Tuesday, March 25, 2014

What is the difference between volatility and risk?

Volatility and risk can both have an impact on your investment portfolio. It’s important to understand how.

Traditional thinking emphasizes the difference between risk and volatility. Volatility refers to those (sometimes wild) upward and downward swings in stock prices or markets caused by events over which you, the investor, have little or no control. Risk, on the other hand, is a personal matter:  It’s how much financial uncertainty you, personally, can tolerate without losing sleep at night.

New thinking, however, emphasizes the relationship between risk and volatility. Volatility can influence your perception of risk and motivate you to take actions that can hurt your investment returns.

Volatility induces people to make poor investment decisions that chip away at returns.

The problem is that humans are often irrational. The chance of making a big score thrills us; we tell ourselves we can tolerate a little downside risk if there is big opportunity on the upside. But we are lying to ourselves. Once a stock price turns southward, most of us lose our taste for adventure. We panic and sell — at the bottom. That’s called behavioural or execution risk.
People have to be honest with themselves, and that is very difficult.

Volatility can be measured using standard deviation

Standard deviation indicates how much a stock price, a mutual fund return or a stock market index varies from its average, both on the upside and the downside. For example, if a stock has a standard deviation of 25%, it trades in a range 25% higher and 25% lower than its average price. If the bellwether composite index for that market has a standard deviation of 12%, you’re looking at a pretty volatile stock. And when it is down 25%, it can be hard to remember why you bought it.

Risk is subjective

There is no measure such as standard deviation for risk. Risk tolerance means different things to different people.  You don’t really know your tolerance for risk until you have knowingly been through it - until you have knowingly lived through losses.

And age may be a factor. In theory, the younger you are, the less affected you are by volatility. You can set your sights on long-term goals, more or less ignore the market’s gyrations and trust that investment returns will trend upward. You have time on your side. Conversely, the closer you are to retirement, the more vulnerable you are to volatility. You may not have the time to recover from a 25% drop in value.

That’s in theory. The reality is people, regardless of age, don’t like losses.  Investors tend to overweight recent experience disproportionately.  If they have just lost money, they are extremely fearful of losing again.

So, how do you adjust for the impact of volatility on your risk tolerance? First off, know thyself. Be honest with yourself: If you can’t stomach volatility, don’t buy volatile investments. If you think you need reinforcement, work with an advisor who can provide a voice of reason when you are about to make rash, emotional moves.

Or purchase investments that are less volatile, that have lower standard deviations, such as balanced funds, guaranteed products, or even annuities. Then you’re more likely to resist the impulse to sell when volatility erupts and you will hold onto the investment longer, which generally improves returns.
You can’t separate volatility and risk, but you can manage their impact on your investments.

For help determining your risk tolerance, or choosing suitable investments that maximize your income or long-term return while minimizing volatility, contact us by phone 705-798-0062 or 416-230-2703, or by email at tim@retireonyourterms.ca.  705-798-0062416-230-2703
Visit us at www.retireonyourterms.ca. 

Thursday, March 20, 2014

Elder care and the five stages of aging

These days, everyone has a story about caring for an elderly family member. From waiting with Dad at the doctor’s office, to staying overnight to administer Mom’s medication, to visiting your spouse at the long-term care home, the spectrum of care is broad.  Elder care is posing mounting pressure on family caregivers, who are contributing billions of dollars’ worth of unpaid care each year.

People are burning out from taking care of a sick or elderly family member, says Dr. Mark Frankel, president and CEO of Taking Care Inc., an organization dedicated to helping caregivers navigate the elder-care system.  Its self-service website and call centre receive a combined 20,000 to 30,000 inquiries annually. “We get most calls from family members carrying the load, caring for a parent or spouse,” says Frankel. “They’re frustrated, exhausted and stretched, and they need support.”

Going into long-term care is not an isolated event; it is usually a gradual process with many stops and bumps along the way. As people age, they may experience chronic health problems resulting in a variety of functional challenges or disabilities. They and their family caregivers shift from one strategy to another, coping with what can be a trying experience. As the stages of care progress, the choices and sources for that care become more complex, and often more expensive.

To help families understand and be better prepared for the main needs and issues along the long-term care continuum, Frankel has developed the following five-stage framework:

Stage 1
Seniors are still self-sufficient and able to manage chronic health problems and disabilities. Usually they don’t require or even accept special support from family members, preferring to be as independent as possible.

Stage 2
Independence turns to interdependence. Seniors begin accepting care from family members with cooking, house cleaning, shopping and banking, but are reluctant to accept formal care just yet. “Seniors often see formal caregivers as a beginning in the decline in their independence,” Frankel explains. During this stage, Frankel often advises families to begin considering seniors’ residences designed for independent living, which feature 24-hour security, suites, meal plans, cleaning services and laundry.

Stage 3
Seniors become more dependent on others for practical chores such as meal preparation, cleaning, shopping and transportation. They may also begin to need some limited direct help or stand-by assistance with personal care items such as dressing, bathing and grooming. There are a wide variety of care options; live-in and live-out personal support workers provide one-to-one care. Assisted living or retirement homes become options if both personal care and social activities, such as group dining or recreation programs, are desired.

