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retirement

75% of People Not on Track for Retirement

A new study shows that three in four Canadians are not on track for retirement. With the recent economic turmoil, many working Canadians are struggling to make ends meet as it is. The same survey indicated that half the population is living paycheck to paycheck, and very few have any emergency savings built up. Living in the moment means that they’re not focused on retirement goals, and many expect to be working several more years as a result.

Although workplace pensions, the Guaranteed Income Supplement (GIS), Old Age Security (OAS) and the Canada Pension Plan (CPP) can provide funds, it’s often not enough. Moreover, the higher your income is now, the less likely you are to have your future needs met by these types of programs. If you’re among the 75% who are not on track to retire, here are the changes you need to make now:

Take a Hard Look at the Money Coming In

You’ll need to set a budget, but long before you get to it you must have a full accounting of how much money is coming into the household. Then, you’ll need to deduct between 20% and 30% of the gross for emergency expenses and retirement. Focus on building emergency savings that will cover you for three to six months first.

Eliminate Bad Debts

Carrying a balance for a mortgage or vehicle isn’t usually a problem, but more and more Canadians are maxing out credit cards and racking up other smaller debts. These things should also be knocked out of the way first.

Say Goodbye to Luxury Spending

While the older population is much better at assessing value and affordability, the younger generation is geared toward luxury items. Expensive cars, lavish clothing and trending technology add to debt. If you aren’t on track for retirement, and you’re carrying unnecessary debts, you should get yourself back on track and only purchase essential and value-oriented products.

Reevaluate Your Investment Choices

Unfortunately, many investment firms take a chunk of payments, and they fail to deliver in returns. Do a cost-benefit analysis and see if you need to consider moving your money to another firm or program. Diversification, both on a local and international level, is essential, as it provides a kind of insurance in case the economy falters. Think beyond stocks, as well. Bonds, commodities and real estate holdings can provide extra layers of security.

Use a Budgeting Program

There are numerous options available, but they all serve the same essential function. Using software or an app to track expenses takes the brainwork out of it and enables you to stick to your budget without having to work so hard.

Incrementally Increase Retirement Savings

As you pay off your debts and eliminate your mortgage, and your children become self-sufficient, you’ll obviously have more money to spend on yourself. Many people jump into doing the things they’ve been holding off on, like vacations and home remodels, but this becomes a slippery slope. As you find yourself free of expenses and debts, it’s imperative to increase your retirement savings, as well. During your last decade or two of work, your goal should be buildings toward setting aside 60% of your income for retirement. Some of the cash should go into savings, but a fair amount should be invested into dividend-paying stocks, which will add a steady trickle of supplemental cash as your non-working days progress.

Reevaluate Your Goals and Get Expert Advice

Even though most people can benefit from visiting with a financial planner, very few people do. You don’t have to be wealthy to benefit from one, either. A financial planner can help you figure out ways to minimize debts and how to save and may be able to help you get lower interest rates on the debts you already carry. If you choose not to visit a financial planner, you should still reevaluate your budget and strategy on a regular basis. This way, you can find ways to increase your savings if you aren’t setting aside enough, or enjoy more of your income now, provided you’re on track for retirement.

There was a time when a person could outright retire at a certain age, but it’s not like that any more. Today’s workers have to contribute more on their own to be able to maintain the same standard of living, and they have to work longer to be prepared. It’s still possible to retire at about the age your parents and grandparents did, but it requires more planning on your part.

Are We Entering a Bear Market?

We promise, when we wrote our monthly discussion a few weeks back titled, “At the Margin,” we had absolutely no magical insight into the price correction U.S. stocks experienced last week and this, one of the more noticeable in quite some time. You may remember our early August discussion heavily detailed the frailties of human decision-making regarding investments, with particular light being cast on emotional crowd behavior. Greed and fear are two of the most emotionally dominant drivers of decision-making, and two of the greatest enemies of investors. We’ve learned after decades of experience in the financial markets that controlling our emotions is the most important personal exercise for investment decision-making. Having said this, we thought it was important to look at the bigger picture in light of the downward movement in the U.S. and global stock markets over the last several trading days.

Although it’s never fun to experience a price correction, we need to remember that price corrections are normal in financial markets. What is abnormal are markets that go straight up without corrections — or markets that go straight down, for that matter. With all major U.S. equity markets off 10% or more as of this writing, one of the longest periods in market history without a 10% correction has ended. The last time we experienced one was in 2011. The steep correction that has taken place in the last week in U.S. equity markets appears to be a combination of emotional selling and forced selling because of margin calls, as the fundamentals of the markets have not drastically changed in the past week.

Let’s step back for a second.

Is this the beginning of a bear market in US stocks? No one knows. For now, there is not enough “weight of the evidence” to suggest this, but we’re keeping score. Although few probably realize this, about a month ago 20% of the S&P 500 stocks had already fallen 20% from their highs, well before the recent correction in the major indexes. The fact is that a “stealth correction” has already been occurring for some time now. If you own the stocks that have corrected in this manner, you are fully aware. What happened in recent days is that a lot of the “winners” of this year sold off. Historically, market corrections have been nearer an end than a beginning once the leaders finally correct. We will be watching market character closely in the weeks ahead.

It has been so long since we have experienced any type of even semi-meaningful correction in the U.S. equity markets that we have been convinced, when it finally arrived, it would feel like a bear market and emotions would be highly charged. Sound familiar?

Is there plenty to worry about in financial markets and global economies today? You had better believe it, but there has been plenty to worry about for years now in the aftermath of the Great Recession. U.S. corporations and households are a lot healthier today than was the case a number of years ago. Perhaps ironically, it’s the government sector where we find balance sheets impaired. It’s a good thing we can’t buy share ownership in global governments.

