Retirement Planning
for the
Canadian Investor
Design by
CY7 Computer Services
Affiliated with Sentinel Life & Sentinel Financial Management Corp.
May/June - 2001
Commentary - Hans H. Mathisen
Buy Now, Pay Big time Later - LIFE LETTER for May focuses on a problem many of us have: The high cost of servicing debt. And many of us don't have to worry about interest expenses dragging us down. Many clients of Mathisen Financial, inc. had the cash required to invest when the markets hit their lows not long ago. And these clients are already reaping the rewards.This is not Market Timing. It's simply Good Timing.
Where to Get the cash to Save a Business - This is the subject of LIFE LETTER for June. We have seen this happen several times: One of the owners or shareholders of a privately owned company dies. The deceased shareholder's widow demands that the family income continues, even though she is not contributing to the business. Suppliers and customers become uneasy and uncertain. Employees get restless. Creditors demand that company loans and lines of credit be paid. Would a large injection of cash help in this situation? You bet it would!
THE STOCK MARKETS - While stock markets have been flat lately, here are some good news:
Since 1944: in bear markets, world stocks have declined on average by 28%. In the following bull market, stocks have risen on average by 146%. Over a period of 57 years!
Annual Index Returns - this table goes back 20 years, and it shows that the average annual return in a globally idexed portfolio would have yielded 14.24% per annum over the past 5 years and 11.87% over the past 10 years. The 20-year average annual return: 12.18%.
The conclusion is: Don't worry because the markets are down. The markets are already on the way up again. And if you have any money available, now is the time to invest. Please call me with questions you may have.
HAPPY INVESTING!
Sincerely,
Hans Mathisen
Buy
Now, Pay Big Time Later
Brent and Darlene really enjoy their
toys, and their lifestyle. In thc last few years, they bought themselves
a big screen TV, a stereo system, two expensive new vehicles, a ski
boat and took a tropical vacation, mostly on credit. They also used
their credit cards to pay for numerous restaurant meals, theatre tickets,
hockey games and other expensive outside entertainment. It wasn't long
before they were carrying a balance from month to month. The credit
charges and payments quickly became a burden.
They received their quarterly RRSP statements and were pleased to see that, thanks to their regular monthly contributions, they had accumulated a tidy sum. But because they felt crushed by their credit card debt they considered cashing in their RRSPs to pay it off. To see if this made sense, they made the following calculations:
-
$642 monthly for five years is needed just to pay off their present $25,000 of credit card debt, assuming no new purchases. The interest rate on it is 18.5%, so $13,520 of their total payments goes entirely to interest. And any further purchases on their card accumulate interest charges as soon as they are added to the bill. So they don't intend to run up their credit card bills any further.
-
Moving their debt to a low-interest credit card can cut their rate to about 10.5% and then their payment for five years would be $537 per month. The total interest over the five years would then be $7,220, but this card has a $29 annual fee, which brings the five-year total cost to $7,365.
-
Consolidating their debts with an 8.75% bank loan requires only $512 monthly for five years. This reduces their total interest cost to just $5,720 and keeps their tax-sheltered RRSP funds intact.
-
The RRSP alternative is the most expensive, because to net $25,000 after taxes from it, they have to withdraw about $45,000. They would then lose out on the tax-sheltered growth of their money. Assuming 8% compounded annually, their present $45,000 grows to about $308,181 in 25 years. That could then provide income of $28,870 a year for the next 25 years. And this assumes no further contributions!
Excessive debt is the biggest stumbling block between most people and their financial success. It is difficult to avoid spending excessively when billions of dollars are spent annually on clever advertising designed to persuade us to blow our hard earned money on things we don't really need.
Brent and Darlene had their eyes opened to the enormous cost of their spending and debt habits. They have cut up their credit cards and save more money regularly to pay future major purchases with cash, And they have also reduced their restaurant meals and outside entertainment. Their plan is to go from living beyond their means to living below their means so they can accumulate more money for their future.
Copyright
© 1999 Bowen Financial Inc. and Donald F. Pooley, Inc.
All rights reserved
Want to see how your savings can grow?
Call Hans Mathisen today at (306)242-7042.
or email - hans@mathisen.ca
Where
to Get the Cash to Save a Business
Ben and Jerry's business grew over the years
because of the different skills each brought to the company. When a
competitor's co-owner died, most of its customers came to them. The
competitor struggled to remain in business and eventually closed. This
caused Ben and Jerry to consider what would happen to their business,
and hard-earned success, if something happened to either one of them.
Without a doubt, they would want the business to continue. Their respective spouses and families will need income to continue living the lifestyles they are accustomed to. Employees will need to be assured that their livelihoods will continue. And the bank will need to know that loans will be repaid.
They soon realized that most of the problems caused by the death of a partner could be solved with cash. But where would it come from? How much would be needed? They explored their options:
-
Borrow from the bank. 'I'hey already owe the bank money and find it unlikely that the bank would lend more right after the death of a partner. Because a loan has to be paid back with after-tax dollars, plus interest, extra pressure will be placed on the survivor to increase revenue in a potentially limited market. A $500,000 loan over 20 years at 9% would cost the survivor $4386 per month, totaling $1,052,272.
