All posts by Financial Independence Hub

When did Retirement Income Planning get so complicated?

Posted By |
Photo by Gustavo Fring from Pexels

By Ian Moyer

(Sponsor Content)

Retirement planning used to be easy: you simply applied for your government benefits and your company pension at age 65. So, when did it get so complicated?

Things started to change in 2007 when pension splitting came into effect. While we did have Canada Pension Plan (CPP) sharing before that, not too many people took advantage of it. Then Tax Free Savings Accounts (TFSA) came along in 2009. At first you could only deposit small amounts into your TFSA, but in 2015 the contribution limit went to $10,000 (it’s since been reduced to $6,000 per year). Accounts that had been opened in 2009 were building in value, and the market was rebounding from the 2008 downturn. Registered Retirement Savings Plan (RRSP) dollars were now competing with TFSA dollars and people had to choose where they were going to put their retirement money.

In 2015 or 2016 financial planners suddenly started paying attention to how all of these assets (including income properties) were interconnected. There were articles about downsizing, succession planning, and selling the family cottage. This information got people thinking about their different sources of retirement income and which funds they should draw down first.

Of course, there is more to consider, such as the Old Age Security (OAS) clawback. When, where, and how much could this affect your retirement planning? People selling their business are often surprised that their OAS is clawed back in the year they sell the business, even if they’re eligible for the capital gains exemption. Not to mention what you need to do to leave some money behind for your loved ones. Even with all this planning, the fact that we pay so much tax when we die is never discussed, although the final tax bill always seems to be the elephant in the room. We just ignore it, and hope it’ll go away.

Income Tax doesn’t disappear at 65

Unfortunately, income tax doesn’t disappear at age 65, and you need time to plan ahead so you can reduce the amount of tax you pay in retirement. A good way to do this is to use a specialized software that takes all your sources of income and figures out the best strategy to get the most out of your retirement funds. Continue Reading…

Target Date Retirement ETFs

Posted By |
Image licensed by Evermore from Adobe

By Myron Genyk

Special to the Financial Independence Hub

Over the years, many close friends and family have come to me for guidance on how to become DIY (do-it-yourself) investors, and how to think about investing.

My knowledge and experience lead me to suggest that they manage a portfolio of a few low-fee, index-based ETFs, diversified by asset class and geography.  Some family members were less adept at using a computer, let alone a spreadsheet, and so, after they became available, I would suggest they invest in a low-fee asset allocation ETF.

What would almost always happen several months later is that, as savings accumulated or distributions were paid, these friends and family would ask me how they should invest this new money. We’d look at how geographical weights may have changed, as well as their stock/bond mix, and invest accordingly.  And for those in the asset allocation ETFs, there would inevitably be a discussion about transitioning to a lower risk fund.

DIY investors less comfortable with Asset Allocation

After a few years of doing this, I realized that although most of these friends and family were comfortable with the mechanics of DIY investing (opening a direct investing account, placing trades, etc.) they were much less comfortable with the asset allocation process.  I also realized that, as good a sounding board as I was to help them, there were millions of Canadians who didn’t have easy access to someone like me who they could call at any time.

Clearly, there was a looming issue.  How can someone looking to self-direct their investments, but with little training, be expected to sensibly invest for their retirement?  What would be the consequences to them if they failed to do so?  What would be the consequences for us as a society if thousands or even millions of Canadians failed to properly invest for retirement?  

What are Target Date Funds?

The vast majority of Canadians need to save and invest for retirement.  But most of these investors lack the time, interest, and expertise to construct a well-diversified and efficient portfolio with the appropriate level of risk over their entire life cycle.  Target date funds were created specifically to address this issue: they are one-ticket product solutions that help investors achieve their retirement goals. This is why target date funds are one of the most common solutions implemented in employer sponsored plans, like group RRSPs (Registered Retirement Savings Plans).

Generally, most target date funds invest in some combination of stocks, bonds, and sometimes other asset classes, like gold and other commodities, or even inflation-linked bonds.  Over time, these funds change their asset allocation, decreasing exposure to stocks and adding to bonds.  This gradually changing asset allocation is commonly referred to as a glide path.

Glide paths ideal for Retirement investing

Glide paths are ideal for retirement investing because of two basic principles.  First, in the long run, historically and theoretically in the future, stocks tend to outperform bonds – the so-called equity risk premium – which generally pays long-term equity investors higher returns than long-term bond investors in exchange for accepting greater short-term volatility (the uncertain up and down movements in returns).  Second, precisely because of the greater short-term uncertainty of stock returns relative to bond returns, older investors who are less able to withstand short-term volatility should have less exposure to stocks and more in less risky asset classes like bonds than younger investors. Continue Reading…

How to handle Fear of a Market downturn

Posted By |
Image courtesy Kiplinger/RetireEarlyLifestyle.com

By Billy and Akaisha Kaderli, RetireEarlyLifestyle.com

Special to the Financial Independence Hub

On our latest adventure, we were on the beach in Isla Mujeres, Mexico when a lady recognized us from our website RetireEarlyLifestyle.com. After some pleasantries, she asked if we could address the fears of the market declining and how to handle it.

We appreciated that input from one of our Readers.

Previous market declines

Since the surviving the 1987 crash when the Dow Jones Industrial Average fell over 20% in one day, there have been other downturns including the recent ones of 2007-2008 and the Covid meltdown in March of 2021. We have learned from each of them.

They can be trying on one’s patience and confidence, so how is it best to handle them?

Noise, corrections and bears

First, let’s define these meltdowns.

Between a 5-10% decline in the averages is called noise and can happen at any time.

Many individual stocks have these gyrations, which is why we own the Indexes. They are more stable.

