By Winnie Jiang, Vice President, Portfolio Manager, BMO ETFs
(Sponsor Content)
Little about the current economic cycle has conformed to historical norms. With divergence in employment data and leading economic indicators, recent data released sent mixed signals that left investors perplexed about the near-term economic outlook.
On one hand, the job market remains overwhelmingly strong, with ISM (Institute for Supply Management) Services bouncing back from extreme lows in December and retail sales also rebounding. The re-opening of the Chinese economy will likely provide a breather on global supply chain issues while boosting demand. Consumer credit remains well retained as default rates stay low with no warning signs of near-term upticks.
On the other hand, yield curve inversions, a precedent of most recessions, continue to worsen. 3-month U.S. Treasury yields are pushed above 10-year yields by the widest margin since the early 1980s. ISM Manufacturing PMI (purchasing managers’ index) and housing data also point to a gloomy outlook. Corporate sentiment and capital expenditure showed little signs of recovery, and housing permits have rolled back to pre-pandemic levels after surging strongly during Covid.
Source: Bloomberg, January 31st, 2023
The Outlook
While robust job markets and consumer data keep inflation well above the Fed’s long-term target, recent CPI (Consumer Price Index) announcements indicate things are steadily, albeit slowly, moving towards the right direction. The inversion of the yield curve caps the magnitude of further rate increases that could be absorbed by the economy before it slips into a recession.
The first home savings account goes live on April 1, 2023. [It was confirmed in Tuesday’s 2023 federal budget.] The FHSA is a program to help first time home buyers save for a home, in tax-free fashion. The program can be used on top of the current Home Buyers Plan (HBP) that is part of the RRSP savings vehicle. We can also throw in the Tax Free Savings Account (TFSA) for ways that Canadians can save in tax-free or tax-deferred fashion. The first home savings plan is a wonderful addition to the Canadian saving and investing landscape.
And special thanks to financial planner Mark McGrath for his tweets and help. Mark is a Wealth Advisor at Wellington-Altus Private Wealth.
Be sure to follow Mark on Twitter. He often provides wonderful insights on financial planning basics, and is always happy to answer questions.
What is the first home savings account?
The First Home Savings Account is a type of registered savings plan for Canadians saving to buy their first home. Canadian residents aged 18 years or older can open an FHSA to save towards the purchase of a home in Canada.
There are limits to how much you can put in your FHSA:
$8,000 – yearly contribution limit
$40,000 – lifetime contribution limit
Contribution amounts are tax deductible, just like the RRSP program. They will reduce the amount of income taxes that you will pay. The annual contribution limit would apply to contributions made within a particular calendar year. Unlike RRSPs, contributions made within the first 60 days of a given calendar year can not be attributed to the previous tax year.
Contribution room carries forward to the next year if you don’t put in the full amount. Carry-forward amounts only start accumulating after you open an FHSA for the first time. The carry-forward room does not automatically start when you turn 18.
An individual would be allowed to carry forward unused portions of their annual contribution limit up to a maximum of $8,000. For example, an individual contributing $5,000 to an FHSA in 2023 would be allowed to contribute $11,000 in 2024 (i.e., $8,000 plus the remaining $3,000 from 2023).
Who can open a first home savings account?
To open an FHSA, an individual must be a resident of Canada and at least 18 years of age. In addition, an individual must be a first-time home buyer, meaning you cannot have lived in a home that you or a spouse/common-law partner owned in the current year or the previous 4 calendar years. And you can only use the FHSA once.
Combine FHSA with the RRSP home buyer’s plan
As you may know you can remove up to $35,000 from an RRSP account to be used for a first time home purchase. It’s called the Home Buyer’s Plan (HBP). You can use monies from both the HBP and the FHSA for that first home purchase. You can combine amounts.
There is no limit to how much you can use from your first home savings plan. Meaning, for your first home purchase.
What can you hold in an FHSA?
