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Retirement and sustainable retirement income and other income
September 22, 2014
11:35 pm
Jack Manning
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When people think of turning 65 or retiring they believe the only way to be okay or do better is to have pensions.

This is the past and we are not going to return to 50% or 60% of Canadians or Americans having workplace pensions. It is not going to happen because of poor demographics, more of an aging population and much lower historical returns, interest rates than the past 20 to 30 years.

Also, the changing nature of work, technology to globalization is going to keep the past pension trend of filling most if not all of retirement income for many a thing of the past.

C.P.P, OAS, GIS and other support programs are there as a base but they were never there for people to retire solely or have a big majority filling up 70% to 80% of their retirement or pension income.

Today, there are many ways to generate retirement income that is better for the whole family as a whole and over the long run.

The problem is many do not plan properly, early enough, take advantage of tax advantaged, tax protective plans plus maybe taking too much risk with high fees etc. Financial illiteracy and not enough or no financial discipline are major reasons that this is and will be the future if people continue ignoring this reality.

Many believe winning the lottery or a big inheritance will bail them out or some pension plan will pay them at 55 years old. Dreaming will not work either. I know people do not want to hear this or believe this retirement reality but that's what it is.

In the past, many retirees with the decent pension plans were through an employer but low income earners were and are in and will never be in a better retirement position than even 30 or 40 years ago.

I will continue this post below to explain about retirement income and other income sources.

September 23, 2014
12:00 am
Jack Manning
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A simple approach that may work for most people that want retirement income but have an investment base too is using annuities, GIC's, bonds and possibly dividend paying stocks.

For example, a retired couple at age 67 years old in 2014 that has $1,200,000 in combined financial investments and a paid off house with no debts of all. Mary and John planned prudently maximizing RRSP's mostly and TFSA's, non-registered investments while paying off the mortgage, debts etc.

They planned well for now 33 years in the above example. Forget about C.P.P, OAS which they are receiving and let's focus on creating retirement income, other sources of income and preservation of capital as much as possible. Hopefully, growing it too.

They can simply put $400,000 in fixed term certain annuities which would provide them monthly income of $2,000 for 25 years. Any remaining months and years will be given to their children in this case as beneficiaries.

Also, any surviving spouse will receive 100% of the $2,000 monthly annuity payments. Note, with any pensions, 50% to 65% go to a surviving spouse only not 100% and no money is given to any children or other non spouse beneficiaries that parents, grandparents and other family members would like to pass on their money to. This could mean easily in the above example anywhere from $100,000 to $250,000 in lost money if it was income from a pension plan.

Their other $250,000 in RRSP's could easily be put into 3.00% RRIF GIC's and with income planning provide $16,000 a year RRIF income for 21 years. Since 71 is the mandatory RRIF withdrawal age, it may make sense to compound at 2.75% for 4 more years growing it to $278,655 and then withdrawing $1,480 a month for 21 years. It depends what income they need or want at ages 67.

Finally, for the last piece of this example and other details, refer to the next bottom post.

September 23, 2014
12:24 am
Jack Manning
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The remaining $550,000 is $70,000 in TFSA's and $480,000 in non-registered accounts. Their $70,000 is put in 20 year 3.90% government, zero coupon bonds for 20 years. This will be worth $150,500 and can be used for future needs, expenses etc. which is a good use of income tax free, income and benefits clawback free money.

If you need $10,000 then you only need to withdraw $10,000. The remaining $480,000 can be a mixture of GIC's and government bonds or GIC's, government bonds and preferred shares maybe REIT's if more risk is wanted by this couple.

This $480,000 will bring in about 3.5% to 4.00% depending on the mix of the non-registered investments they choose these days. This is anywhere from $17,000 to $19,000 in sustainable income a year.

Now, looking through everything, annual income will be $24,000 from term certain annuities, $16,000 from RRIF income, $17,000 income from non-registered investments on the conservative mix of GIC's, bonds. TFSA's are not bringing in annual income but are accruing interest on average of $4,025 annually.

