All posts by Robb Engen

Women, Wealth and Retirement

Posted By Robb Engen | May 2, 2019

One of my very first financial planning clients was a single woman in her late 40s named Rachel who lived in Toronto and worked as a self-employed consultant to the not-for-profit sector. She made good money but lacked the confidence to manage her day-to-day finances and save for the long term.

Moreover, Rachel provided care for her aging parents and was under a tremendous amount of stress: enough for her to worry about her own health and whether she could maintain her current workload.

We worked together to establish a budget and cash flow projections for the next 12 months. During that time, we checked in monthly to ensure her income and expenses were on track and updated her plan accordingly.

Having always come from a place of fear about her financial future, Rachel quickly realized the path was not as bad as she once made it out to be. Most importantly, I never made her feel bad for things she didn’t understand: I just offered support and encouragement, along with tools that were easy to understand and implement.

After just one year she felt empowered about her finances and confident about her financial future. This new-found confidence also shone through her consulting business as she managed three straight years of record revenue growth to help further strengthen her financial position.

Meanwhile, her parents’ health continued to decline, so Rachel decided to scale back her workload and spend more time with her mom and dad. Now she only works on enough projects throughout the year to reach a specific annual income target that meets her monthly spending and savings goals. She has enough confidence in her financial plan to turn away other business opportunities to focus on her well-being and spend more time with her parents.

Rachel now joins a growing list of financially well-prepared Canadian women. Earlier this year, RBC Insurance conducted a survey of Canadian women over the age of 45 with household income of $60K+. The survey found that women are relatively well-prepared financially, but still express varying degrees of confidence when it comes to their financial future.

Highlights include:

The majority of women over 45 have a very clear idea of what they would do with a sudden lump sum of money, with only a quarter worry about being able to manage the money properly.
Canadian women have also mastered the household money matters. More than nine in 10 (92 per cent) agree they have a strong understanding of their finances.
Yet despite this, 24 per cent say they won’t be able to maintain their household’s financial situation if their spouse or partner were to pass away and one-third are not confident that they will be able to afford the lifestyle they want to live through retirement.
Interestingly, single women were only slightly more likely than married women (36 vs. 34 per cent) to cite a lack of confidence in their ability to afford their lifestyle in retirement.

Retirement planning is a challenge in any household, let alone one in which a spouse dies early. If that spouse happens to be the household’s chief financial officer, what’s the surviving partner to do?

Even though I manage our day-to-day finances and retirement savings I do want my wife to have an understanding of our financial position: both current and future. I want to set up our finances in a way that’s easy for her to manage in the event of my untimely demise. I also want to ensure that she can maintain a comfortable lifestyle in retirement.

I’ve made sure to include my wife as the beneficiary on my RRSP. That way, if I died, she could have my RRSP assets transferred to her RRSP through a tax-deferred rollover.

I have a term life insurance policy in place that will be enough to pay off our existing mortgage and provide another $300,000 or so to live on.

I also have a defined benefit pension through my current employer. If I died, she would receive 2/3 of the pension I was receiving for the rest of her life.

Annuities: A Missing Piece of the Retirement Puzzle?

The idea of guaranteed income for life is appealing to me as a way to simplify our finances in retirement. Continue Reading…

3 Reasons to delay taking CPP until age 70

Posted By Robb Engen | April 5, 2019

It might seem counterintuitive to spend down your own retirement savings while at the same time deferring government benefits such as CPP and OAS past age 65. But that’s precisely the type of strategy that can increase your income, save on taxes, and protect against outliving your money.

Here are three reasons to take CPP at age 70:

1.) Enhanced CPP Benefit – Get up to 42 per cent more!

The standard age to take your CPP benefits is at 65, but you can take your retirement pension as early as 60 or as late as age 70. It might sound like a good idea to take CPP as soon as you’re eligible but you should know that by doing so you’ll forfeit 7.2 per cent each year you receive it before age 65.

Indeed, you’ll get up to 36 per cent less CPP if you take it immediately at age 60 rather than waiting until age 65. That alone should give you pause before deciding to take CPP early. What about taking it later?

There’s a strong incentive for deferring your CPP benefits past age 65. You’ll receive 8.4 per cent more each year that you delay taking CPP (up to a maximum of 42 per cent more if you take CPP at age 70). Note there is no incentive to delay taking CPP after age 70.

Let’s show a quick example. The maximum monthly CPP payment one could receive at age 65 (in 2019) is $1,154.58. Most people don’t receive the maximum, however, so we’ll use the average amount for new beneficiaries, which is $664.41 per month. Now let’s convert that to an annual amount for this example = $7,973.

Suppose our retiree decides to take her CPP benefits at the earliest possible time (age 60). That annual amount will get reduced by 36 per cent, from $7,973 to $5,862: a loss of $2,111 per year.

