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.
Sweet!
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!
Saturday, April 28, 2007
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.
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". :)
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?
Summary
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.
Calculations
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 viewpoint...at 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.
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?
Summary
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.
Calculations
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 viewpoint...at 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.
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...is 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 cash...buy more with both hands!
I am sure that I am not the only Canadian who likes to watch their investments grow. Why do we do it...is 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 cash...buy more with both hands!
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