Remember, debt reduction and being debt free in and before retirement will lower monthly expenses and release them from a big burden of a mortgage, debts too. For example, even a modest $700 monthly mortgage remaining in retirement will require $160,000 to $180,000 in current RRIF or annuities to cover them on an after income tax basis.

All together and this comes to $61,025 per year with sustainable, conservative income from conservative annuity, RRIF, TFSA, non-registered investments. This does not include their annual income from C.P.P. and OAS of $27,000.

The above three posts are just an illustration and example on how to create sustainable, multiple retirement income and other income sources without relying on pensions and is in no way any advice, suggestion by myself or from anyone else on how to invest anyone's money. What you and anyone else does with your money and financial affairs is your decision or decisions entirely.

September 23, 2014
2:18 am
Loonie
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There are a great many assumptions in what has been written above. Many of them do not hold water. And most of them do not hold water for most people.

1. CPP, OAS, GIS, and even corporate pension plans can be here for people if we understand their value and want them. If we continue to denigrate them, then it will be a self-fulfilling prophecy, and, yes, they will decline. It's time to speak up and defend them, not treat them like they are dispensable. Tell your MPPs, MLAs, MPPs, co-workers, and union leaders if you have any, that this is really important to you and will influence how you vote at the polls and on negotiated agreements. By all means, become truly financially literate, and you will appreciate that people who do have good pension plans are very glad of them and think they are worth fighting for. You want to join that crowd, not assume that you can't. And if you think globalization is part of the problem, then join the people who are trying to do something about it. Don't be a sitting duck for lower wages for the majority, elimination of full time jobs, increases in part time jobs, outsourcing, and the elimination of pension plans. The best retirement income plan in the world will be no use if people are earning poor wages at part time jobs because they can't get anything else.

2. CPP, OAS, GIS may not have been intended to be enough for people to live on in some people's views, but in fact this assumption is wrong. The reason GIS was invented was precisely to deal with poverty amongst seniors, which was a huge issue at the time it was introduced. Many many people can and do live on this income package. Many of them worked their whole lives (I know one who raised her family, then went back to school and back to work, but it was not enough, even though she worked till she was 74); many had health problems along the way, or their children had health problems so that they had to stay home, and could not save enough for themselves; many had elderly relatives of their own to look after in their homes; and many could simply never get sustainable jobs that would enable them to save $1.2million for retirement or anywhere close to it. These people absolutely do rely on CPP, OAS, and GIS.
The mythical Mary and John in the above example, who may bear an amazing resemblance to the writer 30 years hence, may run into difficult circumstances at some point in their lives and be unable to fulfill their ideal plan of funding RRSPs, TFSAs, and so on. They have good jobs now, and are gambling on remaining healthy, fully employed, and having perfect children. I hope they succeed, but I know that there are people who don't. For those who don't, a combination of CPP, OAS and GIS ought to provide a foundation to allow them to get by.

3. The family that at age 67 in 2014 has $1.2million in investments is in the minority statistically, and probably isn't looking for this advice, so the plan that is presented here does not apply to most people.

4. It must be remembered that financial literacy, while a good thing in theory, is an idea that was thought up by the investment industry. They want people to understand investments better and make more investments, and they don't want to be on the hook for those decisions. They want to download the responsibility for those decisions onto you and me. There is much to be learned, but, frankly, the bulk of it is beyond the time or ability of the average person who already has a busy life. The idea that people had to have a good knowledge of investing in order to have a decent retirement is, historically, quite recent. Even mutual funds are a relatively recent invention, I believe from the 1960s or so. The investment world is not really set up for the little guy to "win". Its purpose is to simply get more money out on the table that people are willing to put into various investments, most of which offer no guarantee. If you find investing a scary prospect, you are rightly cautious, no matter how "literate" you may be. Even the rich sometimes fall into poverty, and there are many examples of that.

