All posts by Financial Independence Hub

Inflation in Retirement

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By Billy Kaderli, RetireEarlyLifestyle.com

Special to the Findependence Hub

First things first, what is inflation? Inflation is when too much money is competing for a finite number of goods. This causes a general increase in prices and a fall in the purchasing value of money.

The US Real-Estate market is a prime example, and we have all witnessed the rising home values. Translate this to food and energy, and this is the effect we are feeling today.

Current inflation numbers

Recent inflation numbers came in at 8.5% year-over-year. The producer price index (PPI) came in higher at 11.2% which means it is costing more for the producers to manufacture products.

These increases get passed on to you and me, the consumers, and we are going to be feeling these increases now and on into the future.

How can you protect yourselves in retirement?

Perhaps you are living on a fixed income such as Social Security. [or in Canada: CPP and Old Age Security.]  Your annual Social Security adjustment doesn’t keep up with grocery and fuel costs; thus, you are slipping backwards.

This is not a good position to be in.

One answer is to own equities. Continue Reading…

How Investors can respond to Ukraine Invasion

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By Sa’ad Rana, Senior Associate – ETF Online Distribution, BMO ETFs

(Sponsor Blog)

It has been almost two months since Russia invaded Ukraine. During this time, we have been witnessing the dramatic impact the war has had on global markets and economies. There is also concern with how these events will impact our portfolios and investments. 

Economic Impact

Inflation numbers are expected to continue rising higher and this war will put more upward pressure on inflation. Russia is a large global oil exporter. Increased sanctions on Russia will undoubtedly cause a supply squeeze in the oil market, which will lead to higher oil prices. In addition, Russia and Ukraine both account for about 25% of total wheat exports, which will now be limited. This can drive up food costs on a global scale. The war will also continue to restrict supply chains. For example, planes are being diverted because Russian air space is closed to more than 35 countries. Having to go around Russia leads to longer travel, resulting in increased fuel consumption and trip costs.  Continue Reading…

Can you retire using just your TFSA?

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Image Courtesy of Cashflows & Portfolios

By Mark and Joe

Special to the Financial Independence Hub

The opportunity for Canadians to save and invest tax-free over decades could be considered one of the greatest wonders of our modern financial world. This begs an important question:

If you start early enough – Can you retire using just your TFSA?

We believe so and in today’s post we’ll show you how!

Can you retire using just your TFSA? Why the TFSA is a gift for all Canadians!

Our Canadian government introduced TFSAs in 2009 as a way to encourage people to save money. Looking back, it was one of the best incentives ever created for Canadian savers …

Our Canada Revenue Agency has a HUGE library of TFSA links and resources to check out but we’ll help you cut to the chase along answering that leading question above:

Can you retire using just your TFSA?

Why the TFSA is just so good

Since the TFSA was introduced, adult Canadians have had a tremendous opportunity to save and grow their wealth tax-free like never before. While the TFSA is similar to a Registered Retirement Savings Plan (RRSP) there are some notable differences.

As with an RRSP, the TFSA is intended to help Canadians save money and plan for future expenses. The contributions you make to your TFSA are with after-tax dollars and withdrawals are tax-free. You can carry forward any unused contributions from year to year. There is no lifetime contribution limit.

For savvy investors who open and use a self-directed TFSA for their investments, these investors can realize significant gains within this account.  This means one of the best things about the TFSA is that there is no tax on investment income, including capital gains!

How good is that?!

Here is a summary of many great TFSA benefits:

  • Capital gains and other investment income earned inside a TFSA are not taxed.
  • Withdrawals from the account are tax-free.
  • Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits (such as Old Age Security (OAS)). This is very important!!
  • Anything you withdraw from your TFSA can be re-contributed in the following year, in addition to that year’s contribution limit, although we don’t recommend that. More in a bit.
  • While you cannot contribute directly as you could with an RRSP, you can give your spouse or common-law partner money to put into their TFSA.
  • TFSA assets could be transferable to the TFSA of a spouse or common-law partner upon death. This makes the TFSA an outstanding estate management account – leaving TFSA assets “until the end” can be very tax-smart.

Since you paid tax on the money you put into your TFSA, you won’t have to pay anything when you take money out. This feature combined with the ability to compound money, tax-free, over decades, can make the TFSA one of the best ways to build wealth for retirement.

RRSP vs. TFSA – which one is better?

