Your parents are finally downsizing after 40 years in the same house. You want to help, but where to even start? 

It’s a dramatically different world from the last time they moved, in terms of finding quality services, researching options and comparing prices. This is where children can play a key role for their parents, especially those who may not be as internet-savvy, says Bill VanGorder, chief advocacy and education officer for the Canadian Association of Retired Persons.

“Often, adult children are more familiar with researching things online, have networks that they can check with, and are able to maybe dig a little deeper,” he says. 

“People get older, they don’t always access information [online], they may use the internet for email and for some entertainment, but they don’t understand the ways of finding good information.”

Significant costs and stress come with downsizing — so research and legwork can ensure a smooth transition to a new lifestyle in a smaller space, VanGorder says. Adult children might also have friends or spouses who have gone through similar experiences with their own parents and can share those best practices and referrals.

Moving and downsizing companies

Finding reputable moving services is a major concern for CARP’s 25,000 members, VanGorder says.

CARP works with the Canadian Association of Movers to share information and resources on its website, including warnings about moving scams. The moving industry is unregulated, the CARP website points out, so anyone can claim to be a mover.

VanGorder recommends using local CARP chapters and seniors organizations to find moving companies that specialize in serving older people. He says the process can be “very different for older people than it is for younger people, who are doing it for different reasons.”

If it’s a big move, a solo parent, or an adult child isn’t available to help, downsizing companies offer the full service: organizing and packing, donating and selling items, junk removal and the move itself.

Cindy Beaudet, owner of Destination Seniors Downsizing in Calgary, says a reputable service should have workers’ compensation insurance to protect clients against lawsuits in case an employee is injured during a move. 

“A lot of [downsizing] companies don’t,” she says.

Testimonials, references and reviews are a must, and Beaudet says detailed quotes ensure every service and cost is upfront. Her company’s quotes will have around 20 line items, with explanations of everything from elevators to travel time.

Another critical detail, if you want to recoup some costs by selling some possessions — ask downsizing companies if they have relationships with local dealers.

Selling possessions

Estate sales typically expect a minimum value of $25,000 in sellable items, Beaudet says, which is not realistic for many clients. Her company has relationships with dealers who buy in bulk, including furniture, antiques, coins and banknotes, jewelry, silver cutlery and original art.

If you’re looking into a downsizing company, ask for a track record of sales or dealer relationships.

“I have an art dealer,” Beaudet says, “plus I have a website I use, it’s called Art Price. So I’ll go into somebody’s house and I’ll just type the artist in and it tells me … the last 100 paintings that were sold, the valuation, I measure them and everything like that. So I can give them an idea — if it goes to auction, this is what it’s going to get.”

If you’re downsizing yourself, you can find dealers to offer a sum for the entire contents left in a house, VanGorder says.

There are also always donation options, including non-profits such as Habitat for Humanity, second-hand stores, religious groups, and newcomer organizations.

In terms of selling privately, via Facebook Marketplace or other local options, VanGorder says it might be fruitful if there’s a family member who is already active in selling on such websites. But generally, it’s a tough racket.

“It can be a lot of work, and it depends on what you have,” VanGorder says. “But things aren’t usually worth as much to other people as they are to us. So that’s often disappointing.”

Once these possessions are sold or donated, Beaudet says adult children can help with acquiring new, compact furniture pieces to fit a smaller space. For those moving into a senior residence, for instance, around 650 square feet is a common size of a unit, so seating and accent tables will need to be sized down.

Storage

Beaudet is blunt about the value of long-term storage.

“I’m sorry, waste of money,” she says. 

It’s better to donate or sell items now, she says, and adult children should get their parents on-board, helping them let go emotionally of possessions they cannot bring along.

“Typically, our clients are 86 and older,” she adds. “They don’t even access the stuff that they put into storage in the basement at the seniors’ home.”

For downsizers who might feasibly use items in the future, VanGorder advises asking storage companies for seniors discounts. 

Older buildings with storage space are often cheaper than the new builds that are popping up, he adds. But parents shouldn’t use storage with the expectation their adult children want all their stuff.

