Saturday, April 28, 2007

Dividend Tax Rate

After completing my income tax I used QuickTax to do a few "What If?" calculations.

I currently have no direct income from dividends but I expect to get into that as time goes on. My current marginal tax rate is 21 percent. This means that if I was to earn money from employment or have additional interest income, I would pay $21 tax on the first $100.

I knew that dividend income had a better tax rate. Both the federal and provincial levels of government in Canada want investors to buy shares in companies that pay dividends so they give "tax credits" for any dividend income. A tax credit is code for a lower tax rate. Companies that pay dividends include the major banks such as TD Bank, Bank of Montreal, Royal Bank and so on.

I added several amounts of additional dividend income on Schedule 4, line 2, to see how much additional tax I would pay. The results are interesting.

$100, $4 additional tax , 4 % tax rate
$500, $28 additional tax, 6 % tax rate
$1000, $58 additional tax, 6 % tax rate

The 2006 tax rate for the additional dividend income is only 4-6 percent. This is quite low relative to my 21 % marginal tax rate for other types of additional income.


ps: I will be away for about a week so I will not be posting.

Update, May 7th

I went back and tried adding "eligible dividend" income in line 6 of schedule 4. In this case, believe it or not, I would actually pay less tax than I do without the additional income. The combined federal and provincial tax credits exceed my marginal tax rate. For example, if I had $1,000 in additional "eligible dividend" income I would pay $97 less income tax!

Friday, April 27, 2007

A Loan By Another Name?

Putting money into things like CSBs and GICs, earning low rates of interest, is "safe"... but at what cost? When one looks at the stock market over the long term it is quite a comparison. It can make a big difference. Lately, I have been spending more time looking into mutual funds and have been surprised by the impressive returns. Its not that difficult to find 10 year average rates of 10 % per year or more.

The other day it occurred to me that when we put our money into safe GICs etc we are really "giving the bank a loan" at a guaranteed rate of interest. Then, I guess...the banks turn around and invest the money in mortgages or the stock market, depending on mortgage rates, and that is how they make their profit. It also explains why the interest rates for "safe investments" like GICs go up as the "lock in time period" increases. It has to do with market variability and probability.

I expect that a probability analysis of the return rates in the stock market or for most stock market mutual funds would show that the probability of making say more than 5 percent increases quite a bit as the time period increases. It is likely a pretty safe bet for the banks.

Saturday, April 21, 2007

Eagles In Love

Two Bald Eagles sitting side by side is not something I have seen before. Normally, if they are that close together, it is a fight in mid-air.

There is a story behind this photo. This eagle tree is on a path that I ride every few days. For a few weeks I noticed there was one eagle in the vicinity. I recall seeing it perched on a rock near the water's edge, alone and looking out to sea. At other times in was in the tree. I suspected it was waiting for its companion to arrive since it was near the start of the mating season. I also know that they go their separate ways only days after the young are out of the nest.

Each time I went by I was waiting for the second one to arrive. This photo was taken on a very windy day the first time I saw them together. Click on the photo to see them in more detail.

Thursday, April 19, 2007

Obsession Tag

Money Diva from A Canadian and Her Money has tagged me to admit to my most obsessive thoughts. I would have to admit that I am obsessed with frugal living in that I seldom spend more than I need to for anything. Many would say I don't spend enough on many things. I drive an old car but I could buy a new one anytime I wanted. I guess some would also say I'm obsessed with saving money.

When I was younger, I went through periods (years?) of obsession with different money making or money saving past times. There was the searching for a rental property obsession. I got so good at it that when I called up a real estate agent about a new listing they would ask me what real estate company I was with. There was also the stock forecasting and trading obsession period - not sure if I'm completely free of that one yet. I went long, sold short, bought Puts and Calls. I continued to trade through the bear market that started in 2000. The only thing I haven't done yet, and yet is the key word here...I didn't sell options.

I now get the right to tag other bloggers and I pick Mike who has left comments on this blog. Mike if you read this...your "it". :)

Canada Pension Plan #3

Continuing on from my first two posts about CPP.

The CPP rules allow a lot of flexibility. So I must decide if I want to accept a lower amount, for life, starting as early as age 60, or wait until age 65 and receive the maximum I qualify for, for life. For me, the age 70 option is a non-starter. My original retirement plan was based on the assumption that I would take it at age 60.

Now its time to ask myself...Is that best? What difference would it make?


