Decumulate & Downsize

Most of your investing life you and your adviser (if you have one) are focused on wealth accumulation. But, we tend to forget, eventually the whole idea of this long process of delayed gratification is to actually spend this money! That’s decumulation as opposed to wealth accumulation. This stage may also involve downsizing from larger homes to smaller ones or condos, moving to the country or otherwise simplifying your life and jettisoning possessions that may tie you down.

Is Now a Bad Time to buy Bonds? Yes, and Here’s Why

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We think Now is a bad time to Buy Bonds … Here’s Why

Recently a friend asked, “Pat, I see that several prominent Canadian investor advisors recently wrote articles that said it’s a bad time to buy bonds right now. Do you agree?”

He was surprised when I told him I haven’t bought any bonds for myself since the 1990s. I haven’t bought any for our Portfolio Management clients in the last couple of decades, except on client request.

In the 1990s, I used to buy “strip bonds” for myself and my clients, as RRSP investments. This was the Golden Age of bond investing. Back then, high-quality bonds yielded almost as much, pre-tax, as the historical returns on stocks. In addition, they were more stable than stocks and provided fixed income that simplified financial planning.

Bonds have tax disadvantages, of course. But you can neutralize those disadvantages by holding your bonds in RRSPs and other registered plans.

The big difference back then was that bond yields and interest rates were much higher than usual. That’s because we were still coming out of (or “cleaning up after,” you might say) the inflationary bulge of the 1970s and 1980s.

In the 1980s, government policies pushed up interest rates and took other measures to hobble inflation, and it worked. But interest rates stayed high for a long time after the government policies broke the back of inflation: kind of like finishing the antibiotic prescription after the infection goes away.

Long-time readers know my general view on the stocks-versus-bonds dilemma. When interest rates are as low as they have been in recent decades, high-quality stocks on the whole are vastly superior to bonds. However, you have to understand the differences between the two. For one thing, stocks are more volatile than bonds. But volatility and safety are two different things.

Volatility refers to sharp price fluctuations, often due to short-term uncertainty and the randomness of short-term market movements. Safety refers to the risk of permanent loss.

Bonds improve portfolio stability but cut investment returns

You might say that what you get from bonds is the opposite of what you get from the stock market.

Inflation near-automatically reduces the purchasing power of bonds. Inflation can also hurt the returns you make in the stock market, of course. However, companies you invest in can take steps to cut the costs of inflation. They can pass on cost increases to their customers. They can introduce new processes and equipment to improve productivity and cut their costs. Continue Reading…

A deadline seniors don’t want to miss: RRSP-to-RRIF conversions

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My latest column looks at a topic of high importance for near-retirees or already retired folk who have reached their early 70s: the requirement to convert an RRSP to a Registered Retirement Income Fund (RRIF) and/or annuitize.. You can find the full column by clicking on the highlighted text here:  How to cope with the RRSP-to-RRIF deadline in your early 70s.

As the column mentions, this deadline is rapidly approaching for my wife and me.

Here’s how Matthew Ardrey, senior wealth advisor at Toronto-based Tridelta Financial, sees the big picture on RRSP-to-RRIF conversions: “By the year in which one turns 72, the government mandates that the taxpayer convert their RRSP to a RRIF and draw out at least the minimum payment. The minimum payment is calculated by the value of the RRIF on January 1st multiplied by a percentage rate that is tied to the taxpayer’s age. Each year older they get, the higher that percentage becomes.”

Currently, at age 72 (the latest that you can receive the first RRIF payment), the minimum withdrawal is a modest 5.28% of the market value of your RRIF assets. By age 95, this increases to 20% of the market value, says Rona Birenbaum, founder of Caring for Clients.

You need to take the RRSP to RRIF deadline seriously: you must convert by December 31st of the calendar year in which you turn 71. What if you miss it? Then, Birenbaum cautions, 100% of your RRSP becomes taxable income in that year, which will often push you into the highest marginal tax rate. Needless to say, for those with hefty RRSPs, losing almost half of it in a single tax year would be disastrous.

There is of course the option of using your RRSP to purchase an annuity, but Birenbaum observes that most clients opt for the greater flexibility of the RRIF.

Given the normal human inclination to procrastinate, most near-retirees will probably want to keep their RRSPs going until the bitter end and aim for this “latest” deadline for conversion. However, technically, Birenbaum says you can open a RRIF much earlier than is mandated. “There is no earliest age, though it’s rarely beneficial to open a RRIF during your working years.”

Note that when RRIF income is received, it’s taxed as fully taxable income, Ardrey says, “There is no preferential treatment for this income, like there would be for capital gains or Canadian dividends. Though this income is a cornerstone for many Canadians, it can also cause tax complications that were not there

While similar in several respects Birenbaum notes some important differences between RRSPs and RRIFs. Both are tax-sheltered vehicles, can hold the same investments, and withdrawals are fully taxable as income. However, RRSP contributions are tax-deductible, while you can’t contribute to a RRIF (so there are no tax deductions.)

