Be Somewhere Else

I have great admiration for Richard Feynman. He was a prolific scientist who also had the ability to communicate in ways that non-scientists could understand. I am pretty sure he would have made an interesting dinner guest.

He was remarkably capable and some of his work in the ’80’s is just now becoming practical. Quantum computing and nano-tech come to mind.

One of his colleagues claimed that Feynman had a unique way of solving difficult problems. He wrote down the problem, thought hard about it for ten minutes, and then wrote down the answer. Good method if you can use it.

One of his thoughts is appropriate today as we try to digest the world, especially the economic and social part of it.

“It doesn’t make any difference how beautiful the hypothesis is, how smart the author is, or what the author’s name is; if it disagrees with data or observations, it is wrong.”

Couple this thought with Herb Stein and his law, “If a thing cannot go on forever, it will stop.”

The two thoughts together give us a way to decide what things may be wrong and given those things, we know they must stop. The hard question we are left to decide is, “When and how will the idea fail?”

And, of course, do we wish to participate?

We can observe things that don’t work that are still presented as workable solutions.

  1. The whole process of providing something for nothing has been tried and found wanting.
  2. Create a symbiotic relationship with part of society has been tried and is presently failing. Civil service unions that financially support their contract adversary, the government, seem wrong.
  3. Punishing the productive to reward the unproductive is being tried and so far the results are adverse for the theory. In the past five years, how many tax refugees from California or New York are there?
  4. Consolidating power for the sake of power has no apparent value except to the department heads with regulatory control of industry and other parts of society.
  5. Hiding and reclassifying adverse outcomes adds nothing to the value of the knowledge held by citizens.

Detroit is a perfect example of the outcomes. There will be more like it. There are already. Fannie Mae comes to mind.

As an investor what should you do?

Avoid things that cannot pass the Stein Question. If you cannot see how an investment will last for a very long time, if not forever, choose not to participate. As my karate sensei pointed out 45 years ago, “The best defense to a dangerous situation is to be somewhere else.”

Sound advice.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. | Twitter @DonShaughnessy | Follow by email at moneyFYI

How Much Retirement Income Do You Need?

I suppose the simple answer would be “More!” That is not impossible to achieve, but to get it you need to plan and execute better.  If you think about planning, it is the process that connects available resources with desired outcomes.  Unfortunately for many, their plan is like the one shown in this cartoon by Sidney Harris.

math07 then a miracle occurs sidney harrisRetirement income plans are relatively straightforward but many people fail to address the process steps that get them from the inputs to the outcome.

There are explicit and understandable steps in the middle.  Don’t be left relying on a miracle.

The greatest mistake is to fail to notice that in retirement, spendable cash and income are not the same thing.  You really do not care what your income is if you have enough cash to spend.  Addressing what you spend is where you start.

When replacing income, the 70% of income  heuristic fails more than it works because people seldom spend even  50% of their income and usually not 40%.  The rest goes to taxes and other government programs, mortgage and loan payments, some insurance, savings for retirement, and saving for other events that will have passed before retirement.  Like weddings and education.  Of what is left, children may occupy a significant share now.  That goes away too.

You will be trying to manage consumption, not income, because consumption defines lifestyle.

The trick is to break your annual spending into four general  pieces.  This provides an approximation only but it makes clear the idea that you don’t consume your total income.

Start with your tax return and find total income. Line 150 in Canada

  1. Then find the first layer of spending – them – the government and others.  Add up taxes, other government programs, union dues, professional fees and the like. For most people this is about 30% of income.  Much more if your income is high.
  2. Subtract money that affects the future.  RRSP contributions, pension contributions, and any other savings amounts that you may have that are not shown on the return.
  3. Subtract money that is carried forward from the past.  Primarily mortgage payments, investment or business loan payments, student loans and other loans payments, (not including car payments or furniture purchases or the trip last year,  those are consumption) Add 2 and 3 together.  This represents “then”  For most people this is about 25%
  4. Subtract them and then from income and get “now.”  Between 40% and 50% and often less than 40% if debt or tax is large.