My calculations below show, that if one lives to age 80 it doesn't matter what choice is made, the total dollars received are the same. The break-even point is near age 80. Therefore, taking the pension at age 60 appears more attractive on the basis that age 80 is an average life estimate and one would enjoy the benefits of extra income between age 60 and 65. Even if one lives until they are 100 years old they only receive about 13 percent more money overall. An important consideration is the intangible benefit of receiving more money when you are younger compared to receiving more money later in life.


Let's consider an average pension amount to get a feel for the numbers. The average CP at age 65, is $473 per month or $5,677 per year. The age 60 average pension, reduced by 30 percent (0.5 % per month) is reduced down to $3,974 per year. The penalty for taking it 5 years early is $142 per month or $1,703 per year.

From a simple cold blooded accounting some point in time, if one takes the reduced pension amount at age 60 and they live enough, there will be a break even point. At the break even point it does not matter which option one takes, the total money received is the same. My question is - what age does that happen?

I am aware of two possible ways to compare the options. One is to compare two cash flows brought backward in time into present day dollars. Another approach I have seen is to view the early pension option from age 60 to 65 as a loan that must be paid back.

The big "unknown" in this decision is life expectancy. For these calculations lets "guess" that the pensioner lives until age 80. This puts an upper limit on how much money is received depending upon the choice.

The pension is indexed to the Consumer Price Index to make up for inflation.

So the boundaries are; one cash flow stream at a lower amount starting at age 60 and ending at age 80, and the other stream is a higher amount that starts 5 years later, at age 65 and ending at age 80. So we are comparing apples to apples, we can bring both cash flows to equivalent sums at age 60.

The indexing to the Canadian Price Index (CPI) means, that inflation is accounted for, so a future amount will always have the same value at age 60. If we assume that the money is spent in the year it is received, then any investment benefit can also be ignored.

Age 60 Option

30 percent less for life, from age 60 to age 80 (20 years).
Reduced pension comes to $5,677 (0.70) = $3,974/year
20 years ($3,974/year) = $79,478.00 present value at age 60.

Age 65 Option

In this case, present value must be calculated in two steps. First to age 65, followed by taking the lump sum back in time from age 65 to age 60.

100 percent for life, from age 65 to age 80.
Pension amount is $5,677 per year
15 years ($5,677/year) = $85,155.00 present value of at age 65.

This sum must then be discounted for 5 years, assuming a 2 % inflation rate, to find the equivalent sum at age 60 for comparison. This step is like asking... What lump sum would I have to have on deposit, compounded at 2% per year for 5 years, so it grows into $85,155.00?

From the table, the discount rate is 0.906 for 2 % for 5 years. You can check this answer with a calculator by multiplying (compounding) $77,150 by 1.02 a total of 5 times.

$85,155 (0.906)= $77,150 present value at age 60.

Because the numbers are about the same, $79,000 versus $77,000, these calculations suggest that the break-even point is somewhere near age 80. After age 80 the winner will be the wait until age 65 option.

But how much is the pensioner losing if they take the lesser pension at age 60 then live past age 80? Someone else may ask...what does it matter after age 80?

Lets consider the average pensioner living until age 100;

Age 60
$3,974 (100-60 years) = $158,960.

Age 65
$5,677 (100-65) =$198,695
$198,695 (0.906) = $180,018

So, if the average pensioner lives to be 100, this means an extra $21,000 or 13 percent by waiting for the larger pension to start at age 65.

The Loan Point of View Type of Analysis

Lets look at this from a slightly different viewpoint and call the early pension between age 60 and 65 a loan, one that must be paid back from age 60 to age 80. The loan payments are deducted from the pension.

In this case, the amount of the loan (the principal) is $3,974 (5 years) =$19,870. The payments come to $142 per month or $1,703 per year. If we simplify this, by assuming the entire amount is received at age 65, then $19,870 /$1,703 = 11.7 years. 65 + 11.7 = 76.7. This suggests that the break even point occurs in the vicinity of age 77. A similar result to the cash flow view point.

Is it better to get $20,000 between age 60 and 65, or take nothing during that period, and receive $21,000 more between age 80 and age 100?

I think I could make better use of the money at a younger age. Based on this rationale, the age 60 option looks pretty good to me.

Tuesday, April 17, 2007

Saved $200

I was out on the boat about a week ago, just a shakedown cruise to see if I still remembered how to do stuff and to see if everything still worked. I discovered that my handheld GPS had lost the ability to track satellites. Not a good condition for a GPS machine!

