CPP

Don't Give Up On the CPP

By Gordon Powers

Although investor attention is focused on RRSPs this time of the year, it’s worth remembering that most adults are already contributing to a pension plan of sorts, courtesy of the federal government. Although you wouldn’t want to be solely dependent on it, the Canada Pension Plan (CPP) is often the first pension that people collect and the one they understand the least.

The CPP, which was established 40 years ago, is financed through mandatory contributions from employers, employees, and the self-employed, as well as investment income. Employers and employees pay equal contributions based on a maximum amount of earnings, adjusted annually.
Contributing Canadians may receive payments as early as age 60 or upon suffering a disability. Your monthly pension from CPP is determined by how much, and for how long, you contributed to the plan over your working life. The pension is designed to replace about 25% of earnings while you paid into the plan with CPP setting a maximum monthly benefit each year.

If you qualify, the disability pension is a monthly benefit consisting of both a flat-rate and earnings-related component. The latter is 75% of the CPP retirement entitlement, calculated as if you turned 65 in the month when the disability pension kicked in. When you actually hit age 65, the total disability benefit is changed to the regular CPP retirement pension.

2006 CPP Payments

You can receive a retirement pension as early as age 60, provided you actually stop working for a bit. Once you start receiving your pension, you can still work as much as you want but you can’t contribute based on any future employment earnings.

If you take CPP before age 65, your monthly pension is reduced by 6% for each year you are under age 65. So a 60 year old would see 70% of the available pension. Similarly, if you elect to start taking it later than age 65, the amount of your pension is adjusted upwards by 6% for each year past 65. Age 70 is the limit though.

While deciding when to take CPP payments is a personal choice that you should make with a financial advisor, it may be wise for many people to take these payments as early as possible. It’s a question of potential longevity versus financial need.

Obviously, the longer you live, the more money you can expect to collect from the plan. Most actuaries estimate that women who retire at age 60 will live to 84, on average. Men who retire at age 60 are expected to live to an average of age 79. You can get a better idea of the variables involved and where you stand by looking at MSN / Sympatico's life - expectancy calculator (http://moneycentral.msn.com/investor/calcs/n_expect/main.asp). It contains a range of probing questions about age, family history and lifestyle practices.

Looking at the maximum payments by taking CPP at the age of 60, you’ll have received a total of $215,822 by the age of 90. By taking it at 65 you’ll have a total of $258,570 and by taking it at 70, your total will be $271,488 by the age of 90. Clearly, the later you take your pension, the more you end up receiving in total if you were to live to 90. But what happens in the meantime?

The bigger issue for most people is how long it takes for those starting at the later ages (65 and 70) to catch up with those opting for the earliest date (60). If you were to take CPP at the age of 65 it would take you 11 years (when you’re 76) to catch up to the total value received by someone who had taken it at age 60. If you started taking amounts at age 70, it would take 21 years (when you’re 81) for you to catch up to someone who took payments at 60. To see how this works, here’s another calculator (http://curc.clc-ctc.ca/earlycpp.html) to play with.

This simple look assumes that you spend the money as you get it. If even just some of the contributions were invested though, it would take even longer for the 65 and 70 values to catch up to the total value achieved by taking CPP at the age of 60. Inflation is going to be another variable to consider since CPP payments are indexed to the Consumer Price Index annually.

So, if you live to be much older than 75, taking CPP early would mean a lower total pension income over your lifetime. That’s why some people who expect to live into their eighties or nineties choose not to start CPP until age 65. On the other hand, you might be looking for some help with costs such as children’s education, mortgage payments or travel.

It all boils down to whether you want more now or more later. The higher monthly and total payments received by those who defer CPP payments are real. But it takes many years to collect the same amount as someone who starts early. More importantly, there are no guarantees that you will live that long.

It gets more complicated still if you’re involved with corporate pension plan that is ‘integrated’ with the CPP. This would include most public service employees and teachers, for instance. Integration means that your corporate pension is adjusted to take into account the benefits you’ll receive from CPP. The aim is to provide you with a combined pension income – from both your company plan and CPP – that equals approximately 2% of your average salary multiplied by your years of credited service in the pension plan at work.

If you opt for an early CPP pension at a reduced rate, the CPP benefit will be ‘stacked’ on top of your corporate benefit until you turn 65 but your corporate pension is generally not adjusted for CPP until age 65. In this instance, taking CPP early would take advantage of the five-year window during which your corporate pension would be unaffected.