Now is consumption.  What you spend today must have cash flow to support it.  Now will always be there.  You must plan for it.

Some people like to deduct the expenses for the children.  You are probably better not to do so.  That spending will likely turn into new recreation expenses and travel in retirement.  It is okay though to subtract the expenses related to going to work.  That varies considerably depending on drive time, parking, clothing, special tools, and so on.  It is safe to say that it is a least 5% of income.

If you need to replace 40% of your income after tax, you need to know where it is coming from.

Some of that income is spontaneous.  Like your pension or your Canada Pension Plan and maybe Old Age Security if you can organize your income properly.  It just happens.  And some of it is indexed so no worries about that.

The part remaining, plus income taxes to get to it, is what you must replace yourself.  Ignore inflation after the first ten years or so of retirement.  Costs may inflate but your ability and desire to spend deflates.  Similarly notice expenses that relate to properties that you may not keep forever.  A ski chalet is an example.  Sometimes a cottage.  New capital appears and expenses fall.  Do not overlook that.

All that is required then is an investment policy that gives you an idea about future yield and from that your monthly saving requirement.

“But wait!  I will have to take that increase out of my current lifestyle.”

Not necessarily.  If you are careless about how you manage “Them” and “Then” some efficiencies there may find the necessary capital.  That is the miracle that Sidney Harris is talking about.

Find someone who knows how to do this sort of work.  A little tax advantage, a small adjustment in debt management, more efficient insurance, reallocated attention to debt and saving, line of credit instead of credit card debt, a little better investment yield, will together create significant capital. If you have not yet looked at the mortgage/cashflow program at ManuLife One, you might wish to do so.  For some people it works wonders.

It is really just a big arithmetic puzzle coupled with the courage to implement it.  You are spending little or no time managing this part of your income anyway.  Whatever comes out of the reorganization is free money.

Attention to little things is a big thing.  The seed for an oak tree is not bigger than the seed for a flower.  But you do have to plant it and nurture it.  Find an adviser to help you.  Things you do only once tend not to be well done.

You can see more  Sidney Harris cartoons . They are worth your trouble.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.  |  Twitter @DonShaughnessy  |  Follow by email at moneyFYI

Interesting Times

There is, purportedly, a Chinese curse that says, “May you live in interesting times.” Given events over the past five years, it appears that the curse may have been invoked. As always the question is, “What are you doing about it?”

Turbulent times need not necessarily be systemic in order to matter. Each of us has had or is having turbulent times that are unique to us. The question however, remains the same. What to do?

The solution to any difficult problem follows the same path. Take stock. Acquire objectivity. Discover action steps. Implement. Review and revise.

  • Where does the turbulence come from?
  • Is it systemic? Will it change back? When?
  • If not are there clear new conditions?
  • Have the “rules” changed? Is it merely complexity?
  • Is my perception complete? Am I disconnected from the new reality? Can I understand it? Can I reconnect in a different way?
  • Is it culture shock?
  • Is action required? If so, how soon?
  • Am I making it a problem? Consider cognitive dissonance.
  • Do I have a resource who can guide me?
  • How are my investments affected? Probably down, but that means only four possible things. More savings, same savings for longer, higher yield is required, reduced spending in future. Could I deal with any of those?
  • How about my job or business? Demographics, technology, competitors affected worse, skills needed still the same?
  • Have my goals changed? Probably not.

Finding answers will be clarifying, possibly soothing. It may not be a crisis of biblical proportions after all. Action steps and options become visible.

What if you skip the survey step?

Then other things happen.

If you believe there is a serious and personally adverse problem, then you tend to become emotional. Fearful. When there are few facts, emotion is the response. When that happens you start to believe external authorities or informed sources. Usually you do that without verifying their credentials, biases and beliefs. It is difficult to check in a timely way in any case. Usually the external authority or informed source provides instructions or at least implied actions.

These responses are exactly the required collection needed to implement a hoax. If you are frightened, approached by a seemingly reliable authority who cannot be verified or perhaps by several with the same message, and told do something that seems to be a solution, do you do it?

