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Transfer Value... buying an annuity?

I did look into this further, so since it's come back up...

It's pretty uncommon for someone in their 20s/30s to be buying an annuity, so you won't see it advertised, but it is possible. The Sunlife person that did one up for me: "I have to admit, I have not quoted an annuity for anyone your age so I had to play with the calculator and it does allow me to illustrate. So it can be done."

In saying that (and I think it's pretty stupid), even if your transferring the money directly from an RPP to the financial institution you're buying the annuity from, the tax treatment is to tax you on the Transfer Value as income first as opposed to not taxing up front but taxing you on the annuity payments.... that fact pretty much takes away any reason to use your transfer value to buy an annuity.



How long you're expected to live is factored into the equation. An annuity for a 30 year old with $1,000,000 is a lot less than what is offered to a 50 year old. Just like any insurance calculation, the actuaries keep the odds in the favour of the house so that on a broad scale the house always wins. That\s why they're usually set up around the assumption that you'll live to be 90 years old.... the average age of death in Canada is 82, so unless you make it to 90 then they profited. Sure, some people will make it to 90+ but their expenses will be more than covered by all those who don't.
The house always wins πŸ˜‰

That's why it's better to take all your money and run as fast as you can 😎
 
I’ll take the financial security.
This is definitely the biggest factor, IMO. No matter what the economy is doing, you will get your pension payments, unless the whol country collapses.

That being said, I've spoken with several people who have released in their mid-30 with "around" 15 years of service. They all took their TVs and by investing them smartly, they are all on track to far exceed what they would get with a CAF pension, even factoring in what their future rank/inflation adjusted/future pay increase salaries would be if they retired at 35 years.
 
This is definitely the biggest factor, IMO. No matter what the economy is doing, you will get your pension payments, unless the whol country collapses.

That being said, I've spoken with several people who have released in their mid-30 with "around" 15 years of service. They all took their TVs and by investing them smartly, they are all on track to far exceed what they would get with a CAF pension, even factoring in what their future rank/inflation adjusted/future pay increase salaries would be if they retired at 35 years.
We were also in a historic bull market for the past decade with unprecedent growth so that might not be the case going forward.

"Past results aren't a predictor for future returns" however, the historic numbers are definitely in your favour if you're willing to take on some risk.

At this point when if I were to elect to take a Deferred Annuity vice a Transfer Value, I would need to wait 25 years to access the money. 25 years is a heck of a long time in the market.

I use a tool called portfolio visualizer to study trends in stocks, you can see the tool here:


Just to show you just how much money you could potentially make if you were to be just a little more aggressive. I picked 10 stocks and put them in a 20 year portfolio back test going back to 2002.

The rules I used:

1. Only Canadian Stocks
2. Must be a Blue Chip Company/Leader in their Industry
3. Must not have more than 2 in the same sector
4. Must pay a Dividend
5. Equal weighting allocation
6. No Technology Stocks (due to the hyper growth they have experienced and their unpredictability)

The stocks I picked (I just randomly picked these btw):

1. TD Bank (Banking)
2. Enbridge (Oil + Gas)
3. CN Rail (Transportation + Rail)
4. Brookfield Asset Management (Finance + Asset Management)
5. Canadian Natural Resources (Oil + Gas)
6. Bell Canada (Telecom)
7. Teck Resources (Mining)
8. Power Corporation of Canada (Insurance + Finance)
9. Barrick Gold (Gold)
10. George Weston (Consumer Goods)

I then took @SupersonicMax TV and plugged it in to portfolio visualizer to see what number got spit out. Here are the results:

Screenshot_20220220-100556_Chrome.jpg

Final value after 20 years is a cool $31 million in value with an average annual return of 16.86% over the 20 year period.

This includes two recessions during this time period, one of which would see the portfolio value drawdown close to 50% (2008) and a number of Commodity Cycles including Oil Price collapses.

More interestingly during this time period, here is a picture of the income that would be generated during this time period:

Screenshot_20220220-100704_Chrome.jpg

In 2021, these 10 holdings would be generating $927,000.00 in annual income in the form of dividends. If you decided to retire and stopped the DRIP, that's a heck of a lot of income at your disposal for you to enjoy or for your offspring to benefit from when you pass.

Some food for everyone's thought. I'm personally more interested at this point in building generational wealth for my family than I am in the absolute security of a Defined Benefit Pension but that's just me.
 
Yes I did not account for taxes in this calculation but it would still be a lot of money even if I had 😎
 
More confounding factors: 20 years ago pay rates were materially less, meaning the TV would also have been materially less; and over half the initial TV would have been taxable in the hands of the recipient, so needs to be discounted for initial taxes before investing.
 
More confounding factors: 20 years ago pay rates were materially less, meaning the TV would also have been materially less; and over half the initial TV would have been taxable in the hands of the recipient, so needs to be discounted for initial taxes before investing.
Very true, so lets say @SupersonicMax TV was only $600,000.00 in 2002 as opposed to $1,600,000.00 today:

1645387938805.png
It would still be worth over $11,000,000.00, 20 years later. With no additional contributions whatsoever.

