Anyway, I wasn’t able to write anything last month because I was on vacation for three weeks. I went to the Philippines and Hong Kong as we usually do. I’m telling you this because it has something to do with what I am writing about today.

As I usually do whenever I go somewhere, I like to observe everything. I not only try to enjoy the sights and the place, but I always try to look at the town or country from an economics point of view. I know, I’m weird that way.

For my clients who are from the Philippines, here is what I observed.

Philippines

Compared to when I was in the Philippines back around 2009, when Gloria Arroyo was still President. The Philippines today seems calmer with Noynoy Aquino as President. Calmer in a sense that there isn’t much tension in the area of politics like it was back in 2009. Back then, you almost hear that there’s going to be a coup d’etat just around the corner.

While most people will tell you that Noynoy is a know nothing President, in my opinion, a know nothing is better since people can go about their business without interference from the government.

It also seems to me like President Aquino’s promise to curb corruption is somewhat working. I did not hear one siren or “wang wang” in my three weeks there and the authorities did not seem as abusive as they were back when Arroyo was President. Interesting enough, the customs officials at the airport did not even ask for money for coffee or “pang kape” in Filipino parlance. This was in sharp contrast to when Arroyo was President where everyone was asking for “money for coffee”, even the person getting your baggage claim stub.

Noynoy Aquino may not be a smart President, but at least he did create a climate where the government employees would not be so blatantly abusive or corrupt. This is my observation in the short time I was there so it may not be entirely accurate. But it was notable for me.

An interesting thing to note is that the Philippine stock market is actually one of the best performing market since the financial crisis in 2008. It was up compared to every other markets around the world. It’s holding steady now, but it was impressive how good the Philippine market has performed in the last 3 years.

Would it continue doing well going forward? Hard to say. The Philippine stock market is always influenced by “hot money” or money from foreign investors. The reason the Philippine market went up is because foreign investors had nowhere else to go. So they found the Philippines to be the least exposed to the worldwide financial crisis so they all went in there. Good for the Philippine market, but also prone to sudden drops when all these hot money flow out. Which may happen in the near future if these foreign investors keep losing their money in Europe and the US. They will sell everything to keep afloat, even their holdings in the Philippines if they need to.

The biggest problem facing the Philippines right now I believe is inflation and overcrowding. Food and energy prices is really high now. The Philippines has the highest electricity rates in Asia. This is going to dampen the competitiveness of the manufacturing sector.

Overcrowding is another big problem. I’m talking specifically about overcrowding in Downtown Manila or the Binondo area where Chinatown is located. I cannot believe how many malls they have built in that area. These malls are not your regular malls like Richmond Centre or SM. They are of course what we call “Tiangge” or bazaars. It used to be that there was only Tutuban and Ilaya and Divisoria Mall. In addition to that, they now have 168, 268, 368, 568 (they don’t like 4) and so on.

Of course, they sold of an old public school called Jose Abad Santos High School and built in its place mixed commercial and residential building called Cityplace.

I cannot believe how bad traffic is now in Binondo. It’ll take you 30 minutes just to drive one block! And that one block will actually take you 5 minutes if you walk.

Another thing I learned is that they are building the Anchor Sky Suites in the middle of Chinatown. Once built, the 57 storey luxury condominium will the tallest building not only in Binondo, but in any Chinatown around the world outside China.

While that may sound impressive, if you’re from Binondo, you know this is going to be a major headache. It is going to be built along Ongpin Street near T. Alonzo. Everybody knows Ongpin is a one lane street. Can you imagine the traffic? Also, this condominium will have 346 residential units. This is a disaster.

Why do I say it’s a disaster? Let’s look at some facts. The average affluent Filipino-Chinese family will have 3 to 4 family members, then add to that one or two maids. So you are looking at an average of 4 to 6 people per unit. Let’s be conservative and say there’s 4 per unit. Multiply that by 346 you get 1,384 people. Can you imagine the amount of waste, energy and traffic that’s going to be created by that one building alone? If you think the rats in Chinatown are big, they’re about to get bigger. By the way, they’re as big as a cat now.

Hong Kong

I went to Hong Kong for only 3 days, so I can’t really say I know about Hong Kong that much. But here’s what I’ve observed. Hong Kong is getting really expensive now compared to when I was there two years ago. This is due to the increase in tourist from China who are driving up prices in Hong Kong.

