Sunday, 8 November 2015

ORPP...Good thing? Too Paternal? Or Gone?


The ORPP or Ontario Retirement Pension Plan has been in the news a lot over the past few months.  Is it a good thing? Does it help people in a way they don’t want to be helped? Or will the change in federal government mean it will be replaced by something else or disappear like a puff of smoke?

Let’s look at the underlying reason for this plan.  There are fewer and fewer employers offering pensions, people are saving less combined with the small amount of income people get from existing programs like the CPP/QPP and OAS adds up to people not saving enough for retirement.

Or are they?  According to Malcolm Hamilton of the C.D. Howe Institute in his paper, Do Canadians Save Too Little? , the assumptions and numbers used as a basis for the ORPP are flawed and don’t address the “diversity of individual retirement goals”.   His paper does make you question what we are frequently told about savings and retirement.  What I take away from this paper is retirement goals are very personal and what may be perfectly adequate income for one person may not be for another.  If you have an investment advisor, have them do a financial plan for you to see if your goals and income lineup. 

For most of my working life, I have not had a pension and it’s only been in the last few years my employer introduced a Group RRSP/DPSP (Deferred Profit Sharing Plan) to supplement what I’ll get from the CPP (Canada Pension Plan) and my own personal RRSP.  I’m so used to not having a pension, I’m not sure how I feel about being forced into the ORPP where I don’t have the flexibility to do with the money what I want like I have with an RRSP.

With the election of a Liberal government that seems more open to piggybacking the changes Ontario wants on top of the CPP, will the ORPP even be necessary?

Hicks Morley , in their paper, 2015 FEDERAL ELECTION UPDATE: ORPP OR CPP – WHICH WILL IT BE? thinks it will take years to make changes to the CPP due to the time for the consultations and agreement needed by both the federal government and 2/3 of the provinces for any change.  The years prediction sounds reasonable since we can’t even get the provinces to drop tariffs on beer amongst each other.   If the Ontario government wants to keep their time line of starting to implement part of the plan by January 1, 2017, they will need something tactical.  It would be better if they just waited. It will be expensive to set up a complete infrastructure to support this new plan and then just throw it away if they go with a CPP solution long term or the continuing expense of operating it in parallel.

When the ORPP comes in, companies that have an existing pension plan won’t see much change as long as they meet certain conditions in order to be able to opt out of the ORPP.  For example, for a Defined Contribution or DC plan, where both employees and employers make contributions and the payout comes from a combination of these contributions and the investment return, the contributions must be 4% of base salary each or a total of 8%.

I have already heard companies are starting to adjust their existing pension plans to meet the conditions or convert existing Group RRSP/DPSP to pension plans.  No word yet from my employer on which direction they’ll be going, though if my DPSP is converted to a pension plan, the current contribution level is not enough to meet the conditions.

Small businesses aren’t too keen on the plan.  This would be an additional payroll tax for them and if you believe this article by the CFIB, the unemployment rate will rise by 0.5% and wages will be reduced.  I can’t vouch for the figures but it would make sense for wages to be reduced or a decrease in raises for a number of years until these taxes get absorbed.  Some employees may not be too keen as well for the additional payroll deduction either if their expenses are already using up most of their income.  Here’s a calculator to give you an idea of how much you or an employer would be paying (e.g. if your income was $40,000/year, you’d be paying an extra $693 in payroll deductions.)

The ORPP will help a lot of people not savings enough for retirement but would have preferred it wasn’t a “one size fits all solution” so it would target those most in need and that the Ontario government waited to piggy-back on the CPP and save us all a lot of money.  Now we just have to wait and see.
Here’s a few additional links if you want to do some more reading.

What the experts think of the Ontario Retirement Pension PlanThe Star
Jack Mintz: Kill Ontario’s pension planFinancial Post
Bill 56, Ontario Retirement Pension Plan Act, 2015
Ontario pensions and retirement savingsOntario Government
ORPP: who is enrolled - Ontario Government

James Whelan

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Thursday, 17 September 2015

Life Insurance? A little vanilla please!

After my last posting, you should understand the basics of life insurance.  When you start talking about the different types and options though, it’s like walking into an ice store… so many flavours and toppings.  It’s hard to make a decision.  Let’s start with plain vanilla and talk about the other flavours and toppings later.

In the life insurance world, Term Life Insurance is vanilla.