An FHSA can hold savings or investments. The same qualified investments that are allowed to be held in a TFSA can also be held in an FHSA. This could include ETFs, stocks, mutual funds, bonds, savings accounts and GICs.
What if you don’t use the FHSA funds for a home purchase?
Any savings not used to purchase a qualifying home could be transferred on a tax-free basis into an RRSP or Registered Retirement Income Fund (RRIF) or would otherwise have to be withdrawn on a taxable basis. Individuals that make a qualifying withdrawal could transfer any unwithdrawn savings on a tax-free basis to an RRSP or RRIF until December 31 of the year following the year of their first qualifying withdrawal.
Withdrawals that are not qualifying withdrawals would be included in the income of the individual making the withdrawal. Financial institutions would be required to collect and remit withholding tax on non-qualifying withdrawals, consistent with the treatment applicable to taxable RRSP withdrawals.
Transferring your FHSA to your RRSP or RRIF
Your FHSA must be closed by December 31st on the soonest of:
a) the 15th year after you open it
b) the year you turn 71
c) the year following the year of your qualified home purchase The balance can be taken as taxable cash or rolled over, tax-deferred, to your RRSP. Continue Reading…
It’s everyone’s nightmare: watching retirement assets vanish in a bear market, especially in or just before retirement.
Many of you will remember the severe market downturn of 2000-2002, the Dot Com Bubble, when the Standard & Poor’s 500 Index fell 37%.
We’d be lying to say that this declining market didn’t affect us. Our finances dropped about the same as most others on a percentage basis. As retirees, with no regular paycheck coming in on Friday, this event could have spelled disaster for our future plans of maintaining our financial independence.
Then there was the 2007-2009 “Great Recession,” where the market fell by almost 50% lasting 17 months, testing our courage.
The 2020 Covid scare shook the market’s foundation, earning the title of the “shortest bear market” in the S&P 500 history, lasting only 33 days.
And now here we are again in 2023, where the market is in the grip of a bear. How much longer will this last? How low will we go?
What should we do? How do we cope?
First, we’ve learned from past bear markets the importance of some cash flow. Having aged a bit and now receiving Social Security we have adjusted our portfolio to a more balanced one adding DVY, iShares Select Dividend ETF as a dividend-producing asset as well as increasing our cash holdings.
Then, there are regular chats about our finances and the state they are in, in hopes of averting a possible worst-case meltdown. We have discussed the fiscal facts and tried to extrapolate them out into the future.
One obvious problem: No one can predict the future.
Friend asks “Billy, why are you investing now? You know the market is crashing, right?” Same friend 10 years later: “Hey Billy I heard you retired early. How did you do that?”
Using history as a guide
Researching bear markets, we take heart from the knowledge that past downturns always ended.
Retiring is definitely easier when markets are rising as compared to when they are falling. But how do you know if you are in a rising or falling market? That depends on your starting point and there has been no 20-year rolling negative returns.
Another question to ask – is this is a good time to buy equities? For every buyer there is a seller and they both think they are right. Maybe the cure for cancer will be announced tomorrow or the global economy will collapse. We just don’t know.
Canadians who collect Old Age Security (OAS) now get a 10% increase in benefits when they reach age 75. The amount of the increase isn’t huge, but it’s better than nothing. A side effect of this increase is that it makes delaying OAS benefits past age 65 a little more compelling.
The standard age for starting OAS benefits is 65, but you can delay them for up to 5 years in return for a 0.6% increase in benefits for each month you delay. So, the maximum increase is 36% if you take OAS at 70.
A strategy some retirees use when it comes to the Canada Pension Plan (CPP) and OAS is to take them as early as possible and invest the money. They hope to outperform the CPP and OAS increases they would get if they delayed starting their benefits. In a previous post I looked at how well their investments would have to perform for this strategy to win. Here I update the OAS analysis to take into account the 10% OAS increase at age 75.
This analysis is only relevant for those who have enough other income or savings to live on if they delay OAS. Others with no significant savings and insufficient other income have little choice but to take OAS at 65.
