Thursday, 5 November 2015

How Much do Interest Rates Need to Rise for Deferral of Annuity Purchase to Make Sense?

When interest rates are higher, annuity payouts are higher. The big question is, exactly how much would interest rates need to rise in order to justify deferring the purchase of an annuity? Not that much, is the answer, but there are some crucial differences according to age, sex and assumptions about portfolio returns. And there is a significant risk if interest rates do not rise but merely stay the same.

A 1.2% increase in interest rates over five years (i.e. 0.24% per year) could suffice to make it worthwhile for a man, taking money out of an RRSP or RRIF, to defer buying an annuity for five years from age 60 to 65.

The table below shows the results of our calculations. The base case of the assumptions we think most logical is shown in the left most column, along with other possible assumptions for male annuities and the base case for women in the right-most column.

In all cases our approach is simply to make the ultimate lifetime income the same, whether the annuity is bought immediately or deferred five years. While the deferral is under way, we assume the same amount is withdrawn every year from the investor's portfolio as the immediate annuity pays out. The later deferred purchase is then priced on whatever amount would remain after withdrawals and each year's portfolio return and, crucially, at the higher annuity payout rate the five year older person would get. The older you are, the more mortality credits boost the annuity payout, as we explained in Is it Worthwhile to Wait for Higher Interest Rates to Buy an Annuity?.
(click on image to enlarge table)

Here are some other observations on the results:
1) The younger you are, the more worthwhile it is to defer - At age 60, the required rise for a male annuity buyer is only 1.2%, but deferring from 70 to 75 would require a 2.4% rise. The same age pattern exists for women, it's only the numbers are different. The reason is that mortality credits (the money that comes from other annuitants dying) are much more important the older you are, so missing out by deferring makes less and less sense.

2) It takes less of an interest rise to make deferral worthwhile for a woman than a man - The right-most column for female annuity pricing shows that deferring from age 60 to 65 requires only a 0.95% rise in interest rates to gain higher annuity income. The reason again is mortality credits. Because women live longer than men, it is as if the whole age scale for mortality credits is shifted youngwards - women get fewer mortality credits than men of the same age. Note that single-sex, men vs women, annuity pricing, where the differing lifespans influence payouts, applies only to non-locked in registered retirement accounts, TFSAs and non-registered accounts. Locked-in retirement accounts are subject to unisex pricing rules that create payouts in between those of the single-sex prices, (Our table does not show those payouts)

3) A high return in the investment portfolio during deferral can significantly reduce the required interest rise - When we set the investment portfolio's annual return at 2.7%, matching the return embedded in the annuity, the required interest rise was only 0.3% for the 60 year old investor, versus the base case 1.2%. The required interest rise was much lower for the other two age groups as well. ... however ...

This raises a crucial point - what rate of return on the interim investment portfolio is most logical to assume. Our base case uses 1.0% per year, which is about the net return (yield to maturity of 1.26% minus the fund's MER of 0.28%) currently on the iShares Short Term Bond Index ETF (TSX symbol: XSB). This ETF has very high credit quality and its duration of 2.79 years means that it will have limited exposure to capital value losses that would result from the very interest rate rises the investor is trying to take advantage of. As we discussed in What Happens to a Bond ETF When Interest Rates Rise? duration also tells us how long it will take for the ETF to recover from capital losses as newer higher yielding bonds replace outgoing issues in the ETF portfolio. At the end of the deferral period, the investor wants to be sure to have enough money to buy the annuity. Investing in much more volatile longer duration higher yielding bond ETFs, or a stock bond portfolio, is taking on considerable exposure to volatility risk.

One thing that does not make much difference is how much of the interest rate increase is captured by the interim investment portfolio. The second column from the right shows the results when only half of the interest rise gets reflected in the interim portfolio. This might well be the case for the short term bond fund when the interest rise, which is the rise in the long term rate used to price the annuity, is not matched at the short term end.

4) If interest rates stay the same, there is a big hit to the deferred annuity income - The 60 year old man would be forever stuck with about 13.1% less yearly annuity income, the 65 year old 15% less and the 70 year old 18.7% less. There will be less of a hit to a woman but it will still be very noticeable as our table shows.

Bottom Line: Is it worth taking the chance? What are the chances of a rise in interest rates and by how much? We'll explore that question in the next post.

How we came up with the calculations - Note that this blogger is not an actuary or annuity pricing expert. Our calculations are rough (and rounded to the nearest 0.05%) but hopefully reasonable. First we followed the method for roughly pricing an annuity laid out by professional retirement researcher Wade Pfau in Income Annuity 101. Then we applied recent mortality tables from the Canadian Institute of Actuaries - Canadian Pensioners' Mortality, published in February 2014 - that contain data on pensioners of private plans (apparently public plan pensioners live longer!). Next we compared resulting actual current prices of annuities as quoted in the Globe and Mail to find what implicit interest rate is embedded in the current quotes. That's how we got the 2.7% rate to discount annuity payouts. The 2.7% discount rate also lines up pretty well with what a portfolio of highly secure investment grade long term bonds would yield nowadays i.e what the insurance companies would invest in to back up the annuities. For instance, a mix of federal ( holdings like BMO's Long Federal Bond ETF (TSX: ZFL) with a yield of 2.25%) and provincial (holdings like BMO's Long Provincial Bond ETF (TSX: ZPL) with a yield of 3.28% could average out to 2.7%.

There are other signs we are close to the mark in the calculations. First, retirement researcher Wade Pfau in his post Annuity Pricing Sensitivity also calculated the effect of interest rate changes on annuities based on annuity pricing principles. Historical Canadian data in this post came up with 0.58. The two approaches give us reassuringly close estimates that every 1% rise in interest rates will cause annuity payout rates to rise about 0.6% (Pfau gets 0.63 to 0.65% and my Canadian data shows 0.58). On our simple annuity model the figure is 0.61%.

Second, the TIAA-CREF Institute, a research offshoot of one of the largest retirement income providers in the world, looked at the general issues around possible deferral of an annuity purchase in Annuities: Now, Later, Never? At unchanging interest rates they found that annuities always look better than deferring indefinitely and living off drawdowns from an investment portfolio.