5. A fixed term annuity for 25 years, if bought at age 67, will EXPIRE when you reach 92, if you should happen to live that long. This is the age at which your expenses might increase, and you may need to purchase extra care. But, according to this model, you will suddenly lose $24,000 of annual income. Further, we are not told if this income is inflation-protected. The cost of buying an annuity with the 3 necessary conditions, namely inflation protection, 2 beneficiaries, and a term that extends to cover your entire life, will decrease the annual income from it. So, I would not count on $24,000 without seeing quotes from insurance companies which specify these 3 conditions.
Need I mention that benefits from a pension plan continue as long as you both shall live and usually have some degree of inflation protection?

6. The writer is confused when he says that the children or other named beneficiaries will necessarily get a benefit from the $400,000 annuity. He has said that this is to be a 25-yr term annuity. That means that you have to gamble on how long you will live. If you live past 92 (increasingly likely as longevity is generally on the increase), then nobody will get a cent from this annuity. If you die at, let's say, 85, they will get the remainder of the annuity only (7 x $24,000); and so on. If there is no inflation protection in this policy, and if inflation continues at its general average, then this might only be worth considerably less than $100,000 in today's dollars. A pension plan pays out as long as you and your spouse live. Most people want that kind of security when they are old, although they may not appreciate its importance when they are young and healthy and imagining that they can do everything themselves.
Annuities, however, should be considered as part of one's retirement planning if you have the money to do it. Most advisors feel that you are better off though to wait until you are about 75 or 80 to buy an annuity, as you will get a better return. You will get a much better tax break, though, if you buy them with non-registered funds.

7. It's not wise to assume what the returns will be for the next 25+ years. As rates are low at the moment and no significant sign of rising, it could be difficult to attain these returns. On the other hand, they might be greater. In either case, inflation will probably rise to meet or exceed them. The unique advantage of a pension plan in this regard, which can never be matched by the individual, is that it can invest for the very long haul, which typically brings better returns.

8. There is an implicit assumption here that RRSPs and pension plans are a kind of either/or situation, that you can only have one or the other. This is not the case. Many people have both. It is the rare pension plan indeed which accepts contributions up to the RRSP limit. Most people have contribution room left over after their pension plan contribution and can, if they choose, maximize their RRSP accordingly.

9. Contrary to the summary statement about the total income, this is not a sustainable income, as no mention has been made of how the couple will deal with inflation - except, of course, for that much-despised pension plan which they eschew. At least the CPP (Canada PENSION Plan) and OAS have inflation protection. Yes, it might be changed or whatever, but so can anything. The principle has been established that it is important.

All of that said, it's not a bad plan, if you happen to have been able to save $1.2million and are 67 and retiring right now. (Watch out for inflation though, as it can eat you alive! $61,000 will not be very impressive in 10 or 20 years.)
In the financial planning world, too little attention has been paid, generally, to how one would go about living off the money one has saved, and, thus, some financial institutions do not even offer RRIFs. Some do not even offer RRSPs.
The best plan is a well-diversified one, and that includes a good pension plan.
If you want to read more about why good pension plans are important and how they work, I suggest
Pension confidential: 50 things you don't know about your pension and investments. by Drummond, R. J. (Robert Johnston); and Roberts, Chris. (Toronto: Lorimer, 2012.) I found it very helpful, and it is available in most public libraries.
However, the ideas I have expressed are my own, based on a variety of sources.

September 23, 2014
1:37 pm
Jon
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Personally speaking, I will not plan for anything longer than 10 years and I will make adjustment for my plan every 2 years, things are changing too fast to plan for this long and things can really change instantly (like in 2008).

September 23, 2014
8:29 pm
Jack Manning
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Loonie, Europe is the model that you are talking about pensions and nothing else. If you want that model then move to Europe. We are not Europe. We are North America.

Loonie, if everything you said is such a great idea and works better than what anyone else is doing by being financially responsible and looking after their family first as it is their money not yours or the government then turn over all your money and getting a pension for you and your spouse.

This includes your house too so you can get even more. Loonie, the days of the past of getting a free lunch of living 25, 30 years getting a pension at taxpayers expense and those that die of no fault of their own is over.

If you want a decent retirement you have to pay for it and stop digging in people's pockets like my wife and I working 100 hours a week.