1645388134392.png

As for dividend income, last year they would have made #330,000.00 in income from dividends. 10 years after they withdrew their transfer value and invested it, this particular portfolio would be paying them $107,527.00 in dividend income annually. Canadian dividends are also taxed at a lower rate than regular Income and are a more tax efficient.

See here for explanation:


This is particularly important for high networth and high tax bracket individuals.
 
Very true, so lets say @SupersonicMax TV was only $600,000.00 in 2002 as opposed to $1,600,000.00 today:

View attachment 68855
It would still be worth over $11,000,000.00, 20 years later. With no additional contributions whatsoever.

View attachment 68856

As for dividend income, last year they would have made #330,000.00 in income from dividends. 10 years after they withdrew their transfer value and invested it, this particular portfolio would be paying them $107,527.00 in dividend income annually. Canadian dividends are also taxed at a lower rate than regular Income and are a more tax efficient.

See here for explanation:


This is particularly important for high networth and high tax bracket individuals.
Except that you get taxed on everything that doesn’t go into a LIRA. You don’t get 600k.
 
So, the 600K would have come in as 300K (in a LIRA), and 300K taxed in hand in 2002 (Ontario rates) 29% federal / 11% provincial leaving 180K (per ARCHIVED - Ontario -- 2002 General Income Tax and Benefit package - Canada.ca). So that makes 300K invested tax deferred (LIRA), and 180K where capital gains would not be taxed until disposition, but all dividend payments would be taxed every year (with advantageous tax treatment since they are Canadian).

Remember, though, that the $300K in a LIRA is subject to regulations which govern conversion to a LIF and increasing minimum drawdowns as you age.
 
Except that you get taxed on everything that doesn’t go into a LIRA. You don’t get 600k.
Well aware, but your $1.6 million today would have been worth just north of $1 million in 2002. Given this fact, $600,000.00 is conservative even accounting for taxes.

What accounts you put you're holdings in to are also pretty inconsequential as far as the value of the holdings themselves are concerned. $600k invested in those 10 equities would still be worth nearly the same regardless of whether it was held across 3 different accounts or 1 single account.

What would differ would be your ability to access that money but even then, there are ways around that if you are really concerned about it.

You could max out RRSP, max contribute to LIRA and then dump the rest in a cash/margin account.
 
This is definitely the biggest factor, IMO. No matter what the economy is doing, you will get your pension payments, unless the whol country collapses.

That being said, I've spoken with several people who have released in their mid-30 with "around" 15 years of service. They all took their TVs and by investing them smartly, they are all on track to far exceed what they would get with a CAF pension, even factoring in what their future rank/inflation adjusted/future pay increase salaries would be if they retired at 35 years.

There are also things that one might want to do with that kind of capital that are hard to put a value on, particularly when you're still in your late 20s or early 30s. For example, using the TV to start a business.... which could be a flop but also has fairly unlimited potential to create wealth. I had it in my head in 2015 when I started down this path that it was to start my own accounting firm, that remains where I am headed and the outside portion of the TV can make it all the more doable.

Knowing my luck I'll be dead before I'd get to a deferred pension. I want my last cheque to bounce, but not because all of my wealth is sitting in a government account.
 
There are also things that one might want to do with that kind of capital that are hard to put a value on, particularly when you're still in your late 20s or early 30s. For example, using the TV to start a business.... which could be a flop but also has fairly unlimited potential to create wealth. I had it in my head in 2015 when I started down this path that it was to start my own accounting firm, that remains where I am headed and the outside portion of the TV can make it all the more doable.

Knowing my luck I'll be dead before I'd get to a deferred pension. I want my last cheque to bounce, but not because all of my wealth is sitting in a government account.
Bingo!

Starting a business takes a lot of capital. Look at the start up costs for even buying a turnkey business that's already up and running and you quickly realize why few people become entrepreneurs.
 
Well aware, but your $1.6 million today would have been worth just north of $1 million in 2002. Given this fact, $600,000.00 is conservative even accounting for taxes.

What accounts you put you're holdings in to are also pretty inconsequential as far as the value of the holdings themselves are concerned. $600k invested in those 10 equities would still be worth nearly the same regardless of whether it was held across 3 different accounts or 1 single account.

What would differ would be your ability to access that money but even then, there are ways around that if you are really concerned about it.

You could max out RRSP, max contribute to LIRA and then dump the rest in a cash/margin account.
That’s also easy with hindsight to pick good investments opportunities and maximize your potential return. I would have invested $10,000 in Bitcoin back when it started and I’d be a multi-millionnaire too.

I doubt you’d be able to get a 90% return in 2009…. Perhaps a healthy 20-30% that would partially offset a similar performance the year prior. Run it with an average 10% return and you’ll get a much different picture.
 
That’s also easy with hindsight to pick good investments opportunities and maximize your potential return. I would have invested $10,000 in Bitcoin back when it started and I’d be a multi-millionnaire too.

