All posts by Robb Engen

The many benefits of ETFs: What’s not to love about them?

The availability of exchange-traded funds (ETFs) is one of the best things to happen to investors in the last twenty years. What’s not to love about ETFs?

Investors can get broad diversification on the cheap with just two or three funds. This simplicity is what tipped the scales for me nearly three years ago when I switched from a portfolio of 25 Canadian dividend stocks to my two-ETF solution (the four-minute portfolio).

But not all Canadian investors are as enamoured as I am with ETFs. While Canadian ETF assets climbed to a record $133.8 billion in assets under management (Canadian ETF Association – Aug 31 2017), the Canadian mutual fund industry claims a whopping $1.41 trillion in assets (Investment Funds Institute of Canada – Aug 31 3017).

That 10:1 ratio needs to change in a hurry, but there are still headwinds facing the average investor.

First of all, mutual funds have been around a lot longer than ETFs and their sales channels are more widely available. In plain language that means any Joe or Jane investor can go to an advisor and choose from a menu of in-house mutual funds, whereas if an investor wanted to build a portfolio of ETFs, his or her advisor might not have the right license to sell them, might not have access to an exchange to trade them, or might simply balk at the idea that a couple of low cost ETFs could outperform an actively managed portfolio of mutual funds.

Many investors are forced to go the do-it-yourself route like I did, learning on the fly from financial blogs, forums, and sometimes even the financial media about the benefits of investing in low cost ETFs.

 Benefits of low-cost ETFs

Despite these challenges, Pat Chiefalo, the new head of iShares Canada, sees a bright future for the ETF industry in Canada as investors seek lower price points and broader exposure to different markets.

“ETFs offer a simpler and cleaner approach to building a diversified portfolio and we see that diversification makes up the vast majority of investment returns,” said Chiefalo.

Indeed, fans of this blog and of the Canadian Couch Potato’s model portfolios will recognize products like iShares Core MSCI All Country World ex Canada Index ETF: also known as XAW. This ETF gives investors one-stop-shop access to U.S., international, and emerging markets — nearly 8,000 holdings in total — for just 22 basis points (0.22% MER).

It’s hard to believe a company can make money charging $22 for every $10,000 invested, but you won’t hear Canadian investors complain. That’s because a similar global mutual fund might cost $220 for every $10,000 invested (there’s that 10:1 ratio again).

How low will ETF costs go? Continue Reading…

5 common senior financial traps and how to avoid them

Scott Terrio’s Twitter feed (@CooperTrustee) reads like a financial horror story. Terrio, an insolvency expert at Cooper & Co. in Toronto, uses the 140-character medium to share the multitude of ways seemingly well-off Canadians end up buried in debt and turning to debt consolidation, consumer proposals, and even bankruptcy.

Canada’s record household debt levels have been a cause for concern for years, but Terrio sees a new problem on the horizon. Canadian seniors are the demographic increasing debt at the fastest rate.

Take Dorothy, an 81-year-old widow who owns a home with a 1st mortgage from a secondary lender. She refinanced a couple of years ago to do house repairs ($18,000), assist her son with divorce legal fees ($37,000), and to help her grandson with tuition ($8,500).

When her partner died she was no longer able to make the mortgage payments. A friend from church referred her to a mortgage broker.

The broker suggested a reverse mortgage,  which would let her stay in her house without the monthly mortgage payment. But the money from the reverse mortgage wasn’t enough to pay out the 1st mortgage after fees and penalties. She needed a private 2nd mortgage at 12 per cent to pay the balance.

Dorothy co-signed a $26,000 car loan for her nephew and co-signed with her son for funeral expenses ($12,000) for her partner. Her son stopped paying, so Dorothy was pursued (100 per cent).

She then ran into tax trouble by not having tax on her OAS & CPP deducted for the first few years. She owes $21,000 in tax, much of it penalties and interest.

This scenario is becoming more common among seniors today.

“Many are in a unique quandary. They’re asset-rich, but cash-poor. Cash flow is tight. Pensions are fixed, and many have underestimated retirement costs,” said Terrio.

So what do they do? Many seniors cash out assets to make ends meet. Others raid their home equity and take out lines of credit. All have financial consequences.

We asked Terrio to share the top financial traps seniors fall into and how to avoid them:

1.) Tax problems

Most seniors were used to being paid by their employers in after-tax dollars. At pension time, many don’t have taxes deducted to offset their Old Age Security and Canada Pension Plan income and therefore end up spending taxable pension income.

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5 planning options to help you reach your Retirement goals

There are lots of unknowns when it comes to retirement planning. Most of us focus on how much we need to save for retirement without giving much thought as to how much we’re going to spend in retirement.

A $1 million dollar nest egg can provide you with $30,000 to $40,000 to spend each year with reasonable assurance that you won’t run out of money. But if your ideal retirement lifestyle costs $60,000 per year, your million-dollar portfolio won’t be enough to last a lifetime.

Once you determine your magic spending number, the rest of the variables start falling into place. The earlier you can identify the amount of income you need to live the retirement you want, the easier it is to make your retirement plan and adjust course, if necessary.

Let’s say you’ve analyzed your retirement income needs and find, based on your current financial situation, that you won’t be able to fully fund your desired lifestyle. What to do?

Here are five retirement planning options to help you adjust course and reach your retirement goals:

1.)  Reduce your lifestyle

A $60,000/year retirement might be out of reach based on your current situation, but maybe reducing your goal to $45,000/year can still provide a great lifestyle in retirement.

