All posts by Robb Engen

How to plan your own Revenge Travel Year

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Most of you know the story by now. The short version goes: I quit my job at the end of 2019 to focus full-time on financial planning and freelance writing. The underlying motivation was to have more time to travel.

No longer bound by a set number of vacation days, and with work that could be done from anywhere with an internet connection, we planned some epic trips for 2020.

You know what happened next. Trip to Italy – cancelled. Trip to the UK – cancelled. Two years later, with a lot of pent-up demand to continue this vision of our rich life, we embarked on our revenge travel year.

A week in Maui, 3.5 weeks in Italy, 3.5 weeks in the UK, and another eight days coming up in Paris this fall. It has been a crazy and exciting year.

Planning your Revenge Travel Year

Many of you also have a pent-up demand for travel, and have either managed to get away this year or plan to do so in 2023.

Your ideal destinations may differ from mine, but if you’re itching to travel soon then I suggest you start planning now. Here’s how to plan your own revenge travel year:

Time and Place

My wife and I like to plan our trips at least a year or two in advance so we can properly allocate our travel spending.

Like any financial goal, it helps to have a rough idea of how much you’ll spend, plus a time-frame so you can work backwards and ensure an appropriate savings plan.

For example, you might budget $5,000 for a warm holiday next February. That means saving $833 per month for the next six months to reach your goal.

A budget nerd like me maps out spending for an entire year, so I know which months will incur the big expenses.

A more sensible approach might be to set up a sub-savings account for your travel goal. That kind of mental accounting can be a useful part of your financial plan.

Transportation and Accommodation

How will you get there? Plane, train, automobile? Where will you stay? Hotel, Airbnb, in a friend’s guest room?

Are you a luxury traveller, flying business class and staying at the Ritz Carlton? Or are you happy with an economy flight and a Best Western? Will you need to rent a car?

We flew business class from Calgary to Rome, and then again from London to Calgary. I’m not going to lie, it’s pretty nice to actually get some rest in a lie-flat seat and not arrive completely wiped out after a nine-hour flight. But, the economy flight back from Rome wasn’t all that bad.

We also love staying in nice hotels when it’s just me and my wife enjoying a kid-free getaway. Otherwise it’s Airbnbs for the extra space and the kitchen.

I bring up transportation and accommodation because it’s helpful to know which airline you’re going to fly with, which hotel chain you’ll stay at, and which rental car agency you’ll use.

Most airlines, hotels, and car rental agencies have their own loyalty program or belong to a coalition where you can earn points, get discounts, and receive other perks. Sticking to the same 1-2 brands and joining their loyalty programs can help augment your travel budget each and every year.

Rewards and Loyalty Programs

I’ve been a credit card rewards addict for many years. But I don’t just blindly apply for any credit card with a decent welcome bonus. Instead, I’m laser focused on earning points that I can use when I travel, and using credit cards that can help me accumulate those points in a hurry.

My top loyalty programs for travel include:

  • Aeroplan
  • WestJet / RBC Rewards
  • Marriott Bonvoy
  • Scotia Scene+
  • TD Rewards

Aeroplan is easily the best value of the bunch. Expect to redeem Aeroplan points at a value of 2 cents per mile. That’s at least twice the value of most other programs, where you can expect to redeem points at a rate of 0.50 cents to 1 cent per point.

We focus on Aeroplan because flights for four of us to Europe or Maui are expensive. Redeeming Aeroplan points has helped us save thousands of dollars on flights.

I also collect WestJet Dollars from time-to-time, as WestJet is sometimes a good choice for flying out of Lethbridge and for short haul trips to Vancouver. It’s good to have options. RBC Rewards can also be converted to WestJet Dollars.

I collect Bonvoy points because Marriott has the largest collection of hotels in the world and will almost always have an option in the area if we need a hotel.

We had a lovely stay at the Sheraton in Edinburgh and at the Westin Dublin in 2019, and with Marriott’s fifth-night free option we saved a bundle. We also like the free night certificate that comes attached to their Amex affiliated credit card.

Finally, a couple of supplementary loyalty programs (like Scotia Scene+ and TD Rewards) always come in handy to redeem for car rentals, hotels, or tickets to an attraction.

For example, I had more than 100,000 TD Rewards points ($500) and redeemed the points for a car rental in England this summer.

The point is to zero-in on a select few rewards programs that align with your trip or with the way you like to travel, and start racking up points.

Maybe you can shave off $1,000 from that $5,000 trip just by strategically using your points. Or, like I do sometimes, use those points to enhance your stay with a business class ticket, upgrade to a suite with a view, or to see an attraction you might have otherwise deemed too expensive.