However, they also showed that deferring in period of rising interest rates could be worthwhile. For instance, they calculated that if interest rates increased 0.25% a year for five years (i.e. 1.25% in total after five years), deferring the annuity purchase at age 65 by five years (and living off drawdowns from the portfolio in the meantime) would enable the purchase of an annuity with more than 7% higher income. The benefit tails off with a longer deferral. A 10-year deferral would produce only 3% higher income. A big caveat that they note is this result depends on the interest rate embedded in the annuity pricing (i.e. the interest rate the insurance companies receive from investing the lump sum premiums) being the same as the interest rate / return the portfolio could obtain. The interest rates won't be the same, if one is to construct a realistic apples to apples comparison. With the annuity, the insurance companies will invest in long term highly rated bonds while someone intending to defer five years would logically opt for much shorter term bonds as we argued above. So our results are more cautious than TIAA-CREF's though with the same patterns.

Disclaimer: This post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Copyright 2015 Jean Lespérance All Rights Reserved

Tuesday, 13 October 2015

Surprise! Equities can Outdo Bonds for Cash Distribution Attractiveness

October 2015 Update: The same pattern described in the original article below has continued. Equity distributions have continued to rise while bond distributions in the XBB ETF are still falling. A few of the charts updated to include 2014 distributions demonstrate how cash distributions from various types of equity ETFs have continued on a steady upward path. The big exception is the highly volatile energy ETF XEG, whose distributions have been way up and have now fallen back considerably. After the big fall in 2009, REIT distributions have maintained an upward path. All the equity ETFs have far outstripped inflation.

1) ETFs with the longest history back to 2002
(click on image to enlarge)

2) ETFs with a shorter history back to 2007, such as dividend and fundamentally weighted ETFs
(click to enlarge)

Returns matter too ... and that changes the overall picture. The table below for the same ETFs shows the overall change in cash distributions along with the annual compounded total return (distributions plus capital gain or loss) for the five years up to 30 Sept 2015 for these ETFs. 
(click to enlarge)

First, we note that XBB's results are not all bad - its total return has been positive despite falling cash distributions. Next, we see that XEG's returns have been strongly negative to go along with the fall in distributions. Energy has been a very poor investment. It has done worse than inflation, unlike every other ETF, both bonds and equities. Ironically, one ETF with weak growth in cash distributions - CDZ - is the one explicitly targeting companies that have shown strong dividend growth. The ETF seems to pick up companies after they have had a burst of increases, a fine example of past results not necessarily being indicative of the future. Neverheless CDZ's total return has been very strong, second best overall. The clear overall winner has been the financials - the XFN ETF has had both healthy cash distribution rises and excellent capital appreciation to produce an outstanding total return of 9.3% per year compounded.

The Original article ...
Back in January (2013) we looked at the cash distributions of a few mainstream Canadian equity ETFs and made the pleasant discovery that such income was quite stable from year to year in recent times despite the often gut-wrenching moves of the ETF's price in the market. That is very pleasing to know for long term buy and hold investors who are seeking income, such as those in retirement. It was doubly pleasing to see that the equity ETF distributions were as stable as those of a broad market bond fund. A third attractive feature was that the distributions of the equity ETF had risen appreciably during the 2000s decade while that of the bond fund had declined as interest rates fell continually through the period. Today we return to this theme to find out more - how specific industry sectors like financials, energy and real estate (REITs) have fared and what the longer term history of dividends can suggest about the likely future.

Equity ETF cash distributions generally rose ....
The chart below shows how distributions per unit / share have evolved from the inception of each of the following ETFs.
Immediately we notice that the gap between per share payouts on the bond ETF, the yellow line, and the various equity funds has narrowed considerably over the years.
... but the progression has been uneven amongst sectors
The orange line of the energy ETF XEG is up over the long term but it has seen wild upward then drastic downward movement, not very attractive to anyone seeking steady cash income. 
The dark red of the REITs XRE started quite high but there was a big drop during the financial crisis with some recovery since but the overall income level is slightly down from its 2003 start year. That's a surprise for a sector that is often portrayed as a steady high-income investment. We explore more why this happened below. 
The mid-blue line of the financials in XFN is the best performer of the lot. Another surprise is that it took the least hit during the financial crisis. The big banks merely held their dividends steady for a few years then started boosting dividends again. Now the sector has recovered all the lost ground and is at a new peak. 
The broad TSX 60 XIU fund, which contains a large dose of financials and energy as well as other sectors like mining, industrials and utilities for which we do not have data, has gone steadily but slower ahead overall. The ETF with the broadest diversification across economic sectors has had the steadiest payout record.

Equities look even better on a total income basis
Another way to look at the past distribution performance is to pretend we had invested a large lump sum ($100k) at the end of the year 2002 and simply collected the cash payouts. We ignore total return and do not calculate any re-investment of the distributions. The distributions are real cash in the investor's hand, net of any management and administrative fees. The chart below shows what would have happened.

The REIT fund XRE started well ahead of the pack and is still way ahead after 10 years but its lead has narrowed considerably. And it has lost ground to inflation (shown by the purple line), as has XBB, due to falling total distributions (NB again that we are only considering the cash distribution part not the total return of the fund where capital gains might have made up for the declining income). From second highest total cash received in 2003, the bond fund XBB would now trail all the equity funds

The erratic path of XEG might have caused many investors heartburn even though overall the net increase in distributions since 2003 has far outstripped inflation. The financials XFN and the mixed equity XIU have followed quite a parallel path, though XFN has inched ahead.

Why did REIT distributions fall so much?
The answer is that a few REITs with a heavy weight in XRE cut their distributions during the financial crisis, most notably H&R (HR.UN) and Chartwell (CSH.UN) while another, Dundee (D.UN) made no increase. All the other big REITs had increases, most of them quite healthy e.g. from 2003 to 2012 RioCan (REI.UN) +21% total increase in cash distributed, Canadian REIT (REF.UN) +20%, Calloway (CWT.UN) +35%, Cominar (CUF.UN) +25%, CAP REIT (CAR.UN) +2%, Boardwalk (BEI.UN) +52%. When we note that XRE contains only 14 REITs the influence of one or two holdings can be significant. Cuts in distributions are not typical of the sector. 