We use it when crossing open water and are still too far away to see with binoculars. It saves time steering straight to a destination. It is also handy to have if there is a little fog and you can't see destinations that would otherwise be visible. In addition, the GPS tells us how fast we are travelling and estimates our trip time. Its not a necessity - just a nice little luxury to have on board.

I got out the manual and tried everything they recommended but got nowhere. I talked to a shop that sold new ones and they suggested that the software may be obsolete for communicating with satellites. This sounded like a reasonable explanation. I checked the Magellan site on the net and determined that they stopped making my model 310 about 4 years ago. I priced new ones and they started at close to $200.

As a last resort I called the 1-800 number for Magellan, half expecting them to say it was too old and obsolete, but to my surprise they gave me instructions over the telephone that cleared the memory. These instructions were not in the manual. This worked like a charm and the little guy now tracks 8 or 9 satellites, more than I ever recall seeing last summer.

Sometimes us frugal guys get lucky and get to keep the old stuff going for a while longer.

If I'm ever looking for a new GPS I will certainly start with Magellan.

ps Always keeping one eye on the market... I see that the DJIA is primed to make a break out above the last peak. I also see, that it took 7 years for it to recover completely from the bear that started back in 2000.

OK - I Admit It!

I like checking on how my investments are doing on a daily basis. This is not something new that happened to me because I am in early retirement, I did the same thing every day at work. I spent most days chained to my desk and when the PCs and the Internet were invented I make good use of them.

I am sure that I am not the only Canadian who likes to watch their investments grow. Why do we do it just the gambling gene that all seem to be born with or is it something more noble like being a responsible investor? Is it just a bad habit?

For example, I put a couple of thousand dollars into the TD Canadian Index -e fund starting back in March and it has now increased by $41 to $2,041. That is a 2 percent increase in about one months time. Not a lot these days for the market, but a lot compared to say a GIC or CSB that might be paying 3.5 percent per year.

Intellectually I "know" that I can't count on continued growth forever. I am well aware of the dips and know that it is just a matter of time before the Canadian Stock market will change to a period of sideways or downward movement for a period of perhaps several years. The most recent episode, that many would define as a bear market period, started back near the year 2000. It took about 5 years for the S&P TSX Composite Index to recover back to the year 2000 level.

When the next big bear market period happens my habit of checking every morning will work against me.

On the other hand, I am also certain that the index will come back and make new highs eventually. All I need to do is be patient and keep reminding myself of this fact. And if I can find some extra more with both hands!

Sunday, April 15, 2007

Kyle MacDonald and Beating The System

When it comes to achieving early retirement, one has to; go against the grain, beat the system, observe what everyone else is doing and do something different. You have to accomplish something that many people believe to be impossible. Kyle MacDonald has nothing to do with early retirement but I think he can be an inspiration to any young person who wants to become financially independent at a young age.

Kyle accomplished a feat that conventional wisdom would have said was impossible. I must admit that had you asked me a few years ago, I would have thought it was impossible.

In only 14 trades Kyle MacDonald traded a red paperclip into a 3 bedroom house in Kipling, Saskatchewan. Kyle used a new technology...the Internet to find his trading partners. I call it new because I think society is still learning the limits of this new way to communicate.

Not only did Kyle help himself but more importantly he is an inspiration to others. Kyle's feat is proof that someone can beat the system.

I saw a TV program today and the latest news is that Kyle has sold the rights to his story to a major movie studio. At the official ceremony in Kipling, Saskatchewan - Kyle molded the paper clip into a ring and asked his girl friend to marry him. That brought tears to the eyes of many present.

What a story, I look forward to seeing the movie.

Congrats to Kyle!

Kyle's website link.

Canada Pension Plan #2

In the not to distant future- I will decide when to start receiving my Canada Pension Plan (CPP).

The Canadian Human states,

"The age you start your pension makes a difference... forever.

The normal age that you start receiving a CPP retirement pension is 65. However, you can start receiving your pension as early as 60 or as late as 70. If you start your pension before 65, you must stop working or earn less than a maximum amount for a required period of time.If you start your pension early, it is permanently reduced by 0.5 percent for each month that you are under 65. If you start your pension later, it is increased by 0.5 percent for each month that you are over 65, up to the age of 70. "

The benefit rates, at age 65, range from a maximum of $864/month or $10,365/year (2007) to an average of $473/month or $5,677/year (Oct. 2006). The payments are not automatic, one must apply for this pension. and they recommend applying at least 6 months in advance of one's start date.The rules allow some flexibility. So one must decide to accept a lower amount, for life, starting as early as age 60, or wait until later and receive a larger pension, for life.

