May 2018 Sovereign Wealth Letter — Three Questions

As we head into summer let’s review some friendly financial tidbits.  Here’s a new idea for you:  social-media practices can impact attitudes and life experiences, and actually impede your wealth.  We’ll also share some thoughts for the family cottage or other assets people could be discussing this summer.  We finish with a quick glimpse of where interest-rates are going and what this can mean over the summer months and beyond.

COST OF SCROLLING IN FACEBOOK.

This fits under an old and universal theme, “I see, I want”.  When one child has some ice cream, others want some too.  When one dog has a ball or a bone, others will be jealous unless they have one too.

When I was born in the 1950s everyone had cars.  When one neighbour got a new car others got infected with the need for a new car too.  Time continued.  Soon it was the bigger house, better landscaping.  Then a cottage with canoes, then a power boat to go with that cottage.  Bob on an occasion pulled up to his cottage in a bright new Buick – he had his world by the tail – until the next morning he awoke to a mighty roar as the neighbour was lifting off the bay in his new float plane.  (They remained friends.)

We can smile or cringe at comparisons people make, and the competition to have the latest gadget or upgrade.  Today’s world of social-media (Facebook, Instagram, etc.) shows how other people are always enjoying things that we might not have at that moment.  We might measure our satisfaction or success against thousands of other people, …even before breakfast.  And if we play that game, it all comes with a frightening bill (credit card bill, line of credit, or mortgage).

We see someone’s pictures of a happy dinner.  But how do we compare our own happiness?  One friend has a quiet dinner on the patio among the magnificent colours of the sunset.  Another is with lots of friends at an exotic restaurant with sunset radiance mirrored in the lake.  A third is sipping their finest choice as they settle under an evening pink-hued sky in Santorini among the Greek Islands.  Now how do you feel if you’re scrolling FB to see other peoples’ activities while opening some chips and staying in for a movie?  Could it make you feel less satisfied with your own rewards in life?  Could be pause sadly, “Why is it them and not me?” or “Why isn’t my life more like theirs?”

This is the “Inadequacy Influence” and social-media fans the flames of such a disease as never before.  Scrolling through others’ stories and yearning to keep pace comes with a brutal cost.  “Keeping up with the Joneses” (yup, that’s in google), upgrading our lifestyle and upgrading gadgets to match our friends and neighbours, precedes a tsunami of bills, late-payments, mortgage refinancing, and insolvency or bankruptcy.  Costs can include delayed retirement, or having to find work again in our 70s.

We don’t need to give our heart-strings or purse-strings to Facebook.  We have friends.  They do things and go places.  Pictures show them smiling, and we can be happy for them.  When we do fun things, our friends smile for us too.  Taken this way, we can enjoy FB and other social sharing sites without expanding our bills.

I mentioned Bob.  Though he had flown many missions in WW2 he never bought a plane.  He resisted the impulse to keep up with the neighbour.  He had a wonderful family, enjoyed a great life, and if he and his wife were alive today they’d definitely be using FB to see what their friends and family are enjoying.  They would smile at all their friends’ happiness and achievements posted on FB.  We all have times of joy and satisfaction worth celebrating.

So feel free to set your own dreams;  you don’t have to match what others are doing.  … and you don’t need a tidal wave of regret.   PS:  does anyone come to mind whose spending could use some remedial help?  Let us know.

CONVERSATIONS AT THE FAMILY COTTAGE.

In estate seminars with boomers and seniors we can always count on being asked, “How can we keep a family cottage safe from taxes?”  This relates to an earlier discussion at Estate Planning and other places in this educational website.

A #1 question would be, “Does anyone in the family actually want the cottage?”  The answer might be “no”.  A next generation may be unready for the extra bills, maintenance, off-season security issues, and have other goals for their holiday budget.  Put a sunset clause on your intended ownership (ie. plan to sell) if no one actually wants this paradise after you’re gone.

A close #2 is to avoid cottage conflicts.  These can lurk quietly like a fish under the dock until parents have passed.  But imagine then if one child and their family want to spend the summer there, expecting a sibling to pay half the bills!  Anything unvoiced or unfair expectations of costs and manual labour can become a cottage explosion.  If these issues aren’t aired while living, it stands a poor chance of success once you’re gone.