In the newspapers, they are talking about the high inflation Hong Kong is experiencing which is hurting a lot of lower income people because of higher food cost. Another thing I read in the newspaper is the importation of gold in Hong Kong increased six-fold compared to last year. The big jump in gold imports is due to buying by the Mainland Chinese who goes to Hong Kong and buy their jewelry and gold there.

What’s interesting to note is that while there was a 6-fold increase in gold imports in Hong Kong, the month of September was one of the worst month for gold when gold went from $1,900 a ounce down to $1,600 an ounce. This shows the disconnect of the futures market with the actual physical market in gold.

Another thing that caught my eye was the jewellery store Chow Tai Fook. For those of you who don’t know, Chow Tai Fook is a major jewelry store chain in Hong Kong. When I went to Hong Kong 2 years ago, I only saw maybe one store in a 5 block area, maybe less. Now, Chow Tai Fook is everywhere, it’s like Starbucks where you can see a store every two blocks (I may be exaggerating here). But I cannot believe how many of these stores I saw in my last trip there. I believe the explosive growth of this company is due to the demand of Mainland Chinese for quality jewelry. In fact, Chow Tai Fook is actually going public. Chow Tai Fook is looking to raise $2.8 billion in it’s IPO and legendary investor George Soros is investing $50 million worth of shares in the IPO.

Hong Kong is still a very dynamic city. There are still a lot of construction going on like it was two years ago. There does seem to be a lot of people from China shopping there compared to two years, ago so this is good for the retailers.

Conclusion

So what does these stories have to do with investing or your portfolio? A lot actually. I’ve learned that investing is not something done in a vacuum. What happens in one country affects another country or an asset in another country.

For example, the increase in food prices in the Hong Kong will translate to an increase in food prices everywhere. As demand grows, prices go up. Supply will go to where it can get the highest price and if there’s a short supply in another country, the prices there will have to go up or get nothing.

The increase in energy prices and overcrowding in the Philippines will affect the country and Asia politically, demographically and socially.

What’s interesting to see is that inflation is growing rampant not just in Canada but in Asia as well. If you think groceries are expensive now, wait till you see your grocery bill next year.

The worldwide inflation is driven by massive printing of currencies by every country. When inflation goes up, the biggest hit will be in commodity prices.

Here are a couple of charts which show what I mean.

As you can see from the charts above, sugar, beef and coffee prices have been going up in the last 5 years. You may see some downward movement in the price from time to time, but in general, the trend has been up.

Take a look at these charts.

These are the charts for gold, silver and oil. Same thing, the trend is up. The trend is up due to demand and inflation. Oil went down during 2008 because of the financial crisis. People expected global demand for oil to decrease. But you can see that it’s now back around $100/barrel again.

What does this all mean? In my opinion, we’re going to see a lot of inflation going forward. There is no way that the massive amount of bailouts and money printing by the major central banks won’t affect the prices we pay. You will hear a lot of opinion about inflation, but the lesson I take here is what happened in Zimbabwe where the government printed massive amounts of money which ended up costing you Z$100 billion to buy 3 eggs.

Think this isn’t going to happen? For our sake, I hope not.

The problem in Europe is cause to worry. The European bond market is very volatile because you don’t know which country is going to report a problem next. Add to that the massive bailout six central banks did yesterday to ease the sovereign debt-crisis in Europe, this means even more money printing. Although they call it a loan, I call it a bailout.

Where should you invest right now? GIC looks safe, but in reality, you’re getting a negative real rate of return on GICs. The highest rate you can get right now in the GIC is 2.65% if you lock in for 5 years. The inflation rate in October 2011 is 2.8961%. So that means, that even if you lock in your money for 5 years, you’re still losing out earning -0.2461% on your investments.

Before I go further, real rate of return to put simply means the rate of return of an investment minus inflation.

So if you invest in a 2 year GIC earning 2.00% and inflation is 2.8961%, you get 2.00 – 2.8961 = -0.8961%. If you’re losing money by saving it, you might as well spend your money right away instead of saving it.

The only solution to this is to find a higher yielding investment doing better than inflation. What is the right investment? There is no single answer for this and we will have to sit down with you one-on-one because everybody has a different investment objective and the answer will have to be tailor made for your individual objective.

These changes will affect you if you are:

• an employee who contributes to the Canada Pension Plan (CPP), whether you are just starting your career or you are planning to retire soon;
• a self-employed person who contributes to the CPP;
• between the ages of 60 and 70 and you work while receiving your CPP retirement pension (or if you work outside of Quebec while receiving a Quebec Pension Plan (QPP) retirement pension); or
• an employer who contributes to the CPP on behalf of your employees.
  You will not be affected by these changes if you started receiving a CPP retirement pension before December 31, 2010, and you remain out of the work force.