“One of the greatest disappointments people have is that they think they’ve got all these wonderful things that their kids are going to want,” VanGorder says. “Kids don’t want them.”

Adult children should let their parents know that upfront. They could save significant costs on storage, and perhaps earn them some cash if the items can be sold.

If you have a prescribed-rate loan with a spouse or other family member, make sure the borrower pays interest on that loan on or before Jan. 30.

Failure to pay by that deadline will result in any investment income earned on the loan being attributed back to the lender for the year the interest was incurred — and all subsequent years. As a result, the strategy will no longer allow you and your family member to split income, which is usually why the loan was set up in the first place.

However, if the annual interest is paid within 30 days of year-end, the loan can remain in effect at the prescribed rate that was current when the loan was originally made.

A prescribed-rate loan strategy involves someone in a high tax bracket loaning money for investment purposes to a spouse, common-law partner or adult child in a lower tax bracket so the investment income is taxed at that lower rate, thus achieving income splitting and tax savings. 

To avoid the investment income being taxed in the hands of the person in the higher bracket, the loan must be executed with a minimum interest rate as dictated by income tax regulations, known as the prescribed rate. The lower the prescribed rate on the loan, the greater the potential for income splitting using a prescribed-rate loan strategy. 

Maintaining the original rate is crucial if the prescribed-rate loan was established when interest rates were much lower than they are currently. As recently as the second quarter of 2022, the prescribed rate was 1%, the lowest rate at which the prescribed rate for family loans can be set. However, the prescribed rate has since risen with inflation. For the first quarter of 2024, the prescribed rate is 6%. 

The borrower must transfer the interest payment to the lender and document the transaction, as the Canada Revenue Agency could ask for evidence that interest was paid.

Middle-income earners will start seeing a larger portion of their paycheques going toward Canada Pension Plan contributions as of Monday.

A broader pension revamp began in 2019 as both the Quebec Pension Plan and CPP began phasing in enhanced benefits intended to provide more financial support for Canadians after they retire. So far, individual contributions — and the employer’s matching portion — have primarily ticked upward.

The trade-off is that Canadians will eventually receive higher payouts once they start collecting their pensions.

But as of 2024, the CPP includes a new, second earnings ceiling. For those who make more than a given amount, additional payroll deductions now apply.

“The primary objective of these changes is to strengthen benefits and enhance overall financial stability for prospective retirees,” said Alim Dhanji, senior wealth adviser at Assante Financial Management Ltd. in Vancouver.

Previously, everyone earning over the base amount (currently $3,500) contributes a set portion of their income, up to a maximum amount (last year’s was $66,600) that increases slightly every year. Those who are self employed pay both the employee and employer portions.

Starting this year, the enhanced pension plan now has two earnings ceilings.

The first tier works similarly to the old system: just like before, workers contribute a set portion of their earnings to CPP, up to a government-set threshold — for 2024, it’s $68,500. Those earning that amount or less won’t see any changes to their current contribution rates.

What’s new, for anyone earning more than that amount, is a second contribution level that tops out at $73,200.

People in this group pay 4% on their second-tier earnings, or the amount they make between $68,500 and $73,200.

The upgraded CPP policies, which continue phasing in through next year, were designed to significantly boost retirement income for Canadians — an increase from one-quarter of their eligible income to one-third.

Anyone who has paid into CPP since 2019 will receive higher benefits, but the full effects will take decades to materialize, so the youngest workers stand to gain the most. People retiring 40 years from now will see their income go up by more than 50% compared to the current pension beneficiaries.

Dhanji noted the changes will not affect the eligibility criteria for retirement pension, post-retirement benefits, disability pension and survivor’s pension.

The new, second threshold will affect employers as well as employees, Dhanji noted, since they are required to match their workers’ higher contributions.

Employers have been affected by the phased increase since 2019, he said. Between that year and 2023, both workers and their employers saw contribution rates rise by almost a full percentage point.

Canadian employers match their workers’ pension earnings as a part of the policy. While the pension amount gets split between the employer and workers, freelancers and self-employed people are responsible for paying both portions — a combined 11.9% for the first tier and 8% for the second tier.