The "for life"part part is important. I guess pension plans in general are a crap shoot, in that those who live longer get more and those who die at an early age receive less. Death benefits and survivor benefits offset this fact to some degree. I believe Canada requires that a surviving spouse receive at least 50 percent.

When it comes to life expectancy...its a little bit like a roulette wheel picking an age. I recall a number of guys that never even made it to retirement. Some only lived a short time after retirement and others lived past age 80.

If one enjoys a physical activity, then one of the realities is that as we age we get less bang for our buck . For many people, if not for most, they can expect to have less energy and less enthusiasm. It doesn't mean that extra money cannot be spent on other things one thinks are worthwhile. Maybe you want to leave a larger estate to relatives or more to a charity.

I'm crunching some numbers for comparsion and will post them in the future.

Friday, April 13, 2007

Canadian Stock Market Observations April 13, 2007

I note that the S&P/TSX Composite Index and the TSX Venture Index both made breakouts today. Here, I'm defining a breakout as the index rising above the last larger peak established for both indexes in late February, 2007. These breakouts are technical indications of market strength. This does not guarantee anything because the market continually makes up it's mind about things as events occur. These breakouts strongly suggest continued strength for the next while. Glad I put a little more into the TSX Comp index fund.

In comparison, the DJIA index in the US has not made a breakout. It may have completed it's little bear correction and just be lagging a little, or it may still find lower lows.

Chart Links
TSX Comp
TSX Venture

Raining cats and dogs today.

Thursday, April 12, 2007

Stocks That Pay Dividends

The Royal Bank has been doing very well in recent years. In addition to capital appreciation, it is currently paying a 3.1 % dividend rate. I think one needs to consider both the potential for dividends and the stock price appreciation. The chart says it all.

I have also recently discovered that one can purchase mutual funds that include only stocks that pay dividends.

One fund I took a quick look at today was the TD Dividend Growth - I. It pays a 3.4% dividend and contains 63 stocks. The majority of the fund seems to be in the Canadian Banking sector. The top holdings include; the Royal Bank, the Toronto Dominion Bank, CIBC Bank, and the Bank of Nova Scotia. It is a no load fund, RRSP eligible, has minimum purchase amounts of $100 initial and $100 additional. The MER seems reasonable at 1.97%.

If I decided to move toward owning dividend paying stocks I think I would prefer the mutual fund approach rather than buying individual stocks. I like the lower risk with diversification and the lower initial investment amounts. For example, to buy Royal Bank shares at $58 per share one would need a lot more than $100 to get started.

Wednesday, April 11, 2007

Debt In Retirement

Although we have chosen to be debt free for many years, I am aware that one doesn't have to be debt free in order to retire. I know retired people who continue to have significant debt. They have car loans and mortgages on their homes. It all comes down to having adequate and dependable cash flow to meet all expenses. This means, that when it comes time to decide when to flow is more critical than net worth. My straw pole, based on random observations over the years, indicates that most Canadian retirees drive newer vehicles. How can they afford to do this?

I suspect that many people retire, then later find that they have more money than they counted on having. In Canada, Canada Pension Plan (CPP) and Old Age Security programs provide significant income over and above any private employment pension plan. These sources of income alone can pay for a lot of luxuries. For example, a $300 per month car loan comes to $3,600 per year. This is well under the $470 per month or $5,680 per year average CPP income that the average Canadian retiree receives.

I will discuss more on Canada Pension Plan pension amounts in a future post.

Tuesday, April 10, 2007

Canada Pension Plan #1

The Canada Pension Plan (CPP) has an interesting story behind it. Started back in the 1960s, the intention was to ensure that all working Canadians put away something for retirement. It is funded by pay check deductions at the workplace. Over time, Canadians became concerned that the pension plan would not be sufficient to meet all the pension payments due to the aging population and growth in the number of pensioners. The contribution rates were increased, and extra money was invested with the goal of making ends meet in the future. In recent years, the concern about the sustainability of CPP seems to have diminished due to increased pay check deduction rates imposed on those who earn income, and a move toward building up the plan assets and investing the extra cash. Plan assets are growing.

The average CPP received by retirees in 2006 was $5,677 per year ($473 per month). The maximum CPP received in 2007 was $10,365 per year ($864 per month). These amounts are indexed for inflation. In 2007, CPP pensions were increased by 2.1 % to match the Canadian Price Index. The annual increase for inflation is a nice feature. CPP income is taxable.