If you think we are going to be fooled by your socialism and social programs utopia for all that will never work then you are very mistaken.

Your so called experts can stuff their book back in their book case. We are not going to work another 35 years to get a pension at 75 years old so we can maybe live 5 or 10 years and get peanuts back on the dollar.

Your family and others that think like you never get it and will never have what you are looking for. It does not exist and your policies and your expert policies will bring down Canada, U.S. as government only transfers wealth but it can't create wealth.

All you guys want to do is make everyone equally poor and that is what will happen soon enough.

September 23, 2014
8:45 pm
Loonie
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Nothing I have written has been addressed, so I have no further comment.

September 23, 2014
8:59 pm
Jack Manning
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Loonie, you have nothing else to say until it is 2 in the morning when people have to sleep and go to work putting in 9, 10 hours a days for 6 days a week and wondering if we will live long enough to get the peanuts of pensions you are so sure of.

When it comes to other people's money the government and others have all the answers but when it comes to their own money then I did not address you. Pensions are the worse ponzi scheme than anything else in life. Reality and the truth is not what people want to hear.

All pensions work this way, for example, a coworker that worked for 37 years dies before me so when I am still alive can benefit from his and his family's misery. No thanks!

Loonie, the difference between us is we are for choice and you are for forcing everyone to pay no matter what the cost. We are losing our democracy and freedom little by little in all aspects of our lives.sf-cry

September 23, 2014
9:36 pm
Jack Manning
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Jon, you said you are like a junior economist and that is all you have to say. Pensions are not the best thing since sliced bread as Loonie is suggesting.

Ask those in Greece about their pension plans being cut 30% to 60% and paying much more taxes to just keep that small pension now. The best thing that Loonie and people that he thinks are such experts is take more money out of people's pockets that are better off financially.

This is all the left and socialistic policy heads can think as a solution. Take more from those that actually care about their future to punish us like we are evil villains and are the problem. Take all our money and then what. You have no one else to take from.

This is when we all become poor and it gets really ugly. People are then so surprised like they did not know what was going on, Romania sounds familiar, Nicolea Ceausescu.

September 23, 2014
9:39 pm
Loonie
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I have done my share of long work days and weeks. And now you, who are very concerned about the intrusive role of government, propose that I ought not to post anything at 2am in my retirement years because you apparently don't like it?? Sorry, but this is what retirement looks like.

I have explained pension plans more than once, and do not intend to do so again. People who want a balanced understanding of them can pursue this.

I must agree with you that we are losing our democracy and freedom in many ways, but pension plans are not a big concern. A good pension plan remains an important piece of any sound retirement plan. In the many books I have read, from various perspectives, I can't think of ANY that did not agree with that. ALL responsible advisors except for people who have offbeat ideas such as investing solely in precious metals, unanimously advise diversification, and that is what I am advocating. A pension plan remains an important piece of a defensive portfolio. No one knows for sure what the future will bring.

I must say that I haven't always supported this idea of diversification. For a long time I was looking for some kind of formula that could take advantage of trends and then jump off the train when investments peaked. I didn't lose any money on that line of thinking, fortunately, because I could never bring myself to follow it, as I was afraid of losing.

But I have come to understand that the only way one can hope to avoid the various surprises that always come up is to have irons in several fires, including a good pension plan. Frankly, I do not personally approve of a great many of the investments that the Canada Pension Plan has made. They strike me as risky. The same goes for the work-related pension plan that I am involved with. So, I consider that those plans do the work that I can't do, by investing in things that I would never consider and don't understand. And, thus, I benefit from that diversification without having to do any work or take personal risks. I doubt very much that I could ever do any better. However, I certainly don't have all my eggs in that basket, nor do I suggest that to anyone.

If I die before collecting much of that pension, I won't be needing it and am not concerned. If I live to 100 and collect it for all the remaining years, I will be grateful. That is the kind of pension plan that serves me well.