This lifestyle adjustment could mean travelling less often, making sure you retire debt free, downsizing your home, replacing your vehicle less often, reducing your hobbies, or a combination of all the above.

Don’t forget to include government benefits such as CPP, OAS, and/or GIS when projecting your retirement income. It’s worth sitting down with a retirement planner to figure out the best way to draw down your assets and when it makes sense to apply for CPP and OAS.

2.)  Work longer

It can be difficult to picture yourself working longer once you’ve got retirement on the brain, but a few extra years on the job can drastically alter your retirement projection.

The longer you work, the more you can save (or add to your pensionable service if you’re so lucky to have a workplace pension). But also the more years you’re working and earning a paycheque the fewer years you have to withdraw from your nest egg.

Are you healthy and willing to grind it out at work for a few more years? If so, you might be able to reach that $60,000/year retirement goal after all.

3.)  Earn more return from your investments

This is a tricky one because you might take it to mean investing in riskier assets (i.e. an all-equity portfolio), when in fact you can earn higher returns by reducing the overall cost of your portfolio. That’s the first place to start.

Imagine your $300,000 retirement portfolio is invested in a typical set of mutual funds that together comes with a management expense ratio (MER) of 2 per cent. The cost is $6,000/year but you don’t see the charge directly; instead, it comes off your returns.

Switching to index funds and going the do-it-yourself route might reduce your costs to 0.5 per cent, or $1,500 per year. That’s an extra $4,500/year staying in your retirement account instead of going into the hands of your advisor.

There might also be a case for increasing the risk in your portfolio. Say, for example, you tend to hold a lot of cash in your portfolio: you’re not fully invested. Or you hold a bunch of GICs and other fixed income products.

Dialling up your investment risk to include a portion of equities could help you achieve an extra 2-3 per cent per year. The power of compounding can make a huge difference to your retirement portfolio and holding even a small portion of equities in retirement can help your nest egg last longer.

4.) Save more

This one is so obvious it should be first on the list. If you’re not able to fully fund your desired retirement lifestyle based on your current projections then you need to save more.

Hopefully your final working years can give you the opportunity to boost your retirement savings. Big expenses, such as paying down the mortgage and feeding hungry teenagers, are behind you.

But an empty nest and paid-off home might tempt you to increase your lifestyle now rather than doubling-down on your retirement savings to boost your lifestyle later. That’s fine; see options 1-3.

That said, there’s no better time to enhance your nest egg by maxing out your RRSP contributions, including unused contribution room, and doing the same with your TFSA, in the years leading up to your retirement date.

Be mindful here, though, of strategies to reduce your taxes in retirement. It makes little sense to go wild making RRSP contributions in your final working years without considering how withdrawals will impact taxes or OAS clawbacks in retirement.

5.)Supplement your retirement income

Much like working longer can increase your nest egg, supplementing your retirement income with a part-time job derived from a passion or hobby can prolong the life of your portfolio.

Continue Reading…

Can you retire on a million dollars?

In your 20s and 30s, retirement is so far away that you can barely see it on the horizon. The best way to get there is to save what you can afford – say 10 per cent of your income – and then readjust your financial compass as you get closer and have more information.

You might start the journey with the idea that you need a million dollars or more once you reach your destination. To get to one million by age 65, a 30-year-old would need to save $8,500 per year for 35 years, assuming a 6 per cent annual return.

Saving for Retirement

It’s not easy to save $700+ per month in your thirties. Competing priorities like a mortgage, car payments, and raising children often means that retirement savings are put on hold.  Put off saving until you reach 40 and you’re now faced with the daunting task of saving more than $1,400 per month for the next 25 years to reach that million dollar mark.

Some might feel it’s prudent to pay off the mortgage and max out children’s RESPs before ramping up their own retirement savings. By age 50, most of those obligations should be taken care of which should now free up significant cash flow to save for retirement. It’ll need to be significant to reach a million. With only 15 years to go now, compound interest is not on your side, and so you’ll need to save nearly $3,400 per month – or $40,000 per year – to get to your retirement goal.

A tempting alternative at this point is to adjust your expected rate of return. After all, with an 8 per cent return you’d only need to save $2,800 per month, and at 10 per cent you’d need to put away less than $2,400 per month.

But the more realistic approach would be to adjust your expected retirement age and then figure out if a million dollars is really the amount you need to enjoy a comfortable retirement. You’d be surprised to learn you can live off much less.

Related: Have you considered a permanent retirement overseas? Read this:

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How CDIC would protect Deposits if Home Capital goes bankrupt

Canada has not seen a bank failure since Security Home Mortgage Corporation, a Calgary-based company, went bankrupt in 1996, putting $42 million in bank deposits at risk.

Two decades later we have another mortgage company, Home Capital Group, teetering on the brink of bankruptcy. Deposits at Home Capital were expected to fall to $192 million this week, down 90 per cent from the roughly $2 billion it held at the end of March. To stay afloat the embattled company took out a $2 billion lifeline (at a punitive interest rate) and suspended its dividend.

It truly is a run on the bank, and clients of Home Capital, which includes subsidiaries Home Trust and Oaken Financial, are concerned about their deposits. Should they be? Perhaps not. Home Trust is a member of Canada Deposit Insurance Corporation (CDIC), which handled the Security Home Mortgage Corporation collapse in 1996 and restored client deposits within three weeks.

But clients aren’t taking any chances. As Rob Carrick pointed out on Twitter, even GIC deposits are being redeemed early:

@rcarrick Am surprised at the number of people who say they’re considering paying a penalty to redeem CDIC-protected GICs from alt banks, trusts etc.

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