“From a financial planning standpoint, employers can find assurance in the fact that these changes are designed to benefit their employees during retirement … contributing to enhanced financial well-being,” Dhanji said.

When making financial decisions, investors often grapple with a subtle but potent force that can shape the outcome — confirmation bias. This cognitive tendency, deeply rooted in human psychology, has profound implications for investment strategies and other financial choices.

Confirmation bias, simply put, is the tendency to seek, favour and remember information that aligns with pre-existing beliefs while dismissing contradictory evidence. Its allure lies in the sense of validation. The desire to be right leads investors to cherry-pick data that supports their views. While understandable, it can create a false hope in less-than-ideal investment options.

Consider an investor evaluating a revenue-generating property. Fuelled by the prospects of passive income and the lucrative returns of short-term rentals, initial enthusiasm can lead to a cascade of justifications. The expected high rental rate more than pays for the borrowing costs, leaving a handsome profit. Positive market trends and success stories come readily to mind, reinforcing the belief that the purchase is a sure success.

Sometime later, however, unforeseen challenges emerge. It isn’t easy to get cleaning services. Maintenance costs are higher than expected, and rentals aren’t booked as often as anticipated. Then, a new law prohibiting short-term rentals is introduced, and long-term rental rates won’t turn a profit. Finally, the sobering reality of transaction costs and price uncertainty when selling the property comes too late.

Confirmation bias can influence investors of all asset classes—from housing to stocks to bonds. It can also influence financial choices such as selecting one mortgage interest rate term over another.

To limit the effect of confirmation bias, investors must adopt habits to counteract this silent persuasion. A pros and cons list (with an emphasis on the cons) is a potent tool to consider alternative, and sometimes unpleasant, outcomes. The goal is not self-flagellation but making better financial decisions through scrutiny.

Checklists and decision trees are other basic strategies to ensure you don’t rush into a decision before considering what could go wrong. A checklist itemizes steps or considerations before making a final decision. A decision tree is a path to follow given the information gathered along the process.

Returning to the income property example above, you could create a checklist of a home’s components that deteriorate over time to help determine a property’s maintenance costs. This checklist could be part of a decision tree to determine the expected cashflows and profit from the investment, and whether it meets your criteria. Automating these steps in your process will further reduce the potential for bias because you’ll be less likely to skip a step.

Financial decisions driven by the desire to validate preconceived notions can lead you to overlook crucial factors. Investors convinced of a particular venture’s profitability become naturally attuned to supportive details, dismissing contradictory data and potential pitfalls. Using tools that force you to reframe your perspective and question assumptions will improve decisions.

---

 

KEY TAKEAWAYS FOR CLIENTS

• The deadline for making a charitable donation and claim a tax receipt for 2023 is December 31
• Try to donate public securities well before the end of the year
• If you are making a large donation, you may want to do so before the alternative minimum tax takes effect

As the end of the year approaches, you may have questions for your financial advisor about making charitable donations as both a way of giving back to your community and to achieve tax savings.

“A lot of people now have a better idea of generally what their tax liability [for the year] will be,” said Jacqueline Power, assistant vice-president, tax and estate planning and distribution with Mackenzie Investments in Toronto. “Now, they are trying to figure out, ‘How much should we donate in an effort to be able to reduce that tax liability?’”

Individuals can claim a donation tax credit for donations to registered charities of up to 75% of the taxpayer’s income in a year. (In the year of a taxpayer’s death, and for the tax year before, the limit is 100%.)

The federal donation tax credit is 15% on the first $200 of donations and 29% (33% to the extent income exceeds $235,675 in 2023) on amounts above. The provinces and territories also offer donation tax credits at different rates for donations below and above the $200 threshold.

Depending on the jurisdiction, the total federal-provincial credit can represent more than half of the gift amount once total annual donations exceed $200 in a calendar year.

The deadline for making a charitable donation in order to claim a tax receipt for 2023 is December 31.

If you donate publicly listed securities, you’ll receive a tax credit based on the value of the shares at that time they’re donated. In addition, any capital gain realized on the disposition of the shares will be free from tax.

