Professional Wealth Management FIVE MISTAKES RETIREES MAKE WITH THEIR FINANCES And How To Avoid Them YOUR PRESENTER Sean Gallagher Vice President Investment Advisor
Nov 30, 2014
Professional Wealth Management
FIVE MISTAKES RETIREES MAKE WITH THEIR FINANCES
And How To Avoid Them
YOUR PRESENTER
Sean Gallagher
Vice President Investment Advisor
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FIVE MISTAKES
1. Wrong time horizon
2. Not understanding or covering your risks
3. Failure to understand the stock market
4. Failure to understand investment fees
5. RRIF Owner mistakes
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1. The Wrong Time Horizon
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STATISTICS – LIFE EXPECTANCYYou’ll Be Around Longer Than You Think
Current Age Life Expectancy Years to Invest
65 – 68 85 20 years
69 – 72 86 17 years
73 – 75 87 14 years
76 – 77 88 12 years
78 – 80 89 11 years
81 – 82 90
83 – 84 91
85 – 86 92
90 95
100 103
Source: IRS Publication 590
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2. Not understanding or
covering your risks
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RISKS IN YOUR LIFE
Source: http://www.guidetolongtermcare.com/protectingassets.html#risks
Incident Occurrence Percentage Insured
House Fire 1 in 1200 0.09% Yes
Car Accident 5 in 1200 0.42% Yes
Medical Problem 105 in 1200 8.75% Yes
Long Term Health 720 in 1200 60.00% No!!!
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Who will take care of me…?
Are they qualified?
Do they want the job?
Will your relationship change?
Your Spouse
Your Children
Your Close Friends
Your Community
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Are You Prepared?
We can all pay the actual costs
tomorrow
OR
the premium today
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Return of PremiumNursing Home Policy 70 Year Old Male
Policy pays $100/day for 750 days
Cost of Basic Coverage: $170/month
Return of Premium Option: $223/month
Money Returned at Death: $49,672 (all premiums paid less any claims)
The following example is Manulife Financial, rates as of 06/14/2007, 90 day elimination, married preferred, 70 year old applicant, $100/day benefit for 750 days for nursing, asst living and 100% home health based on monthly premium. Return is calculated to life expectancy (20 years for a 70 year old) and is paid at actual death if policy is in force, less any claims paid.
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3. Failure to understand the
stock market
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EMOTIONS OF THE STOCK MARKET
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EMOTIONS OF THE STOCK MARKET
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S & P 500 – 1 Year Holding Period (1930-2007)
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Dec-2
7
Dec-3
0
Dec-3
3
Dec-3
6
Dec-3
9
Dec-4
2
Dec-4
5
Dec-4
8
Dec-5
1
Dec-5
4
Dec-5
7
Dec-6
0
Dec-6
3
Dec-6
6
Dec-6
9
Dec-7
2
Dec-7
5
Dec-7
8
Dec-8
1
Dec-8
4
Dec-8
7
Dec-9
0
Dec-9
3
Dec-9
6
Dec-9
9
Dec-0
2
Dec-0
5
Dec-0
8
Source: Investment Strategy Group
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S & P 500 – 10 Year Holding Period (1930-2009)
Source: Investment Strategy Group
-100%
-50%
0%
50%
100%
150%
200%
250%
300%
350%1930-1
940
1940-1
950
1950-1
960
1960-1
970
1970-1
980
1980-1
990
1990-2
000
2000-2
010
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Should You Buy Based on Last Year’s Performance?
Funds 2003 2004 2005 2006 2007 2008
RBC O’Shaughnessy U.S.
Value Fund
26% 15% 1% 17% -6% -44%
TD Real Return Bond Fund 10% 14% 11% -4% 1% 2%
GGOF Cdn Large Cap Equity
Fund
26% 12% 21% 21% 11% -30%
Acuity Income Trust Fund n/a 38% 31% -9% 8% -23%
Source: Globe Fund
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4. Failure to understand
investment fees
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What are you paying?
MER (Management Expense Ratio)
FE (Front-End Load)
DSC (Deferred Sales Charge)
LL (Low Load) or NL (No Load)
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5. RRIF Owner Mistakes
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The Sequence of ReturnsAccumulation PhaseStarting Value: $30,000 / No Income / 8% Compounded Rate of Return
PORTFOLIO A
POOR EARLY RETURNS;
STRONG LATE RETURNS
PORTFOLIO B
STRONG EARLY RETURNS;
POOR LATE RETURNS
AGE RETURN ACC VALUE RETURN ACC VALUE
41 -34.2% $19,740 28.2% $38,460
42 -10.6% $17,648 22.0% $46,921
43 13.6% $20,048 17.9% $55,320
And so on to retirement…
63 17.9% $131,741 13.6% $350,273
64 22.0% $160,725 -10.6% $313,144
65 28.2% $206,049 -34.2% $206,049
These calculations and projections are for demonstration purposes only.
They are based on a number of assumptions and consequently
actual results may differ, possibly to a material degree.
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Why the Sequence of Returns Matters
DECUMULATING Assumptions:
1. At 65, you have $206,049 from which to draw income
2. Drawing out 5% of the portfolio in the 1st year, thereafter adjusted
for 3% inflation annually
3. Returns are hypothetical and not actual
4. The sequence has an average compounded annualized return of
8% over 25 years and year to year volatility
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Path Dependency…Results from the Different Sequences
AGE Total
Withdrawals
Value Of
Portfolio
Portfolio A
poor early
returns
78 $167,334 $ 0
Portfolio B
strong early
returns
90 $375,619 $793,304
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RRIF Scenario
Married Couple
One of the spouses dies
RIF rolls over into the surviving spouse’s RRIF
The consolidated RRIF has a market value of $500,000
The surviving spouse changes his/her Will to leave the RRIF to two
beneficiaries… two adult children
How much will the two beneficiaries receive?
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RRIF STRATEGY – Save Thousands of Dollars
$ 500,000 RRIF
at 2nd Death
TAX BILL = $ 218,500Is there anything they can do to put that money back
into their estate for their loved ones??
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Estate Protection PlanExample based on Non Smoking Male age 66 and Female age 65
RRIF Value: $500,000 earning 5%
RRIF Withdrawal per month: $2,083
SOLUTION:
Use $296/month to pay for pre-paid taxes
program = $250,000
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Results of Pre-Paid Taxes Program
If 2nd death occurred 1 year later
Total spent on program: $3,552
If 2nd death occurred 10 years later
Total spent on program: $35,520
Total Pre-Paid Taxes: $250,000
Total RRIF Paid to Beneficiaries: $500,000
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IN REVIEW….
Invest for the correct time horizon
Analyze and cover your RISKS
Don’t get emotionally involved in the market
Understand the fees you are paying
Protect your estate from the government
Diversify your portfolio
Manage your risk exposure
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tax minimization and estate planning.
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Thank you!
Any Questions?
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Disclaimers
This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and
is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a
position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services,
investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its
representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities
referred to above. © CIBC World Markets Inc. 2010.
This material comes from the personal calculations of Sean Gallagher. In the event of a discrepancy between the data used in this report
and the data generated by CIBC Wood Gundy, reliance must be placed on the data generated through the facilities of CIBC Wood
Gundy.
These calculations and projections are for demonstration purposes only. They are based on a number of assumptions and consequently
actual results may differ, possibly to a material degree.