The worries will never stop; there is always something to worry about with the flood of data tied to financial markets and global economies. The key is assessing the magnitude of the reality of these worry points and how they may affect real world economic outcomes.

For now, no one knows where the markets will travel with any day-to-day precision. We have been expecting a correction for some time now, although having it happen in just a few days feels like quite the dramatic event. That sense of “free falling” over a short time is never comfortable. We instinctively act to stop the feeling by any means possible; it’s just who we are.

We believe it is imperative to do two things as we move ahead – 1) keep our emotions in check while thinking objectively and 2) assess forward market character on a continuing and intensive basis. As we have stated many a time in our communications to you, risk management is the key to successful investment outcomes over time. We know emotions have recently run higher than has been the case for some time now, and because of this it feels the risks of being invested in the equity markets are greater. If the weight of the evidence tells us this for-now-short-term correction is to become something much deeper, we will not hesitate to take protective action. The key in investing is not pinpointing the market peak prior to a correction nor nailing an exact interim market bottom before a rally. The key is avoiding large bear market drawdowns and participating in favorable market environments to the greatest extent possible.

A Crucial Role for Annuity ‘Structures’

Every year millions of injured Americans confront critically important financial decisions as their personal injury litigation draws to a close. In planning the path forward and beyond their injuries, the stability and security of ongoing, lifelong income from their settlement, judgment or award proceeds becomes absolutely paramount. The money simply needs to last.

Only one post-injury investment option – – structured settlement annuities or “structures” – – provides a continuing tax exemption for the growth of such benefits.  If the injured individual agrees to a lump sum settlement, the tax exemption for lifelong income disappears.

As of 1983, the Periodic Payment Settlements Act (see also IRS regulation Sec. 104(a)(2)) has made all income from a structured settlement annuity over the lifetime of that individual entirely, unequivocally and absolutely tax-free. Contrasted with a lump sum payment in which only the initial payment is tax free and all subsequent earnings are subject to all applicable forms of state and federal taxation, the structured settlement is considered an insurance policy for payments rather than asset to be taxed upon growth. This view, accepted by Congress in that 1983 Act, makes the value of a structure staggering.

For example, if the injured individual deposits the lump sum settlement proceeds in a bank account, any interest earned would be taxed accordingly. If the injured individual invests the money in taxable bonds or stocks, the interest and dividends would also be classified as taxable income. However, with structured settlement annuity payments, neither the growing COLA payments nor the lump sum scheduled payments, nor the payments beyond life expectancy are ever taxable. If the injured party were to decide on an annuity payout after receiving the funds, the tax benefit would be lost because the funds were accepted separately from the settlement. The critical element is that the structure must be accepted as the payout vehicle initially.

The Tremendous Value of Tax-Free Status

The tax-free effect is quite dramatic. Consider an injured individual in the 28% tax bracket with a 2% fee for a traditional, market-based investment portfolio. In addition to having the risk of a significant reduction or entire loss of funds, the individual’s income from the investment when they are successful will face federal taxes that can reduce actual net income by 30% before accounting for state and local taxes that could tack on another 5% reduction. None of these risks or reductions exists with income from a structured settlement.

For an individual in the 10% tax bracket, earning a 4% return would have the equivalent pre-tax return of 4.44%, and a 15% tax bracket would mean an equivalent pre-tax return of 4.7%.

While a peripheral advantage, the tax-free nature of the structure payout means the individual recipient is not required to deal with the timing and accounting issues associated with the need to pay estimated taxes on this money. With a taxable event, the taxes would be the quarterly responsibility of the recipient. An error in dealing with the estimated taxes could create recurring tax problems.

Therefore, structures not only safeguard the injured individual from the volatility of the stock market, they provide continuing income that one can count on down to the penny and to the day. No wild, market-swing surprises. No reductions in income for taxes. No tax filings and accounting homework.

The Gift That Keeps Giving (and Gives in Other Ways)

In addition to the tax-free opportunity, there are other critical reasons to value the structured settlement for the injured individual. First and foremost, the structure enables the individual to couple the tax advantages with the capacity to schedule weekly income and significant payouts for any future expenses like college tuition, wedding costs or retirement needs to the day and to the penny without any worry about market or 401(k) performance. In addition, because structures are considered a policy for payment rather than an asset, such proceeds generally do not affect eligibility for needs-based public assistance programs like AFDC or Medicaid, as lump sums do. Even if the injured individual is not on Medicaid at the time of the injury, eligibility for many programs — in-facility care, for example — often requires the absence of any significant assets.   As a policy rather than an asset, structure income would be immune from eligibility consideration. Lump sums such as an investment account or a bank account are highly likely to be considered assets that must be eliminated for Medicaid eligibility.

Quite simply, structures may very well be the best way to make sure that the money is peace-of-mind predictable, maximizes other income and benefits and lasts for a lifetime. However, with only 5% of eligible dollars placed in structured settlement annuities, billions in tax exemptions — as well as the opportunity for continuing income security — are squandered every year.

Is a Post-Injury Financial Portfolio “Balanced” Without a Structured Settlement?

While frequently considered an all-or-nothing option, the structured settlement annuity can be used for whatever portion of the settlement, judgment or award that the injured individual chooses.  As with all responsible portfolio plans, balance is a critical value.

With a structure, an injured individual can tailor and fund her entire financial future. In addition to continuing payments, what is scheduled today will be there, exactly as needed, for a lifetime of tomorrows. It is possible to establish a college fund, for example, as part of the settlement that would both schedule and quantify tuition — all tax-free.

Given its value, security and stability, is any post-injury financial plan truly “balanced” without taking advantage of structured settlements? As a highly unusual, tax-free, benefits-exempted gift from the U.S. Congress to the nation’s injured individuals, structures should be a critical feature to secure their financial futures.