However, as a charity that receives an in-kind donation will need to arrange for the shares to be sold, try to donate publicly listed securities well before the end of the year.

“Sometimes people wait until the middle of December and hope that they’re going to be able to make that in-kind charitable donation and use that credit, and sometimes the timing is just a little too tight,” Power said.

In 2023, the last day to trade Canadian-listed stocks is Wednesday, Dec. 27. Trades executed on Dec. 28 and 29 will settle on Jan. 2 and 3, 2024, respectively.

If you’re looking to make a large donation, you might consider doing so before 2024, when the federal government’s proposed changes to the alternative minimum tax (AMT) are set to become effective, Power said.

Under the proposed revamped AMT, only half of the donation tax credit can be applied against the AMT, down from 100% under the current rules. Meanwhile, 30% of capital gains on the donation of publicly listed securities would be included in adjusted taxable income for the purposes of the AMT.

“If there are investors who are trying to decide, ‘Should I make an in-kind donation [this year], should I wait until next year?’, and AMT applies to them, it is likely better for them to make that donation in 2023,” Power said.

The federal government didn’t include proposed changes to the AMT when it tabled Bill C-59 in the House of Commons on Nov. 30. That bill included legislation to implement proposals from the 2023 federal budget and the fall economic statement.

In an email, a spokesperson for the Department of Finance said the government is “committed to implementing the AMT reform” and is currently reviewing stakeholder commentary on the draft legislation to implement the changes.

Even though the government is unlikely to have legislation in place to implement the AMT by Jan. 1, it “may still have that as an effective date,” said Power in an email following the tabling of Bill C-59. Power said “it’s a guessing game” as to how the government might ultimately proceed.

“If [a client] is philanthropic and worried about the AMT changes and how they affect charitable giving, they may still want to make the donation before year end just to be on the safe side,” Power said.

Whether you’re retiring early or changing jobs, one of the largest financial decisions when leaving an employer is what to do with your retirement savings.

If you have a group RRSP arranged through your workplace, the accumulated amount is generally yours to keep, though you’ll likely have to transfer to other investments. If your work has a registered pension plan (RPP), there’s more to it.

You may be allowed to stay in your employer’s RPP, move to a new employer’s plan, or transfer into a locked-in retirement account. Depending on the type of RPP, that last option can be relatively straightforward, or it can be a multi-part process to arrive at the pension value — including potential tax consequences.

Pensions come in two main varieties: defined contribution (DC) plans and defined benefit (DB) plans. Some plans are hybrid arrangements with elements of both.

Defined contribution plans

Under a DC plan, the employer is obligated to contribute a certain amount to the plan each year. Sometimes there may also be employee contributions. You will be able to choose among the investment options within the plan, with all income and growth tax-sheltered. The accumulated value is what is available for your retirement pension, which by default is paid as an annual annuity.

If you leave before retirement, the plan may be transferred dollar-for-dollar into a locked-in retirement account, where your investments may continue to grow tax-sheltered. The main feature of being “locked in” is that there is a maximum amount you can withdraw each year, which is intended to limit depletion so it is sustainable through your retirement years.

Defined benefit plans

By contrast, under a DB plan the employer is obligated to provide a retirement pension determined by a formula.

An actuary calculates the employer’s required contributions based on the number of plan members and their respective rights. Those contribution amounts are adjusted from time to time according to past investment experience and future economic expectations.

You will be entitled to a retirement pension according to a formula in the plan (more on that below). If you leave before retirement and want to take your funds with you, once again an actuary is needed to determine the value. That’s where it gets complicated.

Commuting a DB plan

A DB plan’s annual retirement pension is determined by multiplying a base income times a credit rate times years of employment. The base income and credit rate are negotiated between employer and employees. The base could be (for example) the average of your last five years of employment income, or better yet your best three years’ income. The credit rate generally ranges from 1% to 2% per year of employment.

If you leave prior to retirement, an actuary determines the value of your entitlement in the accumulating pension fund. On the face of it, it’s the annual pension discussed above multiplied by a present value (PV) factor.

The PV factor is essentially an interest rate, but one requiring numerous inputs to derive. The main ones are current age, assumed commencement date (less any reduction for starting early), continuation provisions (e.g., to spouse), any guarantee period and any annual indexation.