When I decided to take early retirement at age 55, I "guessed" that my CPP would only be paid out at 50 percent of my starting rate. This was part of my safety factor. In addition, I expected to use CPP income for non-essentials such as owning a boat, an expense we did not have prior to retirement.

Sunday, April 8, 2007

2006 Car Costs

I got around to looking at our 2006 car costs this weekend.

Depreciation $443
Fuel $1,894
Repair/Maintenance $474
Insurance $1,024
Drivers Licences $150

Total $3,986

Milage 17,032 km

Cost per km 3986/17,032 = $0.234 per km

Friday, April 6, 2007

Vancouver Island Library

We have always made good use of our public is a good way to reduce everyday expenses. When I have purchased a book, I sometimes found that I read it once- then never picked it up again. That doesn't mean that I haven't kept a few books . They tend to be investment related books which I feel are worth keeping. "Nothing Down" and "The Major Works of R. N. Elliott" (not an easy book to find) are on my bookshelf. I have also made a lot of notes from books and photocopied a few pages. Some of my notes are just on the PC. If necessary I know I can always find the book again.

One of the nice things about Vancouver Island is the library system here. One can live in a small and fairly remote community (less expensive) but still have access to an impressive library collection. I don't know how many small libraries there are but when I'm searching for a book it is not unusual to have it come from a community a long way from home. With the exception of Victoria, all the community libraries function as one, and books go back and forth as they would between branch libraries in a large city. Some of the branch libraries are located on smaller islands such as the Gulf Islands, which means that some books have to ride a ferry to get to me.

An interesting thing about libraries today is that anyone can search their collections on-line. If your curious, here's the link to the Vancouver Island Regional Library site.

ps TSX has made a new high.

Tuesday, April 3, 2007

S&P TSX Composite Index April 3, 2007

It looks like the TSX may be on its way to making a new high very soon. The lower volume in the vicinity of the index low in early March suggests - the correction may have ended at that point. In addition, the size of the correction, compared to the run up leading to it, also looks typical. A correction of about 60% is often the case.

I bought a little more TD Canadian Index - e mutual fund about a week ago and I plan to buy a little more after a new high is made. I enjoy trying to squeeze a little more out of the market by timing the entry point.

If my guess is wrong...and the low has not yet been established...we can still count on the index and the index funds to make new highs in the future.

The chart for the TSX Venture index looks very similar. I wish there was an index fund for that index as well.

Monday, April 2, 2007

Bald Eagle

FT over at Million Dollar Journey suggested adding some pictures. Here's a pic of a Bald Eagle by the side of the road in January. Its not often you get this close.
The wildlife on Van Isl is a real treasure, especially in the winter months.

Remembering Names Is Worth A Lot

One of the things I learned when I took the Dale Carnegie Course was that... 'the sweetest sound to a person's ear is the sound of their own name'. My life experiences since then have convinced me that there is a lot of truth to that statement.

I find that if I make it a point to use someones name when talking to them, things tend to go better. This is true for friends, relatives, other people in the workplace, or service people with name tags. I envy those who appear to remember names with no effort at all. I was never that lucky, I have to make a special effort.

Remembering names can help us earn a better living and is great in social circles. A person in sales or someone who is a consultant and in contact with a lot of people can really benefit from being able to remember names.

When I am successful remembering someones name for the first time, on our second meeting, it is always a treat to see the pleasantly surprised smile on their face. More often than not they don't recall my name but that's OK.

I have found a combination of techniques work best for me. You can call them tricks but they are really just learning techniques.
  • Just making a point of remembering someones name takes mental effort and that alone helps us remember the name.
  • The more facts I try to connect to the person helps as well. I try to build a mental web.
  • On occasion, on the first meeting I note something about the person's appearance and tie this to their name, using something else that I imagine, something that will hopefully remind me of their name. A really ridiculous image works best for me. For example, Jane - a cane, Dick - a stick.
  • Sometimes I make note that the person has the same name as someone else I already know.
  • A friend of mine makes up stupid, little phrases of rhyming words to help him recall names. Example- "Taylor, Taylor the little sailor".
  • I also find it helpful to write down someones name soon after I meet them. Here again, simply making that special little effort helps us recall the name later. In addition, you can always review a list of names prior to a social or business event where you might meet that person again.
In my experience, the most successful supervisors, sales people, other business people in general, and people who make friends easily, are all good at remembering names.

If anyone has any other suggestions for remembering names, please comment so we can all learn to be better at this valuable skill.