All posts by Financial Independence Hub

The hard truth about the FIRE movement [Financial Independence, Retire Early]

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By Maria Weyman, creditcardGenius

Special to the Financial Independence Hub

Retirement, whether near or far, is a pretty big milestone in a person’s life.

We start saving for it as early as possible and put as much towards it as we can in order to be better prepared.

Whether we want to spend it travelling, immersing ourselves in our favourite hobbies, or spending some quality time with loved ones, most of us look forward to our retirement but don’t see it happening in the near future.

The average age of retirement in Canada is 64 years old, but the popularized FIRE movement – which stands for “Financial Independence, Retire Early” – is the lifestyle concept that proposes an alternative scenario.

By living as frugally as possible and saving every bit possible while maximizing income and revenue, FIRE-devotees plan on retiring much earlier than the Canadian average.

Although we all want to retire early, and being financially independent enough to retire at a young age is possible, it might not be attainable for everyone.

We can all dream, but it’s important to look at the concept without those rose-colored, heart-shaped glasses we all get when thinking about early retirement. Realistically, the FIRE movement can be quite extreme.

Reasonable income

Living from paycheque to paycheque is still the sad reality for many Canadians, some not even being able to set aside money for normal retirement. Living as frugally as possible is just a means of survival rather than a means to a bigger end.

Stagnant wages and the ever-increasing cost of living has made it harder than ever to be financially stable, let alone financially independent, especially for lower or middle-income brackets.

Not to mention getting higher-income jobs in the first place requires many years of education and consequently entails large amounts of student loans, which in itself can take decades to pay off.

Investment risks

Even if you have an income that allows some wiggle room, saving alone probably isn’t enough. To be successful in the FIRE movement requires some savvy investing.

And since we’re taking away the option of long-term, stable, compounded interest savings, the timeframe is much shorter.

But with higher rewards usually come higher risks.

It’s up to you to decide if the risk is worth the potential payout.

Retirement timeframe

Another glitch in the FIRE movement lifestyle is retirement timeframe: how long you’ll actually be retired for.

Savings breakdown

Let’s crunch some numbers just to get a general idea. The most complicated part of this calculation is compounding interest. Thankfully, we can summarize the effects of compound interest using a multiplier.

Let’s say you’re 23 years old and you plan on retiring early at 40 years old. The average life expectancy in Canada is 82 years old, meaning your retirement fund will have to be sufficient enough to carry on for over 42 years.

Compound interest allows our savings to “go further” than they otherwise would. If we are looking at a compound interest of 3.5% (moderate yield rate) we can calculate how much further savings would go for a period of 42 years:

Savings Multiplier = (1 + Annual Interest Rate)^42 = 1.035^42
Savings Multiplier = 4.241

Where the “^” indicates an exponential power (that is 2^3 =  2x2x2). This means that over a period of 42 years, your savings will essentially be multiplied by a factor of 4.2, which shows you how powerful a force compounding interest really is.

While it’s nice that our savings can grow exponentially with compound interest, taking money out of our savings results in losses that grow with compound interest. As such, if we take money out of our savings at the beginning of that 42 year period, that money is also multiplied by a factor of 4.241. Taking the money out one month after would have a slightly lower multiplier and so on. By summing the total effect of each monthly withdrawal we can also obtain a monthly expense multiplier. The first step is to find the monthly interest rate. This can be obtained as follows:

Monthly Interest Rate = (1+Annual Interest Rate)^(1/12) – 1 = (1+0.035)^(1/12) – 1
Monthly Interest Rate = 0.28708987%

Note that calculating a power x^(1/12) is a 12th root and will require a scientific calculator. After obtaining the monthly interest rate, you need to do a recursive sum representing the multipliers for all monthly withdrawals: Continue Reading…

An innovative way to solve your family cottage dilemma

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By Jason Kinnear, CPA, CA, CBV

(Sponsored Content)

Sipping your morning coffee on the dock with your spouse; teaching your children to waterski; and roasting marshmallows with your grandchildren. These are just some of the treasured memories you’ve created at your family cottage. But times change and those memories can sometimes be replaced with concerns about how to deal with your family cottage dilemma:

You enjoy spending time at the family cottage, but the time, cost and stress associated with it are turning a pleasant summer pastime into an ongoing headache.

To illustrate this dilemma, let’s consider Doug and Barb’s situation. Barb inherited their cottage from her mother just after they got married. They now have three adult children and six grandchildren, and are recently retired. While they’re looking forward to spending more time at the family cottage, they see a number of issues on the horizon:

  • Two of Doug and Barb’s adult children are professionals, while the third owns her own growing company. These time demands mean none of the children are able to visit the family cottage as often as they’d like.
  • There are several steep sections of stairs between the family cottage and the dock on the lake below. While Doug and Barb can navigate these stairs now, they’re concerned they won’t be able to as they get older.
  • Doug and Barb do not know who they will leave the family cottage to.

Time commitment

The most pressing issue for Doug and Barb is the time commitment for maintaining the cottage. They’re the only family members with the time to open and close the property, and maintain it throughout the summer months. While they’re both healthy enough to do this now, they’re concerned that they may no longer be able to as they grow older and their physical health declines.

