Building Wealth

For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).

How to more than double your CPP benefits

Posted By |

While it’s well known that the longer you wait to start receiving CPP benefits, the higher the payout, a series of papers debuting today from the National Institute on Ageing (NIA) highlights the fact that:

a) Many Canadians don’t realize that CPP benefits taken at age 70 are a whopping 2.2 times what they are if taken at the earliest possible age of 60. Indeed, a 2018 Government of Canada poll found an amazing two thirds of us didn’t understand that the longer you wait, the higher the CPP payout will be.

b) Despite this fact and despite being often mentioned in media personal finance articles, most Canadians nevertheless take CPP long before age 70.

You can see at a glance in the chart shown at the top the dramatic rise in free government money that can be obtained by waiting till 70.

The paper’s lead author is   Bonnie-Jeanne MacDonald, PhD, FCIA, FSA, Director of Financial Security Research for the National Institute on Ageing at Toronto Metropolitan University.

Addressed chiefly to Canadian baby boomers, MacDonald and three contributors say upfront that deciding when to start taking CPP (or the Quebec Pension Plan) is “one of the most important retirement financial decisions they will make.”

Not only are benefits begun at age 70 2.2 times higher than they would be if taken at age 60, but “these higher payments last for life and are also indexed to inflation.”

So it’s a baffling that 90% choose to start CPP at the traditional mid-way point between these extremes: age 65.

Starting with the paper being released today, the NIA will publish seven papers in total aimed at educating consumers about these decisions.

It’s not as if most Canadians don’t already realize how important CPP will be to their income. Indeed, with traditional Employer-Sponsored Defined Benefit pension plans becoming increasingly rare outside the public sector, for many the CPP, together with Old Age Security, will be the closest many retirees will come to having a guaranteed-for-life inflation-indexed pension. According to a 2023 NIA survey on Ageing in Canada, 9 out of 10 recipients say their CPP/QPP pension is an important source of their retirement income, with 6 out of 10 saying it’s essential and they can’t live without it.

The chart below illustrates this:

The initial paper being released today observes that similar dynamics are at work in the United States with its Social Security system. Academic literature there finds that “delaying claiming is almost always the optimal decision from an economic perspective.”

CPP offsets the 2 big bogeymen of Inflation and Running out of Money

A larger CPP income obtained by waiting till 70, or at least past 65, helps new retirees address two of their biggest fears, the NIA says: Inflation and running out of money before you run out of life. It finds that 37% fret about inflation and 22% worry about running out of money in old age. Continue Reading…

Vanguard S&P 500 is a third of my portfolio

Posted By |
Vanguard S&P 500

 

By Alain Guillot

Special to Financial Independence Hub

My investment strategy is to buy more every time I have more money. I don’t time the market. I know that investments (on the long run) will eventually go up.

No one knows when the market will tank or when it will rally. So why waste my brain energy trying to stay informed and anticipate, or react to the market? I just buy and buy some more.

When will I sell? Hopefully never, but the second best answer is: When I retire, when I need the money for personal living expenses. In that case, I will just take the money out when I need it, not when the market conditions are right (we never know when the market conditions are right).

Generally I divide my investment in three parts: 1/3 Canadian stocks, 1/3 U.S. stocks, and 1/3 international stocks.

I don’t know how much money I have made since I don’t know how to account for all the dividend payments I have been getting. But it’s a lot.

Investing in the stock market is safest way to invest your money. Yes, there is day to day volatility. If you learn how to ignore the new, the latest development, the latest emergency crisis, the latest election, you will be OK.

Of course, it’s not easy to avoid all the noise. Media companies spend billions of dollars every year finding new ways to capture your attention. The worst part is that “bad news” is a very potent attention-grabbing tool and many people fall victims of it. I have friends who have their money in cash, gold, or silver because the next financial catastrophe is coming. If they only knew how to calculate all the money they have left on the table, it’s worse than any catastrophe they have envisioned.