For investors looking at direct holding of REIT units instead of a fund, the past history is a reminder to closely consider the sustainability of the REIT payout - is the REIT distributing more cash than it earns? Chartwell is still having big problems with large net losses. H&R seems to have steadied the ship somewhat and has increased distributions since 2009 but the 2012 payout was still 10% below that of 2003 and it has more debt and lower return on equity than the other major REITs.

Will the equity ETFs continue to outgrow bond ETF cash distributions?
The investing landscape has been changing fast recently as interest rates, long kept at record low levels by central banks, have started to rise dramatically (see Bank of Canada's charts of various benchmark bond rates). As a result, bond prices have fallen and it is now much cheaper to buy into XBB. Anyone buying in at the current price (as of 26 June 2013) with a lump sum, such as we pretended to do in 2002 would get a 3.23% cash distribution yield from XBB according to its iShares webpage. By fluke, it so happens that XIU's current cash distribution is exactly the same 3.23%. 

As of June 26th, the investor would get exactly the same cash distribution from XIU and XBB. But as time passes, the cash distributions for each will change and diverge driven by different factors.
XBB distributions will evolve with interest rates
There has not been a huge absolute shift in interest rates - around 0.7 to 0.9% or so for medium to long term government bonds  - though the relative shift - about a 30% increase in the rate - in the last month has been dramatic. XBB's 2.7% yield to maturity is still below the cash distribution yield of 3.23% which means that if interest rates never changed again from today the existing bonds with higher coupon rates of bonds issued long ago at times of much higher interest rates, would eventually get replaced with lower coupon (around 2.7%) bonds and cash distributions would still fall. If interest rates keep rising, and it would not be too surprising if they do since we are still at the very low end of rates historically speaking e.g. see this Barry Ritholz chart for US rates going back to 1790 then after another 0.5% or so of rise, XBB distributions will level off. If interest rates rise above 3.23%, distributions will gradually start to rise as the higher coupon bonds gradually replace maturing lower coupon bonds. The slow downward creep of distributions that we see in our charts above would be become a slow upward creep.

XIU distributions will evolve with economic growth and earnings growth
Equity ETF distributions are driven by the dividends paid by companies held within the funds. There is good historical evidence, some of which we linked to in our first post back in January, that dividends on broad market indexes do rise over time and do also handily outstrip inflation. Unless economic growth stops entirely, companies no longer grow earnings and dividends cannot grow too, we do not believe cash distributions of funds like XIU will stop rising. For example, Thornburg Capital's The Benefits of Dividend Paying Stocks shows much the same exercise as our pretend investment of $100k in 2002 but for the USA's S&P 500 going back to 1970. The results in their chart, copied below, look very similar overall, though we notice that there was a much bigger hit to dividends from the 2008 financial crisis. The results of sectors may vary but the overall market should grow over the years.

Bottom Line: Equities, especially broad-based ETFs such as XIU (and there are multiple others from other providers such as BMO, Powershares, Vanguard) present the income-seeking investor with an attractive combination of cash distribution stability and long term growth.

Disclaimer: This post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Copyright 2015 Jean Lespérance All Rights Reserved

Monday, 6 July 2015

Is it Worthwhile to Wait for Higher Interest Rates to Buy an Annuity?

Payouts on annuities are at all-time lows these days. The same lump sum payment buys a much smaller lifetime income than it did ten or fifteen years ago. The main culprit is the steady fall in interest rates in the last few decades. Money that the insurance companies receive from investors and then invest themselves in highly secure bonds to back up the annuities yield a lot less so the insurance companies can offer less.

That situation may cause some people to wait for higher interest rates to get a higher payout on an annuity. How worthwhile is this? In our last post on annuity buying tips, Annuitize now, or wait?, in tip #7 we concluded that the basic answer is that if you need to start taking income, it doesn't make sense to wait. It is tough to beat the return required to beat the annuity. But that assumed that interest rates stay as they are. Suppose they rise, as has been expected for years now, though it has not happened yet.

Annuity payout rates will rise much more slowly than interest rates
Using the actual data from 2000 to 2013 on the Individual Finance and Insurance Decisions Centre in the Payout Annuity Index, we can see the steady drop in actual payouts on annuities as interest rates fell from around 6% on Government of Canada 10-year bonds to the 1.77% available as of 26 June 2015. Payouts on the way down can give us a good rough idea of what would happen on the way up. We found the payout for every 0.25% or so interest rate level and came up with the following graph.

The annuity payout rate is simply the yearly income you get divided by the lump sum you pay over to the insurance company, e.g. on 26 June 2015, a 65 year old male RRIF single sex priced monthly income annuity averaged over the five highest insurance company quotations for a $100,000 lump sum came to $6,150 income per year, a 6.15% payout. In contrast the payout rate on 19 July 2000 when the 6% GOC rate prevailed was 8.83%, or $8,830. That's a substantial $2,700 more income per year.
(click on image to enlarge)

The graph shows how gradual the change in annuity payouts is compared to interest rates. A 4% difference in interest rates from 2% to 6% - a three times increase - produces only half that amount of change in payout, just over 2.3% from 6.5% to 8.8%.

Mortality credits, the return from people dying younger to those dying older, strongly influences the gentle slope of the graph points. As we noted in our previous post, interest return drives only part of the annuity income. Mortality credits are another large chunk. The 1.7% difference in payout rate between ages 65 and 75 also shows the powerful effect of mortality credits. It is much more worthwhile to look at getting older as a source of higher income than rising interest rates. And unlike interest rates, we definitely know which direction we are going in terms of age!

Continued rising life expectancy means the slope will be more gradual than the historical graph
The above graph over-states the steepness of the slope of changes to the annuity payout rate in response to interest rates. The reason is that life expectancy has continued to increase in the 15 years since 2000. The extra three or so years gained in longevity since 2000 means the insurance companies have to pay out for longer and so they offer lower monthly income. In addition, the insurance companies know about the actuarial projections which forecast a continuation of rising life expectancy. Since the oldest data and the higher interest rates are at the right end of the graph, that's where the greatest change in life expectancy has occurred and the payouts would be most reduced. The slope of the line is consequently reduced.