Costs

There’s also the issue of costs related to maintaining the cottage. The cost of repairs and improvements to host their growing family and their friends means the simple family cottage they inherited from Barb’s mother a generation ago has morphed into a monster home on a lake!

Additionally, there’s the question of how these capital improvements and the maintenance costs will be shared amongst family members. Should Doug and Barb continue to pay for the upkeep? Or should that be split amongst the adult members of the family? How would they split these costs: evenly, or based on actual cottage usage?

Succession planning

Finally, there are the succession and estate planning issues to consider. Which of the adult children will get the cottage? Do any of them really want it? What about the personal taxes triggered when the cottage is transferred, or the probate fees (Estate Administration Tax in Ontario) if they both should pass away unexpectedly?

As you can see, Doug and Barb have a number of issues to contend with. They continue to enjoy the family cottage experience, but need a solution to address these issues.

Consider establishing a Family Vacation Trust

One solution for Doug and Barb to consider is establishing a Family Vacation Trust to pay for their family’s future summer vacations. A Family Vacation Trust would allow their family to continue to enjoy the annual cottage experience without the responsibility and costs of maintaining one.

Here’s an example of how their Family Vacation Trust might work:

1.) Let’s assume the value of the cottage when Barb took possession was $100,000 and it’s currently worth $800,000. Selling expenses will be 5% of the sale price and the resulting capital gain will be taxed at the highest personal marginal tax rate in Ontario*. This situation would result in Doug and Barb receiving approximately $580,000 on the sale of their cottage. Continue Reading…

Ten questions on Annuities – answered here!

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I tell ya…I get no respect.

That could be an old, popular Rodney Dangerfield tagline or it could be how annuities feel from time to time:  disrespected, unloved, and generally misunderstood.

Thankfully, I have someone here to help demystify annuities: to see if these products could be right for you or someone you know at some point.

Alexandra Macqueen is a fee-for-service financial planner, author and faculty member at the Schulich School of Business.  She has also been kind enough to share her expertise on my site, why you should consider pensionizing your nest egg at some point, along with countless other personal finance and investing sites.

Here are ten questions and ten answers about annuities – in plain language – in the hopes of helping you learn more and become better educated about what these financial products actually do.

1.) Alexandra, thanks for this!  Let’s get down to basics: what is an annuity?  

At the most basic level, an annuity is a contract under which you (the annuitant) provide a sum of money to an annuity issuer — a life insurance company — who, in exchange, provides you with monthly income for as long as you are alive, no matter how long that is.

Annuities come in many different “flavours” (indexed? deferred? joint? variable? prescribed?), but all of them incorporate this basic exchange: a sum provided to an insurance company for cash flow in your bank account over time.

2.) Why should older Canadians consider annuities? Who are they designed for?

While I would in no way argue that every Canadian should consider an annuity no matter their financial situation, the reasons that a retiree might consider incorporating an annuity into part of their retirement income strategies include:

  • If you are worried about living a long time, potentially outliving the funds from your portfolio, and want to ensure you have some cash flow that cannot “expire.”
  • If you are reluctant to leave all of your assets exposed to some form of investment market risk and would prefer to have income that’s protected from market-based fluctuations.
  • Depending on factors primarily including the age at which you purchase the annuities and the source of funds used for the purchase, if you are interested in cash flow that has a higher yield than products with similar guarantees (think Guaranteed Investment Certificates or GICs), while producing lower taxable income to preserve income-tested retirement benefits (think GIS)

3.) OK, so great benefits. Why do annuities get no respect? Do you think it’s because Canadians have a huge bias: they just think advisors or planners are (as a reader actually wrote on my site) just “circling the sky” on these products?

In my view Mark, there are many potential reasons why annuities “get no love.”

Think about the asset management industry today, compared to a few decades ago: we now have relatively abundant, cheap, and transparent DIY choices that allow individual investors to take their financial management directly into their own hands.

(Mark:  I’ve written about some of these choices here:

The best all-in-one Exchange Traded Funds (ETFs) to own.

Get help to train your investing brain with a low-cost robo advisor.)

In comparison, the annuity purchase cannot be a “self-serve” choice but must involve an advisor who holds a life insurance license. The product, too, is priced to take into account interest rates at the time of purchase, actuarial factors predicting how long someone might live, and how much the company wants to attract or forego that particular kind of annuity sale at the time you’re looking to buy.

None of these elements are transparently visible to the purchaser, or even the salesperson. In other words: although the concept is simple — the exchange of cash for income — the details are not.

Other factors include the reluctance of purchasers to hand over assets to the annuity issuer, the fact that many people really underestimate just how long they might live in retirement, and the belief that a portfolio invested in markets can “beat” the implied return of the annuity while potentially leaving estate value.

4.) So you touched on transparency: a bigger issue now and rightly so. What are the typical commissions paid to advisors for annuities they sell?  Is it a one-time commission (vs. a mutual fund that typically charges for every year the asset is owned)?