The bedrock of my U.S. investment is the Canadian dollar Vanguard S&P 500 Index; here is the symbol, VFV. It trades in the Toronto Stock Exchange. My strategy is to buy some more every December.

The Vanguard S&P is a fund that invests in the stocks of some of the largest companies in the United States.

This is a great investment because it’s well diversified and is made up of the stocks of the largest U.S. corporations. These large corporations tend to be stable with a solid record of profitability.

How much money can you earn?

We are not in the business of predicting the future, but here are some of the past results:

Rate of return investing on the S&P 500

As you can see the rate of return for 3 years is 42%, for 5 years is 66%, and for 10 is 304%. This is the best return you can get for your money. This is a great investment opportunity if you have the patience to wait for it.

How to invest in the Vanguard S&P 500

You can buy shared of the S&P 500 as you buy shares of any stock. Continue Reading…

92% of investors have a better mindset if they do this one thing, research finds

Posted By |

By Carol Lynde, Bridgehouse Asset Managers

Special to Financial Independence Hub

If you Google “what contributes to positive mental health?,” you’ll find helpful tips on exercise, diet, getting enough sleep and mindfulness. You’ll find advice on connecting with people, building resilience, gaining control over your life and getting help from a mental health professional. You might find mention that reducing your debt and controlling spending can reduce stress. But you’ll find very little about financial planning or that making a financial plan can contribute to positive mental well-being.

It can.

Bridgehouse Asset Managers recently released research confirming a direct link between planning your finances and positive mental well-being. The more financial planning activities you do, the better your sense of security, control, ability to bounce back from life’s challenges and positive mindset. Further, having a financial plan makes you less anxious about today’s financial issues, such as cost of living, debt levels and saving enough to retire.

The Bridgehouse national research project included focus groups and an online survey developed in partnership with the Canadian Mental Health Association (Toronto) and an advisory panel including mental health, legal and financial advisor experts from across the country. The research found that it’s not the amount of money you have, it’s doing something that counts. Planning your finances and creating a plan for the future leads to a sense of hope, security, resilience and control:  all attributes associated with positive mental health.

There’s a compounding effect: the more financial planning you do, the better your mental health. The survey asked participants how many of 10 financial planning activities they had completed and compared the results to their self-assessed mental state.

The research concluded the more activities respondents completed, the better their sense of security, control, ability to bounce-back and positive mindset. Financial planning activities included: calculating retirement requirements, calculating net worth, determining short-term goals, determining long-term goals, determining insurance requirements, establishing an emergency fund, creating a debt management plan, creating a budget, actively finding day-to-day savings and scheduling regular meetings with a financial advisor.

Of respondents who did seven or more financial planning activities:

  • 73 per cent expressed a sense of security about their financial situation.
  • 73 per cent felt in control of their financial situation.
  • 79 per cent felt an ability to bounce back if life throws tough challenges.
  • 79 per cent reported a positive mindset.

Respondents who took even small steps claimed positive mental well-being benefits. Of those who did only one-to-three financial planning activities:

  • 52 per cent reported a sense of security.
  • 54 per cent reported a sense of control.
  • 73 per cent felt an ability to bounce back.
  • 71 per cent reported a positive mindset.

According to regression analysis (a research method to rank contribution weighting), establishing/maintaining an emergency fund and scheduling regular meetings with a financial advisor were the two most important drivers of positive mental well-being and the ability to sleep at night. Continue Reading…

Automating Wealth: How to Systematize your Path to Financial Independence

Posted By |
Pexels/Tima Miroshnichenko

By Devin Partida

Special to Financial Independence Hub

Financial freedom: everyone knows what it means, but few understand how to achieve it. Those who do understand the role of automation in the process and how it allows them to focus on other vital actions necessary to reach their goals. Automating repetitive manual tasks can streamline financial management and improve decision-making.

Strategies for Automating your Finances

Becoming financially independent requires the right habits. However, consistently following a set pattern for saving, budgeting and other money-related activities can quickly feel repetitive. Automation can take care of the boring stuff, saving time and giving you more control over your financial situation. Here are some ways to go about it.

