In no particular order of importance consider the following:
One consequence of the financial crisis in the US is the inability of municipalities and states to stay in the black. Some of them have coped with their lack of cash flow by cutting pensions benefits to their retirees.
Although Canadian companies, provinces, and municipalities are better off financially there is some disturbing news that hopefully will not become a trend. There are Canadian companies with unfunded pension liabilities but when pension obligations exceed the current payroll of a very large corporation that is cause for concern. Indeed the most recent labor disputes where government introduced back to work legislation was due in part to the pension benefit discussion.
But it is the dilemma of one of my retired clients that really shows the problem pension administrators face.
In the span of 6 years this supposedly gold plated provincial service pension had to reduce one of their pension options from two thirds to one half. When my client retired she elected to receive what she understood to be the option where when she died the beneficiary would continue to receive half of her benefit. In reality her own pension was reduced by half because the beneficiary died first. She is now faced with a reduced monthly benefit and at the same time must immediately repay tens of thousands of dollars. Her situation shows that nothing is guaranteed when it comes to pension benefits and that administrators will put the plan’s financial well being ahead of their members’ well being.
Canadians personal debt levels are very high and could approach the 160% of income level that US consumers faced before the financial crisis. Just to make that clear: for every dollar of income Canadians earn they have approximately 1.52 of debt. The Bank of Canada and Governor Mark Carney are concerned because Canadians are not that concerned. People continue to buy houses and borrow money on lines of credit and credit cards. Some treat their home equity like piggy banks. How many homeowners view the current low borrowing rates as a temporary gift to maximize the opportunity to bring down the principal on their mortgage, line of credit or credit card? In fact the OECD has recommended that Canada raise its interest rates by the end of this year.
What the governor is concerned about is a possible perfect storm where interest rates increase(when not if), the value of the borrowed asset(usually a house) decreases, and stagnant wages or even job losses. He considers consumer debt to be the number one threat to the economy at the present time.
So these are the questions to ask about your own financial situation:
What is the maximum monthly payment I can afford on my debt?
What is my total debt to income ratio? To find out do this calculation. Net income divided by all monthly debt payments. The bank is comfortable with 35% which I personally think is too high. The governor thinks so too, as he has scolded the banks for their less than strict lending practices.
A client asked me to advise him on an offer of life insurance on his mortgage from his bank. I explained how banks can conduct post claims analysis, especially on people with pre existing conditions which both he and his wife have. I told him there have been cases in Ontario and Alberta where the bank has refused to pay the death benefit even when sued. In this client’s mind, the offer of life insurance has legitimacy because it coming from the bank, and the offer is also available. Contrast that to my advice which is based on lesser known less easily obtained facts. I could sense both his availability and confirmation bias reflected in his voice. that he doubted the validity of what I was saying.
Is my job stable?
Do I have a rainy day fund of at least 3 months living expenses? A rainy day fund is NOT more credit like a line of credit.
Along with the proliferation of financial products mentioned in my last newsletter another related trend is emerging. In the quest to promote newer financial products it has become popular to cast aspersion on financial products that have been around awhile. This tactics is to make consumers feel they are missing out if they do not buy the highly promoted new product.
This is true of mutual funds. The trend is to view them as stodgy, old fashioned, and expensive. But the fees mutual fund holders pay are in large part due to increased government regulation. That thick prospectus you receive when you open a new account? The pages within contain your legal rights and outline risks. You would not want to buy an investment that does not issue a prospectus, as some Canadians have discovered the hard way. That statement you glance at and file away? Legally the investment company must send a minimum of 1 per year. Now due to new MFDA regulations you will now receive quarterly statements for your portfolio. As an example of increased regulation let’s consider the forms needed today as compared to a decade ago. The investment application a decade ago was one page. Now it is six pages long. To transfer money from one institution to another a decade ago was 2 forms. Now it is 5 or 6 forms. All this compliance costs money and it is for investors’ benefit.
It may appear there are investments with less fees than mutual funds, but in reality the costs will be charged somewhere else. Each investment must be weighed on its own merits.
Fraudsters are using the CRA as a platform to acquire personal information from unsuspecting taxpayers. This practice is known as phishing. This illegal activity begins with an official looking email or letter claiming to be from the CRA. Sometimes the letter states the recipient is getting a further tax refund or that an investigation is going to be conducted. The recipient is then redirected to a link where they must provide personal information.
Ask yourself these questions before giving any personal information:
- Is the correspondence asking for personal information not normally included on a tax return, for example credit card information?
- Is the communication asking for information the CRA already has on file?
- Keep in mind the CRA does not email taxpayers(as far as I know they don’t ask for email addresses).
- If in doubt phone the CRA before taking further action. 1 800 959 8281.