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Managing Your Money
Critical information that could save your financial life
Headlines like these get more frequent and more frightening by the day: West Nile Escalates …New Super Bug Identified and Moving Fast; Antibiotics Ineffective … Ozone Depletion Raises Cancer Risk, says Expert … Poor Diet Promotes Heart Disease… Two Die While Waiting for Heart Surgery. Even though we find these stories alarming, most of us optimistically go about our daily lives, firm in the belief that a terrible health problem will not strike us.
But it could. Too many Canadians have already discovered that a critical illness can have a devastating impact on their lives - and the unfortunate reality is that suffering a critical illness or condition is more likely than you think*:
1 in 2 men and 1 in 3 women are predicted to develop heart disease in their lifetime.
40,000 to 50,000 Canadians suffer a stroke each year.
During their lifetime:
1 in 2.5 men and 1 in 2.8 women living in Canada will develop cancer
1 in 9.5 women will develop breast cancer
1 in 11 men and 1 in 20 women will develop lung cancer
An estimated 50,000 Canadians, twice as many women as men, have Multiple Sclerosis (MS).
And what if it did? If you're like many people, you probably assume our health care system will pay all your expenses if you become critically ill - but you'd be wrong. Many drugs aren't covered. Additional expenses like travel, day care and home care and private treatment may not be covered. In fact, to cite just a single alarming example, The Canadian Cancer Society estimates that two-thirds of cancer treatments are indirect expenses not covered by provincial health plans.*
Many other expenses, such as modifications to your home or business losses caused by an owner's critical illness, are also not covered by provincial health plans. And as health-care costs for professional services and pharmaceuticals continue to escalate, government aid continues to fall further off the pace.
How would you keep going? A critical illness may require you to hire a nurse or domestic help. Your spouse may need to take time off work. You might require timely, non-insured or experimental treatment outside Canada. These all cost money and most of us will do everything we can to preserve our health, regardless of cost. If that cost includes withdrawing money from your Registered Retirement Savings Plan (RRSP), it could mean a serious depletion or even the loss of your retirement savings. In some cases, you could find yourself deeply in debt.
Here's a simple, yet startling example of a hypothetical Canadian cancer patient who required six weeks of radiation therapy at the Mayo Clinic in Rochester, Minnesota:
Actual cost of therapy = $42,750 CDN.
Real cost of therapy if money is taken from an RRSP = approximately $70,000 CDN. The patient's marginal tax rate is 40%, meaning that approx. $70,000 must be withdrawn to realize $42,000 in after tax dollars.
Real cost at retirement = $224,500. By withdrawing $70,000 to cover treatment expenses, the patient loses tax-deferred growth on that amount of money. Over twenty years, and assuming a 6 per cent compound annual rate of return, the actual loss in value at retirement will be nearly a quarter million dollars
Note: The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values or returns on investment.
There is a bright side. You're more likely than ever to recover from a critical health problem. The remarkable strides in medical technology have made it possible for growing numbers of people who experience a critical health problem to live long and fruitful lives, perhaps even making a full recovery. And there is a reasonably-priced way to help ensure you'll have the finances to keep going until you can once again earn a living. It's called critical illness insurance.
Critical illness insurance enhances your medical insurance by providing options that would otherwise not be available to you. It usually pays a lump sum to the policyholder after the diagnosis of a specified life altering illness. and the satisfying of a specified survival period. Once you qualify for the payout, you usually get it with no strings attached. Use the money any way you wish - for private treatment, paying down the mortgage, modifying your home, financing a recovery vacation or to keep your business going. This can help to protect your retirement savings.
Depending on the coverage you choose, critical illness insurance can cover cancer, heart attack, stroke, paralysis, MS, Parkinson's disease, Alzheimer's disease, kidney failure, burns, diabetes and many other ailments.
Critical illness insurance - and other types of insurance such as disability and long term care - can help you achieve and maintain financial security no matter what life brings. A licensed insurance consultant can advise you on the coverage that's best for your situation.
* Sources: Heart and Stroke Foundation 2001; Multiple Sclerosis Society 2001; National Cancer Institute of Canada; Canadian Cancer Statistics 2000.
This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
Insurance products and services distributed through I.G. Insurance Services Inc. Insurance license sponsored by The Great-West Life Assurance Company.
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It's never too early to wrap up your holiday plans
Santa Claus is a few months from comin' to town. Jack Frost isn't yet nipping at our toes. And most of us are dreaming of Thanksgiving turkey, not sugar plums. So it would seem a tad early to be thinking about Christmas spending - but it's not. Now is the time to make plans that will help you avoid impulse shopping, last-minute splurging and a sleighload of high-cost debt come the new year.
Here's how you can have a joyful, debt-free Christmas this year:
Make your list … and check it twice: Make a list of the gifts you would like to give - then check it against how much you can really afford and align your gift-giving impulses with your financial reality. Planning your purchases in advance helps avoid unnecessary costs. Plus you may get the added advantage of 'early season' sales that will further reduce your outlay.
If you're considering a festive season vacation, decide now where you would like to go. You have plenty of time to investigate travel options and pick the package that will give you the best bang for your vacation bucks. Divide the cost of your trip by the number of pay periods before your date of departure and set aside that portion each and every payday. If you're taking a longer term approach to vacation planning, consider putting three per cent of your income into a vacation savings account.
The three per cent rule also works well for establishing a fund for gifts, emergencies and other personal reasons. But, be sure to make the most of your savings by avoiding low-interest bank accounts. Money market funds, Guaranteed Investment Certificates (GICs), term deposits and government Treasury bills are among your investment choices that can generate higher returns.