There is no shortage of blog posts that highlight this debate and one of our favourites is from My Own Advisor. You can check out his post here. 

Without stealing too much of his thunder, the RRSP vs. TFSA debate essentially comes down to this: managing the RRSP-generated refund.

Let’s dive deeper with a quick example.

Contributions to the RRSP are excellent because the contribution you make today lowers your taxable income – and you may get a tax refund because of it – a pretty nice formula. The problem is, some Canadians might spend the RRSP-generated refund from their contribution. You’ll see why this is a major problem.

Consider working in the higher 40% tax bracket whereby RRSP contributions to lower your taxable income make great sense:

  • If you put $300 per month into the RRSP for the year, that’s a nice $3,600 contribution.
  • You’ll get a $1,440 refund (40% of $3,600).

When your $1,440 RRSP-generated refund comes in, and now you decide to spend it on a new iPhone, just know that your RRSP refund is effectively borrowed government money. Yup, a long-term loan from the government they are going to come back for. If you always spend your refund you are undermining the effectiveness of RRSPs because you are giving up your government loan that would otherwise be used for tax-deferred growth.  A refund associated with your RRSP contribution should not be considered a financial windfall but the present value of future tax payment you must make.

If you typically spend the RRSP-generated refund in our example then we think some Canadians are FAR better off prioritizing your TFSA over your RRSP because of the known benefits of that present-day contribution.  

TFSAs offer tax-free growth for any income earner

At some point, the money that comes out of your RRSP (or Registered Retirement Income Fund (RRIF)) will be taxed.

With TFSAs, the government has eliminated the guesswork about taxation. Because the TFSA is like the RRSP, but in reverse (you don’t get any tax break on the TFSA contribution), TFSA withdrawals are tax-free.

For far more details including answering dozens of questions about this account, read on about our comprehensive TFSA post below:

If you haven’t contributed much towards your retirement and/or you can’t possibly save enough with so many competing financial priorities – that’s OK – striving to max out your TFSA contributions each year, every year, is still very valuable and admirable goal. In fact, focusing diligently on just maxing out your TFSA (and ignoring the RRSP account entirely) will still serve your retirement plan well.

Regardless of your income, any Canadian who is 18 years of age or older with a valid social insurance number (SIN) can open a TFSA. All you need to do is reach out to a financial institution, credit union or insurance company that offers TFSAs and open an account.

Whether you set up your automatic savings plan to your TFSA weekly, monthly, or other – striving to make the maximum contributions to this account can be a significant wealth-building tool as part of the Four Keys to Investing Success. 

Let’s use a case study to demonstrate just how good this account can be for you too – and why you can retire just using your TFSA!

Can you retire using just your TFSA – A Case Study

The big question in his article is – given enough time (ie. if you start young enough), can someone retire using only their TFSA?  The answer may surprise you, at least it surprised us!

To help accurately model this scenario to account for government benefits, inflation, taxes, tax credits, and optimized withdrawal schedules, we dove into the software that we are using to manage our own early retirement plans.

Here are the assumptions we made: Continue Reading…

Investment fads and other destructive behaviours

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By Steve Lowrie
Special to the Findependence Hub

Chasing Investment Performance results in far more losers than winners

Would you like to improve your investment game?

Counterintuitively, you don’t necessarily need to master more fancy moves; it may be a more powerful play to simply reduce your biggest investment mistakes. It’s those false moves that usually cost you the most gained ground.

In particular, I’ve commented before on two common and costly behavioural mistakes, both of which stem from reacting to recent returns instead of patiently positioning your portfolio for future market growth.

  1. The first such blunder is to give in to a sense of gloom and doom, and sell out at low prices during down markets.
  2. On the flip side, many investors seem to love chasing after expensive trends in frothy markets. I’ve seen a lot of that behaviour lately, so let’s revisit why that typically doesn’t end well.

Fleeting Passions and Expensive Fashions

Admittedly, it’s tempting to chase investment fads when they are playing out in real time. Unfortunately, it’s only obvious in hindsight which lucky few will be long-run winners, and which of the far greater majority will end up as costly illusions, conjured up by an intoxicating brew of performance-chasing and FOMO (fear of missing out).

Here are four points to help you avoid following fads:

1.) Success stories abound. There is always a good story behind every hot investment trend. We humans are remarkable at devising new technologies, ground-breaking opportunities, and out-of-the-box ideas. A few of them pay off handsomely, especially for investors who manage to get in at the beginning of the run. However …

2.) By the time it’s in the popular press, it’s usually too late to profit on the news. Once a success story has gone mainstream, it’s too late to get in on its past exceptional performance. You end up buying high and hoping it will go even higher, despite the odds that it won’t.

