The Cost Of Education

I've been talking to a lot of my clients about education savings lately that I thought I should write some information about the cost of education.

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.

Why Are My Insurance Rates Going Up? May 2011 Newsletter

A question I've been asked a lot lately is why are their home insurance rates going up?

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 it is their internal basis for factoring the 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.

You may be asking yourself, "but my stuff is old, why are the insurance companies increasing my coverage?" The reason is, when the insurance company replaces your property in the event of a claim., they don't buy you used property. They buy you brand new furniture, TV, clothes, couch, etc.

Since it may be 10 years after you first insure your property before you have any 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 and computers. 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.

These are just a few of the factors that affects your insurance rates. You should review your coverage regularly to see that it still fit your needs and whether any changes needs to be done.

April 2011 Newsletter

2011 Tax Deadline

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.

Eric Sprott: There is No More Silver

Speaking at the Casey Research Gold and Resource Summit, Eric Sprott told investors that there is no more silver left to go around, "There's $22 billion of silver available in the world, of which the ETFs already own half, and between you guys and us we probably own the other half... Which means there's nothing left."

Emergency Preparedness

I'm sure you're heard of the recent earthquake that hit Japan yesterday. Here are some useful links on how to prepare for an emergency.

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

March 2011 Newsletter

Retirement

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.

Eric Sprott on BNN Talking About Gold and Silver

Here's a video interview with Eric Sprott of Sprott Asset Management regarding his views on gold and silver.