulative room assuming no contributions since TFSA inception

As noted in the chart above, if someone had not opened a TFSA to their name since the inception of the savings vehicle in 2009, they would have $31,000 of contribution room that they could put money in, to shelter from taxes as all contribution room is carried forward. As you can also see in the chart above, the government has promised to rise the contribution room by $500 as needed to keep up with the rate of inflation (the first rise being in 2011).

Investments

What can you do within your TFSA? Some people will settle with the 0-2% the bank may pay them for just holding the account, however you can actually hold almost any type of investment inside your TFSA. The following are some types of investments you can hold within your TFSA:

• Mutual funds
•  Segregated funds
• Stocks
•  Bonds
•  GICs
•  Gold
•  Cash

The nice thing about a TFSA is that since these investments are held inside your account, all the growth that happens inside that account is 100% tax-free! That means no reporting your gains and no government dipping their hands into your return on investment.

What are you waiting for?

Some experts have matched TFSAs with RRSPs in terms of the overall benefits to the consumer, and some have even ranks TFSAs well above RRSPs. I believe everyone’s situation is different however I am a firm believer in TFSAs and if the client’s situation permits, I incorporate it into all of my client’s plans.

Keep in touch for my post where I will discuss RRSPs vs TFSAs and which one you should consider first.

http://boysfin.ca/wp-content/uploads/TFSA-vs-RRSP.jpg

Let’s sit down today and assess your plan. Let’s look at your current TFSA and see if you are getting the biggest bang for your buck; and if you don’t have a TFSA lets meet and go over your personalized plan.