The relative attractiveness of annuities is greater at low interest rates than high interest rates
The higher are interest rates, the greater is the interest rate component of the annuity return versus the mortality credit component. The following chart shows the compression of the gap between annuity payout rates and interest rates / GOC 10 year bond rates the higher the GOC 10 rate.
(click to enlarge)

At the highest interest rates, other safe investments like the GOC 10s are much more competitive with annuity payouts. The payout rate for a 65 year old man when GOC 10 interest rates were 6% was only 8.8%, a gap of only 2.8% but the gap today at current 1.77% GOC 10 interest rates is 4.4%.

The investment funds that will be used to buy the annuity may be reduced by rising interest rates
If you as the investor waiting to buy an annuity hold a diversified portfolio of stocks and bonds, consider the reaction of those holdings to a rise in interest rates. For bonds, the answer is straightforward. They will fall in value. Investopedia explains how this works. The Duration metric indicates the sensitivity of a bond or bond fund to interest rate changes - e.g. as of 6 July 2015, the broad market Canadian bond ETF from BlackRock, the iShares Canadian Universe Bond Index ETF (TSX symbol: XBB) has a duration of 7.35 years. Thus, if interest rates were to rise 1%, XBB's value would fall about 7.35%. $100k of annuity money would drop to about $92,650. To recover that capital loss in XBB would require staying invested for the 7.35 year Duration (we described how this works in this post).  Meantime, for the annuity, that interest rate rise, judging roughly by the graph above, might bring about a 0.5 to 0.6% higher income payout. That's a much smaller gain than the XBB loss. In addition, XBB's return, aka yield, is only 1.65% net of fund expenses (1.98% portfolio yield minus 0.33% MER).

There are many shorter Duration, less interest-sensitive funds around, such as BlackRock's ETF with trading symbol XSB, but returns are even lower, such as the 0.8% net of expenses for XSB.

Stocks are usually also hurt by rising interest rates, especially in the short term, though in the long term, the businesses do adjust and stocks do ok. The price reaction of stocks and stock funds is much less predictable and more variable than for bonds, as we previously described. The investor is left with considerable uncertainty and the annuity purchase becomes very dependent on market conditions for the best annuity purchase timing.

Perhaps the best alternative waiting time investment is cash, whose value is completely insensitive and oblivious to interest rate changes. A High Interest Savings Account today can earn up to 1.95% (though the deposit protection may be less than the best, which is CDIC's). HISAs at major institutions with CDIC deposit insurance coverage currently earn about 1.0%. Nevertheless, while interest rates are steady, the opportunity cost metric Implied Longevity Yield, which we described last post, handily beats that return.

How long can you wait?
The final element to think about is how patient you can manage to be. In our previous post on which bond ETFs are most susceptible to interest rate changes, we wrote "Interest rates will inevitably rise when conditions improve, the only question being how soon that will happen. Be ready!". That was in 2010 - almost five years ago! It's a long time to hold one's breath. In the interim, the annuity payout rate for a female single life 10-year guaranteed RRIF-funded annuity fell from 6.7% to 5.7% as interest rates fell, instead of going up.

In short, waiting for rising interest rates likely is not worth it. Waiting while you get older is a better way to think about it.  But if you need to draw income and you can cover you can cover basic needs with an annuity even at today's low rates, it's likely not worth waiting at all.

Disclaimer: This post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Copyright 2015 Jean Lespérance All Rights Reserved

Sunday, 21 June 2015

Buying a Life Annuity - Tips

When buying a Life Annuity it is especially important to get the best deal since it is a one-time decision that lasts a lifetime. Here are some points to consider in making the purchase.

1) Shop around, use a broker
Make sure you cover all the life insurance companies that sell annuities. As the listing of current rates on the Globe and Mail annuity table and our comparison table below show, the company offering the highest income usually differs according to your sex and age. The highest quoting company also change constantly. The best way to shop around is by using a good broker who deals with all the companies, such as (Ivon Hughes) and Canadian Annuity Broker Services (John Beaton).

There is a wide range between the highest and the lowest income quotes - anywhere from 3% to almost 30%. The range widens the longer the deferral period between purchase and income start date e.g. hi-lo quotes in our table below on the eight and a half year deferral to age 71 for a 62 year old span more than 20% for all types of life annuities for both men and women.

(click on image to enlarge)

2) Mind which account you use to buy the annuity
Men should buy with RRSP/RRIF funds first, and locked-in funds (LIRA/LIF/LRIF) funds second, for pension money regulated in all provinces except Quebec and Newfoundland & Labrador. Women should do the opposite and buy with locked-in funds first and RRSP/RRIF funds second.
That will obtain the most annuity income for both men and women. The reason is legislated mandatory unisex rates, which came into effect during the 1980s and which apply to all locked in pension money but not to RRSP/RRRIF funds. Under unisex rates, insurance companies are not allowed to price annuities differently for men and women, which would entail paying higher amounts to men and lower amounts to women in recognition of the fact that men die sooner than women and thus do not collect their lifetime annuity for as long.

The result, as our table shows, is that unisex-rated income lies somewhere in between the single sex-priced income for men and women, anywhere from 3% to 8% above - for women - or below - for men - the single sex income level. Men lose and women gain with unisex. Quebec still requires, and Newfoundland & Labrador still allows, single-sex annuity pricing in locked-in accounts. Standard Life has created a detailed table on pension legislation, part of which covers sex discrimination provisions across Canadian jurisdictions.

Most online sources of current annuity quotes seem to publish only the single-sex prices so getting unisex quotes for locked-in money will require contacting a broker.

3) Men - Unlock to get more income
Men should take advantage of unlocking privileges to be able to use single-sex pricing. Locked-in pension savings may be moved to unlocked accounts, like an RRSP or RRIF under certain conditions, including becoming non-resident, financial hardship, small remaining balances and reduced life expectancy as explains on Unlocking Your Locked-in Pension Accounts. The most generous provisions are under Federal (see FAQ here), Alberta and Manitoba jurisdictions, which allow a one-time unlocking of up to 50% of account value upon moving the funds from a LIRA or LRSP into a LIF or LRIF. Once inside the RRSP/RRIF the funds can be used to buy higher income single-sex annuities instead of unisex annuities. The same amount of original locked-in money will buy higher income.