With all types of insurance, you make a contract with the insurance company for a certain amount of coverage or the amount your beneficiaries would receive if you die.  Also called the Death Benefit.  With Term Life Insurance, you make the contract for a specific period of time or term and if you cancel the contract at any time, you don’t get any money back or there is no “Cash Value”.  The amount you pay or premiums is dependent on a number of factors such as age, sex, and health.

The shortest period of time would be a 1 year term but if you purchased it this way year after year, the premiums would go up every year.  To make it easier for consumers, insurance companies offer 5, 10, 20 or 30 year terms where they have calculated the average premium across the entire term so you pay the same amount every month for the full term.

So where do you get this type of insurance?

The first place you should look is your employer.  If you have a benefit plan, your employer will most likely offer coverage equal to two times your annual salary.  This is the average offered according to the Benefits Benchmarking 2012 study from the Conference Board of Canada with a minimum of one times.  Some employers also offer dependent (spouse, partner, dependent child) insurance where coverage is paid if you dependent dies.   Both of these, if offered, will be at no cost.

Optional life insurance, where the employee pays for the additional coverage for themselves, their spouse, partner or dependent children is also frequently offered.  The amount is typically a flat amount or could be a salary multiple as well.  If your free coverage isn’t enough, this optional coverage is normally much cheaper than if you bought insurance on your own.  It’s cheaper because it’s bought in bulk from an insurer so rates are averaged across all or a certain age group of your co-workers.  If you buy higher amounts, the insurer will ask you for some simple medical tests such blood pressure to determine if they will accept you for coverage.

Besides your employer, you can purchase life insurance directly from insurance companies or life insurance brokers representing multiple companies.

A few comments on some specialized Term Life Insurance products:

  • Mortgage Life Insurance can be purchased to cover your mortgage if you or your spouse or partner dies.  Not a great deal for most people.  First, the amount covered shrinks as your mortgage gets smaller so you end up with less coverage as time goes on and it’s limited to just this one expense.  Second, if you move, the policy is cancelled.   Better to get regular term life insurance to cover all your finances including your mortgage.
  • No Medical Exam Life Insurance.  You’ve probably seen or heard the commercials where you can apply and don’t need a medical.  There are reasons for people to get this type of insurance like having health problems, wanting coverage quickly or not liking medical tests but the tradeoff is higher premiums.  The reason is simple.  The life insurance company is willing to not get as much medical information about you but will charge you more to cover themselves for the unknowns.  Make sure to read the fine print and see if it’s worth it for you.  Take a look at this company’s site for some variations for this type of policy or the article Life insurance: On the edge from MoneySense for a dated but still good discussion on the topic.
  • Insurance for children. The article Does your child need life insurance? from the Globe and Mail discusses the pros and cons of this quite well.  I’m not a big fan.  The death of a child is a horrible thing for any parent but not a big financial burden to need insurance.  There are lots of other things to use your money for on your child’s behalf like RESPs before even considering insurance as a way to create wealth for them or as a “just in case” against future health issues.

Well, the second bite-size piece is done. Only a few more to go.  In the next postings, we’ll be talk about types other than vanilla and then on to when you should consider having insurance, how much, the different features, factors affecting its cost and contrast the pros and cons across the types.

If you want to do some further insurance reading before my next posting, here are a some links for you.

James Whelan

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Thursday, 23 July 2015

Wanna bet…on my life?

Do you know how long you’re going to live?   If we did, it would be so much easier to get all our financial affairs in order and make arrangements to limit the impact on everyone around us.  

But we don’t, so what’s the alternative?

We could have a bet with ourselves on how long we’re going to live and use that to plan our preparations.   

The World HealthOrganization calculates the average life expectancy in Canada, in 2013, for females is 84 years and males is 80 years.  So I could bet I’m going to live until age 80 so I’ve got a while to get things all straightened out but wait that’s only part of the story.  Since this is the average, roughly half are going to die before this age and half this age.  So now I’ll be flipping a coin on which side of the average I’m on but still don’t know how far away from that number I’ll be.  This bet is just getting worse and worse.

Aside: For readers in other countries, the World Health Organization has numbers for you as well!

So the self-bet is a non-starter.  I wish there was a way to make sure my loved ones are spared the financial burden (e.g. debt, decrease in standard of living and maybe even funeral expenses) my death would have on them.   Of course there is and this is the reason for the existence of Life Insurance.

The basics of life insurance are quite simple:  I (the Insured or policyholder) agree to make regular payments to an insurance company (the Insurer) in exchange for paying a lump sum amount to my named dependents (called beneficiaries) when I die.  The insurance company creates a pool of money with all these payments from a large group of people.  They determine the amount of the payments and how to manage the investment of the pool to ensure they have enough money to pay everyone when they die and of course make some money because they are a business.  The insurer determines if they will enter into an agreement or contract (called a policy) with me using a process called Underwriting.  I buy the policy from a specialist (called an Advisor, Agent or Broker) licensed to sell insurance in your province or territory.  So far so good?

