Exploring Early Retirement Strategies: My Journey towards Financial Independence

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By Abid Salahi

Special to Financial Independence Hub

If you had told me in my early twenties that I’d be already planning for retirement before my first major job promotion, I might have laughed it off.

Like many young professionals, I was more concerned with navigating the beginnings of my adult life and my first ‘real’ job than retirement, far in the future.

However, a deep dive into the financial world revealed the concept of ‘Financial Independence’ or ‘Findependence,’ a state where you have sufficient personal wealth to live without having to work actively for basic necessities. Essentially, what it means is that you can retire way earlier than what society considers ‘retirement age’ and enjoy your retirement while you’re still relatively young.

Today, as I share my experiences and the strategies that I’ve learned along the way, I hope to inspire you to start thinking about retirement sooner rather than later. After all, achieving financial independence is not just a goal; it’s a journey that offers profound peace of mind.

Start Early and Embrace the Power of Compound Interest

Let’s talk about the first and most important strategy I adopted; harnessing the power of compound interest.

Compound interest is like a snowball rolling downhill; as it rolls, it picks up more snow, growing bigger and faster. When you save money, compound interest works by earning interest on both your initial amount and the interest already earned.

This means your money grows faster over time. For example, investing just $200 a month starting at age 25 could grow to more than $500,000 by age 65, assuming an average annual return of 7%.

Diversify your Investment Portfolio

Diversification is key to managing risk and maximizing returns over the long term.

I’m going to say it again … DO NOT invest all of your money in one single asset!

My approach has been to spread investments across a variety of asset classes including stocks, bonds, real estate, and even some alternative investments like cryptocurrencies.

But again, if you spread your investments into too many different assets, the profit you might obtain from each investment could become very small and not that significant. So, not too many but also not too few.

Take advantage of Tax-Efficient Accounts

In both Canada and the U.S., you can take full advantage of tax-advantaged retirement accounts. How? Let me elaborate.

In Canada, utilizing the RRSP (Registered Retirement Savings Plan) and the TFSA (Tax-Free Savings Account) can significantly enhance your savings growth by deferring taxes or allowing tax-free gains.

In the U.S., similar benefits are offered through IRAs (Individual Retirement Accounts) and 401(k)s.

The amazing thing about these accounts is that they not only reduce your tax liability but also allow your investments to grow unhindered by taxes, which can make a substantial difference over the decades.

Consider Real Estate Investments

When talking about investments, it’s impossible to leave out investing in Real Estate.

Real estate can be an excellent addition to any retirement strategy, offering both capital appreciation and potential rental income. Continue Reading…

Best high-yield Canadian HISA ETFs: Should I invest in them?

Image courtesy Tawcan/Unsplash

By Bob Lai, Tawcan

Special to Financial Independence Hub

Earlier this year, I discussed three key reasons why we don’t invest in GICs and have no plan to invest in them any time soon. After reading that article, a few readers asked about Canadian high-yield high interest savings account (HISA) ETFs or cash-alternative ETFs.

Does it make sense to invest in one of these ETFs like CASH, HSAV, or PSA?

I get it, putting your hard-earned cash in the stock market can be considered risky for those risk-averse Canadians. More importantly, what should you do with short- or medium-term savings to allow such money to work extra hard for you?

Due to the shorter timeline, investing money that you need in the short or medium term in the stock market simply doesn’t make sense, because you might get caught by market volatility and a downturn and be forced to sell when you’re in the red.

Given that GICs force you to lock your money in for a set period and therefore are restrictive, these high-yield HISA ETFs can be quite enticing for some Canadians

Here are the best high-yield Canadian HISA ETFs available today.

Why you should keep some cash reserve

I believe it’s important to keep some cash reserves. How much cash reserves you set aside will depend on many different factors:

  • Are you working or are you retired?
  • If you’re working, do you have a relatively high savings rate to give you extra cash flow every two weeks?
  • Do you have any debt?
  • Do you have any big expenses planned for the next year?
  • How much money do you need in your banking account to make you sleep well at night?
  • Let’s also not forget that most banks have a minimum requirement for chequing & savings accounts or you’d have to pay a monthly fee.

This is why personal finance is personal. I can’t tell you how much is the right amount to set aside for your cash reserve or how much money you should have in your emergency fund. It will be different for everyone.

The key reason for keeping some cash reserves is to have liquidity. I can’t emphasize enough that you don’t want to be forced to sell your investments when the market is down simply because you need the money.