RRSPs don’t have any mandated withdrawals, whereas RRIFs have mandated annual withdrawals, starting in the calendar year after you open the account. With RRSPs, there are no minimum withdrawals, although they are permitted: your only option is to request a one-time lump sum withdrawal (and pay tax on it at various rates depending on the amount you wish to withdraw).

RRIFs have mandated annual minimum withdrawals, which rise steadily over time. Minimums are outlined on this website. Unlike an RRSP, a RRIF lets you automate withdrawals for ease of cash flow management (monthly, quarterly, annually etc.)

Unless the taxpayer requests it, there are no withholding taxes on RRIF minimums. A second complication is that this extra income from the RRIF can also trigger clawbacks of Old Age Security (OAS) benefits. If income exceeds $90,997, OAS payments will be clawed back by $0.15 for every dollar over this amount until they reach zero, Ardrey warns.

Pension splitting and using your spouse’s age

Fortunately, there are ways to minimize these possible tax consequences. If you are one half of couple, you can benefit from a form of pension income splitting: RRIF income can be split with a spouse on their tax returns, providing the taxpayer is over the age of 65. “Even if incomes are in a situation where a RRIF income split would not seem logical, a split of $2,000 can provide a pension tax credit for the spouse. This could also be the difference between being impacted by the OAS clawback or not.”

Another trick is basing your minimum RRIF payment on your spouse’s age. This works when you have a younger spouse/ By doing this, the taxpayer gets their younger partner’s age percentage applied to their RRIF minimum payment.

The full MoneySense columns goes into the mechanics of withholding taxes and what happens upon death.

The Mechanics of Conversion

Birenbaum says you can usually expect your financial institution to reach out to you to remind you before the deadline. There will be paperwork to file at the institution where you’d like to hold the RRIF, although it’s not required that the RRIF be at the same place your RRSP is held. Your existing RRSP investment holdings can be simply transferred to your new RRIF account. The initial paperwork will ask you to set your desired payment schedule (day of month and payment frequency), to choose RRIF minimums based on your age or that of your younger spouse.

  

The retirement landscape in Canada

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By Bob Lai, Tawcan

Special to Financial Independence Hub

The retirement landscape in Canada
Image courtesy Tawcan

Recently I wrote about what we’re doing in this bear market condition. Since we’re still in our accumulation phase, we’re following our investment strategy by continuing buying dividend stocks and index ETFs regularly and building up our dividend portfolio.

But what if you’re closer toward retirement or already retired? How do you protect yourself from the bear market so make sure you can sustain your expenses in retirement? What is the ideal retirement portfolio for Canadian? Should someone simply try to aim to build a dividend portfolio and live off the dividends? To answer this complicated question, I thought it’d be best to ask an expert. So I decided to reach out to Dale Roberts to talk about the retirement portfolio for Canadians.

For those who don’t know Dale, he is a former investment advisor and trainer with Tangerine. He now runs Cut The Crap Investing and is a regular contributor to MoneySense.

Please take it away Dale!

Thanks Bob.

The typical retirement is likely a thing of the past. Yours will not be your Mom and Dad’s retirement and it certainly won’t look much like Grandpa’s either. The traditional model of a workplace pension plus Canada CPP (Canada Pension Plan) and Old Age Security payments plus home equity won’t likely get the job done.

In previous generations many would work until age 65 and with life expectancy in the mid to upper 70s, the retirement was short lived, meaning that long-term inflation was not the threat it is today. And those workplace pensions were commonplace. A retiree could sit back knowing those cheques were coming in on a regular basis, and those pension amounts were often adjusted for inflation.

According to Statistics Canada the Life expectancy in Canada has improved considerably. Women’s life expectancy at birth has increased from 60.6 years in 1920–1922 to 83.0 years in 2005–2007, and men’s life expectancy from 58.8 to 78.3 years in the same period—increases of 22.4 years for women and 19.5 for men.

A Canadian male who makes it to age 65 will on average live another 20 years. It’s even longer for women. Many will live to age 90 and beyond. We all assess our own longevity prospects, but it may be prudent to plan for a retirement of 25 to 35 years. If you opt for an early retirement, your portfolio (and any pensions) might have to support you for 40 or 50 years.

A sensible retirement plan will work to make sure that you don’t outlive your money. You will also likely want to pass along wealth to children, grandchildren and charities. Estate planning and leaving a meaningful legacy will be a priority for many Canadians.