Top Credit Cards for Travel

Okay, so which credit cards are best to use for collecting travel points? I wish there was an easy answer, but if you’re planning a revenge travel year soon you’re going to need a complete overhaul of your wallet.

Here’s what I’m packing:

  1. American Express Cobalt Card – Simply put, this is the best credit card in Canada for earning points for travel. New cardholders will get 2,500 points for each month in which they spend $500 (30,000 total). That’s in addition to earning 5x points on groceries. Sign up for this card, use it for $500 per month worth of your grocery (or dining) spending, and after 12 months you’ll have 60,000 Membership Rewards Points. These can be transferred to Aeroplan or Marriott, or used to redeem against purchases made on your card.
  2. American Express Platinum Card – Go big or go home. You’ve got an epic year of travel planned, you need an epic credit card (even for just one year). Yes, the Amex Platinum card comes with a $699 annual fee. But do the math and you’ll see the card easily pays for itself and more. Sign up for this card and you’ll get: Airport lounge access, a $200 travel credit, plus 115,000 points when you spend $6,000 in the first three months. Again, these can be transferred to Aeroplan or Marriott, or used to redeem against purchases made on your card. Time this application to coincide with a large one-time purchase (home or auto insurance for us). Cancel the card after your year of revenge travel, or keep it if you find it useful (I do).
  3. American Express Aeroplan Reserve Card – Another premium card option for a big year of travel ahead. This one comes with a $599 annual fee, but also some incredible perks like Maple Leaf Lounge Access, priority check-in, boarding, and baggage handling (all of which came in handy for us this year). Sign up for this card and you can earn up to 115,000 Aeroplan points when you reach the minimum spending thresholds.
  4. Marriott Bonvoy American Express Card – I’ve held this card for years because of the annual free night certificate, which I think easily pays for the $120 annual fee. We redeemed the hotel certificate for one-night stays in London and in Rome near the airport before our flight, and at the Marriott in-terminal hotel in Calgary before an early departure. Sign up for this card and earn 70,000 Bonvoy points when you spend $3,000 in the first three months. As I said, this one is a long-term keeper.

Next, I have a strategy to earn additional points from holding RBC and TD Cards. Here’s what I do:

  1. WestJet RBC World Elite MasterCard / RBC Avion Visa Infinite – I’ve held each of these cards at one time or another. They often have great sign-up bonuses for doing very little (welcome bonus on approval, or on first purchase), which makes them a no-brainer option for someone looking to accumulate points quickly and hassle-free.
  2. TD Aeroplan Visa Infinite / TD First Class Travel Visa Infinite Card – Same idea, I will often hold one or both of these cards to collect easy sign-up bonuses. The Aeroplan Visa obviously helps accelerate your Aeroplan points, while the First Class Travel Visa earns TD Rewards, which can be redeemed for a number of things – most notably through Expedia for TD (where I redeemed points for that rental car in England).

What I like about the TD and RBC cards, besides the easy to earn welcome bonuses, is that you don’t have to cancel your card before the next year’s annual fee comes due. You can downgrade to a no-fee card, or make a “product switch” from Aeroplan to First Class (and vice-versa), or from Avion to WestJet (and vice-versa), so you keep your credit file open and won’t take a credit hit for closing the account.

Ready Player Two?

Most credit cards come with the option of having a supplementary card: a second card for your spouse or partner to use on the same credit card account. Some even charge an annual fee for this “privilege.” No thanks! Continue Reading…

Beware the Retirement Risk Zone

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I often recommend deferring CPP until age 70 to secure more lifetime income in retirement. It’s also possible to defer OAS to age 70 for a smaller, but still meaningful, increase in guaranteed income.

While the goal is to design a more secure retirement, there can be a psychological hurdle for retirees to overcome. That hurdle has to do with withdrawing (often significant) dollars from existing savings to fill the income gap while you wait for your government benefits to kick in.

Indeed, the idea is still to meet your desired spending needs in retirement – a key objective, especially to new retirees.

This leads to what I call the retirement risk zone: The period of time between retirement and the uptake of delayed government benefits. Sometimes there’s even a delay between retirement and the uptake of a defined benefit pension.

Retirement Risk Zone

The challenge for retirees is that even though a retirement plan that has them drawing heavily from existing RRSPs, non-registered savings, and potentially even their TFSAs, works out nicely on paper, it can be extremely difficult to start spending down their assets.

That makes sense, because one of the biggest fears that retirees face is the prospect of outliving their savings. And, even though delaying CPP and OAS helps mitigate that concern, spending down actual dollars in the bank still seems counterintuitive.