Commissions on annuities are paid once (at the time of purchase), with no ongoing trailers or commissions paid to the advisor: which may explain why these products are perhaps less popular than they might be.

Typically, the commission is “tiered” based on the size of the annuity purchase, and might be, for example, 2 or 3 percent on the initial $100,000 deposit, and scaling downwards as the deposit amount goes up.

Certainly, there are other insurance products, and other asset management transactions, that pay higher commissions than an annuity purchase.

5.) Are there certain annuities that more popular than others?  Which ones?  Why?

Without a doubt the most popular annuities in Canada are group annuities sold to fulfill pension plan obligations. Many people will have some portion of their retirement income provided from an annuity even if they never go out and buy an annuity directly. The size of the individual annuity market pales in comparison to the group annuity market. Continue Reading…

What’s performing in China?

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By WisdomTree ETFs

Special to the Financial Independence Hub

While we remain optimistic that a U.S.–China trade deal will ultimately be reached, investors need greater transparency into what’s performing (or not) in the Chinese equity market. In this article we break down performance by a variety of factors including share class.

In December 2017, WisdomTree partnered with Standard & Poor’s (S&P) to launch the most inclusive Chinese beta product that tracks the S&P China 500 Index.

The WisdomTree ICBCCS S&P China 500 Index ETF, CHNA.B, gives investors seeking a beta exposure to Chinese equities access to the broadest diversity of opportunities in the market by investing in H-shares, B-shares, A-shares and P-chips: shares listed in Hong Kong, Shanghai, Shenzhen, Singapore and New York.

Share Class Attribution

There was a great deal of market interest when MSCI announced they would start to include A-shares in the summer of 2017. Since then, current A-share exposure in the MSCI China Index is just over 2%, despite A-shares representing the largest segment of the Chinese equity market. In our view, the S&P China 500 Index provides a more representative exposure by allocating close to 50% to mainland shares.

Breaking down exposures by share class, you can see the impact of gaining broad access to the Chinese equity market. In the performance attribution table below, we can see how the S&P China 500 Index has a more balanced exposure across the different share classes than the MSCI China Index, which limits its exposure to class A-shares.

Since the beginning of 2019, the Chinese equity market has experienced strong growth, and the S&P China 500 Index has been in the best position to take advantage of this rebound, having nearly 50% exposure to class A-shares versus the MSCI China Index’s 2.05% exposure. This allocation was the primary driver for the almost 600 basis points (bps) of outperformance that the S&P China 500 Index had in the first quarter of the year.

 

 Better value and higher quality

Another consequence of having an increased exposure to class A-shares comes in the form of better valuations and increased quality as measured by price-to-earnings (P/E) and return on equity (ROE), respectively. As shown below, we can see that over the past year, the S&P China 500 Index has had higher average exposure to the highest ROE quintile, while also being underweight in the lowest ROE quintile and negative earners. Continue Reading…

”Lucky 5” ways to prepare for a post-Divorce financial future

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By Meggie Nahatakyan

Special to the Financial Independence Hub

Divorce is not the end of the world. Well, not for you. Being newly divorced signals the beginning of a brand new life and the opportunity for you to redesign and fine tune your life, now as a single person, living under your own terms: the way you want it.

Studies show that many newly divorced women are often left off facing worse financial issues right after divorce. Many are struggling to cope with the demands of being able to provide for themselves and their families, single parenthood, and suffering low self-esteem as well as feeling emotionally battered.

Take stock of your life

Instead of focusing on all the negativity a divorce brings, it is crucial that you take stock of your entire life and place yourself in a positive frame of mind by being grateful for all the great things in your life: like your career, health, family, children, friends, and other support systems you have. After that, make a firm decision to make today the very ‘first’ day of a brand new and better life, looking forward to the future and achieve your fullest potentials in a way that fortifies your core values and beliefs.

Take your time

Take the time out of your usual routine and set your mind free. Relax. Think about how you want your life to look 3 to 5 years from now and what you really need in your life. What if you no longer have to work? What will financial freedom, abundance, wealth, and stability really mean to you?

To bounce back from your past broken relationship and face the future with confidence, you need to be financially stable. You can do this by starting a business that you can juggle while working at home and tending to the kids.

Here are 5 business ideas you can start post-divorce to start empowering yourself:

1.) Start Freelancing

There are websites like People Per Hour or Fiverr that allow you to sell your services for a price. If you are a good writer, bookkeeper, transcriber, or you have specific skill sets that can be outsourced, you can always telecommute and work online. The positive side of freelancing is the work time flexibility; you can work in the given timeframe but the exact hours of work will be up to you.

2.) Start a YouTube Channel

With videos booming these days, people are glued to YouTube and social media. There’s no denying that the future is video. Why not start your own YouTube video channel? Are you a good cook? Start a cooking channel. Are you an expert home DIY hobbyist? Then, let the world know through your very own video channel. There are no limits to what you can do so as long as your channel offers interesting and useful content, you are sure to get viewers and subscribers. Join the bandwagon! Continue Reading…