By Gordon Powers

Stock Trimming

This may be a good time to do some stock trimming," notes John Murphy, technician par excellence, and head market analyst at StockCharts.com. Here, he looks the technical state of the market, and offers a cautious assessment for the period ahead.

"Like most other market analysts, I had been expecting the traditional fourth quarter market rally, paving the way for higher prices through the balance of December. I also wrote, however, that I didn't think this last move up would be very long-lasting. In fact, I suggested that January might be a good time to start taking some money off the table if the rally lasted that long. Here, I'm going to show a couple of reason why I'm not that enthusiastic about the staying power of the market's latest upmove, and why I believe that it's on weak technical footing.

"First, is the New York Stock Exchange Advance-Decline line. This is one of the most popular of technical indicators. It's a cumulative total of the number of advancing stocks minus declining stocks. Historically, the advance-decline line is supposed to move in tandem with the market. When it stops rising with the market, a negative divergence is being created. That's where we are right now.

"The NYSE Advance-Decline line bounced off its 200-day moving average in late October (when the market stabilized) and has been rising with the market over the last two months. The problem is that it hasn't exceeded its September high when most of the major market averages have. As long as that negative divergence exists, the staying power of the current stock market rally is in question. As usual, there's more to the story.

"In addition, we are seeing the first negative divergence between the New York Advance-Decline line and the S&P 500 index in three years. The two have been moving up together since the last bull market started in the spring of 2003. The last two market corrections took place in 2004 and 2005 and in both instances the NYAD line moved to new highs before the S&P 500. The AD line hit a new high in August 2004, which was three months before the S&P 500. In June of 2005, the AD line hit a new high a month before the S&P. In both instances, the NY advance-decline line led the market higher.

"Now, the Advance-Decline line has failed to reach a new high while the S&P has already done so. That's the first time since the bull market started three and a half years ago that the NY advance-decline line has failed to move to new highs with the S&P. One of the first things market technicians look for in a mature bull market is a peak in the NY Advance-Decline line. That's because the Advance-Decline line usually peaks ahead of the market. It's too early to call this a peak. But it's not too early to start getting a little concerned.

"Meanwhile, fewer stocks are hitting new highs. In a healthy uptrend, the S&P along with the NYSE High-Low index (which measures the number of NYSE stocks hitting new 52-week highs minus new lows) should be rising together. Again, in the two corrections in 2004 and 2005, both fell together. When the 2004 correction ended, the two rose together. The same thing happened in the summer of 2005. A new high by the S&P 500 saw a corresponding move up in the NYSE High-Low readings.

"Now, however, at the end of 2005, the S&P 500 is hitting a new high— but the NYSE High-Low index isn't. That means that fewer NYSE stocks are hitting new 52-week highs. Even worse, the index is dangerously close the zero line. That means that the number of new 52-week highs barely exceeds the number of new lows. That's not symptomatic of a strong uptrend.

"Finally, the four-year cycle turns down in 2006. Breadth indicators normally peak before the market does. In some cases, the lead time at tops can be considerable. However, the relatively long length of this cyclical bull market (three and a half years) and the fact that we're more than halfway through a seasonally strong period (November through January) heighten the significance of the negative divergences shown herein. 2005 also marks the third year of the four-year presidential cycle (which last bottomed in October 2002). Historically, the fourth year is the weakest of the four. That would be 2006. To me, that sounds like a lot of reasons to use the year-end rally for some stock trimming as opposed to stock shopping."

What's a good investment

The calendar year of 2005 has passed into history and we are into 2006, you are perhaps musing over many things.
Where the heck did the time go anyway could well be one of them.
Where to invest your money may well be another.

The answer to the first question is equally vexing to me, and about this I have no insight.

The answer to the second is, in some ways, much easier. Why, you should invest your money in good investments, of course.

Now we must decide what constitutes a good investment.

The Compact Oxford English Dictionary calls an investment “a thing worth buying because it may be profitable or useful in the future”. You’ll note that this definitive source presents the word in a tantalizing way, leaving us to discover whether the profit or utility show up in the fullness of time.
That suggests that we might use “good investment” to retrospectively define an investment that proved out to actually be profitable or useful. But it allows us to also consider the future, and call a thing a “good” investment when it not only may be profitable, but when it seems highly likely to be.
Now, I grant you, we have just slid a bit on a slope of uncertain traction. What does “exceptionally likely” mean, after all? But before we explore that, let’s move along the quality continuum in the other direction, and consider a “bad investment”.