Consider an example of a recently divorced woman I’ll call Leslie, who earns a good salary of $120,000 per year and spends modestly at about $62,000 per year after taxes (including her mortgage payments). She wants to retire in nine years, at age 55.

Leslie left a 20-year career in the public sector to work for a financial services company. She chose to stay in her defined benefit pension plan, which will pay her $24,000 per year starting at age 65. The new job has a defined contribution plan to which she contributes 2.5% of her salary and her employer matches that amount.

Leslie then maxes out her personal RRSP and her TFSA. She owns her home and pays an extra $5,000 per month towards her mortgage with the goal of paying it off three years after she retires.

Because of her impressive ability to save, Leslie will be able to reach her goal of retiring at 55. But she’ll then enter the “retirement risk zone” from age 55 to 65, while she waits for her defined benefit pension to kick in, and still be in that zone from 65 to 70 while she waits to apply for her CPP and OAS benefits.

The result is a rapid reduction in her assets and net worth from age 55 to 70:

Retirement risk zone example 55-70

Leslie starts drawing immediately from her RRSP at age 56, at a rate of about 7.5% of the balance. She turns the defined contribution plan into a LIRA and then a LIF, and starts drawing the required minimum amount. Finally, she tops up her spending from the non-registered savings that she built up in her final working years.

When the non-registered savings have been exhausted at age 60, Leslie turns to her TFSA to replace that income. She’ll take that balance down from $216,000 to about $70,000 by age 70. Continue Reading…

Stop checking your portfolio

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We’re halfway through 2022 and the year has not been kind to investors, to say the least. Global stock markets are suffering their worst prolonged losses in recent memory. The S&P 500 is down about 18.5%, international stocks are down about 17%, and emerging market stocks are down about 15%. Domestic stocks have fared better, but the broad Canadian market is still down about 4% this year.

Meanwhile, bonds have not been a safe haven as rising interest rates pushed bond prices down. A broad Canadian bond index is down almost 13% this year, while short-term bonds are also down about 5.5%.

What’s an investor to do?

For starters, stop checking your portfolio so often. Investors who focus too much on short-term performance tend to react too negatively to recent losses, at the expense of long-term benefits. This phenomenon is known as myopic loss aversion:

“A large-scale field experiment has shown that individuals who receive information about investment performance too frequently tend to underinvest in riskier assets, losing out on the potential for better long-term gains (Larson et al., 2016).”

Loss aversion is a cognitive bias – the idea that a loss is psychologically more painful than the pleasure of an equivalent gain.

Think of the your portfolio returns over the past three years (2019-2021). It felt good to see your investments increase by double-digits. Here are the returns for Vanguard’s Balanced ETF (VBAL) during that time:

  • 2019 – 14.91%
  • 2020 – 10.24%
  • 2021 – 10.27%

Fast forward to 2022 and VBAL is down 10% on the year. Loss aversion tells us the pain of these losses is felt twice as powerfully as the pleasure of the previous years’ gains.

Myopic loss aversion fails to consider the bigger picture

With myopic loss aversion, we focus too narrowly on specific investments without taking into account the bigger picture. You’ve experienced this if you’ve ever checked your portfolio a short time after a recent purchase and cursed your luck if the investment is down.

Professor John List was a recent guest on the Rational Reminder podcast and he co-authored a paper on myopic loss aversion. The paper found that, “professional traders who receive infrequent price information invest 33% more in risky assets, yielding profits that are 53% higher, compared to traders who receive frequent price information.”

When asked how often investors should check their portfolio, List said, “as rarely as possible”:

“I would say once every three, six months is fine. But the reason why I don’t want you to look at your portfolio is, because when you do and you see losses, even though they’re paper losses. You say, “My gosh, that hurts.” And you’re more likely to move your portfolio out of risky assets and into less risky assets. And as we all know, just look at the data. The data over long periods of time, that’s the equity premium puzzle, is that you get much higher returns, if you’re willing to bear some of that risk. Now, if you look at your account a lot and you have myopic loss of version, you’ll be much less likely to bear that risk. So, you’ll move out and you’ll be in inferior investments.”

This applies to both novice and experience investors. I coach clients regularly on the benefits of sticking to their investment strategy and ignoring short-term market fluctuations. But it’s hard when the daily news headlines are screaming in your face about how bad the market is doing and why it’s only going to get worse.

My worst moment was during the March 2020 crash. I had just quit my job three months before, and my investments were down 34% in a short period of time. It was a rough time when even I was questioning what to do. It didn’t help that I had no RRSP or TFSA contribution room – so I couldn’t even “buy the dip” to make myself feel better.