OAS payments are indexed to price inflation, and the increases before you start collecting are also indexed to price inflation. So, the returns that come from delaying OAS are “real” returns, meaning that they are above inflation. An investment that earns a 5% real return when inflation is 3% has a nominal return of (1.05)(1.03)-1=8.15%.
In many ways, the OAS rules are much simpler than they are for CPP, but two things are more complex: the OAS clawback and OAS-linked benefits. For those retirees fortunate enough to have high incomes, OAS is clawed back at the rate of 15% of income over a certain threshold. This complicates the decision of when to take OAS. Low-income retirees may be eligible for other benefits once they start collecting OAS. These factors are outside the scope of my analysis here.
A One-Month Delay Example
Suppose you’re deciding whether to take OAS at age 65 or wait one more month. For the one month delay, the OAS rules say you’d get an additional 0.6%. So, for the cost of one missed payment, you’d get 0.6% more until you reach 75. After that, you’d be getting 0.66% more.
For a planning age of 100, the real return from this delay is a little over 7%. So, your investments would have to average 7% plus inflation to keep up if you chose to take OAS right away and invest the money.
All the One-Month Delays
The following chart shows the real return of delaying OAS each month for a range of retirement planning ages, based on the assumption that the OAS clawback and delaying additional benefits don’t apply. The returns are slightly higher than they were before CPP payments rose 10% at age 75. Continue Reading…
Most people know that investing in the stock market is a good way to earn higher returns on their investments. Money in savings accounts and GICs doesn’t grow fast enough to keep up with inflation over time. To avoid eroding the value of savings, the stock market is the place to be.
You might agree that you need higher returns, but you might not want to support certain companies or industries for ethical reasons. When you buy a traditional mutual fund or exchange-traded fund (ETF), you will own dozens, hundreds or even thousands of companies. Not all of them will line up with your values.
The stock market is an efficient mechanism for companies to get access to the funding they need to grow – to develop new products, to offer more services, and to produce more goods. Like it or not, we are all part of this ecosystem. It’s impossible to escape. But what if you could earn higher returns while avoiding the worst of the worst companies, the ones you really don’t like?
Enter SRI and ESG investing.
What is SRI, ESG and impact investing?
SRI and ESG investing are terms used to describe ethical investing. Sometimes the terms are used interchangeably, but there are differences.
Socially-responsible investing, or SRI, is a way for investors to own companies that better align with their values, usually by eliminating certain sectors of the economy like oil, tobacco and weapons. Environmental, Social and Governance (ESG) investing is a little different – it applies a screen to companies to evaluate their practices as it relates to environmental, social and governance issues. The main difference is that with SRI you are avoiding certain industries, but with ESG you are investing in the “better or less bad” companies. There is a third term: impact investing. This takes things a step further and focusses on companies that are actively doing ethically-appealing activities, like funding community projects, enhancing solar energy technology, or financing local food producers.
For example, an SRI ETF might invest in the U.S. market index but eliminate companies in oil production and weapons manufacturing. An ESG fund might invest in the U.S. market index but exclude the bottom 25% of companies, as ranked by their ESG practices. An impact fund might invest only in solar energy companies.
Three things you need to know
There are some important things to understand about ethical investing before you jump in.
You’re not always getting what you think you’re getting.
Would you be surprised to learn that your ESG fund owns Amazon, a seller of massive amounts of consumer goods that provides same-day, gas-guzzling delivery? Or Halliburton, one of the world’s largest fracking companies? Or Agnico-Eagle, a mining company? The reason they are in the ESG fund is that they are actively doing things to be less bad, or even do some good. They get points for writing a report outlining their environmental practices, like buying electric vehicles, using more green energy in their operations, and doing environment clean-up. Their operations might not be great for the world (although we all use oil and gas, metal, and probably Amazon), but they are offsetting some of the damage by doing good things. Continue Reading…
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