Stage 4
The responsibility for providing care at home can send some families into an exhausting spiral of crisis management. “Families call us saying they went to Mom’s fridge and all the food was rotten, or Dad’s been leaving the stove on,” says Frankel. “The health and personal care needs of a senior can outstrip the family’s capacity to help. Formal home care may be insufficient or too expensive and the family goes from crisis to crisis.”

Stage 5
Frankel’s final stage of long-term care occurs when families are forced to admit their elder family member into a nursing home. Skilled nursing care and extensive personal care help the senior continue to live with dignity and allow the family to continue providing social and emotional support, while still tending to their own responsibilities.

Whatever the care, the funding is all on you, Frankel warns. Long-term care homes are not part of the Canada Health Act and government-subsidized care is very limited. “Everyone is discovering that the hard way,” he says, adding that families unprepared financially to cover costs of assisted living homes often end up bearing the responsibility of care at home.

Understanding Frankel’s stages of aging has become particularly important as Canadians live longer than ever before. They reinforce why planning for retirement requires both important lifestyle and life stage choices.

There are many options for funding your long-term care if you prepare before the crisis stage.  For help with planning for long-term care call us.  416-230-2703 or 705-798-0062 tim@retironyourterms.ca416-230-2703705-798-0062

Tuesday, March 11, 2014

What Nobody Ever Tells You About Medical Insurance

Did you know that you could make all of your health care expenses tax deductible?   

There are 3 ways to pay for health care expenses:

1. Paying from your personal bank account (paying out of pocket)
2. Personal or group insurance with monthly premiums
3. Your company can pay these expenses by using a Private Health Services Plan (PHSP)

Paying Out of Pocket

The money we earn through our work, whether it is from an employer or through our own company, is taxed.  What would you have had to earn to pay $3,000 in medical expenses for your family?  If you earned $70,000 a year and had $3,000 in medical expenses you would have had to earn $4,478 to have $3,000 cash in hand after taxes.
You have the ability to write off a small portion of medical and dental expenses on your personal tax returns but it is very minimal. For example if you had a net income of $50,000 a year and had $3,000 in medical expenses you would have approximately $255 as an allowable deduction on your personal return. 

Traditional Health and Dental Insurance

Traditional insurance is when you pay a monthly premium even if you never make a claim. If you do have a claim there is a good chance that you will still have to pay a deductible or co-payment; meaning you are rarely covered 100% for services you need.  For example, you may have 100% dental coverage but only on scaling, cleaning, fillings, examinations and polishing.  If you need a crown or some other specialty item you are only covered at 50%. What if your child needs braces?  Are they fully covered? Often not.  In reality you could be paying up to $1.60 for every $1.00 in health care expenses.  When you purchase health insurance you typically do so because you would like to be able to have your health and dental costs covered by the insurer, so you don’t have to take the money out of your own pocket.  Shouldn’t this mean that you would spend less money?  Actually you spend on average 60 cents over and above every dollar worth of benefits you receive.  If you end up using more coverage dollars yearly than you pay in premiums then your premiums will go up.

What is a PHSP?

A Private Health Services Plan allows you to expense your medical, health care and dental costs (for you and your employees) through your company.  In 1988 CRA (Canada Revenue Agency) stated that if your medical and dental benefits are administered through a third party arms-length administrator, they can be 100% tax deductible to your company.  These benefits are also tax free to your employees.  This means with a PHSP you are able to have an approved third party insurer administer your benefits plan and you have the maximum tax savings possible. 

In some Health Spending Accounts, the company makes advance payments (incl. Administration Fees and Taxes) on behalf of Employees, for Health and/or Dental expenses. In other Health Spending Accounts, payments can be made on a "pay as you go" basis.

Eligible Claims are reimbursed to the Employee (must be a bona fide employee and not just a shareholder or unincorporated owner), and are non-taxable benefits for the Employee.  Expenses (Claims, Administration Fees and Taxes) are a 100% business deduction for the Employer.

Let’s compare the example used above where your family needed to earn $4,478 to pay $3,000 in medical expenses.  Using a PHSP instead, you would only need $3,339 including all taxes and administration.  

Your tax savings would therefore be $1139 or 25% compared to paying out of pocket.  If you earn more or spend more on medical, prescription drugs, vision, and dental, your savings would increase.   

Who is Eligible?

If you have an incorporated business, limited company or sole proprietorship you qualify. The size of your business does not matter. You could be the only employee or you could have numerous employees.  The benefits are greatest for incorporated businesses, however if you are a sole proprietor; to qualify for this deduction you must meet one of the following parameters:
1. Your net income from the business in which you are regularly and actively engaged must represent at least 50% of your net income for the year.
2. Your net income from sources other than business does not exceed $10,000.

To find out more, get in touch with us at tim@timweichel.ca or call us at 705-798-0062 or 416-230-2703705-798-0062416-230-2703