Imagine that you needed $7,000 to repair a leak in your house’s roof in March 2020 and you didn’t have any cash reserve. The market was in turmoil at that time and it would be terrible to have had to sell investments to fund this repair.

A couple of important notes on HISA ETFs

Before we dive into the best high-yield Canadian HISA ETFs, there are a couple of important notes I want to point out.

CDIC Protection

The Canadian Deposit Insurance Corporation (CDIC) insures savings of up to $100,000. Most Canadian financial institutions are members of the CDIC. This means when you have money deposited in a bank, you are protected up to $100,000. Provincial credit unions, such as Coast Capital Savings, are protected by the province’s deposit insurer with no limits.

Unlike cash savings, the high-yield HISA ETFs are not eligible for CDIC insurance. But you shouldn’t be too concerned. All the Canadian HISA ETFs use big Canadian banks to hold their money. It is virtually impossible for these big Canadian banks like TD, Royal Bank, and BMO to go under. If that were to happen, the Canadian economy would be in turmoil.

Furthermore, all of these high-yield HISA ETFs I am going over in this article are provided by reputable ETF companies, so there shouldn’t be any concerns for these ETF companies to go bankrupt.

OSFI Rules

In October 2023, the Office of the Superintendent of Financial Institutions (OSFI), which regulates banks, announced new guidelines regarding HISA ETFs.

The OSFI essentially requires HISA ETFs to support 100% liquidity so withdrawals by other financial institutions can be supported on demand. Before this requirement, banks typically maintained a 40% runoff rate on HISA assets.

So what does the OSFI ruling mean?

Basically, the new rule means that the yield from these HISA ETFs isn’t as high as previously.

OSFI can impose further rules, reducing the yields further. This is something investors should keep in mind when investing in a HISA ETF.

Best high-yield Canadian HISA ETFs

Here are the best high-yield Canadian HISA ETFs you can easily buy and sell with your discount broker: Continue Reading…

Franklin Templeton mid-year outlook: Caution lights on Recession

Jeffrey Schulze

The 12 variables used to forecast Recessions are currently “signalling caution,” says Jeffrey Schulze, CFA.

Speaking Wednesday in Toronto at Franklin Templeton’s mid-year outlook, Schulze — Managing Director, Head of Economic and Market Strategy for Clearbridge Investments — told financial advisors and media that as of May 2024,  the 12 variables he tracks have “historically foreshadowed a looming recession … the overall dashboard [shown below] is currently signalling caution.”

 

Three indicators — Job Sentiment, Money Supply and Yield Curve — have been flashing red since the end of 2023 and continue to be, as you can see in the above chart taken from a presentation made available to attendees. The only green light is Credit Spreads, while the other eight — which include Housing Permits, Jobless Claims and Profit Margins — are all a cautionary yellow.

However, stock valuations do not appear to be too stretched at present. The composition of major stock indexes, such as the S&P500, support higher P/E ratios, Schulze said. “Less-volatile defensive and growthier sectors are typically rewarded with higher multiples. These groups make up a near-record share of the S&P 500 today.” As you can see in the chart below and in the higher purple line of the graph, these Defensive stocks include Tech, Consumer Staples, Utilities, and Health Care.

However, Schulze did note a “troubling” record-high concentration of the largest S&P500 names by market weight. As you can see in the chart below, the five largest-cap components now account for more than a quarter (25.3%) of the index, which is “the highest levels in recent history … While this dynamic can persist, history suggests that a reversion to the mean will eventually occur with the average stock outperforming in the coming years.”

 

In fact, the combined weight of the so-called Magnificent 7 tech stocks now exceeds the combined market weight of the stock markets of Japan, the U.K., Canada, France, and China!

 

However, “after behaving fairly monolithically in 2023, the performance of the Mag 7 members have diverged substantially so far in 2024,” Schulze said. A slide of the “Divergent 7”  showed Tesla down 28.3% and Apple flat, while the others were higher, led by the 121.4% surge in the price of Nvidia this year.

A key driver of the Mag 7 outperformance has been superior earnings growth, Schulze said, but “this advantage is expected to dissipate in the coming year,  which could be the catalyst for a sustained leadership rotation.”

Companies that grow their dividends are overdue to start outperforming. “Over the past year, dividend growers have trailed the broader market to a degree rarely seen over the past three decades … Past instances of similar underperformance have been followed with a strong bounce-back for dividend growers.”