Wrap up your presents early: It's easier to stick to your plan when you're not rushed and have time to hunt for bargains - so start shopping soon. And do it at less busy times like mid-week or early in the day. When you shop at peak times in a crowded mall, it's easy to panic and you're more likely to buy, buy, buy, just to get the whole thing over with. That kind of last-minute shopping is bound to ramp up your expenditures.
Don't pay for the same present over and over: It's so simple: you see it, you want it, you pull out a credit card to pay for it - but that plastic road often leads to exponentially escalating debt. For example, interest on a retail credit card can be as much as 28 per cent and that means, if you don't pay off the balance immediately, you could end up paying two or three times the real cost of your gifts. If you choose to get a credit card advance to pay for your purchases, you'll be facing interest of 20 per cent or more beginning the moment you make the transaction. The calculation is simple - and simply staggering: Borrowing $10,000 on your credit card will cost you about $2,000 in yearly interest.
So don't do it. Choose less costly options like:
Arranging a personal loan from a financial institution at today's very low rates and paying it back in the shortest possible time.
Setting up a line of credit that will let you borrow up to a pre-approved amount that you can access by cheque or instant teller. A line of credit is based on your overall creditworthiness and is sometimes secured by an asset, such as the equity in your home. You'll pay interest only on the amount you draw down from your line of credit at an interest rate that will often be much lower than credit card rates.
Consolidating your current debts - credit card balances and loans - by taking out a single loan to pay off all your creditors, leaving you with a single, normally lower, monthly payment.
You probably have a Registered Retirement Savings Plan (RRSP) - and that ready stack of money can look mighty tempting when you're in a cash crunch. But dipping into your RRSP is very costly, both in the short and long terms. For starters, you'll be hit with an immediate withholding tax of between 10 and 30 per cent, depending on how much you withdraw. And you may find that you owe even more taxes when you file your next tax return.
Secondly, you'll lose years of potential growth on tax-sheltered money earmarked for a comfortable retirement. Here's a simple example: You need $20,000 to pay off immediate debts and you're in the 40 per cent tax bracket. That means you'll have to withdraw almost $34,000 from your RRSP to realize $20,000 in after tax dollars. If you're 30 years from retirement (and assuming an annual return of eight per cent on your RRSP investment) you'll lose out on $342,130 in tax sheltered growth!
A sound holiday season budget will help you enjoy a debt-free Christmas. A solid overall financial plan will help achieve all your life goals. A professional financial advisor isn't Santa Claus, but he or she can bring you the best present you'll ever receive: a financial plan that fits you perfectly.
Note: The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values or returns on investment.
This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
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Yes, you can make your debt less taxing
A debt is always a debt - but you can keep more money in your pocket when you restructure your debt to make it as tax efficient as possible. Here's the inside story on deductible debt.
Generally speaking, interest is deductible for tax purposes as long as the loan was used to earn income from a business or property. So, if you borrow money to buy a mutual fund, shares in the stock market, or invest in a business or property, the interest you pay is usually deductible if the investment is made for purposes of earning income. (With respect to deductibility of interest, "income" would include interest and dividends, but not capital gains.)
Interest is not deductible when you take out a loan for a purpose other than to purchase an income-producing investment - meaning you can't deduct loan interest for such things as your home mortgage (except for that portion used to support a home-based business), cars when used only for personal use, credit cards (except for business expenses), loans, and interest on late income tax or installment payments. (RRSP loans are also not tax deductible because of specific provisions in the Income Tax Act, even though the loan is being used to acquire an income-producing investment.)
That's why it can pay to restructure your debt to ensure the loans you take out qualify for tax deductible interest payments. For example, you could sell some of your investments, use the money to pay off a non-deductible debt (your mortgage, for instance) and take out a loan to repurchase your investments. You have now effectively turned non-deductible debt into deductible debt. This strategy is especially appropriate right now. Recent market downturns mean you probably won't be subject to excessive capital gains taxes when you sell your investments and you can buy them back at a reasonable cost. But be aware that you may have to pay redemption costs and there will be some level of tax liability on any investment gains. Also, if the investment is in a loss position you must wait at least 30 days, before and after you sell your investments, before repurchasing the same investments in order to ensure that any losses you realized on the sale of your investments remain eligible to apply against capital gains.
For a few years, financial planners did not recommend the strategy of turning non-deductible debt into deductible debt. That's because the Canada Customs and Revenue Agency (CCRA) had raised a number of legal challenges regarding exactly what constituted a 'legitimate' investment that qualified for interest expense deductions. As a consequence, there was much uncertainty about whether or not certain types of interest payments were deductible.
However, recent Supreme Court decisions have upheld the right of taxpayers to organize their affairs on a tax-efficient basis so long as it can be proven that the dominant purpose of the loan was to acquire an investment in a business, property, common shares or a mutual fund that is purchased with the intention that it would earn taxable income.
The CCRA is known to pay special attention to deductions for interest expenses. So, if you decide to employ a deductible loan strategy, it's wise to keep accurate records showing the amount of the loan, the purpose of the loan, and the amount of interest you paid during the year. Additionally, there is always a risk that the CCRA could deny the interest deduction for a particular investment loan at any point in time. Even with the recent Supreme Court decisions, the interest deductibility rules continue to be complex. That's why it's always a good idea to get professional advice from a financial advisor who can develop a tax-saving, income-building plan that is exactly right for your life.
This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitations, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Consultant.
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