The pandemic has made Canadians rethink many areas of their lives. Our own mortality became a concern. For good reasons, during the pandemic more Canadians have sought out meaningful financial advice. They recognize the need for proper insurance, investments that can stand the test of time and a well-thought-out financial plan that ties it all together.

You don’t get a second chance 

It all adds up to greater peace of mind. There is that popular expression from Benjamin Franklin:

If you fail to plan, you are planning to fail

 

When it comes to retirement, that plan is essential. You don’t get a second chance.

Retirement building blocks 

The traditional building blocks of a secure retirement will be insurance, plus cash flow from savings and a well-diversified investment portfolio, plus government and company pensions. Income from investment properties are often in the mix.

Annuities offer the ability to pensionize more of your nest egg. Thanks to product innovation Canadians can add a pension-like component with a revolutionary new offering such as the Longevity Pension Fund from Purpose Investments.

Canadians who might have missed out on a workplace pension can fill that void. It operates like a pension fund with mortality credits. That is, it protects the risk of longevity as plan members who die sooner will top up the retirement of those who live to a very ripe old age.

  • Insurance
  • Cash
  • Pensions, public and workplace
  • Old Age Security (GIS for lower income)
  • Retirement portfolio
  • Annuities and investment pensions
  • Real estate and other
  • Part-time work
  • Inheritance

The retirement portfolio 

Historically, simplicity can work when it comes to building the retirement portfolio. That is to say, a simple balanced portfolio that owns stock market funds and bond market funds will do the trick.

The famous, or infamous 4% rule shows that a 60% stock and 40% bond portfolio can provide a 4% (or slightly more) spend rate that will support a retirement of 30 years or more.

Note: a 4% spend rate suggests that 4% of the total portfolio value can be spent each year, with an increase at the rate of inflation. The 4% rule is more of a rule of thumb to help you figure out how much you need to save and invest to hit your magic retirement number. This video demonstrates why no one really uses the 4% rule.

And here’s my video on the simple retirement portfolio.

You’ll find examples of these core balanced portfolios on my ETF portfolio page. You might look to the Balanced Portfolio with More Bonds and the Balanced Growth Portfolio as potential candidates for a core retirement portfolio. There are also the all-in-one asset allocation ETFs.

I would suggest that the traditional balanced portfolio can be improved with a cash allocation and dedication inflation protection. You might consider the Purpose Diversified Real Asset ETF, ticker PRA on the TSX. The cash will help during periods of extended bear markets. In 2022 saw how stocks and bonds can fall together in a rising rate environment.

Given that you might consider for a simple balanced model:

  • 50% stocks
  • 30% bonds
  • 10% cash
  • 10% PRA

But Canadians love their dividends

While a core ETF portfolio might do the trick, most self-directed investors love their dividend stocks and ETFs. That’s more than fine by me.

In fact, building around a core Canadian stock portfolio is likely a superior approach for retirement funding. Thanks to wide moats (lack of competition) and oligopolies, Canada is home to the most generous and retirement-friendly dividends on the planet.

That said, don’t sell yourself short by only living off the Canadian dividends. Total return matters and dividend investors should always consider selling some shares to supplement their dividend income and for tax efficiency purposes.

Tawcan: Can’t agree with you more Dale! Selling some shares later on during your retirement will help with estate planning as well. I’d say living off dividends and not touch your principal early on during your retirement may provide some margin of safety.

Dale: My Canadian core stock portfolio provides a generous and growing (though not guaranteed) income stream and a defensive stance. I call it the Canadian Wide Moat 7. Bob always has listed some top Canadian dividend stocks to consider as well.

To boost the yield you might also consider some Canadian Utilities as bond proxies (i.e. replacements). And certainly, thanks to the defensive telcos, utilities and other defensives, you might go much lighter on any bond allocation.

I recently posted on building the defensive big dividend portfolio for retirement.

I prefer dividend growth stocks for the U.S. allocation. In the post below you’ll find our (for my wife and me) personal stock portfolio, and how the Canadian stocks work with the Canucks. The portfolio offers generous market-beating returns with a more total portfolio defensive stance.

consumer staples info
Source: Dividend Growth Investing & Retirement 

To generate modestly better retirement funding (compared to core balanced index portfolios) we can boost the dividend stream, and hold a greater concentration in defensive stocks.

We’ll find that defensive nature in telcos, pipelines, utilities, healthcare and consumer staples. U.S stocks help fill in those Canadian portfolio holes as we find wonderful healthcare and staples stocks south of the border. The U.S. offers ‘the best companies on the planet’ – my sentiment. And many of those companies are in the technology and tech sectors. It’s a great idea to add growth in retirement, but we do want to make sure that we are defense first.

Tawcan: Yup, since the Canadian market is very financial and energy heavy, investing in U.S. stocks will help with sector diversification.

