All posts by Financial Independence Hub

Pensionize your Nest Egg with Annuities, your Super Bonds

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By Dale Roberts, CuttheCrapInvesting

Special to the Financial Independence Hub

Most Canadians do not have a defined pension with guaranteed income. Speaking of birds and nest eggs, those guaranteed pensions are going the way of the dodo bird. Just 33% of Canadians have a defined benefit workplace pension where the income is guaranteed and usually indexed to inflation.

That’s according to Pensionize Your Nest Egg: How to Use Product Allocation to Create a Guaranteed Income For Life.

There’s only one way for me and you to create a generous and guaranteed income stream and that’s by way of the annuity. It’s a topic and product category that gets little attention. And when it gets attention it’s often negative. Annuities are offered by insurance companies. Strike One. Annuities come with ‘high fees.’ Strike Two. Let’s not go to Strike Three; we want to keep this blog post alive. In the process we might keep your retirement in good shape as well.

Hear me out. I’ll admit that I have not been a fan of the annuity in the past. I’ll also admit that I knew very little about annuities. That’s always a good way to form an opinion, right? Give that thumbs down based on the headlines and 5 minutes of research. So please join me in a more than surprising and interesting discovery of just what the heck an annuity is.

With an annuity you simply purchase your own pension

Yup, it’s that simple. As an example, you hand over $100,000 and the insurance company will pay you monthly income, guaranteed for life. Of course that’s a Life Annuity. There are a few types of annuities, but for now we’ll stick to the most common and most popular annuity.

And of course the rates available will fluctuate based on a few factors. Here’s a site that will give you an idea of the rates available in today’s market.

In March of 2019 here are the rates for a Canadian single male. The payment is in the range of 6% annually for a male at age 65.

Annuity RatesYou can purchase an income stream for life. And of course, the longer you wait to purchase that annuity the greater your payments. You might stagger your annuity purchase(s) over many years and periods of your retirement. That’s typically the advice found in Pensionize Your Nest Egg and offered from advisors who Pensionize a portion of their clients’ nest eggs.

When you hand over your money, it’s a done deal

These are irreversible contracts. When you purchase an annuity you usually exchange control of those funds for guaranteed income for life. When you die, your money goes to the insurance company. To be exact, a portion of your monies goes to the survivors:  to those who purchased annuities and who might live to 85, 90, 95 or 100. That’s how insurance companies can afford to pay you rates that are well beyond the bond and GIC rates of the day. With an annuity the unlucky (the dead) pay for the lucky (the living).

In the above quote table there is a 10-year guarantee, meaning that the payment would continue for 10 years from time of purchase even in the event of an early death.

Many Canadians are living well into their 90s

And from the many tools available at pensionizeyournestegg.com here’s a shocking survivability table for a 65-year-old male.

Survivability TableFor a 65-year-old Canadian male there’s a 25% chance that they’ll live to age 94. Yikes. What side of the annuity grass will you be on? This table demonstrates why a certain level of guaranteed income might be a good idea. You might at least cover your basic living needs for life and projected oldage home payments with guaranteed income.

The 3 product allocation buckets

The main theme of Pensionize Your Nest Egg is to think product buckets, not traditional asset allocation that would normally include your mix of cash, GICs, stocks and bonds. Instead the theme and 3 buckets is …

  1. Guaranteed Income For Life.
  2. Guaranteed Income Plus Growth Potential.
  3. Asset Growth Potential (your personal portfolio) Continue Reading…

Tax hacks: Top 5 tax filing tips to get the most out of this tax season

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By Clayton Brown (Sponsor Content)

Are you leaving money on the table when it comes time to file your taxes? Lots of people do. They don’t bother applying for grants. They leave that ratty pile of expense receipts in the drawer (where they left it last year, too). And they don’t take full advantage of the deductions to which they are entitled.

Let’s get your taxes done right and get the biggest possible tax refund. Here are some tips about pitfalls to avoid, and easy things you can do to make that happen.

Tip 1. Don’t forget to deduct your deductions!

Remember, that tax refund you want isn’t a freebie from the government. It’s your money! They’re just holding it for you. So get it back, by claiming allowable deductions!

Hold on a second. What’s a deduction? It’s an amount you can deduct from your taxable income, thereby paying tax on a lower income.

We’ve noted a few common deductions here to save you some time.

RRSP contributions. You’ll need all of your RRSP slips … right? Actually, not so much! All you need is the dollar amount. Look at the transaction history for your RRSP contributions (which might just be a few lump sum contributions, or from an automatic savings plan) and add up all the contributions you’ve made. It’s a good idea to hang on to the receipts in case you’re audited but you don’t actually need them!

(You should have received them by now: see the timeline of forms below). Lower your taxable income by contributing to your retirement savings.)

Your annual contribution is limited to 18% of your previous tax year’s earned income, plus any unused carry forward room from previous years.

Child care costs. Did you pay someone else to look after your little ones while you went off to work or advanced your education?