If an investment “may”, and a good investment clearly “did”, then it may seem compelling to say that an investment that “didn’t” was a bad investment. But that surely can’t always be the case, since it ignores the distinction between speculation and investment.

If we go back to the Compact OED, it explains that speculation is an investment “in stocks, property, or other ventures in the hope of financial gain but with the risk of loss”. When we glide down the continuum from investment to speculation, in other words, we downgrade “may” to “hope”, and introduce the big but of loss.
In the vernacular, this is not a small distinction. It implies that any speculation may leave you with a great deal less than that with which you started. So a loss need not be the product of a bad investment. It may simply be the sour fruit of a perfectly good speculation which realized its implicit risks.

So losses don’t automatically translate to “bad investment”. But do losses negate the possibility of calling something a “good investment”? That is, if a thing turns out to be neither profitable nor useful, could it still have been a “good investment”? Clearly, yes. We can make investments which hold risks that are exceptionally unlikely to manifest, and suffer when the unlikely occurs.

That doesn’t make the investment “bad”. It would make it, more correctly, a good investment with undesirable consequences. Consider the analogy of a pedestrian struck by a car while walking in a crosswalk. The unfortunate event doesn’t imply that going for walks or using crosswalks are bad practices. In fact, both are excellent practices that generally reduce risk, but may have negative consequences in some very small number of instances.

So what makes an investment or a speculation either “good” or “bad”? If certain actions that produce undesirable negative consequences can still be deemed “good”, then the thing that defines their goodness or badness must be an original condition, and not based on outcome. An investment, in other words, is either good or bad when you make it. This is a critically important point for any investor to understand. It implies that you can make good investments that have undesirable outcomes. And most confusing of all, it implies that investors can make quite bad investments which, despite their folly, can have quite pleasant results.

This last bit is confusing because it is natural to associate an action with its reward. But if the assessment of whether an investment is “good” were to hinge merely on outcome, successful results from insanely risky behaviour would be given the same weight and imitated in the same way as sound first principles. Clearly, this would be a very bad idea. As investors, we must surely be interested in models of success that have shown themselves to be reproducible without recourse to luck and happenstance. In 2006, and in the future, we want to make good investments.

By John Caspar

Interest Rates

If rising interest rates aren’t enough to rekindle your interest in GICs, then how about some new research about the stability they can bring to a portfolio?

Unless you put risk avoidance at the top of your list of attributes when selecting investments, you’ve probably not bothered to take a look at guaranteed investment certificates in recent years.

With interest rates as low as they were, GICs offered returns that were almost laughably low. Today, though, you can get as much as 3.6 per cent for a one-year GIC and 4.45 per cent on a five-year term. Still not interested? Then consider some research that Bank of Montreal commissioned recently.

The study tries to put a mathematical spin on something you already know in your gut – that GICs can add reliability and safety to a portfolio.
A couple of other conclusions are worth looking at, one is that short-term GICs can provide higher returns than other cash-like investments.
Another is that long-term GICs have a low or negative correlation to stocks and bonds, which is a fancy way of saying that GICs are a good diversifier because they offer returns that don’t rise and fall with other asset classes.

Over the last 20 years, returns from five-year GICs had returns were almost completely independent of the S&P/TSX composite index and had only a minimal similarity to the S&P 500 stock index (in Canadian dollars) and the Scotia Capital Universe Bond Index.

Aside from their recent low returns, the main drawback with GICs is that rates vary widely between financial institutions.

You may not be able to get the most competitive rates unless you buy through an adviser or broker with access to the products of various banks, trust companies and credit unions.
Even if you deal with a big bank and get bonus of an extra half a percentage point, you still could be making less than what small trusts and credit unions are offering.

If you deal with an adviser or broker (full-service or discount) and you’re interested in GICs, ask to see the most competitive rates available. Then, use a source like Cannex.com (look under term deposits) to see how competitive those rates are.

Making 3.5 per cent in a one-year GIC doesn’t sound like much in the context of what stocks and bonds have delivered in recent years. But if you’re worried about what rising rates will do to bonds and how the stock market can possibly produce yet another great year of returns, then putting a little money in something guaranteed to make 3.5 per cent might sound good.

This article first appeared on GlobeinvestorGOLD.com. If you'd like to profit from the insight of more than 30 financial experts and columnists, including Rob Carrick — sign up for a free trial to GlobeinvestorGOLD.com.

Large-Cap Stocks

While there were many consistencies in investment choices for all Baby Boomer executives, the report found some differences in investment strategies or asset class choices based on age.