The CPP operates throughout Canada, except in Quebec, where the Quebec Pension Plan (QPP) provides benefits. These changes do not apply to the QPP. For information about the QPP, visit the QPP Web site.

What are the changes?

The following changes to the CPP will be phased in gradually between 2011 and 2016, with the first major change occurring in January 2011 for people retiring after age 65:

• Your monthly CPP retirement pension amount will increase by a larger percentage if you take it after age 65 (gradually from 2011 to 2013).
• Your monthly CPP retirement pension amount will decrease by a larger percentage if you take it before age 65 (gradually from 2012 to 2016).
  The number of years of low or zero earnings that are automatically dropped from the calculation of the CPP retirement pension will increase (in 2012 and 2014).
• You will be able to begin receiving your CPP retirement pension without any work interruption (starting in 2012
• If you are under 65 and you work while receiving your CPP retirement pension, you and your employer will have to make CPP contributions. (or if you work outside of Quebec while receiving a QPP retirement pension) (starting in 2012). These contributions will increase your CPP retirement benefits (starting in 2013).
  If you are age 65 to 70 and you work while receiving your CPP retirement pension, you can choose to make CPP contributions (or if you work outside of Quebec while receiving a QPP retirement pension)(starting in 2012). These contributions will increase your CPP benefits (starting in 2013).

These changes will improve retirement flexibility for working individuals in Canada, enhance pension coverage, and improve equity in the CPP.

On April 1, 2010, administrative penalties under the Canada Pension Plan and the Old Age Security Act came into force.

The penalty provision imposes monetary penalties on individuals (an applicant, a beneficiary, or a third party) who receives or tries to receive benefits by knowingly providing false or misleading information or omitting information.

The interest provision came into force on April 1, 2011. This provision gives the Minister of Human Resources and Skills Development Canada the authority to charge interest on monetary penalties and on overpayments that are subject to a penalty.

Service Canada’s disclosure policy allows individuals to come forward and correct inaccurate or incomplete information.

About the interest provision:

• The rate of interest is the Bank of Canada average rate plus three percentage points. Interest is calculated daily and compounded monthly.
• Interest starts accumulating 120 calendar days after the Department has sent a demand for payment in writing.
• This 120-day period allows individuals the time to appeal the decision that originally led to a penalty and/or to negotiate a repayment schedule.
• The Department will not charge interest on either the penalty or the associated overpayment amount as long as there is a monthly payment made according to a repayment schedule.
• You have the right to appeal the penalty amount and/or the circumstances that gave rise to the penalty by requesting a reconsideration of the decision. To do this, you must make a request in writing within 90 days of having been notified of the penalty.

Here are links more information about the changes to CPP:

• Factsheet: Changes to Canada Pension Plan
• Canadian Retirement Income Calculator
• Retirement Planning
• Seniors’ section of Canada Benefits
• Seniors Canada
• Government of Canada news for Seniors
• New Horizons for Seniors
• Federal Budget

Here’s a link to a video explaining the changes to CPP.

Part of the debt deal is to cut the US deficit by at least $2.1 trillion over 10 years. If you divide that, it’s around $200B a year. To put that amount in context, in 2010, the interest alone paid by the US on its debt is $164B. The Department of Defense budget in 2010 is $663.7B. In short, the spending cuts are insignificant.

Here’s the sad part, the budget cut is not really a cut in spending. According to Presidential hopeful Ron Paul, the budget cut is akin to a family “saving” $100,000 in expenses by deciding not to buy a Lamborghini, and instead getting a fully loaded Mercedes, when really their budget dictates that they need to stick with their perfectly serviceable Honda.

I know a lot of people are confused on what this US debt crisis is all about and all the rhetoric by both the Republicans and Democrats are making it harder to understand. But here’s what the US debt crisis is in simple terms.

Let’s say a father is making $60,000 a year but the family is spending $100,000 a year. All they have been doing is paying the interest on their credit cards. In the meantime, they keep spending money on cars, gas, luxury items but not on building new businesses. Eventually, their debts grows to a point where they will default on their debt and may have to file for bankruptcy. But at the last minute, the father says, don’t worry, I’ve solved our problem. I just got a new credit card!