4) Check out a short guarantee period
Choosing a guaranteed payment period of 5 or 10 years may offer higher income than a no guarantee period. This is a bit of a surprise. It would normally be expected that when the deal is that the insurance company stops paying out an annuity immediately upon the annuitant's death instead of guaranteeing to continue paying (into the estate after death), it would offer higher income. But due to the segmentation of the annuity market and the choice of some providers to offer only products with or without the guarantee, it seems to happen regularly that the highest income comes with a guarantee. For example, in the upper left area of our table, the unisex rate offered by Equitable Life with a 10-year guarantee is $5796 per year while the best no-guarantee rate is from Desjardins at $5760. The Equitable annuity would ensure getting back at least $57,960 of the $100k premium. It's an easy choice to buy from Equitable instead of Desjardins. Checking both guarantee and no-guarantee options at the time of purchase is worth it.

5) Check out the return of premium option 
Choosing the option that offers return of premium (to your estate) when you die before the income start date may offer higher income than no return of premium. Again, it is a quirk of the market segmentation but in many of the quotes in our table as highlighted in red text and numbers, the income from return of premium insurers was higher than the no-return offers. This is especially valuable for the long-deferred-annuities, where the income may start eight years or more down the road. Dying before the income start date without receiving a penny for the large premium handed over would be galling. Of course, the insurance company does not lose out by making the guarantee since it only hands back the premium whose value diminishes from inflation and in the meantime it is able to use the capital to invest and gain returns for itself.

6) Index income to offset inflation?
Indexation of income to try to match inflation seems to be of dubious value. Our first table above shows much lower income compared to non-indexed annuities from annuities indexed to rise by 2% a year to match the current best guess rate of many economists, which also happens to be the official target rate of the Bank of Canada.

To judge whether this is worth it, we calculated how long it would take for the indexed income to reach the same level as the non-indexed annuity. As our second table shows, it takes eleven years, till age 73, before the 2% indexed annuity reaches equality for a man buying today aged 62. With rising age of annuity purchase the levelling off happens sooner and sooner but then you have many fewer years of life expectancy to worry about inflation eating away at purchasing power. We believe's method for offsetting actual inflation, in which you set aside and reinvest a portion of the annuity income each year, offers a better solution. Instead of a one-time forever guess at inflation, you reinvest depending on actual inflation.
(click on image to enlarge)

7) Annuitize now, or wait?
It's almost surely not worth waiting to annuitize if you have retired and need to start taking income. Whether to wait or not is a trade-off between the investment return from a portfolio less withdrawals and the certain, steady income from an annuity. Annuity expert Professor Moshe Milevsky of York University has developed a formula to guide the choice. The formula is called Implied Longevity Yield (ILY). It measures what rate of return a portfolio or other investment would have to achieve to beat the annuity while withdrawing the same income as the annuity. ILY takes into account the fact that deferring purchase means you will be able to pay less later for the same annuity income because your remaining life expectancy will be lower. ILY also assumes interest rates remain the same as today. Below is a table of ILY calculations from as of June 2015.
(click to enlarge image)

Even at relatively young ages in the 60s, it is hard to beat an annuity. Certainly, investments with the same rock solid triple A equivalent rating, like term deposits or Government of Canada bonds, can provide nowhere near the same return. Even broadly diversified portfolios of stocks and bonds, which can and do fluctuate and have no guarantee of producing a return, would be hard pressed to beat the ILYs in the above table. These days especially, expected future portfolio returns are likely to be muted compared to historical actuals i.e. not likely to exceed the ILYs of age 70+. We must remember that if interest rates were to move up and more attractive returns from investments were to be available, the annuity payouts would rise too and thus the ILY as well. Back in June 2000 interest rates were much higher - Government of Canada 10-Year bonds yielded 5.9%, but the ILY for a 65 year-old male at 6.9% and a 65 year old female at 6.4% both beat that per Milevsky's IFID research centre table.

The underlying reason why life annuities will always be very competitive with any type of portfolio investments is that annuities have the additional source of return from the forefeited funds of those annuitants who die sooner than expected, the so-called mortality credits. The following chart from Sun Life in the document Payout Annuity - Overcoming Objections. shows how large the mortality credits, which it calls insurance credits, become the older you get.
(click to enlarge)

Unfortunately, the latest ILY figures are available only from CANNEX and thus by contacting an insurance broker. shows on this webpage how to do a simplified "good enough" approximation.

Disclaimer: This post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Copyright 2015 Jean Lespérance All Rights Reserved

Wednesday, 10 June 2015

Retirement Investing - How an Annuity Complements an Equity-Fixed Income Portfolio

Retired investors face a challenging set of financial and investing risks. Several are not faced by those in the accumulation stage of life and are unique to the retirement withdrawal phase. Traditional portfolios of equities and fixed income, such as systematic withdrawal plans like the 4% rule (see posts here and here), can succeed in the face of such challenges. But they can do so more easily if combined with guaranteed lifetime income sources such as defined benefit pension plans, Canada Pension Plan (& OAS) and lifetime annuities.

Complementary Roles - Systematic Withdrawal Plan vs Lifetime Guaranteed Income
The table below shows how the two categories of income sources complement each other very well. Against most of the risks and the beneficial features, where one falls short with a NO, the other copes well with a YES. Only for inflation and tax minimization does neither type provide an ideal mechanism.
(click on image to enlarge)

Annuities fill a gap for retirees without a DB pension
Most retirees will get CPP and OAS but they max out at $12,780 and $6,765 (2015 figures) respectively, which probably is not enough to meet basic living expenses. Since fewer and fewer Canadians have defined benefit pensions and are saving in RRSPs, TFSAs or defined contribution retirement savings plans, all of which consist of equity-fixed income portfolios, the annuity can fill a significant gap.

One of the worst dangers of retirement, when money is being taken out of a investment portfolio for living expenses, is that withdrawals may be too high and the portfolio expires before the retiree, leaving the unfortunate person high and dry, usually at an advanced age when going back to work to make a shortfall is no longer possible.

An annuity is an investment income insurance product in which an investor hands over a lump sum to an insurance company and then receives a fixed, guaranteed, regular (monthly, quarterly, semi-annually or annually) income for life. In the plain vanilla version, the income continues only as long as the person lives (or the second of a couple to die, in the case of a joint annuity) and there is no return of principal at death.