Now suppose she waits until age 70 to take her CPP benefits. Her annual benefits will increase by 42 per cent, giving her a total of $11,322. That’s an increase of $3,349 per year for her lifetime (indexed to inflation).

2.) Save on taxes from mandatory RRSP withdrawals and OAS clawbacks

Mandatory minimum withdrawal schedules are a big bone of contention for retirees when they convert their RRSP to an RRIF. For larger RRIFs, the mandatory withdrawals can trigger OAS clawbacks and give the retiree more income than he or she needs in a given year.

The gradual increase in the percentage withdrawn also does not jive with our belief in the 4 per cent rule, which will help our money last a lifetime.

You can withdraw from an RRSP at anytime, however, and doing so may come in handy for those who retire early (say between age 55-64). That’s because you can begin modest drawdowns of your retirement savings to augment a workplace pension or other savings to tide you over until age 65 or older.

Tax problems and OAS clawbacks occur when all of your retirement income streams collide simultaneously. But with a delayed CPP approach your RRSP will be much smaller by the time you’re forced to convert it to a RRIF and make minimum mandatory withdrawals. Continue Reading…

Solving the home country bias in Canadian portfolios

Posted By Robb Engen | March 8, 2019

Canadian investors tend to suffer from home bias – a preference to hold more domestic stocks over foreign equities. This is actually true of investors in most countries, but it’s particularly troubling in Canada where our stock markets are highly concentrated in the financial and energy sectors.

The federal government could be partially to blame for our home bias tendencies. As recently as 2005 the government imposed a limit on the amount of foreign content allowed in RRSPs and pension plans. This cap was introduced in 1971 to help support the development of Canada’s financial markets but was scrapped in the 2005 federal budget, freeing Canadians up to invest abroad.

Sizes of World Stock Markets

It’s well known that Canada makes up less than 4 per cent of global equity markets (2.7 per cent, to be exact), yet 60 per cent of the equities in Canadian investors’ portfolios are in domestic securities.

Even most model ETF and index fund portfolios have Canadian investors overweighting domestic equities, holding anywhere from 20 to 40 per cent Canadian content.

Canadian home country bias

The result is a portfolio that is more volatile and less efficient than one with international equity diversification. Indeed, investors with a Canadian home bias are taking risks they could have diversified away by increasing their allocation to global equities.

My two-ETF portfolio

So how does my portfolio stack up? When I switched to my two-ETF solution, made up of Vanguard’s VCN (Canadian) and VXC (All World, ex-Canada), I chose to have an allocation 20-25 per cent Canadian stocks and 75-80 per cent international stocks.

That allocation would be relatively easy to monitor and rebalance if it was simply held in my RRSP. Whenever I added new money to my RRSP, I’d simply buy the ETF that was lagging behind its initial target allocation.

But I complicated things recently when I started contributing again to my TFSA. I wanted to treat my TFSA and RRSP as one total portfolio and keep the same asset mix in place. Since my RRSP was much larger than my TFSA, I decided to hold mostly foreign content (VXC) in my RRSP while putting Canadian stocks (VCN) in my TFSA.

This worked out great for several years but now I’ve run into a second problem; I’m contributing to my TFSA at a much faster pace than my RRSP. That’s because I’ve maxed out all of my unused RRSP contribution room and, due to the pension adjustment, I get a measly $3,600 per year in new contribution room.

Meanwhile I still have loads of unused TFSA contribution room and so I’ve been socking away $12,000 per year for the past two-and-a-half years. I hope to continue at that pace for many more years until I’ve completely caught up on all that available contribution room.

The result is a portfolio that is becoming increasingly more tilted to Canadian equities. At this rate, if I continue filling my TFSA with VCN, my portfolio will have more than 30 per cent Canadian content in five years, and nearly 40 per cent Canadian content in 10 years.

My Home Bias Solution

I’m considering a change to my two-fund portfolio. With the introduction of Vanguard’s new all-equity asset allocation ETF – VEQT – I could turn my two-fund solution into a true one-fund solution and make investing even more simple. Continue Reading…

Value for Money: Do you always get what you pay for?

Posted By Robb Engen | February 4, 2019

“This $6 bottle of wine tastes awful.” “What did you expect – you get what you pay for.”

It’s true, in most circumstances, that the quality of products and services increases as the price increases. You get what you pay for. When you cheap out on something, be it a bottle of wine, pair of jeans, or a manicure, more often than not you’ll end up disappointed. You might even end up paying more in the long run, having to replace the item or fix the mess you made when you cheaped out the first time.