The result is the lump sum amount that would be required to pay the projected annual pension to you over your expected lifetime. For the sake of the calculation, it is assumed that the lump sum will be invested at long-term interest rates. Accordingly, commuted values tend to be higher when prevailing interest rates are low, and lower when interest rates are high.

Between you and the CRA: maximum tax-free transfer to a locked-in plan

The commuted value from the actuary’s report should not be confused with the amount that can be transferred into a locked-in retirement account.

In structure, the tax rule is similar to the commuted value calculation above. In tax terms, it multiplies your “lifetime retirement benefits” by a PV factor. In this case, though, the PV factor is less generous than the commuted-value PV factor outlined above. For example, it doesn’t account for any indexing or early retirement benefits.

As a result, the tax transfer value is often less than the commuted pension value. In a sense, the tax calculation is what you would have accumulated under the RRSP rules, and therefore that’s the amount that you are allowed to transfer into a locked-in retirement account.

The difference or excess amount will be taxable in the current year. While this is obviously not a pleasant prospect, remember that it is applying tax to the more generous terms of the DB pension and you still get to keep the after-tax amount. The impact of this may be deferred if you have unused RRSP contribution room and choose to make a corresponding contribution.

Considerations before deciding to commute

Apart from the value of the commuted plan and tax transfer, here are some additional issues to review before committing to a course of action.

• Do you really want to commute your pension? Investment of the commuted value may ultimately deliver a larger retirement income, but this should be balanced against downside investment risk. Some people like to make investment decisions, while others shy away and may prefer to keep their money in the employer’s plan. A conversation with your financial advisor can help you decide.

• Are you comfortable leaving behind indexing and guarantees that may have been part of the original pension?

• Do you want to be able to adjust income from year to year, or ever make a lump-sum withdrawal? As locked-in plans put a cap on annual withdrawals, a commuted pension may be needed for this kind of flexibility.

• Some pension plans allow continued health and dental coverage, at least for some period, which can reduce costs in retirement.

• On the other hand, if you have health concerns that may affect your life expectancy, you may prefer to take the commuted pension as a sure thing to be able to pass on the remaining value to your beneficiaries, especially if you have no spouse.

• Spousal pension income splitting is available under age 65 from a registered pension plan, but generally only from age 65 for an individual life income fund. Does this affect your income plans?

• Beyond a spouse, you may wish to leave a legacy to family or charity. Managing a commuted pension amount may provide an avenue for that kind of planning.

As tougher lending requirements have more homeowners turning to the private mortgage market, brokers say having a strategy to eventually get out of the loan is crucial, or they risk falling into a debt trap that could eventually lead to a For Sale sign on the front lawn.

“Getting out is very difficult. And if you don’t plan for it, or at least acknowledge the difficulties and make that part of your risk determination, you can end up just paying money for the rest of your life and never owning a home,” said Steve Biderman, a mortgage broker at mortgageoutlet.ca.

“You have to treat them as a Band-Aid, not a solution.”

While private mortgages can be appropriate or necessary in certain circumstances, most in the mortgage world consider them a lender of last resort.

A private mortgage is a short-term home loan (typically one year), based on the value and equity in the home. It’s financed by affluent individuals or a group of investors, rather than a bank or other financial institutions like credit unions. Examples of Canadian private mortgage lenders include Capital Direct and Alpine Credits.

They can be a financial lifeline for a homeowner or buyer who can’t get traditional financing because of their low credit score or because they don’t pass traditional lending requirements, but the fees and interest rates associated with these loans are significantly higher than a bank or credit union.

Private mortgage interest rates can range from 10 to 18 per cent, depending on factors such as the property value and credit risk of the borrower, according to rate comparison website Ratehub.ca, compared with mortgage rates of around six or seven per cent at the big banks. The monthly payments on private mortgages are also usually interest only.

A so-called exit strategy maps out how the borrower will move out of the private lending space to a traditional lender. That can involve refinancing, using available cash to reduce or pay off the loan or outright selling the property.

