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Monthly Archives: October 2016

When downsizing, it comes down to lifestyle

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Home ownership, condo life or apartment renting are options for retirement living

Toronto Star

Anne Bokma

June 18, 2016

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My husband and I are planning to sell our century-old four-bedroom Hamilton home in four years and hope to realize net proceeds of $600,000 when my husband retires at age 65. The mortgage will be paid, the kids will be gone and we’d rather be travelling than trimming the hedges.

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Question is — should we own or rent? And if we own, should we consider opting for a condo or a smaller home? Certified financial planners Tom Feigs, with Money Coaches Canada in Calgary, and Steve Sztricsko, with IPC Securities Corporation in Hamilton, help analyze the numbers and examine the pros and cons of each scenario.

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Downsizing to a smaller home The bottom line: Spend $400,000 of $600,000 house proceeds to purchase a bungalow. Earn $8,000 annually (4-per-cent rate of return) by investing remaining $200,000 from sale of house. Annual property-related expenses include property tax ($4,000), maintenance ($2,400) and utilities ($3,600): $10,000. Net out-of-pocket annual costs: -$2,000. Pros: This scenario offers all the benefits of home ownership (such as real estate that will likely increase in value and also help to keep our portfolio diversified), plus extra dough for investments or to use for perks such as travel or a new car. Cons: We may have to uproot ourselves to find affordable housing. “Many retirees move to smaller communities where the housing costs can be 25 per cent cheaper,” notes Sztricsko. We’d still be on the hook for the property taxes, utility costs and home maintenance expenses and chores attached to home ownership. Instead of investing the entire $600,000 proceeds from the sale of our house, most of that cash would be tied up and not easily accessible should we need it.

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Buying a condo

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The bottom line: Spend $300,000 of $600,000 house proceeds to purchase a condo. Earn $12,000 annually (4-per-cent rate of return) by investing remaining $300,000 from sale of house. Annual property-related expenses include property tax ($3,600), condo fees ($6,000) and special assessments ($1,200): $10,800. Net surplus yearly cash flow: +$1,200. Pros: Turnkey and worry-free living. This option is ideal for snowbirds who want to simply lock their door and leave for a few months. We’d be able to say goodbye to fix-it jobs around the house and condo fees often include access to services we’d otherwise have to pay for: utilities, laundry facilities, a fitness centre, security, landscaping and movie screening/party rooms. Cons: Condo fees aren’t fixed and can be expensive. Plus special assessments, which are imposed if there’s an unexpected shortfall or repair, can be unpredictable.

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Renting

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The bottom line: Invest $600,000 house proceeds. Earn $24,000 annually (based on 4-per-cent rate of return). Rent two-bedroom apart- ment/condo or part of a house for $1,600/month. Utilities: $100/ month. Total annual rental expense: $20,400. Net surplus yearly cash flow: +$3,600 Pros: Renting offers lots of freedom — more mobility (we have dreams of living in places like Chicago and New York for a month or two at a time and renting out our apartment on Airbnb) and fewer responsibilities (if something breaks, someone else fixes it). Renting also allows us to tap into our home equity to increase our nest egg and offers dramatically reduced utility costs. Cons: Since real estate tends to appreciate in value, we’d potentially miss out on future profits if we are no longer homeowners. And investing our $600,000 house proceeds comes with some risk since there’s no guarantee on rate of return.

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Then there is the adjustment in lifestyle to consider — can we put up with potentially noisy neighbours, lugging our clothes to a laundromat or basement laundry room and giving up backyard space?

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We’d also have to incur monthly storage costs of about $100 since we won’t have room for stuff such as sports gear and Christmas decorations. And where do we put the kids — and potential grandkids — if they come for a visit or move back home? Will we miss the comforts of a cosy home, mature garden and longtime neighbours?

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“People spend a lifetime building a sense of community and that’s something we need when we age,” cautions Feigs. “If you move away from your neighbourhood, you can risk losing important connections.”

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As these examples illustrate, “renting may be the most economical option but the difference is only a few hundred dollars a month — lifestyle factors play the biggest role,” says Feigs.

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And there’s no denying that it would be hard to give up a home we’ve lovingly maintained and that holds so many memories. Maybe that’s why “most people say they plan to stay in their homes until they are dragged out kicking and screaming,” says Sztricsko.

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The big lesson from Nortel Networks: Pension plans aren’t a guarantee

Jason Heath

FINANCIAL POST

October 21, 2016

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Ever since Nortel Networks first filed for bankruptcy protection in 2009, the 20,000 Canadian pensioners of the company have been waiting to see how much they will get out of the pension plan.