A positive for markets is the “copious” amount of cash sitting on the sidelines and being readied to deploy on buying stocks. After the October 2022 lows, investors flocked into money market funds with a net increase of US$1.5 trillion, or 32%, Schulze said:  “Should the Fed embark upon its widely anticipated cutting cycle later this year, investors may reallocate. This represents a potential source of upside for equities.” Continue Reading…

MoneySense Feature on Rising Fraud: How Seniors and everyone else can minimize odds of being scammed

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MoneySense.ca has just published a feature article by me that looks at the rising tide of frauds directed at Canada’s seniors, and everyone else.

You can find the full piece by clicking on the highlighted headline here: Canadian Seniors, watch out for these scams.

This Saturday (June 15th) is World Elder Abuse Awareness Day.

Note that while the full 2500-word article at MoneySense is aimed at Seniors, it is not technically my  monthly Retired Money column, which is typically shorter.  And this short summary here at Findependence Hub is only a third as long: hopefully enough to entice readers to hop over to MoneySense for the full article.

So below, I offer only a small fraction of the full column and some of the major links. This is an important topic both for seniors and those who hope to be financially independent seniors one day, so do take the time to click on and read the full article at MoneySense.ca, linked above.

It was a bit of an eye opener researching and writing  this piece but it appears to be the unfortunate reality of the technological world we all now inhabit.  It’s overwhelming and the situation is unlikely to improve any time soon.

In the past MoneySense has covered such topics as getting scammed through e-transfersphishingcrypto schemes, identity theft and more. There’s financial fraud in general that targets bank accounts, credit cards and potentially every other aspect of your financial life. My feature attempts an overview of most of them from a Canadian perspective, with a few new scams I hadn’t known about before researching this article. (Example: “smishing,” which is sort of phishing in the form of text messages on smartphones.)

A.I. is exacerbating the spread of Frauds on all platforms

As I note at the top of the full column, it’s a sad fact that the rise of Artificial Intelligence (A.I.) has exacerbated this problem. While anyone can be prey for technology-linked schemes to separate you from your money, seniors need to pay particular attention, seeing as they tend to have more money to lose and less time to recoup it.

According to Equifax, Fraud is the top crime perpetrated against older Canadians. Sadly, many seniors fail to report these crimes to the police because they feel shame or embarrassment about being duped by scamsters.

Identity Theft

 Identity theft is particularly worrisome for seniors, if not the rest of us. As Equifax puts it, “a scammer may try to get information such as a bank card or personal identity number, credit card number, health card number, or a driver’s license or Social Insurance number. They can then apply for credit cards, take out loans or withdraw funds in the person’s name.”

5 cyber scams targeting seniors

Elder Abuse Prevention Ontario (EAPO) lists 5 cyber scams that target seniors. These include Romance scams targeting the recently bereaved. Here are 5 red flags to watch for if you’re looking for love online. Continue Reading…

Stocks still marching to inflation’s drum

By Elias Barbour, Clearbridge Investments

(Sponsor Blog)

Inflation continues to be the biggest near-term driver for equity markets, given its influence on central bank decision-making regarding interest rates. Inflation rates have moderated from their peak levels; however, they remain above the 2% targets set by the Bank of Canada (BoC) and the U.S. Federal Reserve (Fed).

U.S. and Canada Inflation

As of April 30, 2024

 

 

Equity markets entered 2024 with six to seven U.S. interest rate cuts priced in over the course of 2024, with the first cut expected in March. Clearly, that did not happen. Both central banks have remained on hold, which has contributed to higher rates across the yield curve. That number has since moderated to only three cuts, and the timing of the first cut has now been pushed out to June in Canada and even later in the United States.

The effect of “higher for longer” interest rates has been particularly painful for interest rate-sensitive market sectors such as utilities and communication services. Nonetheless, pockets of the market that were expected to continue to grow have continued to advance, undeterred by the yield curve shifts.

Buoyed by hopes for a pivot in monetary policy as inflation trended closer towards the central banks’ targets, Canadian equities had a strong start to the year, although they paled compared to the ongoing boom in U.S. equities, where a large portion of the gains were derived from mega-cap information technology  and related names with less representation in Canadian markets.

Mind the lag

Although decelerating, the economy continues to show sufficient resilience, with customer spending remaining robust since the reopening of economies after the global pandemic-induced shutdowns. Fiscal stimulus has moderated since the immediate aftermath of the pandemic outbreak; however, fiscal policy continues to operate at odds with monetary policy. Labour strength and wage gains have further reinforced this view, fuelling fears of lingering inflation and the potential for a higher-for-longer rate environment. Continue Reading…