Where it gets complicated is when you start considering the factors impacting the payment amount, the features of the insurance agreement (or policy), when it covers multiple people and if it is straight insurance or if there is an investment component as well.

In the next few postings, we’ll be discussing the different types of insurance, when you should consider having some, how much, the different features and factors affecting its cost.  This is a long topic so I’m going to break it up into bite-size pieces so it’s easier to digest and this is the first bite.

 A couple of last words.  My future posting ideas survey is still running if you want to vote.  The top three are still: (1) Alternative payment systems (PayPal, Apple Pay, Google Wallet) (2) RESP basics and (3) Life Insurance basics.  

If you want to do some further insurance reading before my next posting, here are a some links for you.

James Whelan

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Monday, 29 June 2015

That's not the right Price!

I remember as a kid, my parents coming home from the weekly grocery shopping trip and helping them check off the grocery prices against the cash register receipt.  Quite frequently, the prices didn’t match.  This was back when employees looked at the item price on the shelf, set the price by turning a dial on a sticker gun, and clicked a trigger to eject a sticker that was applied to the item.   If it was replacing the old price, the old sticker would need to be removed or the new one just went on top.  The cashier would read the price on the sticker and manually key in the price. No scanners back then.  There were lots of places for things to go wrong on what you were charged and hence why my parents went through this price checking routine.

Fast forward to present day, where prices are read by scanning bar codes, cash register screens face customers and a lot less manual keying.  This has led to overall better accuracy but it’s still not perfect.  I’ve seen claims that as much as 3% of scanned prices are incorrect.  Like happened to me the other day when I bought something on sale but when the item was scanned at the cashier, the wrong price came up.   I pointed it out and thought I’d just get the right price but I got a lot more.

I forgot a lot of Canadian retailers voluntarily follow the “Scanning Code of Practice” which basically gives you the product for free if the correct price is $10 or less or a discount of $10 if the correct price is higher than $10.  Take a read of the practice to get all the details.  You’ll see this sign displayed at the cashier for those that follow this practice.  This code encourages retailers to ensure their prices are accurate and to have a standard claim mechanism.  The $10 discount sure helps with this.

You should have seen how fast the store manager went off to fix the scanned price!!  I ended up getting $10 off the sale price.

For my readers, outside of Canada, you’re not out of luck.  There may be similar practices in your area such as the  “Get One Free” in Connecticut or “Code of Practice for Checkout Systems” in Australia.

So watch your prices and if a mistake happens, check if the store follows this practice.

A couple of last words.  Thanks everyone for the survey responses for future posting ideas.  l’ll leave it open for anyone else who still wants to vote.  The top three so far are: (1) Alternative payment systems (PayPal, Apple Pay, Google Wallet) (2) RESP basics and (3) Life Insurance basics.   I’ll start with the Life Insurance basics soon since I’ve been procrastinating on finishing the insurance topics.

James Whelan

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Monday, 25 May 2015

Beware. People are Phishing!!!

You may have guessed I’m not talking about the leisure activity some people enjoy with boats, rods and reels, lures and depending on who you talk to... hours of boring waiting.  I’m talking about using electronic means to trick you into giving up confidential information.  Most often this is done via emails, fraudulent websites or texts to get your financial or personal information.

Why the sudden interest?  Both my wife and I received texts such as this one within the last week.  We didn't click on the link but some people would see the link and automatically click on it.  This is what the sender is hoping for... a quick reaction before you have a chance to think it through.  The most important thing to remember is a legitimate business will never send you electronic communication asking you to give personal information.   If in doubt about the communication, go to the main website of the business and contact them using one of the "Contact Us" methods listed.

I once did this when I had a message on my voice mail about possible fraudulent charges on my credit card and they left a number to call their fraud department.  Instead of calling this number, I  called the main phone number for the company and asked to be transferred to the fraud department.  Turns out it was a legitimate call and my wife had made a larger than average number of purchases at multiple stores and this triggered their systems to flag her transactions.   I have to admit I'm a little paranoid about credit card purchases every since that time someone bought a $6000 watch in Boston without me being there.  The funny thing is the credit card company didn't flag that one but picked up my wife's shopping spree.  No system is perfect.