That my friends is the US debt situation in a nutshell.

So what does this mean for your investment? Well, if you’re looking at the stock market right now, you’ll know all the world markets are down. Why? The US agreed to cut spending, but they did not raise taxes to increase revenue. So you got the father cutting down on food cost, medical cost, etc. But the mom did not find work to increase income and help pay for the debt. Is it a wonder why the market is reacting badly? How long do you think the US can keep this up? They’re going to reach another debt ceiling in 2012. What then?

The Dow Jones is now below 12,000 again, the same level it was back in June. What’s interesting is, gold is now at its all time high of $1656.60 as of this writing. It was boosted by reports that the Bank of Korea announced that it bought gold for the first time since 1998. Reminding investors of gold’s appeal as a safe haven.

Investment in gold is not similar to investing in real estate or stocks. It pays no rent or dividend, it’s a static investment. When you invest in gold, you are merely protecting the value of your money or buying power. When you see the price of gold going up, it’s not because the cost of gold is rising, it’s because the value of the currency is decreasing and gold basically is a hedge against the decrease in value.

Here’s an example.

If you compare the value of gold to value of other real assets, you’ll see that they’re pretty much the same or better.

In May 2006, the average home price in Vancouver is around $518,716. Gold is at CAD$756.92.40 per oz.

On May 2011, the average home price in Vancouver is around $770,000. Meanwhile, gold is at CAD$1,417.27 per oz.

In currency terms, the cost of buying an average home in Vancouver has increased by 48% from 2006 to 2011. But in gold terms, you can buy an average home for 685 oz of gold in 2006 ($518,716/$756.92) but in 2011, you only need 543 oz of gold ($770,000/$1,417.27) to buy an average home in Vancouver or a drop of 20.7% in gold terms.

Let me clarify that by explaining what I mean by currency terms.

In the circles of gold investing, they differentiate currency and money. When they talk about currency, they talk about the paper currencies we use like the US Dollar or Canadian Dollar. When they talk about money, money is a medium of exchange which can be gold, silver, cows, coffee, etc. Currency is Fiat money or backed by promise of the government to pay. But money is backed by a physical asset like gold or silver.

So when I say in currency terms, it means part of the cost of the increase in housing is due to the devaluation of the currency. So in actual money or gold terms, the cost of housing has actually decreased.

How about in silver terms? Silver price back in May 5, 2006 was at CAD$15.42/oz and at CAD$33.08/oz on May 6, 2011. In 2006, you needed 33,604 oz of silver to buy an average Vancouver home but only needed 23,277 oz of silver in May 2011 which equals to a drop of 30.7% in silver terms.

Note that the May 6, 2011 price I’m accounting for silver is after the margin call requirement which resulted in a 23% in silver prices.

If you account for the price of silver today August 2, 2011 at CAD$39.21. You only need 19,638 oz of silver to buy an average Vancouver home or a 41.5% drop in home prices in silver terms.

So in terms of gold and silver, the prices of homes in Vancouver has actually dropped.

Gold and silver is still considered a speculative investment. In the mutual fund world, normally, when you invest in precious metals funds, you are investing in mining stocks, hence it is considered speculative. However, you may still want to consider investing in these assets either in funds in the near term while the world economy is in a turmoil to protect your buying power. As with any investments, there are of course no guarantee these prices will continue going higher. Eventually, all investments follow a bull and bear cycle and it is impossible to predict when the top or a bottom of a market is going to happen.

As I mentioned in my previous e-mails, after the huge price drop in silver from $47.015 on May 2 to $36.35 on May 5, 2011. The price of silver is now back up to US$40.21 today.

Interesting isn’t it?

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Insurance Trivia

Here’s something else that interesting.

Do you know how much your body part is worth? Here are some examples celebrity insurance policies:

• Shirley MacLaine, who is widely known for her beliefs in reincarnation and extraterrestrial life, owns a $25-million policy protecting her acting fortune against an alien abduction, according to Parade Magazine.
• When the iconic late ’70s band Kiss was at its peak, Gene Simmons had his extra-long tongue—rumoured to be surgically enhanced—insured for $1 million.
• In 2008, the New York Daily News and several other media outlets reported that Welsh pop singer Tom Jones had his chest hair insured for $7 million.
• According to ABC News, country star Dolly Parton has insured her 42-inch bust for $600,000.
• Aquafresh insures Ugly Betty’s America Ferrera’s teeth for $10 million.
• Several media sources have reported that the Rolling Stones’ guitarist, Keith Richards, has insured the middle finger on his left hand for $1.6 million.