“Sometimes, it’s the only game in town, right? And if it’s focused with a particular purpose in mind, it can be a wonderful stopgap,” Biderman said.

“But when it’s used to maintain ownership of a house that you really can’t afford, where you’re cash flowing negative constantly, it’s just going to eat up your equity eventually.

“There is no `pro’ to that type of private lending because … if it’s just a way to not sell the house, it will become a way only to delay the selling of that house.”

Frances Hinojosa, the co-founder and chief executive of Tribe Financial Group, says she only uses private lending on an “as is, as needed” basis. Private mortgages make up only a small part of her business because the potential pitfalls can be severe.

However, the private lending market has flourished over the years as home prices skyrocketed and more recently, borrowing costs jumped.

The latest data from the Financial Services Regulatory Authority of Ontario shows private mortgages represented 11.7% of all brokered mortgages in the province last year, compared with 8.4% in 2014. The dollar value of private mortgages in Ontario last year was $25.9 billion, more than doubling from $9.1 billion in 2014, according to the data.

“Private mortgages have definitely come into the forefront as we head into these uncertain times,” Hinojosa said.

“It’s becoming more and more prevalent as a type of product that consumers are leaning into in order to afford their current situation,” she said, also adding that some homebuyers see private lenders as their only option to get onto the property ladder.

She says she’s also noticing an increasing number of homeowners who were previously set up with a private mortgage at other firms without a proper exit strategy — they’re now not able to handle the higher monthly payments upon renewal nor do they have proper options to move forward with other financing options.

“We’re starting to have difficult conversations with homeowners saying, really, your only exit strategy at this point is you should seriously consider selling and right-sizing your housing situation — look at buying something smaller or something a bit cheaper,” she said.

Biderman says homeowners who currently have a private mortgage should look at the original reason and rationale on why they obtained the loan, what their exit strategy was and whether or not that plan is still do-able.

“If your exit plan is no longer possible, or you don’t have an exit plan, or if you are unsure where you stand, you should talk to a mortgage professional,” he said.

“Check your maturity date. Know your property’s value. Find your mortgage documents, read them and have them standing by.”

Otherwise, he says, the consequences could be dire, including a forced property sale, a rapid erosion in home equity or the inability to refinance.

As an experiment, Kelley Keehn asked ChatGPT to suggest a financial plan for a small Canadian family.

She prompted the artificial intelligence (AI) software to craft a plan for a couple in their 30s who have two young children and want to save for a house. They’re dealing with hefty debt and have zero savings, but they’re a high-income household.

“What should they do first?” Keehn, a personal finance educator, asked ChatGPT.

The software offered more than a dozen recommendations the family could follow — from building an emergency fund to paying down high-interest debt to creating a budget to building up a down payment for a house.

But Keehn said the AI-generated advice lacked specifics for the family to achieve financial stability.

Financial experts say AI may be an important tool to democratize financial literacy among Canadians, but the software is still not sophisticated enough to interpret the nuances of life and tailor advice to individual financial situations.

“AI is a great resource for the average Canadian seeking financial advice but just not quite with that human element yet,” Keehn said, adding that a financial advisor would’ve had a different take on the case.

“What I think a human would say, is, ‘Look, you’ve got young children, you’ve got debt, so insurance probably should be number one,”’ said Keehn.

“Because if that family is left with high debt, there could be a huge gap in looking after those children,” she said.

“If they have a high income, a human [advisor] might recommend a strategy to invest in an RRSP, take that tax refund and use that to pay down high debts.”

A recent RBC poll, conducted by Ipsos, found younger Canadians were much more likely than older demographics to turn to AI to help manage their finances.

David Lewis, president of behavioural science consultancy BEworks Research Institute, says people are more likely to be honest about their financial situations or admit their lack of knowledge to a machine.

“No one likes to turn to another human and say, ‘I’m an idiot, and I have no idea how a mutual fund works,”’ he said.

“We’re more willing to be honest with the computer because we don’t view a computer as judging us, but we view humans as a judge,” he said.

It is also less expensive than consulting a human financial advisor, Lewis said.

“For those starting out or in lower socio-economic classes and don’t have as much in assets to manage, AI advice can help have better financial outcomes,” he said.