Since many people balk at the idea of losing the whole principal if they live only a short time after the annuity starts paying - imagine handing over $100,000 of your lifetime savings to the insurance company and living only long enough to receive the first monthly cheque of $530 or so (per the Globe and Mail's table for single life 65 year old male as of June 10, 2015). Being dead you wouldn't be upset, but your heirs might be! The annuity purchase is irreversible. Consequently, insurance companies offer options to guarantee payments to the estate or a beneficiary for 5, 10 or even 20 years. Such guarantee options do come with the downside of lower payments.

Contrary to what some may imagine, the insurance company does not keep all the money of investors who buy a plain no-payout-guarantee annuity and then die early. The insurance company does keep some of the money of those who die early for its costs and profit margins, but this is kept in check by the fact that the annuity market is competitive amongst insurance companies. Given the guarantee of income provided by Assuris in Canada, most investors can safely opt for the best quote aka highest income so the companies are unable to profiteer. Instead, the bonus money, called mortality or insurance credits, goes to other investors who live a long time. The insurance company is able to calculate very accurately the average remaining lifespan for a population of retirees (and even that of retirees who buy annuities, which happens to be longer than retirees as a whole), which enable it to price out a payment level for everyone based on the average and to offer it for as long as you might happen to live. Live long like Merle Barwis, you win!

Research shows the annuity - SWP combination enhances retirement success > more income and less chance of running out
Economists are constantly puzzled by the relatively low rate of uptake of annuities because they are beneficial to retiree investors. Researcher Wade Pfau, Professor of Retirement Income at the American College of Financial Services on his blog has posted papers detailing the benefits of immediate and deferred annuities. Professor Mark Warshawsky of George Mason University compared life annuities head-to-head with the classic 4% portfolio withdrawal rule using US historical data in Government Policy on Distribution Methods for Assets in Individual Accounts for Retirees and found that annuities generally performed somewhat better for providing lifetime income during retirement. Canadian Associate Professor of Finance at York University Moshe Milevsky explains annuities in detail in the free 150 page Life Annuities: An Optimal Product for Retirement Income. He and co-author Alexandra Macqueen put forth a popularized exhortation to include annuities within a retirement income mix in the book Pensionize Your Nest Egg. David Blanchett, Head of Retirement Research at Morningstar in his Allocating to a Deferred Income Annuity in a Defined Contribution Plan even cites a source that found that investors with annuitized incomes were happiest! If money can't buy happiness, can it buy an annuity which can buy happiness?

Where to buy: Annuities are only available from insurance companies, so interested investors need to contact either a life insurance agent, who represents only one company, or better, a licensed broker who can source quotes from the whole market and get the best currently-available deal, which varies constantly amongst the various insurance companies. Specialized annuity brokers in Canada with an online presence are sparse - two we found (whose licensing claims check out as of June 2015) are (Ivon Hughes) and Canadian Annuity Broker Services (John Beaton).

Buying an annuity involves handing over a big chunk of money, so check that the agent or broker is licensed in your province:
- Financial Services Commission of Ontario
- Autorité des marchés financiers (Québec)
- Alberta Insurance Council
- Nova Scotia Superintendent of Insurance
- Insurance Council of British Columbia
- Insurance Councils of Saskatchewan
- Insurance Council of Manitoba
- Financial and Consumer Services Commission of New Brunswick
- Government of Prince Edward Island
- Newfoundland and Labrador
- Government of Nunavut
- Yukon Government

Disclaimer: This post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Copyright 2015 Jean Lespérance All Rights Reserved

Monday, 2 February 2015

Best and Worst Canadian CEO Pay from the Investor Viewpoint

The recently released All in a Day's Work? - CEO Pay in Canada by Hugh Mackenzie questioned whether CEOs should be paid so much, especially in relation to the pay of an average worker. Others like Vincent Geloso of the Montreal Economic Institute came to the defense of high CEO pay, saying that CEOs live an ever-shortening and very risky existence. In between the blanket condemnation, or approval, sits the investor, merely trying to figure out whether individual CEOs are earning their pay in order to pick good investments. As might be expected, some CEOs and companies (since the Board of Directors are mandated to control CEO pay) have been plain terrible, while others are shining examples of superb performance for very reasonable pay. Let's see who sits where.

The Globe and Mail CEO Pay Tool
When we did this last year, naming the best performers and the most over-paid, we had to do our own data collection. Fortunately for us and all investors, in June 2014, the Globe and Mail posted the excellent (and free!) Interactive Pay-for-Performance graphic display tool created by Global Governance Advisors. It shows CEO pay for the 100 largest companies in Canada relative to other companies and to a series of seven key measures useful to an investor, starting with total shareholder return. It can also break down the various pieces of CEO compensation and show results of each company's Say-on-Pay shareholder voting. The screenshot below shows the possible selections and part of the output display.
(click to enlarge image)

We've played around with the tool to find the most consistently good or bad CEOs / companies across industries, across time from 2010 to 2014 (year-by-year vs averages) and across the various performance metrics. Our logic is that if a company always looks good, no matter the time frame, industry or market cap group comparison, or the measure of performance, that company's CEO pay must be well-aligned to investor interests, and a positive indicator that the company is well-managed. Clicking on the various options and watching the CEO dots move around gives an impression of evolution and sensitivity of results. It's fun to do!

The best performers are those furthest away from the diagonal line that shows where company performance and CEO pay are in perfect balance. We are looking for those in the bottom right quadrant where company performance is above average while CEO pay is below average - the best investor bang per CEO buck. The worst performers are those in the top left quadrant where high CEO pay is matched with below average performance - when investors are being taken for a ride by the CEO.  In general, below the line is favourable for the investor, above it not so.