(source Elliott Special Risk LP)

First let’s look at education cost.

How much does it cost?

The average cost of University education in BC is around $4,300 a year. Here’s a list of average cost of Universities around BC for 2010/2011 from the Province of British Columbia website.

I also found this calculator from the University of British Columbia to estimate the cost of going to UBC.

Including books and student fees, it currently cost around $7,200 a year for a science major. It’s cheaper as a Fine Arts major at $6,500. Engineering major is around $8,500. But a law major would need $13,100 a year and to be a doctor will cost almost $20,000 a year.

Luckily for British Columbians, tuition fee increases has been limited to just 2% per year which is pretty manageable for most families. Whether this trend continues in the future, we’ll have to wait and see.

On average, a four year education would cost a total of $17,200 including books but not including any other miscellaneous fees like travel, personal expenses, board and lodging (if living away from home).

So depending on what course your child will take and which University they’re going to, we can assume that your child will need between $20,000 to $50,000 for a four year course.

So how will the child pay for his or her University? There’s several options:

1. The parents can pay for it.
2. The child can work part time to help pay for part or all of the cost
3. They can get a student loan, or
4. The parents can save money in an RESP.

There’s not much to discuss on the first two options, so let’s go to the third option, getting a student loan.

Student Loans

If the student qualifies for a student loan, according to the Canada Student Loan Act, they won’t have to repay the loan while they are a full time student. Once they cease to be a full time student, either by graduating or just dropping out of college, they have to start repaying the loan before the last day of the 7th month after ceasing to be a full time student.

For the months between graduating and the 7th month, interest will be applied to the student loan but the student is not required to pay yet. They will be required to start paying off the loan on the last day of the 7th month of graduating. So there are accrued interest in the loan for the first six months from graduating or ceasing to be a full time student.

I know it’s a little hard to understand, but let’s just put it this way. If the child graduates on June 15, 2011. From July 2011 to December 2011, interest will be charged on the loan but the child is not required to pay for it. However, the child is required to start paying off the student loan before the end of January 31, 2012.

Canada Student Loans carries a maximum fixed interest rate of the prime rate + 5% or a maximum floating rate of the prime rate + 2.5%. Provincial student loans have different interest rates varying from province to province.

Here’s a link explaining how to pay off a student loan.

RESP

The other option is to set up an RESP or a Registered Education Savings Plan for the child.

For example, the parents can setup an RESP and contribute money into the plan. They will then be eligible for the following:

Canada Education Savings Grant (CESG)

• A grant that equals 20% of the first $2,500 of their annual contribution up to a maximum of $500 a year.
• Grant is given until the end of the calendar year the child turns 17.
• Lifetime amount of $7,200.

Canada Learning Bond (CLB)

• For parents who’s child is born after December 31, 2003 and the parents qualify for the National Child Benefit Supplement
• One time contribution of $500 to an eligible RESP.
• Additional $100 for each year of eligibility until the child turns 15.
• Up to $2,000 in total.

The parents may qualify for additional CESG depending on their income.

Those living in Alberta and Quebec may qualify for additional benefits.

Basically, everyone qualifies for the Basic CESG of 20% on the first $2,500 of annual contributions. The other grants are based on when the child is born and income of the parents.

So if your child is going to University in the next 5 years, the aim is to save between $20,000 to $50,000 to cover a child’s education.

There are special rules to follow when you want to start an RESP for a child that is between 15 to 17 years old.

In order to continue receiving the Canada Education Savings Grant after age 15, certain contributions must have been made to the RESP (and not withdrawn) by December 31 of the calendar year in which your child turns 15.

They are:

1. Total contributions of at least $2,000, or
2. Contributions of at least $100 a year or more in any 4 previous years.

Let’s say your child turns 15 on July 2011. That means by December 31, 2011, you must have either contributed at least $2,000 in total to your child’s RESPs, or you must have put in at least $100 annually in any of 4 previous years (they don’t have to be consecutive years).

In Summary

The cost of education in BC at this time is manageable. The child can work part-time, get a student loan or the parents can contribute into an RESP.

Some parents who can’t save for the full cost of education either because of their income or don’t have enough time to save because they have older children may still want to contribute as much as they can into an RESP. The 20% grant and helping your child pay for their University education is the best return on investment you can get.