Keehn said AI is “brilliant as an educational tool to help you understand your situation and where you need to brush up on your [knowledge] before working with a human advisor.”

She said the software can be a great tool for preparing to see a financial advisor and to ask the right questions.

Jessica Moorhouse, a personal finance blogger with an Accredited Financial Counsellor Canada designation, agrees that AI can serve an educative purpose but suggests cross-checking information learned on an AI app with a human advisor to identify potential inaccuracies.

“Don’t rely on it 100%,” she said. “Just as I tell people to not rely 100% on hiring a professional to make a financial plan.”

ChatGPT has a disclaimer that the results may produce incorrect information about people, places or facts.

Lewis said AI-generated financial advice may be misleading and could result in inferior or suboptimal outcomes.

“One of the reasons is that you have no idea about the quality of advice you’re getting from AI or an online influencer,” he said.

“The challenge with AI and advice is that you really need the advice, [but] you’re also in a position where you have less capacity to understand the quality of advice.

“That’s a paradox — the more you need it, the less you know whether it’s good or bad.”

Lewis suggests a hybrid model, where the computer processes information and numbers, while humans focus on guidance and long-term planning, as a perfect marriage of human and machine skills.

“Your computers are not good at empathy,” he said. “They’re great at collecting facts and organizing information.”

He said if humans have to spend less time on asset allocation and account administration, it will free up more time for things they’re good at — empathy and coaching.

The fewer choices you face, the fewer opportunities there are for errors. Therefore, one way to reduce the effect of bias on your financial well-being is to make fewer decisions.

This doesn’t mean neglecting your investments or other financial decisions. Rather, it means making decisions strategically to align with your long-term goals. While this may sound straightforward, investors should beware of how inherent biases and heuristics — potentially harmful decision-making shortcuts — can get in the way.

The G.I. Joe fallacy refers to the public service announcements that ran alongside the popular 1980s cartoon series, with the tagline “Knowing is half the battle.” Every parent knows that isn’t true. Telling a child not to run into the street isn’t enough to stop them. Sometimes we do things we shouldn’t, even when we know better.

In financial terms, most people know that buying high and selling low is not a sound investment strategy. But that doesn’t mean it’s easy to resist the fear of missing out on a surging investment or the urge to cash out in a bear market.

Most people also know it’s a good idea to have a financial plan, but very few people spend time developing one. However, a plan with a clear destination means fewer decisions are required along the way, leading to fewer mistakes.

Therefore, it’s important for investors to determine where they want to go. This sounds straightforward but it takes time and energy to execute.

Start by understanding your core values or, in the case of financial decisions, your personal economic values. Beyond the obvious list of what you want to have or achieve over your lifetime and understanding your financial skills or limitations, consider other fundamental questions, such as:

• What keeps you up at night?
• What are your beliefs about borrowing, spending and saving?
• What should you stop spending on?
• Which professionals can add the most value to your plan?
• Which financial decisions are you most happy with?

Your decisions propel you in the desired direction when your personal economic values define them. That’s important because investors often react hastily to market fluctuations and news events, undermining long-term objectives. It’s natural to want to feel a sense of control, and making changes when experiencing discomfort provides temporary emotional relief. But more often than not, those changes derail a well-constructed plan.

When markets drop, stopping your monthly contributions until the volatility subsides will result in reduced retirement savings. Holding cash too long or selling at the wrong time carries significant, long-lasting effects.

One way to manage emotional reactions is to monitor investments with the long-term plan in mind — not the day’s market moves. Even a risk-averse investor can tolerate a well-crafted equity investment strategy when they refrain from incessantly monitoring their investments’ price fluctuations. In any five-year rolling period between 1980 and 2022, an investor in the MSCI World Index would have had a negative return on only five occasions. And if left for one additional year, the return was always positive. That’s why limiting your interactions with your portfolio can help prevent poor decisions and provide better long-term returns.

Understanding your values and objectives enables you to avoid emotional decisions. Your financial success is not determined by the volume of decisions you make but by the purpose behind each one.