September 23, 2014
9:47 pm
Jack Manning
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Pensions are not part of a defensive, diversified portfolio because you have to have investments and assets to have a diversified portfolio. Pensions are just payments based on a person's life and a 40% to 50% cut to a spouse, $0.00 for everyone else.

You are not financially literate in this case, I'm sorry to say Loonie. This is why you probably have to depend on pensions. As for the government, they are taking more of our freedom away and pensions is a sneaky way of doing it.

It is part of their plan to make sure that we have less of our own property and give it to whomever they like. As for our money, it is our money not the government's or yours or anybody else.

If we want to leave our hard work, sweat and time to our family then it is up to us. We don't want to profit from your family and how long you live or die. What we own as investments, assets, income has nothing to do with how long we live. This is a socialist policy invented by your so beloved pension experts and government.

September 23, 2014
10:06 pm
Jack Manning
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Loonie, also many advisers that I don't care for their advice say don't depend on pensions too much because if they fail which they will be cut as many examples like Nortel, Enron etc. have happened, then you are in real trouble.

You may want to research your workplace pension plan to see what real financial backing, guarantee they have. In Ontario, I believe it is a maximum $1,000 a month and there is no annual C.P.I. inflation indexation paid on this anymore.

September 23, 2014
10:17 pm
Loonie
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OK, I will change "portfolio" to "retirement income plan". That would be more correct.

You are right that your money is your money. However, it is the value of your money that counts. What can it get you? You can't eat money. The value of your money is determined by factors well beyond your control. It might end up being worth very little, as people in places like Greece and Italy have repeatedly discovered. Or it might be worth more than today, as we have sometimes seen when our dollar is in the ascendancy. Like it or not, we are all part of a wider society and we can't avoid that by hoarding our pennies in secret.

Socialist, no less! Ooh, really scary!
It's a pension plan, for goodness sakes, not the Regina Manifesto. I hadn't noticed that the Conservative govt in Ottawa was into socialism, yet you accuse all govt of taking too much of your money. I'm sure they would be mortified to know of your revelation.

Readers can draw their own conclusions. I'm sure Jack will want to have the last word.

September 23, 2014
10:26 pm
Jack Manning
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Loonie, creating TFSA's and RRIF income splittling and cutting the G.S.T, raising the personal amount by thousands etc. This is just a few examples of what a socialist government does not do.

There are so many examples that I can go into but you won't read it anyway. My family is my responsibility and the bottom line is you are just some stranger on a forum that wants to convince me that by me giving more and more money to all governments is going to benefit us.

Good luck with that philosophy and tell me how it works out on how future red and orange parties increase your pension. By the way Loonie, your points above don't address if you have a major expense $50,000 or $100,000 and you have little to no assets, investments but thousands in pension income.

You will be in a bunch of debt which is a crushing financial blow worse than 10, 20 years of inflation.

September 23, 2014
10:30 pm
Jack Manning
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Loonie, pensions are more vulnerable to socialist governments like Italy, Spain, Greece etc. than other investments, assets etc.

Also, your points above do not address that those with public sector pension plans especially have very little room to put into RRSP's and usually don't do so because of their very highly subsidized taxpayer funded pension plans 50%, 60%, 70% by us taxpayers.

September 23, 2014
10:53 pm
Loonie
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The last time I looked, the Conservative gov't had not gotten rid of pension plans, which you have labelled as "socialist" (post #11, last paragraph). Heaven knows what they might yet do, but I think they realize this would be very unpopular with seniors.

I have made it clear in various posts that a pension plan is only one part of a diversified retirement plan, so there is no necessary connection between pension plans and major expenses. Only a fool would think that a major expense such as you have suggested could be covered by any kind of existing pension plan - unless it's like the one given to high-placed Ontario Hydro executives, which has been fully funded by taxpayers through both blue and red governments and is outrageously high.

Actually, Jack, I am not trying to convince you of anything. I accept that your position is what it is, will not change unless hit by an avalanche, and that you are entitled to it.
I am tired of the repetition, hyperbole and inflammatory comments, but I am really only bothering to respond to you because I am concerned about the influence of your views on others who may not have thought through all the options yet.
I think it's important to have more than one point of view explored - for the common good, a concept for which you have rejected in another thread.
Other than that, I don't care.