Home insurance rates are based on several factors. The factors that affect your rates directly are:

1. Location of your home
2. Cost to rebuild in your area
3. Materials used
4. House features
5. Dollar amount of coverage

Your location is usually the first place companies will use to determine the cost of your insurance premiums. If you live in an area where there has been a lot of claims, then your premiums will be higher compared to a similar home two blocks away from you if there has been no claims in that neighborhood.

If you live in an are where the cost to rebuild is higher like on the islands with limited access or materials has to be shipped by ferry. Then the cost to rebuild is higher than one in the city.

If your home uses high end materials like hardwood floors, solid oak wood cabinets, etc. Then naturally, the cost of materials to rebuild your home is more expensive than those which uses vinyl carpet or laminate floors.

Having features like stained glass windows, skylights, two kitchens, a huge bathroom will bump up the cost to rebuild your home

All these factors determine what is called the replacement cost for the building or the house structure.

With the cost of raw materials going up as well as gas prices. It is costing more and more to insure your home and keep the insurance companies profitable in the event of a claim.

You may be asking yourself, I live in a strata condo/townhouse. I’m only insuring my contents, so why is my insurance premiums still going up?

There are other factors that affect insurance premiums other than those mentioned above. These are determined by the insurance companies and are their internal basis for factoring thee premiums they charge. These are:

1. Inflation
2. Replacement Cost
3. Capital reserve requirements
4. Investment returns

Inflation rates determine if your coverage increases a little or a lot. Every year, your insurance coverage goes up by a few percent called the “inflation factor” or “inflation index”. Just like your groceries, the cost of your groceries goes up every year by a few percent.

For example. if you are insuring your personal property (contents) for $50,000. It is logical to assume that next year, the cost to replace your property is going to be higher than $50,000. It may cost $50,200. Since your insurance coverage is higher, your insurance premiums also go up.

“But my stuff is old, why are the insurance companies increasing my coverage?” you may be asking. The reason is, when the insurance company replaces your stuff in the event of a claim. They don’t buy you used stuff. They buy you brand new stuff like furnitures, TV, clothes, couch, etc.

Since it may be 10 years after your first insure before you have a claim. Naturally, prices 10 years from now are going to be higher than today. The only properties that usually go down in prices are TVs. But 10 years from now, they will no longer have the same model TV that you currently have. So the company has to replace it with a newer TV. But they will replace it with the same brand, size and the model closes to what you had before you had the claim. That’s why your insurance coverage goes up every year.

One thing you have to remember though, the percentage increase in your insurance coverage is not proportional to the increase in your insurance premiums because there are other factors affecting the premiums.

The company’s capital reserve requirements can affect the rates you pay as well. Insurance companies are required by regulators to prove they have enough capital reserve to pay claims. Meaning, their assets must exceed their liabilities (risks insured). If they experience a year or two with a lot of claims or they have one really large claim, those claims may eat up their capital reserve which in turns reduces their assets.

When their assets are reduced, they have to bring it back up to the reserve requirements. This is similar to your condo corporation’s reserve funds. If your condo corporation’s fund are low, expect your strata/condo fees to go up to build up the reserve.

Insurance companies also invest the premiums they collect until a claim is paid. Because these premiums are expected to be paid out, the insurance companies cannot invest in high risk investments like stocks. They are limited to liquid investments like bonds. Because we are in such a low interest rate environment, insurance companies have a hard time making money from these investments. This low return makes it harder for companies to maintain their reserve requirements so they have to make this up by increasing their premiums.

Normally, a year or two of low interest rates won’t affect your premiums by much. But we’ve had low interest for over 2 years now and the insurance companies don’t expect the interest rates to go up by much in the near future. This in turn translated to an increase of between 10 to 20% in your insurance premiums.

Just a reminder, you have to file your taxes by April 30, 2011.

U.S. Outlook

The rating agency S&P 500 issued a warning Monday, April 18, 2011 on US government debt. It said that there is a 33% chance it would lower the United States credit rating from AAA in the next two years if Washington failed to manage the country’s debt.

This sent the Dow Jones, S&P500 and the TSX lower.

S&P said it has little confidence that the White House and Congress will agree on a deficit-reduction plan before the fall 2012 elections. By that time, the measures won’t go into effect until the fiscal year 2014.

This does not look good for the U.S. The ratings done by the three major ratings agency is very important and the AAA rating is one most sought after rating by both investors and debt issuers.