For example, you are on the 14th floor of a hotel. The phone rings and you are informed by the front desk that there is a ruptured gas line on the 14th floor. You must not go in the hall or you will surely be incapacitated and maybe die. Immediately place wet towels along the bottom of the door to your room. You cannot open the window, so to get access to fresh air, take your television and throw it through the window. You must do it now, you have only a few minutes to get it done.

Would you do it?

This has actually happened and almost everyone “opened the window” with the television. Probably back when televisions were bigger, heavier and not attached to the wall.

There is a lesson there. If you find yourself becoming emotionally connected to a problem without objective facts to analyze your position, then you need to step back and check. Ask questions. Gather information. Revisit goals, personal strengths and options.

Ideally you have someone who understands you, your goals, your resources, your time frames and your strengths. A personal adviser.

If you don’t have an adviser now, hold auditions. Try to avoid those who share your experiences, hopes, fears and expectations. They may react the same way you do.

You might not need an adviser to deal with this level of emotional problem, hopefully you do not, but if you do need them, you will need them badly. Plan ahead.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. | Twitter @DonShaughnessy | Follow by email at moneyFYI

Address Taxation

All tools are designed to get a task completed in an efficient way. A power saw will cut wood into desired shapes much more quickly than a hand saw will do. However, if you try to do it without plugging it in, you will find it is terribly inefficient. Much less efficient than a hand saw. The thing that makes it better, when not present, makes it worse.

Compound growth is a tool to build wealth. Like the power saw it needs to work without impairment to work best.

The most commonly seen impairment is taxation.

Like the power saw, if you want to use the tool efficiently you will need to pay attention to how it gets it power. Do not try to run investment accumulation tools at lower voltages.

If I start with $1.00 and double it every day for 20 days I will have $1,048,576. But if I let the power of compounding be harmed, I will get less. For example, suppose I give 33% of my growth to the government each day. How much will I end with?

No it is not 67% of $1,048,576. That would be $702,546. An acceptable outcome.

You would end up with $56,932 all tax paid.

Admittedly the example is extreme but the point is clear. Tax takes a great deal more than people think. In our 33% tax example, we ended up with $56,000. You could double that if you paid tax at 27% instead. Pay careful attention. Even small tax advantages add up over a long time.

As an investor or as an adviser, the job is not finished until the tax reduction tactics have been considered and implemented.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. | Twitter @DonShaughnessy | Follow by email at moneyFYI

For Advisers – Be A Good Neighbor

I have spent five hours reviewing a shareholder agreement for a valuable group of companies.  It is rather ingenious in the way it allocates equity value, control and day-to-day income distributions.  It is tax efficient and probably durable.  People have spent a lot of time making this come together.  But, it is needlessly complicated and it has some definitional issues.

The complication could have been solved with a single additional holding company.  One that holds all the shares in all of the various opcos.

Holding companies for individual shareholders are a wonderful idea, especially when owned by a trust as these are here, but they don’t work as well when they own fractional interests in many companies and are tied to other shareholders.  You don’t want to have the individual holdco shares being the subject of the buy-sell arrangements.  All of their tax value is lost to the surviving family members on death. Never mind that they may hold assets the surviving shareholders don’t want to buy.  Probably too late for this one.  I will check next week.

The thing that troubled me because it so easy to overcome is the definitions and requirements around disability insurance.  Sometimes lawyers put common sense ideas into agreements that refer to other contracts in a way that the other contract never considered.

For example, one of the disabled definitions is – “A shareholder is disabled if they qualify for disability benefits on the basis of permanent incapacity under the provisions of any disability insurance coverage maintained by any of the Corporations for the benefit of its employees.”

I think that this definition will never be operational.  With the exception of some individual policies that provide for catastrophic injury situations, I know of no group or individual carrier that talks about “permanent incapacity.”

There are two other definitions for disabled in the agreement but they conflict so now what?