Related: Exactly How I Invest My Own Money

What did I do? I stopped checking my portfolio. I had no reason to log-in anyway, since I wasn’t making regular contributions. I reminded myself that my investments were long-term in nature, and that markets go up most of the time. Periodic declines are the price of admission for risky assets like stocks. Continue Reading…

How to invest during high inflation

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It’s common for investors to be concerned about inflation because it brings to mind the high inflationary period of the 1970s that completely wrecked stock and bond returns. It’s also easy for investors to draw spurious conclusions about government debt and linking that to the hyperinflation that occurred in Zimbabwe or Venezuela. This article aims to set the record straight about inflation and let investors know how to invest during periods of high inflation.

Are we experiencing high Inflation?

Inflation is one of the biggest concerns as we near the end of the global pandemic and economies begin to re-open. Governments around the world spent record amounts to keep their citizens, small businesses, and corporations afloat over the past two years, while a majority of those still employed were able to save money thanks to an economy devoid of travel and entertainment.

The result was a significant uptick in savings rates, with Canada’s household savings rate reaching a high of 28.2% in July 2020.

All this money sloshing around on the sidelines has been and will continue to be deployed into goods and services, creating additional demand for a still strained global supply chain. Consumers are ready to dine out in restaurants, attend concerts, and engage in “revenge travel” to make up for lost time.

When that happens, prices tend to rise. Canada’s consumer price index (CPI) has been rising steadily since March 2021. The 12-month change in the CPI for February 2022 was 5.7% (Stats Can). That’s well above the Bank of Canada’s 2% inflation target, and even above their acceptable range of 1-3%.

Meanwhile, the U.S. inflation rate soared to 7.9% in February 2022. (Trading Economics).

Both the Federal Reserve and the Bank of Canada previously signalled they were willing to let the economy run a little hotter than usual to make sure we achieve so-called full employment. But both central banks are now in tightening mode, raising interest rates by 0.25% in March 2022 to kick-off a series of expected rate hikes for the rest of 2022.

It’s clear that high inflation has arrived and persisted for longer than expected. The question is what should investors do about it (if anything)?

How Investors should position their portfolio to deal with high Inflation

What exactly is an inflation hedge? In an episode of the Rational Reminder podcast, Benjamin Felix said an inflation hedge needs the following three characteristics:

  1. It will correlate positively with inflation, including responding to unexpected inflation.
  2. It won’t be too volatile
  3. It will have a positive real expected return

The problem, Felix said, is that asset doesn’t exist.

Continue Reading…

A sensible RRSP vs. TFSA Comparison

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A Sensible RRSP vs. TFSA Comparison

Should you contribute to your RRSP or your TFSA? It’s one of the most frequently asked questions here and on other financial forums, yet the answers couldn’t be more divided. Furthermore, there is a growing sentiment among Canadians that somehow RRSPs are a government scam because you’ll be forced to pay tax on any withdrawals in retirement. That leads many to (sometimes) incorrectly declare that a TFSA is the better savings vehicle for retirement due to the tax-free treatment of withdrawals.

Let’s start by clearing up one important fact in the RRSP vs TFSA debate: The accounts are mirror images of each other. When you put money in an RRSP and invest the tax refund, you’re using pre-tax dollars. The money grows inside a tax sheltered account and then you pay taxes on your withdrawals years later in retirement.

The opposite is true of a TFSA – you contribute with after-tax dollars but won’t have to pay taxes when you take money out. If you’re in the same tax bracket when you withdraw from your RRSP as you were when you made the contributions, the RRSP and TFSA work out to be exactly the same.

RRSP vs TFSA Comparison

Here’s a simple chart that David Chilton used in The Wealthy Barber Returns to help drive this point home:

TFSA RRSP
Pre-tax income $1,000 $1,000
Tax $400 n/a
Net contribution $600 $1,000
Value in 20 years @ 6% growth $1,924 $3,207
Tax upon withdrawal (40%) n/a $1,283
Net withdrawal $1,924 $1,924

Two important caveats to keep in mind:

  1. You need to invest the tax refund in order for RRSPs to work out as designed. Unfortunately, most Canadians spend their refund and so they don’t end up with as much money in their retirement account.
  2. A TFSA is flexible in that you can take out money at any time without penalty. For Canadians who use a TFSA as their primary retirement savings vehicle that means resisting the temptation to raid the account whenever “something” comes up. You should also replace the ‘S’ in TFSA with an ‘I’ and make sure to invest that money for the long-term. Continue Reading…