Automate Bills and Recurring Expenses

Bills you pay regularly — such as rent, mortgage, utilities, credit cards and subscriptions — take a significant part of your budget. These payments can cause stress and anxiety, especially if you have to keep track of them manually. Most banks offer automatic debit arrangements  that deduct monthly payments from your account on or before specified dates, ensuring your expenses are always covered on time.

Use a Budgeting App to Track Spending

Building long-term wealth begins with knowing where your dollars are going and how changing prices affect your budget. If you need help with your finances, a budgeting app will be your best friend.

These platforms can simplify expense tracking and help you identify where to scale back. Several are available, so feel free to explore until you find one best suited to your requirements.

Set up Automatic Transfers to your Savings Account

It’s easy to forget to transfer funds into your savings account, especially if you have many financial obligations. Like your recurring payments, you can also automate your financial conservation efforts. This method can help eliminate  the emotional side of decision-making that often makes saving money difficult.

Set Investments on Autopilot

Investing is a powerful way to grow your finances, but the inherent risks can be off-putting. Consider using a robo-advisor or investment bot to manage your portfolio, make data-driven decisions and minimize the time required to manage your investments.

For example, AI stock-trading programs can analyze historical information and current trends to predict market shifts, cluing you in on when to buy or sell a particular stock. Some systems can even tailor recommendations based on your budget and automatically make investing choices based on set parameters.

How Automation gets you Closer to Financial Independence

Financial freedom starts with defined goals backed by intentional action. Automation plays a massive role in shortening the path to achieving these objectives. Ideally, a well-framed goal only requires 3–5 steps to accomplish: anything more than that will likely complicate the process. Continue Reading…

ETF Fees Explained

Posted By |

By Danielle Neziol, BMO ETFs

(Sponsor Content)

Canadians are facing a lot of sticker shock lately. My grocery bill was how much? My mortgage payment is going to increase by what per cent? Don’t even ask me what it costs to fill up my car these days. With more money going to living expenses, it has become harder to save than ever. One simple way to get ahead is to be more aware of what we are spending — especially in times like these —  and to review our monthly expenses to see where there are opportunities to make cuts.

Our investment portfolios should be viewed no differently. If you are an investor who holds a mutual fund or an exchange traded fund (ETF) there are fees attached to your investments. It would be prudent to review the cost structure of the funds you hold to ensure that the fees make sense relative to the fund’s investment mandate. It would also be wise to review the cost of the funds you hold to see if that fee is competitive relative to similar products in the market. Fees detract from total portfolio returns, so anything an investor can do to manage these costs can help keep more money in their pockets.

Management Fees and MERs

Every investment fund has a management fee. This is the cost a fund manager charges to manage the portfolio operationally (buy and sell securities, rebalance, etc). The Management Expense Ratio (MER) is the bottom-line cost to the investor. It includes any taxes charged to the fund, as well as any added fees (such as leverage). An investor can look up the management fee and MER within the Fund Facts and ETF Facts of their funds. These are regulatory documents that can be found for every fund issued in Canada. Some asset managers advertise very low management fees but have higher, less advertised, MERs, so investors should always do their due diligence on the total fund cost to fully understand the bottom-line payment that they are making every year.

The MER is subtracted from daily returns. Therefore, it has a direct impact on the total return of the fund. And as investors we know that overtime, our total returns help build our overall wealth. Therefore, the lower the fee on the investment, the more money there will be for the investor at the end of their investment period.

Comparing Fees

Once investors are aware of the fees they are paying for their investment products, they have the ability to “shop around” to see if there are any products that may be a better fit in their portfolios or which offer lower fees. When comparing fees it’s important to understand what you’re getting for in return for what you’re paying for. Broad market index funds generally have the lowest fees in the market. For example the BMO S&P 500 Index ETF (ZSP) has an MER of 0.09%. Index funds tend to have the lowest fees because operationally they are easier to manage. A Portfolio Manager will go out and buy the stocks within a particular index, and rebalance when needed.1 Continue Reading…