Dale: On the defensive front, I’d throw in Canadian financials as well – they will offer up those generous, and mostly reliable dividends. And yes, you might also consider international, non North American ETFs. I prefer to mostly get my international diversification by way of the U.S. multinationals.

While not advice, my personal portfolio shows how easy it is to build a simple retirement stock portfolio. As you can see from that above post, we also hold other assets in moderation – including cash, bonds, gold and other commodities plus oil and gas stocks. Continue Reading…

When is it wise to spend more in Retirement?

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Photo courtesy Unsplash and RetireEarlyLifestyle.com

By Billy and Akaisha Kaderli

Special to Financial Independence Hub

Recently, an interesting question was presented to us: How much is Enough?

We posed this same question to ourselves years ago when we were contemplating early retirement. But what about now, three decades later?

4% rule be damned

Years of capital appreciation due to decades of compounding and proper money management has paid handsomely in the growth of our net worth and financial wellbeing. Now, 33 years later, do we still need to be diligent in monitoring our spending and outflows, or is now the time to seize the day and go first class? Eat in trendy restaurants, be seen and show off our wealth?

This is definitely not our style …

Flying under the radar living a bohemian lifestyle is more like us, and we’re still here livin’ the dream.

In fact, some family members and friends consider us “poor” as compared to their consumer-based standards. That’s fine with us. We have not owned a car for years and we tend to live in foreign countries where we can geographically arbitrage value for money spent. We prefer experiencing cultures and cuisine as compared to a shiny new car, club membership and debt payments.

We are just trying to make it to Friday

There are many ways to live a life, and our choice is unique to us. It’s a lifestyle not a vacation and our approach is one that we created based on our personal values and interests.

But back to the question of when we might loosen the purse strings … Should we start living on more – or less – than the US$35,000 that we have done for years?

We now use more private drivers than chicken buses, stay in pricier hotels (not always a better choice), and we’ve set up a stable, semi-permanent home base in Chapala, Mexico.

We donate freely, giving our time and money, helping others less fortunate, as well as teaching people better money management and life skills.

There are needs everywhere and we do our best to contribute. As always, we want results rather than throwing money at a problem to feel good and brag about it.

Checking back in with the 4% rule, we took a look at what that number would be for us today and both of us asked “How would increasing our spending to that amount change our lives?” Granted, it’s not Bill Gates’ level, but how much more can we eat, drink, travel, be merry and give away?

But that’s us.

What about you?

Is it time for you to flip the switch from saving and being frugal for your future – to enjoying a higher standard of living and giving back to the community?

Below are a couple of suggestions which might clarify this question for you.

Know where you are

Life circumstances change.

None of us know our exit date from this planet. As each day passes, we are one day closer to the end of our adventure. But you could check some actuarial tables to see where you stand in general. We are not saying throw caution to the wind and start “X-ing” out days on your calendar. Rather, utilize this bit of information to get a clearer picture of where you might be.

Imagine if you knew your Date of Death. Would that change your spending habits or the way you live?

Other thoughts

Have you or your spouse had an awakening in regards to health? Do you want to open a foundation that produces results and wealth? Begin a new business or leave a particularly handsome legacy for your grandchildren? Continue Reading…

How to deal with uncertainty in Investments and in Life

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By Alain Guillot

Special to Financial Independence Hub

“I will invest in the stock market when things calm down,” said my friend Mercedes after the market crashed following the COVID pandemic.

Another friend said something similar after the terrorist attack of 9/11.

The thing is that in the markets and in life, everything is always uncertain.

Even when everything seems calm, there might be a surprise the next hour. And when everything is chaotic, long periods of peace and calm may follow. Between WWI and WWII, there were 20 years and 9 months of peace and prosperity.

After WWII there have been almost 80 years of economic, scientific, and technological improvement.
* Countries like China, India, and Brazil took millions of people out of poverty.
* The information technology changed how business, governments, and people communicate.
* There have been medical breakthroughs for various diseases which have improved global health.

Dealing with uncertainty in the stock market isn’t too difficult. At my age (56), I have seen a few economic cycles. I know that markets go up and markets go down. The best action I can take is to sit on my hands and do nothing.

In our regular life, it’s more challenging. Life also works in cycles, but these cycles can be more difficult to discern, and we don’t always know what to do.

Market cycles

How to deal with uncertainty in Life

These are some tips from our community on how to deal with uncertainty:

Kelly Bron Johnson, IDEA Advisor Supporting Businesses to Create Completely Inclusive Workplace Cultures: I won’t lie – it makes me feel very destabilized. It affects all my planning. For example, right now the teachers are on strike and my kids are home from school. We don’t know how long it will go for. It’s hard to make plans and to work without knowing how long the strike will last. I just try to take one day at a time and one task at a time and keep going. Continue Reading…