A recent Canadian example was the full legalization of cannabis with huge amounts of fanfare on October 17, 2018. Trying to capture this trend, Horizons ETFs launched the Marijuana Life Sciences ETF (HMMJ) on April 4, 2017, holding a basket of North American stocks active in the marijuana business. From the initial $10/share price, the EFT skyrocketed to over $24 by September 2018. From there it declined to $22 by the October 17, 2018 legalization date, and then dropped further to $15 by the end of 2018. Currently, this ETF is trading just over $5. Its past performance is horrendous, –53% over the past 12 months, –32% for the past 3 years, and –5.63% per year since inception. So much for following what was garnering the most attention in the media!

3.) It’s easy to forget that there are a lot more market losers than winners. Think you can pick the ones with room to grow? Although markets in aggregate have delivered premium returns over time, those returns tend to come from a tiny minority of securities. For example, in a recent report on pursuing individual stock returns, JP Morgan looked at U.S. stock performance from 1980–2021. They found about 10% of stocks across all sectors proved to be “mega winners,” but 66% failed to outperform the Russell 3000 Index, and 42% delivered negative absolute returns. In sharing this and other data, Wall Street Journal columnist Jason Zweig observed:

“Winners like Walmart are vivid … Failures fade as if they were written in invisible ink — but they are much more common than successes.”

4.) Your investment attention is up for sale. Despite these points, Bay Street and Wall Street are always looking to capitalize on the next big investment trends. Trade brokers and product manufacturers are no fools. When they see opportunities to make easy money by selling hot hands, they’re happy to “help.” Whether you win or lose they can feast on fat commissions and tasty trading revenues.

Quacking Ducks

Who me, cynical? I’ve covered most of these points in my 2018 piece, Investing fads: Quack like a duck and you may get plucked. I described how there’s even a saying for these sorts of popular feeding frenzies: “When the ducks quack, feed them.” As one source described, “when investors want to buy something … that something is offered for sale. It doesn’t make any difference if Wall Street knows in its heart of hearts that that something (such as an IPO) is overpriced.” Continue Reading…

Tackling your Stock Market fears

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By Anita Bruinsma, CFA

Special to the Findependence Hub

Investing has become more accessible to more people over the years. The emergence of mutual funds, ETFs, online brokers and robo-advisors has given pretty much everyone the means to invest. So why are so many people still reluctant to invest, and in particular, why don’t they think they can do it themselves? Judging by the people I’ve talked to the answer is: they’re scared. 

This is unfortunate and unnecessary. The investment industry has made investing look so complicated. We are led to believe that we need an MBA, a Bloomberg terminal and a proficiency in Excel modeling to invest. This is absolutely not true. Investing can be simple when you buy and hold broad-market ETFs. 

Compounding the problem are the tales of fortunes lost in the stock market, either by gambles taken or being swindled by an unscrupulous financial sales person. These horror stories, although real, are uncommon, and like many of our fears, are bigger in our imaginations than in reality. 

Investing can be simple

Have you heard of imposter syndrome? That’s when you think you aren’t talented or skilled enough to deserve your job, your income, or the accolades bestowed on you. I had terrible imposter syndrome when I was hired as an equity analyst 16 years ago. I thought everyone around me was way smarter than me when it came to investing in the stock market. 

Over the years, though, I realized that so much of what people were talking about was irrelevant, and the excessive amount of information and analysis was unnecessary. The highly-paid “experts” who came to meet with us couldn’t simply say “The stock market goes up over the long term.” Why would anyone be paid to give that simple piece of insight?

The thing is, that’s all that matters. The fact that the U.S. stock market has, historically, always recovered from dips and crashes and continued the march upward is all that matters. Don’t let all the other market-related noise distract you from this point.

Fewer decisions, better outcomes

Here’s how to de-complicate investing: don’t make predictions. The smartest investors on Bay Street don’t try to guess where the market is going: they buy their investments and hold onto them for the long term. The more decision-making you remove from investing, the better off you’ll be. This means don’t pick stocks and don’t choose when to get in and out of the market. Buy ETFs or index mutual funds that mirror the broad market, buy when you have the money, and sell when you need it.  Continue Reading…