This is only the start of what could be a larger discussion on fraud and identity theft so I'll stop here. For further reading,  you could start with the RCMP, Canadian Bankers Association or the Financial Consumer Agency of Canada websites.

A couple of things before I sign-off.  Prior to my last posting, I was just over 6000 views but am now quickly approaching 7000 views.  Thank you for your vote of confidence that I’m writing about things you are interested in.  A big thank you also to Rob Carrick, one of my favourite financial literacy writers, for including me on one of his webpages.

I have a number of possible topics for my next posting.  I'd appreciate to hear your opinion by taking this quick survey.  Thanks in advance.

James Whelan

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Thursday, 9 April 2015

Stop making interest-free loans to the government!

Got your attention?  Let me explain.   I just finished doing my family’s tax returns and like every year, after putting all the information into the app I use, I cross my fingers for a big refund.  I run down to tell my wife and we have a happy moment about this “found” money and what we are going to do with it.  Sounds great doesn't it? But wait a minute…this is really the government giving me back money they owed me but much later so I just gave them an interest free loan.  If only there was a way to get more of the money during the year so I have more to spend.  Most people have heard of the TD1 Personal Tax Credits Return because most likely your employer gives it to you at the end of the year to fill out for the coming year.  

A less known way to reduce the tax your employer withholds from your pay cheque is to use the T1213 Request to Reduce Tax Deductions at Source.  This form covers other deductions not covered by the TD1.  Sorry this only applies to Canada.  I'm sure some of you in other countries will have similar mechanisms to use.

I’ve used it for RRSP contributions and when my kids were younger, child care expenses.  There are other things as well.  The way it works is you fill out the form with proof of the deduction, send it the Canada Revenue Agency and they send back a letter like the one pictured here to give to your employer telling them how much to reduce your taxes being withheld against your paycheque. 

Pretty simple.  Just try and do it before the end of the year so things are set up for the beginning of the calendar year. For me, the RRSP contribution item has an added benefit. I can provide evidence of a pre-authorized monthly contribution and a whole year’s contributions are used in the calculation.  This has encouraged me to try to maximize my monthly contributions increasing my regular savings and that's always a good thing.

A couple of other items before I close off.  As of my last posting, I've had over 6000 views thanks to all of you.  Also, I now have a twitter account so please add me to the list of those you "follow".   Aside: If you want to get some really funny looks, try telling your two teenagers you've opened an account. 

Well that’s all for now.  If you have any ideas for a future topic please, feel free to post a comment (anonymously if you’d like) or email me.

James Whelan

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Sunday, 22 February 2015

The price made me do it!!!

It's been a while since my last posting.   My last couple have discussed disability and critical illness insurance.   Before we take on life insurance, a really meaty topic, I'm going to divert a bit into a few other topics while I figure out how to break up life insurance into digestible pieces.

Have you ever been in a store or online, looked at all the prices ending in 99 and wondered if anyone is really ever affected by them?    Apparently, it does work and makes us feel like we are getting a deal.    

The interesting thing, in Canada, is we no longer have a penny coin so, if you paid in cash, you wouldn't get the 99 price.    

Last year, I read an article called “The Psychology of Price” done by Terry O’Reilly as part of his CBC Radio Under the Influence series.  In it, he talks about how marketers use different pricing strategies and how these influence our purchasing behaviour and our enjoyment of our purchases.  Ever since I read this, it’s made me more aware of their existence that I think I always intuitively  sensed but never really fully realized the impact.

One very effective strategy, he talks about is “Anchoring" and has two pieces.  The first, is showing you a price to help convince you of the item’s value.   If an item has a high price, your perception is altered to make you associate a higher value with it.   The second is offering multiple products with similar basic functions but with different prices.    The higher priced item may make you think the lower priced item is a good deal.   After reading this article, I realized this is everywhere.  Here are two examples.

You want to make a charitable donation and are offered some preset amounts.

The smallest one seems to be too low and feels a little "cheap".  The biggest one(s) is more than you're willing to give, so you pick one of the middle ones.   What if there were no preset amounts?    Would you have given as much as you did?

Here is a second example:

You want to buy a fruit arrangement online.    You find an arrangement you like and click on the link to get details.

There are 2 prices and the arrangement shown is for the larger one.   You think the larger one looks nice and the smaller one is only $10 cheaper so why not get the larger so you're sure of what you're getting.  You've just been steered towards the higher one.

Well that’s all for now.  I’d highly recommend taking a read of the full article.  If you have any ideas for a future topic please, feel free to post a comment (anonymously if you’d like) or email me.

James Whelan

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