The reason this is important is because most big pension funds, hedge funds and mutual funds have in their mandate to only buy “AAA” rated bonds. If the U.S. loses its “AAA” rating, that means these fund companies will have to sell all their bond holdings which amounts to billions of dollars. This will immediately crash the U.S. bond market and who knows which other countries will be affected by this.

This has been pretty much my concern over the last year. While the U.S. stock market recovery has been very good and a lot of U.S. corporations have been reporting record earnings, the problem still lies with the U.S. government.

Even if the company does well, a major news that affects the U.S. market like this one will eventually affect the individual companies.

In short, investors are still jittery about the U.S. recovery. They know that the U.S. has been printing money recklessly and that is never a sustainable way to improve an economy.

Now what?

So where do we go from here? Depending on how bad the market reacts to this news. It may be a good time to start moving some money into the U.S. again. It’s always better to buy when the market goes down, as long as the fundamentals are strong (strong US company balance sheets).

If the U.S. rating does get cut, the U.S. dollar could also fall hard. This may send gold prices up.

These are of course just speculation on my part and is not meant as investment advice. It is just my way of thinking as a learning process about economic history.

What is currently happening may or may not affect you and your investment situation should be assessed individually according to your investor profile.

Please check these websites:

http://choicez.biz/FraserValleyEmergencyResources.htm

http://www.pep.bc.ca/hazard_preparedness/earthquake_preparedness.html

http://www.getprepared.gc.ca/index-eng.aspx

http://vancouver.ca/emerg/

http://www.cooperators.ca/static/pdf/en/Prepare-for-the-unexpected.pdf
　

How to survive a major Earthquake:

http://www.victoria.ca/cityhall/pdfs/departments_vepnei_ind_prepare.pdf

http://www.taekwondo.bc.ca/Emergency%20Preparedness.pdf

Check this PDF file:

http://www.getprepared.gc.ca/_fl/guide/national-eng.pdf

This year, 2011, marks the year the first of the baby boomers turn 65. Baby boomers are those who were born between 1946 to 1964. So in this edition of the newsletter, I thought it would be good to talk about retirement since we’ve just finished the RRSP season.

When you retire, you qualify for some government pension or benefits like CPP, OAS and GIS. So what are they and how do they work? Here’s a summary.

CPP – Canada Pension Plan

A CPP retirement pension is a monthly benefit paid to people who have contributed to the Canada Pension Plan. The pension is designed to replace about 25% of a person’s earnings from employment, up to a maximum amount. For 2010, the maximum amount it was $934.17. Not very much is it?

But there’s good news! CPP has increased their maximum benefit. For 2011, the maximum CPP benefit you can get is $960.00. Woohoo!

And if you qualify, you can get Old Age Security (OAS) benefit as well, up to $524.23 and Guaranteed Income Supplement (GIS) of $661.69 for a total of $2,145.92.

If you have no mortgage and no debts, you can probably live comfortably on $2,145.92 per month today.

But wait! Before you think that your retirement is taken care of, consider this; if you are living in the Greater Vancouver Area. You are living in the city that has highest cost of living across all provinces.

If you also think you qualify for the maximum for CPP, OAS and GIS. Consider this as well. To be eligible to receive the maximum CPP, there are 2 criterias: Time and Contribution.

Time
The first criterion is that you must contribute at least 40 years between 18 to 65 years old. If you migrated here after you are 18 or started working only after you finished college, then you won’t get the maximum.

Contribution
Every year you work and contribute to CPP between ages 18 to 65, you add to your benefit. To qualify for the maximum, you must not only contribute to CPP for 40 years but you must contribute enough based on what CPP calls the Yearly Maximum Pensionable Earnings (YMPE). For 2010, the YMPE is $47,200.

If you make less than $47,200, you don’t qualify for the maximum because you haven’t contributed the maximum CPP.

You only qualify for the maximum if you retire at age 65. If you decide to retire earlier and get your CPP, your benefits are reduced by 0.5% for each month before age 65 to a maximum of 30%.

So if you decide to retire at age 60, you get 30% less CPP or if you retire at age 63, you get 12% less (0.5% x 24 months).

On the other hand, if you retire after age 65, you get 0.5% more for each month after age 65 to a maximum of 30% or age 70.

Here is a link on how your CPP is calculated.

http://www.servicecanada.gc.ca/eng/isp/cpp/soc/50-70/yourcpp.shtml

If you took some time off work due to pregnancy, you can apply for the child rearing drop out to increase your benefit.

http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/chidropout.shtml

If you were not working or you just happen to migrate to Canada after 18 years old, CPP takes off the low earning years in their calculation to help increase your qualified CPP benefit.