Third there are taxes for the gain in market value.  Two “bad kids” by the name of Ottawa and Toronto want to pull money out of your cottage and spend it without your consent.  So if you purchased the cottage long ago for $200,000 and its sale could bring $1.2Million you’ve got a million dollar gain.  Dying in that position, your estate needs $250,000 to cover the tax bill.  (Kids are usually mortgaged heavily enough already so the earlier hopes of keeping the cottage in a family may prove impossible.)

A hand goes up, a voice asks:  “Can we transfer ownership to the children while living?”  Yes but then you owe the taxes even sooner.  And if this property could be qualified for principle residence exemption, you’d lose that tax saving too.

Solutions?  Estate Insurance, arranged ahead of time, can beautifully cover the taxes – it can even fund years of future maintenance.  A deposit account can possibly cover taxes but it takes forever to save what’s needed.  Putting the cottage into a family trust is considered but it will generally accelerate the tax bill you were wanting to avoid.

Above all be clear about the first two questions.  If no one wants the cottage or you see conflicts in the next generation, consider how and when may be best to sell.

INTEREST RATES RISING.

Very briefly, today’s rising interests rates will hit over-leveraged homeowners, but remember interest rates are still at historic lows.  We used to have mortgage rates at 10% and higher!  Today’s rates near 3% to 4% actually reflect that the world’s economy is doing well and needs less stimulus than in recent years.

FREELY ENJOY LIFE'S TRUE PLEASURES EACH DAY

If you would invest in guaranteed certificates, banks are paying 1-2% and smaller firms are offering a bit over 2%.  With inflation now at 2.2% that means guaranteed returns are zero.

Media want to stir the fear of U.S. 10-year bonds passing 3% saying this will hurt corporations and crack a jittery stock market.  But history shows, it takes many interest-rate rises to subdue a growing economy and upset markets.  3% is an arbitrary number.  They’ll say the same thing when 10-year U.S. bonds hit 4%.  Canadian 10-year bonds are still highly stimulative at 2.4%.  Europe, Japan, and some others have trillions of bonds still at zero or negative interest rates!

If rates rise toward more normal levels this will be an evidence of improved economic resilience and confidence.  It also gives more flexibility in a future recession for central banks to reduce rates again and ease the journey.  Maybe we’ll see some of this in the next two to three years.

Media also harp that rising interest rates will hurt the value of dividends and real estate income.  In this way media have been “talking down” the value of Canadian banks and other high-yield investments.  It won’t last, and if anything it will help us.

Compare for a moment:  where do we expect strong value and return in the case of 2% inflation, 2-3% interest-rates, 4% to 6% yields in dividends, real estate, and infrastructure (plus capital growth)?   A portfolio with these strong income mandates, alongside diversified bonds, will secure our clients’ health and wealth for the years ahead.

ON HOLIDAY – BACK JUNE 18th.

Our team is always here for you whether I’m at home or away.  Virginia and I will be in Europe, followed by Sarah’s graduation in Kingston.  That puts me back in the office June 18th.  While I’m away I’ll be able to check emails on occasion, but be sure to copy Ben (investments) or Christine (insurances) during my absence.  Or simply call our office and ask for them.

Our heartfelt wishes go to every reader and family through the summer season.  Let’s speak soon.  July is flexible and we’re booking appointments.  With today’s three discussions, if someone you know could be experiencing happier results in their financial lifestyle, please put us together.  We are always grateful to help.

Yours in Financial Security for LIFE!

Brian Weatherdon, MA, CFP, CLU, CPCA. 905-637-3500

627 Guelph Line, Burlington, Ont. L7R 3M7.  1-877-937-3500

Brian@SovereignWealth.ca

Author:  A Lifetime Of Wealth — And How Not To Lose It  (2013). Protecting Life, Loved Ones, and Future Dreams  (2013). Your Business, Your Retirement: Halton Retirement Study (2015) .

** This monthly letter touches on key strategies in Canadian and global investing and financial planning. This letter is not an offer to sell any kind of security, insurance, or program. Historical returns and risk measures are not a valid guide to future performance. Returns are from publicly available sources and research from a variety of firms including but not limited to GLC, RBC, CIBC, Mackenzie, Franklin Templeton.  Opinions reflected in this letter belong solely to the author and no other body is responsible for the content expressed here. We value opportunity to consult alongside your legal and accounting firms to advance your financial security and unique goals. We are grateful always to receive your comments and questions.

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