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Court proceedings in Canada and the U.S. have focused on how to divvy up Nortel’s US$7.3 billion in assets between Canadian, U.S. and European creditors. Estimates from financial analyst Diane Urquhart suggest that more than US$1.9 billion in legal and advisory costs have been incurred, drastically reducing the money for Nortel’s creditors, including pensioners.

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The Nortel pension fund has been managed by Morneau Shepell on behalf of the province of Ontario for the past seven years. Nortel’s Canadian pensioners’ battle for their benefits has now culminated in settlement options that need to be considered and decided upon by the end of 2016.

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Pensioners will receive different cuts in their pensions based on where they worked and the province in which they reside, but estimates are that Canadian pensioners will receive somewhere between 55 cents and 70 cents on the dollar. Pensioners in Ontario are estimated to have only a 30 per cent reduction in their pensions, in part because of the province’s Pension Benefits Guarantee Fund.

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There will be two options for pensioners, including a lump-sum commuted value payment to be transferred to a locked-in retirement account (LIRA) or life income fund (LIF). Their retirement incomes will depend on investment performance in these accounts and minimum and maximum withdrawals would apply beginning at age 72 at the latest.

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The second option is an annuity, much like a pension, which is a monthly payment for life. An annuity would be purchased from an insurance company since the pension plan will cease to exist beyond 2017 as the bankruptcy proceedings wind down.

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These are obviously significant financial decisions for pensioners who expected to receive much higher “guaranteed” monthly pension payments in retirement. It will depend on personal factors whether the lump-sum payment or annuity option is better.

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But other Canadians in pension plans should also consider the implications of Nortel’s pension woes upon their retirement planning. Horror stories like Nortel can make you wonder whether it is better to opt out of company pensions entirely and go it alone. 

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Nortel’s woes and widespread pension shortfalls should prompt pensioners and policymakers to consider stricter rules on pension deficiencies.

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Defined-benefit (DB) pension plans are clearly not always guaranteed. In fact, Aon Hewitt’s Pension Plan Solvency Survey from earlier this year found that only eight per cent of the 449 DB pensions it administers were fully funded. The median solvency ratio was only 81 per cent at that time, meaning a 19 per cent shortfall in assets relative to estimated pension benefits payable.

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Persistent low interest rates have hampered the ability of pensions to generate solid returns and magnified deficiencies in recent years.

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So what’s a DB pensioner to do? I think Nortel’s woes and widespread pension shortfalls should prompt pensioners and policymakers to consider stricter rules on pension deficiencies and for more provinces to follow Ontario’s lead with pension fund guarantees.

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Pension plan members in the private sector need to at least consider the risk of their company being able to fund their pension payments for life if they have the opportunity to commute their pension and otherwise take a lump-sum payout upon leaving the plan.

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And for the growing ranks of defined-contribution (DC) pension plan members who are not maximizing their contributions or leaving their pensions invested in cash, generous pension payouts are not guaranteed either. Sun Life estimates as much as 50 per cent of the free money employers offer as a match to funds employees contribute — some $3 billion — is being left on the table.

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The Pension Investment Association of Canada (PIAC) reports over $800 million in DC pension assets are invested in cash, daily interest and money market investments. These returns are not even keeping up with inflation.

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Should a pension plan member ever opt out of their pension plan? There are 20,000 Nortel pensioners who may disagree with me, but I would say that the answer is no. Hopefully, Nortel is an anomaly. The discipline, tax deferral and company match on any Canadian pension plan are compelling reasons to take full advantage of whatever your employer might offer.

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But, if you’re a member of a pension plan, consider this: Your pension plan is not guaranteed. Do not be naïve in thinking your pension will provide eternal retirement security for some of the reasons above, as well as others.

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Pay close attention to your pension, whether it’s a DB or DC plan. You owe it to your future, happily retired self. And, if you’re a Nortel pensioner, make the most of your decision and compare your options to determine what’s best for you and your family.

 

Financial Post

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Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto, Ontario.

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BLOGS ON THE STATUS OF DEFINED BENEFIT PLANS

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DAN ZWICKER

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https://beyondrisk.wordpress.com/2016/01/14/are-you-sure-you-can-fund-a-lifetime-sustainable-income/

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https://beyondrisk.wordpress.com/2014/09/27/thursday-january-5-2012-the-health-status-of-defined-benefit-retirement-plans-in-canada-january-2012/

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THOUGHT LEADERSHIP MATTERS

 

https://beyondrisk.wordpress.com/2016/09/24/thought-leadership-matters-when-we-are-raising-the-bar-slightly-out-of-reach/

 

DAN ZWICKER IMG_7859[1]

THE DECADENT SOCIETY HAS THE U.S. RETURNED?