Best CEO Performers - "Great performance, modest (relative to other CEOs) pay"
It's hard to choose between the first three below, they have all been consistently superb:
  • Constellation Software (TSX: CSU) - CEO Mark Leonard 2013 pay $2.7 million. The company is currently 62nd largest by market cap in the TSX Composite yet the CEO's pay was not even close to making it into the top 100 list of Mackenzie, where 100th place garnered $3.9 million. Screenshots below are taken from the tool.
(click on image to enlarge)
  • The Jean Coutu Group Inc (TSX: PJC.A) - CEO Francois Coutu 2013 pay $2.0 million. It is a smaller company at $2.1 billion market cap but look at the outstanding relative performance metrics below, which makes a clear leader amongst consumer staples companies.
(click to enlarge)

  • Canfor Corp (TSX: CFP) - CEO Don Kayne 2013 pay $1.4 million, which is the other company in the extreme bottom right corner.
(click to enlarge)

Using the same approach, here are fifteen other companies a good distance from the diagonal in the bottom right quadrant with a very investor-friendly link between CEO pay and company performance:

Consumer Discretionary
  • Dollarama (TSX: DOL) - CEO Larry Rossy 2013 pay $3.7 million
Consumer Staples
  • Alimentation Couche-Tard (TSX: ATD.B) CEO Alain Bouchard 2013 pay $7.2 million
  • Saputo Inc (TSX: SAP) CEO Lino Saputo Jr 2013 pay $3.3 million
  • Metro Inc (TSX: MRU) CEO Eric R. La Flèche 2013 pay $2.7 million
  • Vermilion Energy (TSX: VET) CEO Lorenzo Donadeo 2013 pay $3.6 million
  • Keyera Corp (TSX: KEY) CEO James Bertram 2013 pay $2.4 million
  • Peyto Exploration (TSX: PEY) CEO Darren Gee 2013 pay $2.5 million
  • Tourmaline Oil Corp. (TSX: TOU) CEO Michael Rose 2013 pay $2.5 million
  • CI Financial (TSX: CIX) CEO Stephen MacPhail 2013 pay $4.6 million
  • Intact Financial (TSX: IFC) CEO Charles Brindamour 2013 pay $4.2 million
  • First Capital Realty (TSX: FCR) CEO Dori Segal $2.0 million
  • Westjet Airlines Ltd (TSX: WJA) CEO Gregg Saretsky 2013 pay $3.1 million
  • Finning International Inc. (TSX: FTT) CEO Scott Thompson 2013 pay $4.6 million
  • West Fraser Timber Co. Ltd. (TSX: WFT) CEO Ted Seraphim 2013 pay $2.4 million
  • ATCO Ltd. (TSX: ACO.X) CEO Nancy Southern 2013 pay $1.5 million
Worst CEO Performers - "High pay, lousy performance"
This set of companies look more like the CEOs are getting rich at the expense of investors.

The top culprits here are:
  • Talisman Energy (TSX: TLM) CEO Harold Kvisle 2013 pay $9.5 million. The accounting metrics are as bad as they get and shareholder return has been a negative 9.6% per year over the past five years. There was no sign of improvement from 2010 to 2014 either.
(click to enlarge)
  • Onex Corporation (TSX: OCX) CEO Gerald Schwartz) 2013 pay $87.9 million, the most by far of any Canadian CEO (Mackenzie's $13.3 million figure appears to be for 2012). It's astounding pay yet results are insipid.
  • EnCana (TSX: ECA) CEO Doug Suttles 2013 pay $12.8 million. The shareholder return is awful at -9.4% per year for the last five years, as are the accounting metrics. Suttles was named as CEO in mid 2013 to clean up the previous mess, so the pay figure is a handsome welcome package. ECA is the green dot above Talisman in the previous chart. It is even further away from the diagonal in the 4-year average view we have used.But in 2013, when Suttles came on board, the dot moves a lot closer to the line, which is improvement. Nevertheless, should the company / shareholders pay in advance for performance?
Gold mining CEOs - The price of gold may rise and it may fall but the CEOs of the gold miners are making buckets of money no matter what happens to the company or shareholders. Click on the Materials drop down selection and see the top left quadrant is filled with gold stocks and CEOs:
  • Agnico-Eagle Mines (TSX: AEM) CEO Sean Boyd 2013 pay $9.3 million
  • Yamana Gold Inc. (TSX: YRI) CEO Peter Marrone 2013 pay $9.9 million
  • Goldcorp (TSX: G) CEO Charles Jeannes 2013 pay $9.7 million
  • Barrick Gold (TSX: ABX) Jamie Sokalsky 2013 pay $7.5 million
  • Eldorado Gold (TSX: ELD) Paul Wright 2013 pay $7.4 million
  • Kinross Gold (TSX: K) CEO Paul Rollinson 2013 pay $8.2 million
Other "heads I win, tails you lose" CEOs ....

  • Teck Resources (TSX: TCK.B) CEO Donald Lindsay 2013 pay $9.0 million
Consumer Discretionary
  • Thomson Reuters Corp (TSX: TRI) CEO James Smith 2013 pay $8.4 million. What's puzzling is that with well below average performance, this decidedly above average CEO's pay garnered a 98% approval rating from shareholders in a Say-on-Pay vote.
  • Valeant Pharmaceuticals (TSX: VRX) CEO Michael Pearson 2013 pay $6.7 million. The metrics are very inconsistent - shareholder return has been great, but accounting metrics like Return on Equity and Earnings per Share growth very poor. Are stock speculators over-enthusiastic?
This best vs worst list can be a help to company and stock analysis in determining which are well or poorly controlled by the Board of Directors. We have only discussed what we think are the best and the worst. The rest are somewhere in between. Being close to the median diagonal means a company CEO is being paid fairly, relative to peer performance.

Whether CEOs as a whole on average are too-highly paid is another matter (e.g. see the thought-provoking The World's Dumbest Idea paper by author James Montier, who argues long-term excessive CEO pay rises worldwide, not just in Canada, are a manifestation of the shareholder value maximization philosophy that serves investors and the economy poorly) and for consideration another day.

Disclosure: This blogger directly owns shares of TCK.B, IFC, MRU and FCR.

Disclaimer: This post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Friday, 23 January 2015

Taxes 2015: Links & Resources for Canadians Filing 2014 Income Tax Return

Tax season is starting. The Canada Revenue Agency will soon open up the NETFILE online electronic tax filing service to receive returns electronically. It's time for Canadian investors to start getting ready for filing their 2014 income tax return. There can be a multitude of slips and receipts to assemble, not to mention older records to dig up and preliminary calculations to do in order to be ready in time for filing on or before the deadline of April 30. We therefore present a collection of resources that should cover the tax information and tools needs of Canadian online investors.