There is a provision that if the agreement terminates life insurance will be transferred to the insureds at cash value.

There are four things to notice here.

  1. The transfer is required by the agreement
  2. It does not address the case where fair value may be higher than cash value.  That will be deemed to matter by CRA.
  3. It seems not to recognize that there could be material tax costs to transfer it out even if Cash value approximates fair value.
  4. The agreement never specifies who should own the insurance in the first place.  If it is the individual’s holdco, why force it out?

Now here is where it can become interesting for advisers.

Why do you not photocopy some disability definitions out of both individual and group contracts and share them with lawyers who prepare agreements like this?  I know of not a single lawyer who dislikes learning more and especially if it comes with precedent wording.

Similarly a little extra knowledge about how insurance contracts are taxed when they are transferred to and from corporations and trusts might be useful to them.

It might not be crazy to send these to accountants too.

Spreading knowledge to the professionals in your network who use it infrequently is a good neighbor sort of thing to do.  Who knows, they may be able to help you some day.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.  |  Twitter @DonShaughnessy  |  Follow by email at moneyFYI

Why Good Ideas Fail

Only good ideas fail. Bad ideas never get the money to start. Good business ideas are worth about 50 cents a dozen. Strangely people who have never had one before, think they are worth more. The evidence suggest that 50 cents may be too high.

In Silicon Valley, there are a large number of successful venture capital firms. They are the folks that put money into new and untried ideas. They know what to look for and how to analyze what they see. What do they find?

All Silicon Valley VC’s have a filter so the weak ideas get tossed before they spend any money studying them. Of the ones they study, the rate at which the ideas receive funding is between 1 in 100 and 1 in 300. Of the ones that receive funding about 5 of 6 end up losing it.


Making a successful business is not about having a terrific idea. That will help but it is not conclusive. Successful businesses result from execution of the idea not from the having of it. They key element in being the one of the 100 or 300 who get funding is management. You must have a team that might be able to carry off the idea.

They need to know how to reach out for resources. They need to be coachable. They need to be disciplined and hard working. Smart VCs invest in the people not the idea. I could be convinced that the team of Bill Gates, Paul Allen and Steve Balmer could have started any business they were interested in and made it very valuable.

Every business consultant has had someone with a “great” idea that has no clue how to do it. The have the idea and they can see the outcome. Money, prestige, nice personal toys or whatever. They just don’t see the workspace between the idea and the outcome. It is like the plan is 1) I have an idea, 2) magic happens, 3) I am we’ll rewarded. None succeed.

Some time ago, I wrote about Korean chef, David Chang, who, on opening a new restaurant, said. “We’re hoping to succeed; we’re okay with failure. We just don’t want to land in between.” He is wise and experienced.

The in-between he talks about is the place where tactics are inadequate. A great idea poorly executed ends in between. A poor idea, poorly executed, ends up in the same place. Only tactics prove the worth of an idea. You want to be able to reap success and to stop failure. Execution tells you where you are.

Tactics are endlessly changing and hideously complex. Nothing is as easy to manufacture in practice as it is in theory. Customers do not beat a path to your door and of the early ones who come, you have no idea why. Employees do not have your passion. Banks are not your friend. 24 hours in a day is an immutable limit. Nothing is as it seems in the beginning. For every 5 things you know there are 5 more you do not and some of the things you think you know have changed.

Your personal financial plan or estate plan is similar. As I pointed out yesterday, the plans are all fundamentally the same at the deep level.

The middle, the part between conception and the end, is the difficult part. The execution phase. Magic does not happen. so, you need a guide. Someone who has been there and done that. It is very difficult to navigate the day-to-day complexity and get it right the first time you try it.

You need someone who can help you to prioritize, to put the tasks in the right order, who can be sure the task list is complete, someone who can pick you up when you are down and bring you down a bit when you get over-committed. Someone who is vigilant and who can change when circumstances change.

In Canada there is currently debate about the worth of a financial adviser. Some of it is justified. Much of the critique is coming from people who not only have not navigated the tactical space, they do not even see the space to be anything more than time. That oversight will not end well.