The government lets you deduct up to $8,000 per child, for kids under 7. You can deduct up to $5,000 per child for those aged 7 to 16 (just guessing, but maybe there’s a government ratio in there that accounts for cuteness, which declines precipitously after age 6). For disabled or dependent children of any age, the maximum claim is $11,000.

Tip 2. Don’t forget to claim your credits!

A credit is an expense you can claim to reduce your taxes payable. It’s not the same as a deduction, which comes off the top of your income. But a credit is not a 1-to-1 deduction. A $500 credit is not the same as $500 off your tax bill. Check out this list of all available deductions and credits.

One example: interest paid on student loans. This is a pretty sweet deal. You can claim any interest on your student loans as a non-refundable credit. For student loans, the tax credit (federal and provincial) is calculated by multiplying the lowest federal/provincial/territorial tax rate by the amount of the loan interest.

Medical credits are another one that people forget about. You can apply credits to certain medical expenses. Charitable donations are also popular credits.

Credits can be non-refundable or refundable. A refundable tax credit means you’ll get the value for that credit, even if the tax bill is zero. But a non-refundable tax credit will only reduce your tax bill to zero.

Tip 3. Don’t file your taxes before you have all of the information you need

This is a super-common mistake. But filing too early could cost you extra time and money later, if you need to file all over again. Better to wait a bit and do it right the first time. Continue Reading…

Aman Raina’s 4-year Robo Advisor review

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By Aman Raina, SageInvestors

Special to the Financial Independence Hub

Four years ago, Obama was President of the United States and Stephen Harper was Prime Minister of Canada. A Liberal was running America and a Conservative was running Canada. The New England Patriots were still making it to the Super Bowl, even winning a few…

…and I had opened my Robo Advisor account.

Yes it been a full 4 years since I opened up my Robo Advisor account. For those new to investing, a Robo Advisor is a new wave of wealth management companies that invest on behalf of others using an online platform and a combination of algorithms and computer coding to buy and sell specific investments and manage portfolios. Four years ago these firms were just stepping into the investing conciousness, but since then they have mushroomed and even traditional investment companies are now offering some flavor of online investment management services. It all seemed quite appealing however there was one thing that many marketing materials, blogs, and mainstream media was avoiding (and still are I might add)…do these types of services make money for investors?

Since no robo advisor company back then was interested in disclosing their performance (they still avoid it) other than citing research that their strategy is superior, I decided four years ago to try an experiment and find out for myself. I setup an account with one of the big Robo Adviser firms. My goal was to go through the process and blog about my experience and more importantly, the results. I’ve always said that we need a good five years to really get a handle on how effective these services are compared to traditional wealth management services. Well, we’re at the 80% mark of my ROBO journey, so let’s check back in and take a look at how it’s doing now and see if we can squeeze any conclusions about the service.

In previous years, I have stated that for us to get a real handle on their effectiveness, we need to see these robo-portfolios experience some stress. Up until 2018, the markets have been quite tame. We’ve seen how these portfolios operate in a period of rising stock prices. In 2018 we finally hit some periods where there were major swings in stock prices around the world. In February we saw the Dow Jones on several days drop more than 1000 points and in December we had the Christmas Eve Massacre where stock prices fell off a cliff creating a lot of hand wringing over the Christmas break. Finally meaningful, although short-term stress points for the ROBO portfolio.

Performance

Below is the current status of my ROBO portfolio as of January 30, 2019 and below that is the chart of annual returns over the past four years.

My ROBO Advisor portfolio as of January 30, 2019

My ROBO Advisor portfolio as of January 30, 2019

ROBO Portfolio Annual Return

(annual returns)

 The first year was a rough one for ROBO as it had lost 2.15 per cent. In the second year and third year, ROBO picked up its game. The portfolio generated a 13.2 per cent return in Year 2 and in Year 3 it posted another solid year with a 14.2 per cent return. In 2018, the portfolio pulled back going down a total of 2.1 per cent. The loss was tempered by dividends, where the portfolio generated $142.91 in dividend income. The ROBO was also saved a bit by a strong rebound in stock prices in January coming off the correction in December. The losses could have been much worse. Considering the largest component of the ROBO portfolio was concentrated in US and Canadian stocks and where the S&P500 and TSX/S&P Composite were down 6.3 and 11.7 per cent respectively in 2018, a 2.1 per cent drop is very reasonable. I lost money but not as much. Since January 2015, the portfolio is up 22 per cent over the last 4 years.

Asset Allocation

When I set up the account I answered a series of questions about my financial literacy and risk tolerance. ROBO took my responses and crafted a portfolio that it felt was compatible with my profile. As I am pretty experienced with investing and have a long-term investment horizon, ROBO determined that a portfolio mix of 85 per cent stocks and 15 per cent bonds would work for me. It has since then retained the same stocks/bonds ratio.   Continue Reading…

How federal housing policies could impact first-time homebuyers

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By Jordan Lavin, Ratehub.ca

Special to the Financial Independence Hub

For a little more than a decade, the Federal Government has been making policies that make it harder to buy your first home in Canada.