-
Pay the widow and family over time. With the death of a partner also comes the need to find a replacement of the deceased's management skills. If the survivor also needs to continue an income to the widow and her family, there is the pressure to again increase revenues to meet these demands. The widow may also want a say in any business decisions that are made, especially if she is still a shareholder.
-
Bring a deceased's family member into the business. This may not be viable. A widow may not have the necessary skills or interest to do the job. A child may be too young, not interested or not skilled, either. Other family members may be reluctant to make a career change just to help a relative.
-
Find an outside buyer for the deceased's share of the business. Buying or selling a business takes time and potential buyers would be reluctant to pay full price if a shareholder has recently died. A competitor might be a potential buyer. But would they really like to see this business continue or have the best interest of the survivor in mind?
Use life insurance to meet the cash needs. Life insurance provides cash at the exact time it will be needed most and costs just pennies on the dollar. Proceeds can be used to buy out the widow, pay off the bank, cover the cost of a new manager and keep the company going while it adjusts to the loss of an owner.
Copyright
© 1999 Bowen Financial Inc. and Donald F. Pooley, Inc.
All rights reserved
Want to make sure your business can
continue ? Call today:
Mathisen Financial, Inc. (306)242-7042 or email Hans at hans@mathisen.ca.
| Annual Index Returns | ||||||||
| S&P500 | Euro- | Asian | Indexing the Globe | TSE300 | Nasdaq | ITG | ||
| Index | pean | Index | 40/40/20 | 20/40/40 | Index | Comp | 30/30/20 | |
| Index | Index with 20% | |||||||
| (Weighted Average) | Tech | |||||||
| Year | ||||||||
| 1981 | -9.73% | -1.87% | 5.32% | -3.57% | -0.56% | -13.86% | -3.21% | -3.06% |
| 1982 | 14.76% | 14.58% | -18.77% | 7.98% | 1.28% | 0.20% | 18.67% | 8.78% |
| 1983 | 17.27% | 34.24% | 17.96% | 24.19% | 24.33% | 30.35% | 19.87% | 23.02% |
| 1984 | 1.40% | 16.43% | 26.46% | 12.42% | 17.44% | -5.96% | -11.22% | 8.40% |
| 1985 | 26.33% | 35.34% | 25.61% | 29.79% | 29.65% | 20.54% | 31.36% | 29.90% |
| 1986 | 14.62% | 17.36% | 46.52% | 22.09% | 28.47% | 5.98% | 7.36% | 20.37% |
| 1987 | 2.03% | -15.81% | 1.40% | -5.23% | -5.36% | 3.07% | -5.26% | -4.91% |
| 1988 | 12.40% | 21.85% | 26.88% | 19.08% | 21.97% | 7.28% | 15.41% | 18.73% |
| 1989 | 27.25% | 31.75% | 19.77% | 27.55% | 26.06% | 17.11% | 19.26% | 25.51% |
| 1990 | -6.56% | -17.59% | -16.85% | -13.03% | -15.09% | -17.96% | -17.80% | -14.18% |
| 1991 | 26.31% | 15.94% | 20.15% | 20.93% | 19.70% | 7.84% | 52.03% | 27.11% |
| 1992 | 4.46% | 10.04% | 3.34% | 6.47% | 6.25% | -4.61% | 19.11% | 8.84% |
| 1993 | 7.06% | 30.68% | 64.76% | 28.05% | 39.59% | 28.98% | 14.75% | 27.22% |
| 1994 | -1.54% | -9.57% | -12.19% | -6.88% | -9.01% | -2.49% | -3.20% | -6.41% |
| 1995 | 34.11% | 15.28% | 10.90% | 21.94% | 17.29% | 11.86% | 39.92% | 24.98% |
| 1996 | 20.26% | 20.77% | 11.57% | 18.73% | 16.99% | 25.75% | 22.71% | 19.17% |
| 1997 | 31.01% | 36.44% | -22.43% | 22.49% | 11.80% | 13.03% | 21.64% | 20.07% |
| 1998 | 26.67% | 18.16% | -6.74% | 16.56% | 9.90% | -3.19% | 39.63% | 20.03% |
| 1999 | 19.53% | 25.55% | 52.58% | 28.55% | 35.16% | 29.72% | 69.10% | 37.86% |
| 2000 | -10.14% | -6.71% | -19.94% | -10.73% | -12.69% | 6.18% | -33.37% | -15.72% |
| 5-Yr | 16.47% | 18.22% | -0.28% | 13.84% | 10.72% | 13.64% | 18.62% | 14.24% |
| Average | ||||||||
| 10-Yr | 14.86% | 14.83% | 6.98% | 11.19% | 9.92% | 10.62% | 20.78% | 11.87% |
| Average | ||||||||
| 20-Yr | 12.05% | 12.95% | 9.29% | 12.00% | 11.54% | 7.09% | 13.33% | 12.18% |
| Average | ||||||||
The rates of return indicated above are historical annual rates of return, obtained from what we believe to be reliable sources. These rates of return are not a guarantee of future performance.
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Mathisen
Financial, Inc.
335 Redberry Road
Saskatoon, Saskatchewan S7K 4W5
Bus. (306) 242-7042 Fax. (306) 242-4314
Email: hans@mathisen.ca