Tax-specific Websites

Key Dates -  see complete CRA list of dates for individuals
January - mid CRA pdf tax forms for all tax years 1985-2014 available to download and print
February - 9 CRA online filing service NETFILE starts accepting 2014 tax returns; last day is January 16, 2016
March - 2 RRSP contribution – last day for making contribution applicable to 2014 tax year
April - 30 CRA – last day to file 2014 return and pay amounts owing to avoid penalties
June - 15 CRA – last day to file 2014 return for self-employed though amounts owing deadline is still April 30
December - 31 RRSP – last day for making an RRSP contribution in the year you turn 71

continual CRA issues tax refunds, often within days, if return is filed electronically
TFSA contributions anytime during year for 2015 or missed past years since 2009

CRA dates are rigid; be late even by a day and you will miss out or suffer penalties. On the other hand the tax documents below relating to the 2014 tax year flood in progressively from mid-January to the end of March. There can be weeks or more of variation amongst companies that issue the slips and receipts.

Checklist and guide for interest, dividends and capital gains
If your investing involves … look for these documents … from these organisations ....

Borrowed money to invest Investment interest  expense  on statements from broker for margin, or bank for loan
Canada Savings Bond interest T5 slip (min $50 interest) from broker if held in a broker account or from Bank of Canada if bought directly from BOC;
GIC interest T5 slip (min $50 interest) from broker if held in a broker account or from bank or trust company if bought directly
T-Bill and Stripped Bond interest Annual summary of security transactions Interest = redemption/sale amount – purchase cost; for details see

T5 does NOT show it, even when over $50 e.g.
Mutual fund distributions T3/T5 slips mailed directly by Mutual fund companies, NOT brokers, even when fund is held in a brokerage account
Mutual fund capital gains (sales) Annual summary of security transactions from broker if held in a broker account 
from mutual fund company if held directly with the mutual fund company  click on links to fund companies at and then look for tax or Distribution info

Bond interest T5 slip (min $50 income) broker
Bond capital gain or loss (sale or maturity) Annual summary of security transactions broker provides statement at purchase year and at maturity or sale; for how to calculate see
Stock dividends T5 slip (min $50 income) broker
Stock capital gain or loss (sale) Annual summary of security transactions broker provides statement at purchase and at maturity or sale
ETF and REIT distributions T3/T5 slips broker
ETF, REIT, Income Trust, Closed End Fund capital gain or loss (sale) Annual summary of security transactions + own records broker for trading transaction summary

Investor must track own adjusted cost base – see

ETF providers publish tax breakdown of distributions on their website. ETF providers in Canada list and links at

CDS Innovations database of free downloadable spreadsheets by year at

Income Trusts and Closed-End Funds - ACB Tracking Inc has a pay service that simplifies the tracking
Split Corporation income T5 broker
Limited Partnerships
Foreign income, capital gains or assets
Exchange rate to Canadian dollar
Bank of Canada average rate for 2014 e.g. USD to CAD multiply CAD by 1.1044664, or rate on the particular day, per;
for T1135 Foreign Income Verification Statement, use rate on day of purchase
for capital gains, use rates on day of purchase and of sale
Note: Quebec residents receive a T5 and relevé3, or T3 plus relevé 16, or T5013 plus relevé 15.

Checklist and guide for account withdrawals, contributions
If your investing involves … look for these documents … from these organisations ....

RRSP contributions RSP Contribution Receipt RRSP account trustee, be it broker, bank, mutual fund company
RRSP contribution room various Canada Revenue Agency -
RRSP / RRIF / LIF / LRIF withdrawals T4 RRSP / RRIF slip RRSP/ RRIF account trustee
RRIF / LIF / LRIF withdrawal limits Evaluation letter or phone call broker
Annuity payouts T4A and T5 slips mailed by insurance companies, both for registered or non-registered annuities
RESP withdrawals T4A Educational Assistance Payment or Accumulated Income Payment slip brokers or financial institution where RESP is held
Non-resident taxpayer NR4 slip broker
TFSA interest, dividends, capital gains, contributions and withdrawals none None – happy days! No tax reporting to do
TFSA contribution room and contribution or withdrawal history phone call or online Canada Revenue Agency – see
Note: Quebec residents receive above T4s and relevé 2.

Tax News, Tips and Blogs - to remind us of the latest developments, the implications, the gotchas and possible strategies to legitimately minimize what we pay
 Books - buy them online, read them offline at leisure

Software - to prepare and NETFILE income taxes electronically; the best packages guide you and make suggestions to optimize your taxes
  • List of CRA-certified programs with links to the companies - old list from last year as of date of posting; certification is on-going through January and February, so check the link to each provider to see if it is certified yet.
  • Wikipedia - basic details on costs, versions, price, limitations, freebies  

HowToInvestOnline Tax-related Posts - our most popular and presumably most useful tax posts

Tax Calculators - for tax planning, what if scenarios and estimation
  • Canadian Tax Calculators - a Basic version, an Detailed version for all provinces except Quebec, one for Quebec, with all the tax credits and a special Investment Income version that compares different types of income, especially useful for retirees.
  • Ernst & Young - ultra-simple, enter your taxable income and it shows you by province total tax (using the basic personal tax credit only) as well as marginal rates on ordinary income/interest, capital gains and dividends;  very handy when you have a taxable and tax-sheltered investment accounts to see which types of securities should go in which account
  • RRIFMetic - sophisticated tool (not free, costs $99) for planning and optimizing for retirement income including taxes on types of accounts (taxable, RRIF, LIF, TFSA, RESP) and types of income (dividends, interest, capital gains) plus factors in non-investment cash flows; helps decide how much to take from which account during retirement.
Tax Discussions - read what other people are grappling with and learn from their experience or register and you can take part, ask questions and perhaps get good answers
These resources will make it easier to pay your taxes quickly with minimal frustration at the very least and probably to pay less as well.

Disclaimer: this post is my opinion only and should not be construed as investment or tax advice. Readers should be aware that the above comments are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.