I doubt you’d be able to get a 90% return in 2009…. Perhaps a healthy 20-30% that would partially offset a similar performance the year prior. Run it with an average 10% return and you’ll get a much different picture.
He picked 10 Cdn Blue chip stocks, at random. I don’t think his point is that far off the mark.
 
That’s also easy with hindsight to pick good investments opportunities and maximize your potential return. I would have invested $10,000 in Bitcoin back when it started and I’d be a multi-millionnaire too.

I doubt you’d be able to get a 90% return in 2009…. Perhaps a healthy 20-30% that would partially offset a similar performance the year prior. Run it with an average 10% return and you’ll get a much different picture.
But you do realize Bitcoin is different than CN Rail or a Bank like TD right?

The companies I picked aren't highly speculative assets, they are Dividend Kings & Aristocrats. A couple of them have almost 30 years of dividend increases under their belts.

If you look at the 10 stocks I picked up above, the only thing I even looked at was that they are all in the top 50 Companies on the TSX by market capitalization.

I did no technical analysis, no reading reports or financial statements, I simply put a number against a group of assets to show how much they gained in value over the past 20 years.

As for the average growth rate, the avg over the 20 year period was just under 16%.
 
Even if your choices are blue chip stocks a portfolio of 20 equity stocks isn’t exactly diversified nor balanced. The volatility of such a portfolio, especially for the purposes of a retirement fund, would be inappropriately high in my opinion. Probably cause undue stress and/or a panic sell at an inopportune time which defeats the purpose.
 
Even if your choices are blue chip stocks a portfolio of 20 equity stocks isn’t exactly diversified nor balanced. The volatility of such a portfolio, especially for the purposes of a retirement fund, would be inappropriately high in my opinion. Probably cause undue stress and/or a panic sell at an inopportune time which defeats the purpose.
Yeah, kind of like the Ontario Teachers Federation diversified with lots of Nortel….

*HB’s list is essentially a Canadian top industries index…pretty diversified if you ask me (and my financial planner).
 
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Even if your choices are blue chip stocks a portfolio of 20 equity stocks isn’t exactly diversified nor balanced. The volatility of such a portfolio, especially for the purposes of a retirement fund, would be inappropriately high in my opinion. Probably cause undue stress and/or a panic sell at an inopportune time which defeats the purpose.
I think it really depends on what you think of when you talk about diversification. Some of the companies I listed above are highly diversified in their own right.

Power Corporation of Canada for instance is a holding corporation as is Brookfield Asset Management.

When you invest in those Corporations, you are really investing in a highly sophisticated holding company with interests in a large number of markets.

Most people don't know this but Power Corporation actually has ownership and in some cases controlling interest in brands like Adidas, Total SA (one of the largest oil companies in the World) and owns 28% of China AMC directly or through IGM which it has a 62% controlling position in.

Or when you are signing up for and using an app like Wealthsimple you're actually buying a product owned and created by the Power Corporation of Canada πŸ˜‰

On the topic of diversification, it also has weaknesses. When you buy an indexed fund that tracks an exchange like the S&P 500, you get all the strong performers but you also invest in all the laggards as well.

See the following article:

Investment Diversification Gone Wrong

The reason I personally love Dividend Aristocrats is because they have proven to be able to consistently produce income and generate profit which they redistribute to their shareholders over an incredibly long period of time and they have staying power.

Canadian Natural Resources is an example of this:

21 years of consecutive dividend payments with no lapses and consistent increases to the dividend payout. They even managed to maintain their dividend during the biggest oil price shock in history and are basically printing money atm with oil prices the way they are.

They are actually trading at the highest price they ever have been, despite all the people claiming in May 2020 "OIL IS DEAD"

Screenshot_20220220-174528_Chrome.jpg
 
Now I am not arguing for or against TV or even talking about asset allocations or what people should do with their money.

My real point is this:

If you have a Strategy and a Plan then work towards executing it and doing what you think is best for your own situation. A lot of people will tell you it won't work and it may not but it most definitely won't work if you don't try.

I mean they teach really good skills in the Armed Forces like the Estimate Process, Operational Planning, etc. These tools have wider applications than just the Military, just a thought πŸ˜‰
 
Exactly. I treat my DB pension (contributing another 3 years) as the fixed income element of my portfolio, with some inflation protection.

My portfolio, on the other hand, is where I can take risk in equities. It's structured for a deliberate draw down of RRSP assets to minimize tax implications (which will also defer CPP to age 70, increasing payout and thus generating some additional inflation protection), more tax sensitive investments sheltered in my TFSA to grow undisturbed, and my unregistered investment account is for buy and hold capital appreciation.
 
If I took the TV I would have a fixed income portion to try to reduce volatility. Not saying 40% of my portfolio would be government bonds but 20 equity stocks is aggressive for me. Ack that power Corp and Brookfield has many holdings. Keeping it ton just Canada makes me nervous too. At that point might as well just buy Berkshire and call it a day.
 
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