The yield on the 10-year Treasury has reached 5% for the first time since 2007. That matters for everyone, not just Wall Street.

Treasury yields have been climbing rapidly, with the 10-year yield rallying from less than 3.50% during the spring and from just 0.50% early in the pandemic. Monday morning, the yield on the 10-year Treasury was at 4.96% after hitting 5.02% earlier. The jump means the U.S. government must pay more to borrow money from investors to cover its spending.

It also directly affects people around the world, because the 10-year Treasury yield is the centerpiece of the global financial system and helps set prices for all kinds of other loans and investments. Besides making it more expensive for U.S. homebuyers to buy a house with a mortgage, higher yields also put downward pressure on prices for everything from stocks to cryptocurrencies. Eventually, they could help cause companies to lay off more workers.

Higher yields mark a sharp turnaround for a generation of consumers and investors who have known pretty much just low yields, as central banks kept benchmark interest rates pinned at nearly zero. Such low rates let people borrow money more easily, which helped economies to strengthen following the 2008 financial crisis, the European debt crisis and other maladies including, most recently, the Covid-19 pandemic.

The low rates led to rising prices for houses, stocks and other investments, but they may also have encouraged too much risk-taking and spurred investment bubbles.

Now, central banks are more concerned with getting high inflation under control. To do that, they raise interest rates and hope the higher costs to borrow will starve inflation of its fuel by bringing down spending.

The Fed’s main interest rate affects extremely short-term loans, those that banks charge overnight. The Fed has already pulled its federal funds rate to the highest level since 2001, and it’s debating whether to hike it one more time. Either way, it’s signaled plans to keep rates high for a while to successfully suffocate inflation.

The 10-year Treasury yield has been catching up to the Fed’s main interest rate after a string of reports has shown the U.S. economy remains remarkably resilient. While that calms worries about a possible recession caused by high rates, it could also keep upward pressure on inflation and shorter-term rates.

Federal Reserve Chair Jerome Powell said Thursday that many other factors could be contributing to the swift rise in the 10-year Treasury yield. They include the U.S. government’s big deficits, which require more federal borrowing, and the Fed’s ongoing efforts to reduce its trove of bond investments built earlier to keep yields low.

On the wonkier side, bond prices have also been falling in tandem with stock prices more often than they used to. That’s unnerving for investors who usually see bonds as the safer part of their portfolios, and it could be pushing them to demand higher yields to own them.

The rise in the 10-year Treasury yield most directly means the U.S. government has to pay more to borrow money for 10 years. But because the 10-year yield is the reference point for financial markets, it also quickly filters out into all kinds of loans.

Even for companies with the best credit ratings, the interest rates they borrow at are set by adding some extra on top of whatever the U.S. government is paying for its Treasurys. Borrowers with worse credit ratings have to pay more extra than those seen as good bets to repay their debts.

More expensive borrowing keep U.S. households from spending as much and companies from expanding as much, which should eventually hit overall U.S. economic activity.

More immediately, because a 10-year Treasury is seen as one of the safest possible investments on the planet, its yield swiftly sways prices for all kinds of investments.

When a super-safe Treasury is paying much more in interest, investors feel less need to pay high prices for a Big Tech stocks, cryptocurrency or other investment that carries more risk. It’s a big reason the S&P 500 has seen its gain for the year so far tumble from 19.5% at the end of July to 10% as of Friday.

Higher U.S. yields also attract more investments from abroad, which means investors are increasingly swapping their currencies for U.S. dollars. Since the end of July, the U.S. dollar has climbed roughly 4% against the euro, 5% against the British pound and 6% against the Australian dollar.

While a stronger dollar helps U.S. tourists buy more stuff when they’re abroad, it can also add financial pressure and heighten inflation for other countries, particularly in the developing world.

Even for U.S. bond investors, the swift rise in bond yields has brought losses of their own. When new bonds are paying higher yields, it makes the older, lower-yielding bonds already sitting in investors’ portfolios or mutual funds less attractive and knocks down their price.

The largest U.S. bond mutual fund has lost roughly 3% so far in 2023 and is on track for a third straight yearly loss. That’s never happened since its birth in 1987.