The CPP protects your pension by making certain adjustments before calculating 25% of the earnings you contributed over your working life. For example, some low-earning periods during your career may be “dropped out,” so they do not reduce the amount of your pension.

OAS – Old Age Security

The Old Age Security program provides you with a modest pension at age 65 if you have lived in Canada for at least 10 years.

The Old Age Security program is financed from Government of Canada general tax revenues.

You may be able to collect OAS indefinitely outside Canada if your OAS has been approved and you’ve lived in Canada for at least 20 years after age 18. Otherwise, payment may be made only for the month of a pensioner’s departure from Canada and for six additional months, after which payment is suspended. The benefit may be reinstated if the pensioner returns to live in Canada and meets all conditions of eligibility.

http://www.servicecanada.gc.ca/eng/isp/oas/oasoverview.shtml

GIS – Guaranteed Income Supplement

The Guaranteed Income Supplement provides additional money, on top of the Old Age Security pension, to low-income seniors living in Canada. To be eligible for the GIS benefit, you must be receiving the Old Age Security pension and meet the income requirements.

http://www.servicecanada.gc.ca/eng/isp/pub/oas/gismain.shtml

Payment Rates

Here are something interesting facts to know.

The average CPP benefit in 2010 is $504.50. The average OAS is $490.47 and the average GIS is $452.04 for a total of$1,447.01.

That’s a far cry from $2,145.92. I’m not even sure if you can live off $1,447.01 a month even without a mortgage.

But…

The CPP benefit is indexed to the Consumer Price Index (CPI) and is adjusted once a year.

http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/cpicpp.shtml

OAS is indexed to the Consumer Price Index (CPI) and is adjusted four times a year.

http://www.servicecanada.gc.ca/eng/isp/oas/tabrates/cpioas.shtml

Here are the current rates for CPP and OAS

http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/rates.shtml

http://www.servicecanada.gc.ca/eng/isp/oas/oasrates.shtml

Qualifications

GIS is intended for low-income seniors living in Canada. (The link is based on 2006 rates)

http://www.servicecanada.gc.ca/eng/isp/pub/oas/lis/qualify.shtml

For 2011, if you make over $15,888 a year, you don’t qualify for GIS.

http://www.servicecanada.gc.ca/eng/isp/oas/oasrates.shtml

If your income is over $67,668, your OAS is going to be reduced or “clawed back”. You will have to pay back 15% of the excess of this amount. Here’s a sample calculation.

http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/oasrepay.shtml

Taxes

Like most retirement income, your CPP benefit is considered a taxable income.

http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/retire.shtml#taxation_cpp_benefits

OAS is also taxable

http://www.servicecanada.gc.ca/eng/isp/pub/oas/oas.shtml#five

GIS is not taxable, but must be reported in your tax return.

http://www.servicecanada.gc.ca/eng/isp/pub/oas/gismain.shtml#f

It’s funny that when you get CPP and OAS which is already low, it is also subject to tax. And when you have more income, your OAS is “clawed back” and you don’t get GIS.

RRSP withdrawal is considered an income and is taxed. Any income you receive from your RRSP affects your OAS and GIS if you go over a certain income level.

Why is it that the government penalizes (taxes) you on your savings and then cuts your benefit (OAS and GIS) if you have a lot of savings? That makes it less attractive to actually save right? Yes and no.

Does it make you wonder if it’s even wise to contribute to your RRSP?

The answer is…it depends.

It depends on how much you’ve saved and your individual situation. You may want to contribute to an RRSP to reduce the taxes you pay today. Sometimes, it may not even be advantageous to contribute to an RRSP if you have low income.

Because of this, a new savings plan came out called the Tax Free Savings Account or TFSA.

The TFSA is a flexible, registered general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs.

There are several investment options in a TFSA such as mutual funds, GICs, stocks and bonds. But remember, when you invest in stocks in a TFSA, like you cannot use capital losses inside a TFSA to offset future capital gains.

Income and withdrawals from a TFSA is tax free and does not reduce any of your government benefits like OAS, GIS and the Canada Child Tax Benefit.

So the final question is, will CPP be there when you retire? Here’s a link to the CPP Investment Board explaining the status of CPP.

http://www.cppib.ca/News_Room/News_Releases/nr_01200401.html

If you like to know more, talk to your financial advisor.