One of the most common examples is with clothing. In this age of fast-fashion it’s not unheard of to find a t-shirt, pants, and a pair of sneakers – all of it – for less than $20. Anyone who’s ever shopped at Old Navy or Walmart can attest to this. But then what happens? The thin material starts to unravel, it’s improperly stitched, and it quickly wears out. Or, just as likely, it just doesn’t fit properly in the first place and so you never wear it.

I hate the term ‘investment’ when it comes to something that doesn’t have the potential to earn you money, but ‘investing’ in more expensive clothes can pay off. A well-cut suit, a timeless pair of shoes, work-out gear that doesn’t fray or pill after a few washes. Most of us can agree that spending more on a high quality item that will last a long time is worth the money.

Do you always get what you pay for?

But higher price = better product/service doesn’t always hold true. Take investing, for example. It’s widely accepted now that cost is the only reliable predictor of future returns. The higher the cost, the lower the expected return. The reverse is also true.

Canadian investors pay some of the highest mutual fund fees in the world and so it stands to reason that our expected returns will also diminish. We’re not getting what we pay for: our advisors get paid and investors get short-changed.

Yet I’ve heard advisors use this argument – you get what you pay for – when trying to persuade their clients that low-cost indexing, or a robo-advisor, is an inferior solution to their actively managed model. Ridiculous!

Here are some other, hopefully, less controversial examples from my own personal experience where a higher price doesn’t always mean better quality. Continue Reading…

The Beginner’s Guide to RRSPs

Posted By Robb Engen | February 1, 2019

More than sixty years after the federal government introduced the Registered Retirement Savings Plan as a vehicle to save for the future, RRSPs still remain one of the cornerstones of retirement planning for Canadians. In fact, as employer pension plans become increasingly rare, the ability to save inside an RRSP over the course of a career can often make or break your retirement.

Here’s a beginner’s guide to RRSPs:

The deadline to make RRSP contributions for the 2018 tax year is March 1st, 2019.

Anyone living in Canada who has earned income can and should file a tax return to start building RRSP contribution room. Canadian taxpayers can contribute to their RRSP until December 31st of the year he or she turns 71.

Contribution room is based on 18 per cent of your earned income from the previous year, up to a maximum contribution limit of $26,230 for the 2018 tax year. Don’t worry if you’re not able to use up your entire RRSP contribution room in a given year: unused contribution room can be carried-forward indefinitely.

Keep an eye on over-contributions, however, as the taxman levies a stiff 1 percent penalty per month for contributions that exceed your deduction limit. The good news is that the government built in a safeguard against possible errors and so you can over-contribute a cumulative lifetime total of $2,000 to your RRSP without incurring a penalty tax.

Find out your RRSP deduction limit on your latest notice of assessment or online using CRA’s My Account service.

You can claim a tax deduction for the amount you contribute to your RRSP each year, which reduces your taxable income. However, just because you made an RRSP contribution doesn’t mean you have to claim the deduction in that tax year. It might make sense to wait until you are in a higher tax bracket to claim the deduction.

When should you contribute to an RRSP?

When your employer offers a matching program: Some companies offer to match their employees’ RRSP contributions, often adding between 25 cents and $1.50 for every dollar put into the plan. Sadly, many Canadians fail to take advantage of this “free” gift from their employers: giving up a guaranteed 25-to-150 per cent return on their contributions.

When your income is higher now than it’s expected to be in retirement: RRSPs are meant to work as a tax-deferral strategy, meaning you get a tax-deduction on your contributions today and your investments grow tax-free until it’s time to withdraw the funds in retirement, a time when you’ll hopefully be taxed at a lower rate. So contributing to your RRSP makes more sense during your high-income working years rather than when you’re just starting out in an entry-level position.

A good rule of thumb: Consider what is going to benefit you the most from a tax perspective.

When you want to take advantage of the Home Buyers’ Plan: First-time homebuyers can withdraw up to $25,000 from their RRSP tax free to put towards a down payment on a home. Would-be buyers can also team up with their spouse or partner to each withdraw $25,000 when they purchase a home together. The withdrawals must be paid back over a period of 15 years; if not, the amount is added to your taxable income for the year.

When should you contribute to an RRSP?

When your employer offers a matching program: Some companies offer to match their employees’ RRSP contributions, often adding between 25 cents and $1.50 for every dollar put into the plan. Sadly, many Canadians fail to take advantage of this “free” gift from their employers, giving up a guaranteed 25-to-150 per cent return on their contributions.

Annuities: A Missing Piece of the Retirement Puzzle?

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1.) Enhanced CPP Benefit – Get up to 42 per cent more!

2.) Save on taxes from mandatory RRSP withdrawals and OAS clawbacks

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My two-ETF portfolio

My Home Bias Solution

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Here’s a beginner’s guide to RRSPs:

When should you contribute to an RRSP?

When should you contribute to an RRSP?

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