Over a 10% drop is called a correction, meaning it is wringing the excesses out of the markets. The markets are constantly being over-extended and under-extended and these 10% moves correct for those times.

If the averages drop 20% or more, it is considered to be a bear market and we tend to have these every 56 months.

On average, bear markets last 289 days or 9.6 months with an average loss of 36.34%. These can be painful for one’s financial health — or an opportunity — depending on where you are in the investment cycle.

A number of events can lead to a bear market: including higher interest rates, rising inflation, a sputtering economy, and a military conflict or geopolitical crisis. Seems we have all of these presently!

If you are in the accumulation phase and buying more shares at cheaper prices, this can be a bonus for you. However, if you are now retired and living off your investments with your account values dropping, that can be difficult to swallow.

How to calm your nerves to prevent panic selling

It’s important to note the difference between trading and investing.

Traders drive the day-to-day activity, booking profits and hopefully taking losses quickly. We investors take a longer view to ride out these cross currents of the markets knowing that — over the long run — we will be fine. Continue Reading…

Retirement Readiness: The investment fee gap can set retirement back four years

Posted By |

 

By Jillian Kennedy, Mercer Canada

Special to the Financial Independence Hub

If someone said you could have four extra years to enjoy your retirement, you’d probably be thrilled. Now imagine being forced to hold off on retirement for four years longer than you planned. 

As it turns out, a gap in investment management fees can potentially make that a reality for many Canadians – but there is a fix.

Our newly released 2022 Mercer Retirement Readiness Barometer analyzed the various investment management fees in the market and their impact on retirement readiness. What we found is that someone paying the median level of fees for an individual investment account – 1.9% – would have to wait until age 70 to be retirement ready. Obviously, that’s well past the traditional retirement age target of 65 that many of us have in our sights.

 

It’s a different story if you consider the benefits of a workplace defined contribution (DC) plan. An individual paying 0.6% in fees – the median for a DC savings plan – would be ready for retirement four years sooner, at age 66. (The analysis assumed individuals are invested in a “balanced” target date portfolio with a 12% combined contribution rate – with 6% coming from the employee and 6% from the employer).

Those who have access to a workplace DC and savings plan can benefit from pooling power and lower fees in a group arrangement. Personal finance experts have commented for years on this fee disparity between group workplace plans and other investment savings vehicles, but this analysis puts that into clear perspective. Consider not only shaving years off your working life but having a better quality of life in the retirement years that follow.

The fee gap’s impact before – and after – retirement

This gap in fees doesn’t only affect the savings phase, but also the period after someone begins to draw from their retirement savings. It’s common to move retirement savings from a workplace plan into an individual account and at that point, higher fees tend to kick in.

Take, for example, an individual retiring at 65. Our analysis shows that if that person pays the median retail fee (1.9%) when they begin drawing money from their individual retirement savings account, they’ll run out of money five years earlier compared to someone paying the median group fee of 0.6%. 

If someone is paying the median group fee (0.6%) throughout their career, on the other hand, then retires at age 65 and subsequently invests their nest egg in an account paying that same rate, they will have an average of 12 more years of retirement income compared to a similar person paying the median retail fee (1.9%) over the same period.

Group pooling is a powerful tool

Of course, successful retirement income planning takes a comprehensive approach including workplace savings programs, government benefits and personal savings. Higher contribution levels and a smart investment strategy also play an important role, as does money management post-retirement.  Continue Reading…

What investors need to understand about the Russian invasion of Ukraine

Posted By |

By Allan Small,  iA Private Wealth

Special to the Financial Independence Hub

Markets are down. The Nasdaq is in bear territory and the S&P500 is in correction territory (at the time of writing).

This is the direct result of the Russian invasion of Ukraine. Not surprisingly, investors are nervous about what will happen to their wealth. I’ve certainly been getting calls from clients unsure about what to do.

Here’s what I’ve been telling them: Don’t panic. This too shall pass. The world has weathered terrible events in the past and come out the other side. We will again.

In my 25-year career as an investment advisor, investors faced Y2K, a worldwide financial collapse, and a global pandemic. In each case, downturns were followed by rebounds and even better returns.

This is temporary and stability will return

Russia’s war against the Ukraine is wrong and creating a tragic humanitarian crisis, but in terms of the markets, investors should view it as a temporary event: because it is. Yes, markets are down – for now – but they are not going to collapse. You are not going to lose all your money. Your wealth may drop for a period of time, but once the war is over, regardless of the outcome, stability will be restored and returns will tick up, in my opinion. For those fearing a global nuclear war, then market performance won’t matter.

Uncertainty causes markets to fall. Even before Russia invaded Ukraine, the markets were experiencing volatility because the central banks in Canada and the U.S. announced they would be increasing interest rates and reducing stimulus support. Higher interest rates are the primary tool to curb inflation, which is at record highs in both countries. While this made some investors nervous, it’s important to understand that the fact the Bank of Canada and the Federal Reserve are raising interest rates means the economies in both countries are strong.

Statistics Canada’s labour report for February showed just how strong. Unemployment had fallen below pre-Covid 19 levels for the first time since the start of the pandemic, down to 5.5%.[1] The Office of the Parliamentary Budget Officer projects an economic rebound and robust performance in the second half of 2022.[2] All of this is good for the markets and those benefits will be realized once the war and geopolitical tensions end.

Energy self-sufficiency will be a positive

Energy prices are high now because demand is greater than supply. Worldwide sanctions against Russia, a major global producer of oil and natural gas, mean Canada, the U.S. and Europe are looking for other suppliers and working to become more energy self-sufficient:  a positive going forward. When the Russia-Ukraine situation becomes more stable, those prices, which are also driving up inflation, will drop, in my opinion. Continue Reading…