It’s hard to blame them. The great recession of 2008-09 was principally caused by a crash in the U.S. housing market which, in turn, had been caused by lax mortgage lending standards. Hundreds of thousands of people bought homes they couldn’t really afford, and were later foreclosed on or forced to sell. Left behind was a glut of housing inventory and an equal glut of people who had lost everything. The ripple effect was felt throughout the world, including here in Canada.

Fortunately, the mortgage problem was isolated to the United States. But the repercussions hit Canada hard, and interest rates fell to unprecedented lows as a response to the worsening economic situation. During the recovery, mortgage rates in Canada continued to fall and house prices quickly rose. In hot markets like Vancouver and Toronto, the average price of a home nearly doubled between 2010 and 2016.

All this left government officials on this side of the border wondering if it was possible for the mortgage and housing market to fail here. With the compounding worry of a housing market crash – what if prices went back down as quickly as they had gone up? – they began making new policies with the goal of making it more difficult for Canadians to qualify for a mortgage, especially if that mortgage were to be insured by the Canada Mortgage and Housing Corporation (CMHC).

Among the changes: Limiting amortization length for insured mortgages to 25 years; Limiting CHMC insurance to homes purchased for under $1-million only; Establishing a minimum down payment of 5% and then increasing the minimum for homes over $500,000; and expanding a “stress test” to eventually force all mortgage borrowers to qualify at a higher interest rate than they would actually pay.

This cocktail proved poisonous for first-time homebuyers. High house prices, harder qualification criteria and lower earning potential forced first-time homebuyers to get creative, finding new ways to afford homes.

Today, the government is looking at two new policy changes that could have an impact on first-time homebuyers.

A return to 30-year insured mortgages for first-time homebuyers

Currently, the longest you can take to pay back an insured mortgage (mortgage insurance is usually required when you have a down payment of less than 20%) is 25 years. But one policy change the government says they’re looking at is increasing that limit to 30 years.

This is a boon to affordability, at least at the qualification level. Ratehub’s mortgage payment calculator shows that the monthly payment on a $500,000 mortgage at today’s best rate of 3.29% will be $2,441 when amortized over 25 years, or $2,181 when amortized over 30 years. Since mortgage affordability is based on a fraction of your income, a lower payment equals a higher purchase price you can qualify for.

But there’s a significant downside. The obvious is the additional 5 years of mortgage payments later in life. If you’re over 35, signing a new 30-year mortgage could keep you making payments into retirement. Continue Reading…

Should you start an E-commerce business?

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Image via Pexels

By Gloria Martinez

Special to the Financial Independence Hub

Do you want a job where you can work from home, set your own hours, and earn a virtually limitless amount of money? If you answered “yes” and you’re decently tech-savvy, e-commerce could be the perfect fit for you. E-commerce can be any type of online business transaction, but most of the time, it refers to online shopping.

Why e-commerce?

Skyrocketing rents and a shift toward online shopping has brought about the demise of many brick-and-mortar businesses. Unable to compete with the low prices of big-box retailers, mom-and-pop shops are shuttering their doors. Even big-box brands are suffering as their limited inventory fails to keep up with ecommerce giants like Amazon.

With e-commerce, entrepreneurs can avoid these small-business pitfalls. It’s no mystery that hosting a website is far cheaper than maintaining a brick-and-mortar store, and the rise of dropshipping has rendered the need for massive warehouse space obsolete.

Is e-commerce profitable?

E-commerce isn’t a guaranteed path to success by any means. Countless online stores open and close without registering a blip on consumers’ radar. However, stores that do well do very well. An analysis from RJMetrics found a typical ecommerce store generates $63,000 in monthly revenue by its third month. By year three, that number jumps to $352,000 a month.

How to make money in e-commerce

Setting up a successful e-commerce site requires three things:

1.) An in-demand product

Every e-commerce store needs a niche, but it can’t be just anything. Your niche needs to be something shoppers actually want to buy. However, it shouldn’t be the hottest thing on the market either or it will impossible to stand out.

Complete keyword research to find what consumers are searching for, then narrow down your search until you find a micro-niche with a profitable market. Make sure it’s a product you’re genuinely interested in. If you’re selling something you know nothing about, you’ll have a hard time making a compelling pitch to potential customers.

Once you’ve found your niche, have a plan to keep your inventory fresh. If your store has limited offerings, shoppers won’t keep coming back for more. Rotate your inventory on a schedule that makes sense. If you’re dropshipping wholesale clothing, change your inventory with the seasons. If you’re selling video games, make sure your site reflects the newest releases. Remember: It’s much easier to sell more stuff to an existing customer than it is to find new ones.

2.) A great website

Nothing kills an e-commerce site faster than a website that’s not user-friendly. Resist the urge to DIY your site to save money. A clunky website will lose you far more money than it saves. A good e-commerce site instills trust in shoppers, makes products incredibly easy to find, and executes an effective sales funnel. Web Designer Depot gives an excellent rundown of what goes into creating a high-quality ecommerce site. Continue Reading…