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The word decadence, which at first meant simply “decline” in an abstract sense, is now most often used to refer to a perceived decay in standards, morals, dignity, religious faith, or skill at governing among the members of the elite of a very large social structure, such as an empire or nation state. By extension, it may refer to a decline in art, literature, science, technology, and work ethics, or (very loosely) to self-indulgent behaviour.

STEPHEN HARPER:
How Shimon Peres transcended politics
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CJN
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09 29 2016
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Shimon Peres was not a man who thought small. His ambitions were not resigned to a four-, eight- or even 20-year term, but a lifetime.
His legacy is a nation.
Few world leaders can claim a presence at the moment of their country’s birth, but Peres could, and it was this remarkable beginning that infused his long subsequent career with such depth and wisdom. To speak to him was to be humbled, for it was to sit in the presence of a man who had not only lived through his nation’s war of independence, but done reconnaissance for it. A man who had not merely served as head of the defense ministry, but overseen the very creation of his nation’s armed forces. A man who had not just met the leading statesmen of the last century – Ben-Gurion, Churchill, DeGaulle, Adenauer, Reagan – but worked first-hand with them.
Peres’ ability to serve in so many different capacities over the course of so many different decades under so many different administrations – negotiating a peace agreement one moment only to be tasked with curbing inflation the next – was
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A testament to his ability to transcend the myopic world of politics for a life of genuine public service.
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No matter his title, a deep moral constancy lay beneath, born from an incorrigible faith in the Zionist dream and a vision of a confident, Jewish state that was successful at home and at peace with the world.
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He was Israel’s indispensable man, a leader whose participation in the political arena was driven not by what would bring personal glory, but what his country needed to be done.
And to be sure, glory was often not forthcoming. To speak of the career of Shimon Peres is to speak of a life in which defeat and setback consistently accompanied success and progress. There were lost arguments, lost battles and lost elections, but never lost hope. He was handed endless opportunity for a quiet and dignified exit from public life and declined every time, knowing his cause, which was nothing less than the survival of a nation, was one for which no holiday could be justified. Even in his final years as president, an office Israeli political culture traditionally expects to be more seen than heard, he remained an activist, refusing to accept that even his nation’s highest honour could be anything but a platform from which to continue his life’s labour.
I had the privilege of meeting Peres several times during my own career in public service. In addition to his immense worldliness and invaluable historic perspectives,
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I was always struck by his personal dignity and depth of character.
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He was wise without being arrogant, stoic without being grim, and witty without being frivolous. He radiated the rare, quiet confidence of a person who has explored life in all its complexities and challenges and located its reservoirs of hope.
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For those who dwell beyond its borders, Israel itself is a reservoir of hope – a promise, however contested, that peace and liberty can survive under even the most inhospitable of circumstances, so long as there are those willing to defend it. Peres’ biography is an essential chapter in this inspiring story of human achievement.
Stephen Harper was the 22nd prime minister of Canada.
http://www.cjnews.com/news/canada/stephen-harper-how-shimon-peres-transcended-politics

Against Donald Trump

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For the third time since The Atlantic’s founding, the editors endorse a candidate for president. The case for Hillary Clinton.

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In October of 1860, James Russell Lowell, the founding editor of The Atlantic, warned in these pages about the perishability of the great American democratic experiment if citizens (at the time, white, male citizens) were to cease taking seriously their franchise:

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In a society like ours, where every man may transmute his private thought into history and destiny by dropping it into the ballot-box, a peculiar responsibility rests upon the individual … For, though during its term of office the government be practically as independent of the popular will as that of Russia, yet every fourth year the people are called upon to pronounce upon the conduct of their affairs. Theoretically, at least, to give democracy any standing-ground for an argument with despotism or oligarchy, a majority of the men composing it should be statesmen and thinkers.

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One of the animating causes of this magazine at its founding, in 1857, was the abolition of slavery, and Lowell argued that the Republican Party, and the man who was its standard-bearer in 1860, represented the only reasonable pathway out of the existential crisis then facing the country. In his endorsement of Abraham Lincoln for president, Lowell wrote, on behalf of the magazine, “It is in a moral aversion to slavery as a great wrong that the chief strength of the Republican party lies.” He went on to declare that Abraham Lincoln “had experience enough in public affairs to make him a statesman, and not enough to make him a politician.”

 

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