If you are an adviser, you need to formally establish your “value proposition.” Who you are, what you do and why those factors are benefits for your clients. The client has a vision. They need you to “Make it so.”

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. | Twitter @DonShaughnessy | Follow by email at moneyFYI

Everyone Has The Same Estate Plan

Every estate plan is the same.  Some are more complicated than others but that is only detail.  The complexity means that many people lose track of what they are trying to accomplish and when they do, they lose track of some advantages otherwise available.

Here is the overview that keeps it all focused:

All of your wealth owned and to be received will end up in one of three piles:

  1. Spent it
  2. Lost it
  3. Left it or gave it away

This implies that estate planning begins today and extends to about 2 years after the second death of a couple, by when the estate should be settled.  There are zones in that time space where priorities change.  For example, it is generally wise to make management simpler as people age.

Once you know the overview, you can work at avoiding losses.

There are several categories of loss to look at:

  1. Taxes due from the estate.
  2. Estate final expenses
  3. Taxes payable while living
  4. Investment losses
  5. Inefficient investments
  6. Mismatched income and spending
  7. Inadequate liquidity in the estate
  8. Inefficient charitable donations
  9. Poorly structured or invalid will(s)

Many estates are looking at income taxes, final expenses and other costs that exceed 30% of the assets.  Sometimes that can be reduced.  Frequently substantially reduced.  The only mistake in reducing it is to go too far.  Look for the cost-efficient minimum.  It is rarely zero.   Avoid paying a dollar to save 50 cents.

Taxes payable while living, usually result from inefficient investments and mismatched income and spending.  Ideally you should not pay income taxes until you are going to spend the after tax amount remaining.  Reinvesting unused but taxed income compounds the tax loss problem.

It is possible to do a virtual probate on your will.  Worth considering to see if it really will work under all conditions.

All executors love liquidity.  It gives them choices and prevents forced sale of hard assets.  There are four ways to get the liquidity.  Two of them you control and two of them the executor controls.

You control

  1. Hold permanently liquid assets which are taxed adversely and return lower yields.
  2. Own life insurance which is tax efficient and carefully matched to the liquidity need

Your executor controls

  1. Borrow but must give security, pay non-deductible interest and force the estate to wait longer to liquidate
  2. Sell something at some unknowable price to an unknown buyer within 12 months of death.  Estate sale usually means “expect a bargain.”

Estate liquidity is an issue.  You can analyze the cost to acquire liquidity for your estate.  You can easily prove that owning life insurance provides the greatest value even though it is an unlikely choice for many people.  If you will need liquidity, you maximize your estate by finding the cheapest way to get it.

Many estates provide charities with welcome money.  Be sure donations are structured to offer the maximum tax advantage.  Sometimes, they are worth more while living.  If the estate cannot use the donation receipt that would result, or maybe only part of it, do not get a receipt for the entire amount of the gift.  Charities have a spending quota based on the amount of the receipts issued.  Sometimes they would prefer capital money.  Ask if you don’t know.

And finally, the strategic estate plan everyone has:

I want to have enough money to live the way I like for as long as I can.  I want a margin for error. (security)  Whatever I don’t spend, I want to leave to my children or other heirs.  If I can reduce the cost of doing these things by careful estate, investment and tax management, I will do so.

Now, how hard does that sound?

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.  |  Twitter @DonShaughnessy  |  Follow by email at moneyFYI

Advice From Ecclesiastes

Ecclesiastes 9-11 offers some useful financial planning advice.

I have seen something else under the sun:
The race is not to the swift
or the battle to the strong,
nor does food come to the wise
or wealth to the brilliant
or favor to the learned;
but time and chance happen to them all.

Simply, there are no certainties.

None of this implies you have no control over the future, nor does it imply that planning will not work.  Education has value and brilliance and wealth can achieve things not otherwise available.   But, none provide certainty. Certainty is unavailable.