The report looked at the executives in three different age categories: those born 1946-1951, those born 1952-1958 and the youngest of the Boomers born between 1959 and 1964.

Large-cap stocks were the most popular of assets measured. According to the report, the number two and three most popular asset classes varied by age group, but fixed income, small caps and money markets were the favorites with Baby Boomers.

According to Ted Disabato, Chief Investment Officer of Clark Consulting's Investment Group, "Baby Boomer executives certainly have more investment choices than their parents did.

They have benefited greatly from the strong US economy over the last 60 years and are very comfortable with equities as a major portion of their retirement account."

Late Boomers (born ’46 – ’51)

Large-cap stocks were the most popular of assets measured, with the oldest group placing nearly 40% of their assets in that class (39.5%).

The second and third most popular asset classes were fixed income (14.1%) and small-caps (10.7%).

For Middle Boomers (1952-1958), small caps were also third most popular, with 12.9% of assets measured. However, second-place money markets barely edged small caps (13.4%) by fewer than 60 basis points.

Middle Boomers (born ‘52 – ’58)

Middle Boomers allocated 35.9% of their assets to large-cap stocks, and the youngest group had 35.0% of their assets allocated to large-caps.

Young Boomers (born ’59 - ’64)

The youngest of the Boomers--those born between 1959 and 1964--differed from their elders; small-caps were not in their top three measured assets. Instead, they selected money markets (17.3%) and fixed income (11.2%).

"Counter intuitively, the youngest group of Boomer executives allocated almost twice as much of their accounts to the 'safer' investment of money market funds than did the eldest group with 17.3% and 9.6% respectively," Wamberg continued, "even though it might be wise for them to take more risk.

While we tend to presume that the closer one is to retirement age, the more conservative their investments will be, our report indicated otherwise."

Baby Boomer Investing

The leading edge of the 76 million Baby Boomers, who are about to reach 60 and be eligible for some retirement benefits, have invested their money in large-cap stocks.

They have nearly 40 percent of their assets in these blue chip stocks, which are most often favored by conservative investors.

They are a little more conservative than younger Boomers, according to a survey of how Boomer executives are investing their money.

To get a snapshot of how Baby Boomers who are executives are investing for retirement, Clark Consulting issued its Executive Retirement Report - The Baby Boomer Edition.

According to Clark's Executive Retirement Report, Baby Boomers overwhelmingly favor large-cap stocks, with these funds comprising 36.9% of all assets measured.

Money markets were a distant second at 13.2%, while fixed income was a close third with 12.7% of total assets measured.

As part of the largest demographic group in our country, the investment choices of Boomer executives may be an economic bellwether," said Tom Wamberg, CEO of Clark Consulting, himself a Baby Boomer.

My peers and I comprise nearly 26% of the U.S. population.
We have impacted American society since the 1960's youth culture and spawned the consumer-based yuppie culture of the 1980's that still exists.

Baby Boomers have become accustomed to a high standard of living, and where and how we invest for retirement will definitely have an impact.

Mutual Fund

Mutual Funds what are they?

By Canadian Securities Administrators

A mutual fund is a pool of money that is managed on behalf of investors by a professional money manager.

The manager uses the money to buy stocks, bonds or other securities according to specific investment objectives that have been established for the fund.

In return for putting money into the fund, you'll receive either units or shares that represent your proportional share of the pool of fund assets.

In return for administering the fund and managing its investment portfolio, the fund manager charges fees based on the value of the fund's assets.

Mutual funds are 'open-ended' investment funds, meaning that new investors can contribute money to the fund at any time, and existing investors can return their units or shares to the fund for redemption at any time.

When you redeem your units or shares of a mutual fund you will receive a cheque based on the current market value of the fund's portfolio.

Several parties are involved in the organization and operation of a mutual fund, including:

» Mutual Fund Manager:
Establishes one or more mutual funds, markets them and oversees their general administration

» Portfolio Adviser:
The professional money manager appointed by the Mutual Fund Manager to direct the fund's investments. The Mutual Fund Manager also often acts as the Portfolio Adviser

» Principal Distributor:
Coordinates the sale of the fund to investors, either directly or through a network of registered dealers

» Custodian:
The bank or trust company appointed by the Mutual Fund Manager to hold all of the securities owned by the fund

» Transfer Agent and Registrar:
The group responsible for maintaining a list of all investors in the fund

» Auditor:
The independent accountants retained by the Mutual Fund Manager to audit each year, and report on the financial statements of the fund

» Trustee:
The entity that has title to the securities owned by the fund on behalf of the unit holders