September 23, 2014
11:09 pm
Jack Manning
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Loonie, for someone that talks about the common good of society you just mentioned two bad things that will happen to me with me hopefully living long enough not dying to be able to I guess see my fruits of my labor and now I am going to hit an avalanche.

Our family will never receive get back all the money we paid and continue to pay in taxes, C.P.P, E.I., fees etc. to all governments. It is mathematically impossible.

As for large expenses of $50,000 or $100,000, most people that have $3,000, $4,000, $5,000 monthly pension plans have not much in investments and have illiquid assets like houses, cottages.

Them like you will be in financial trouble when they don't have many decades of savings, RRSP's, TFSA's, non-registered investments set aside when needed. Only fools believe that pension plans in the thousands a month is going to help them out.

If you read my post above, you can't have much in RRSP's because RPP's which are pension plan contributions have most of the RRSP/ RPP room that the government gives you.

Loonie, if you saved a large amount of savings, investments you would not be in such a panic about inflation and would be sleeping at night. Once again, Loonie, financial illiteracy really looks to be what you are not fully understanding.

The federal conservative government did not go along with that stupid idea of the Ontario red liberals Ontario Retirement Pension Plan, gee what other governments are red, Socialist, Communist.

If you had reds in the feds, they would of taken more money from our paycheck on the federal side for sure.

September 23, 2014
11:44 pm
Loonie
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I don't know what ever made you think you OUGHT to get back personally all the money you have contributed in taxes and so on. Taxes go to all kinds of things which may never touch us as individuals, such as defense budgets and police.

As I said, you know next to nothing about my financial situation. Your comments are completely off the mark and irrelevant.

Inflation, as I mentioned in another thread, is not something anyone can predict. Everyone needs to be concerned about its potential. Financially literate people understand that past performance is not an indicator of future success. The same principle applies to inflation. Let me spell that out for you. Just because inflation has been more or less controlled to the 1 to 3% range for some time, that doesn't tell us anything about what might happen in future. Very few people, no matter how prudent or frugal, can deal with runaway inflation such as has been experienced in some other countries, and often repeatedly.

September 23, 2014
11:49 pm
Loonie
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Jack Manning said

The federal conservative government did not go along with that stupid idea of the Ontario red liberals Ontario Retirement Pension Plan, gee what other governments are red, Socialist, Communist.

Thank you for your clarity. Finally, you have disclosed the belief system which underlies your perspective. You think that even a liberal government is Communist!

For those who might not be aware, the kind of extreme individualism which Jack advocates is consistent with Libertarianism. Anyone interested might want to research that, pro and con, in deciding if they wish to support his views, in order to be fully informed.

September 24, 2014
12:00 am
Jack Manning
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Loonie, if inflation is only 1% to 3% a year then why are you complaining about much higher prices for gas, electricity, property taxes, heat, insurance, food etc.

Inflation is a problem with those that have little to no investments and have no real financial plan. It is for those that live on a peanuts pension plan like you Loonie that have the most financial struggles because you depend on them so much.

By the way, most peanut pension plans have anywhere from 2% to 4% maximum C.P.I. annual indexation inflation caps, so you are not protected if we get 4.10%, 5%, 6% etc. or higher inflation. Sorry your out of luck!

Loonie, if you knew about economics and financial literacy, the more spending by governments, socialistic policies are the main culprits here like pensions, the more inflation will rise. Once again, government taking from us savers, investors at the expense for social programs that Loonie and others will benefit greatly.

As for all the taxes we pay and we will never get even close to it back plus growth, interest, I brought this up because you said in the above post unless I hit an avalanche, I will be entitled to it. Our family has planned well financially and because of our assets, investments, income, governments will exclude us from the very social programs that you Loonie and others will benefit enormously from our expense.

We will get nothing. This is how socialism works, the financially responsible and careful with their money and family's money are going to pay at least 70% of all future socialist entitled people government protects.

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