When planning, noticing pervasive uncertainty is important.  It leads to several useful outcomes:

  1. Situational awareness – the ability to discover and understand the world as it really is.
  2. Vigilance – paying attention finds variance sooner
  3. Reasonable expectations – understanding reality and its vagaries keeps you grounded and focused on long outcomes not short term results.
  4. Persistence – knowing that variability will be there allows you to continue through adversity
  5. Wisdom – the ability to connect your situation to the world at large so that you get what you need even if you have to adjust.

Good financial planning is not about certainty.  It is about the big scene, tendencies and adjustments.  Like driving a car.  Many small adjustments of steering and speed allow you to arrive at your destination safely.

You cannot build a “guaranteed to work” plan that covers a long time.  You cannot know with certainty how the world will behave in the future and you do not know your needs far in the future.  Guaranteed plans cause people to turn off their alertness.  Too late they discover failure.

“time and chance happen to them all”

Planning gives you the framework and the ability to create goals and the resources to meet them.  With a framework you notice changes and can take action.  You see how today, tomorrow and next year are connected to the distant future.  You start with the natural tendencies and systems of the external world and the tendencies of people like yourself.

Some things do not change much.  People grow old.  There is a stock and bond market.  Spending is controllable.  Things that work usually continue to work.  Risks can be avoided or insured.  Assistance is available.

Have faith in the process.

Damon Runyon is reputed to have said, “The race is not always to the swift nor the battle to the strong; but that’s the way to bet.”

Sound advice.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.  |  Twitter @DonShaughnessy  |  Follow by email at moneyFYI

Financial Planning – Use A Guide or A Map

Financial planning is a troublesome and important endeavor.  It’s important because a problem anticipated is a problem solved and it is troublesome because projecting the future relies on the past to provide the pieces that build the model.  The future might be based upon different pieces.  We don’t know what we don’t know and that makes accurate prediction impossible.

I think financial planning is like dark energy.  It exists in theory but evidence of its uses or even its existence is, at best, indirect.  What we should want is a model that produces insight.  Precision is of little value unless you know how the future will unfold.  If you do know, you are wasting your time preparing financial plans.

There are two types of financial plans.  Road maps and guided.  Road maps have the advantage of appearing certain.  Guided are only predictive in short periods.  They are quite uncertain for the long run.  Their only long term elements are those of direction and shape.

I have no love for road map plans that extend beyond about 5 years and I would prefer two.  The problem is that plans of this type tell you more about the planner than they tell you about your financial future.  To build long plans people assume what is convenient for their purpose.

The future is unknown so rigid or perfect plans are automatically wrong.  We delude ourselves if we think the future must behave as the past.  Delusions are a blemish on your chances of success.

Future problems and opportunities change so we need someone who can notice and redirect resources.

Guided plans are evolutionary.  They change to take advantage of circumstances as they arise.  They too are based on assumptions about the future but the assumptions are not rigid.  You are never finished with this type of plan.  The plan is like a garden.  It needs to be weeded, fertilized and watered at regular intervals.  Sometimes you need to plow it down.

Stop stuff that does not work and let the winners run.

A guided plan involves a look at a long time frame with a model based on what we know from the past.  Interest rates versus inflation, tax structure, spending structures, age change effects, first death effects, business or employment income, government plans and many more.  That look will provide a general shape and direction.  It will not be a guarantee of success or even of general outcomes.

Once built the guided plan can be tested across its variables but there is always the limit that not all the variables are present or known.

Every couple of years the guide reappears and resets the estimates based on what has been learned since the last revision.

For example, If someone sold their business in the late ’80’s and made the planning assumption of 12% on short term t-bills, it would have worked for a few years.  Once it changed though, they had to make prompt adjustments to either their spending or their portfolio.

Things change.  When they do, change your plan.  Employ a guide with a wider world view.  You know your spending and overall outlook.  Let a guide fit that with external reality and do it often.

A financial plan that has no requirement for revision in the near term is not really a plan.  It is a persuasive tool to get you to do what your planner wants.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.  |  Twitter @DonShaughnessy  |  Follow by email at moneyFYI

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