All posts by Financial Independence Hub

New retirement: Case study with Cascades Financial Solutions

Posted By |
Photo by Gustavo Fring

By Ian Moyer

(Sponsor Content)

A Canadian couple living in Nova Scotia are approaching retirement. Carlos is 64 and his wife Arlene is 61. They have one adult adopted child who lives on their own with the couple’s three grandchildren. Carlos and Arlene live close to their daughter and help with the grandchildren often, so being able to stay in their home is important.

After two extended careers in the public sector with a combined annual income of $180,000, Carlos and his wife Arlene decided it was time to retire beginning March of the following year.

Managing the family finances Carlos and Arlene were able to save the following for retirement:

Carlos

  • $250,000 Registered Retirement Savings Plan (RRSP), contributing $5500 annually until retirement
  • $31,500 annually from a Defined benefit pension
  • $ 21,000 in A Tax-Free Savings Account (TFSA), contributing $1500 annually

Arlene

  • $290,000 Registered Retirement Savings Plan (RRSP), contributing $5500 annually until retirement
  • $33,600 annually from a Defined benefit pension
  • $ 30,000 in A Tax-Free Savings Account (TFSA), contributing $1500 annually

Carlos and Arlene dream of traveling to various countries and plan to take 3 trips a year and assume they would need a total of $15,000 annually to do so for 8 years. After traveling they would like to contribute to Registered Education Savings Plans (RESP) for each of their grandchildren totalling $3000 a year.

More recently, when the market experienced volatility, Carlos’ portfolio took a big hit. Making adjustments to spending, Carlos was able to recuperate most of his losses and is now back on track with his goals.

“The more you learn, the more you earn.”
— Warren Buffett

A key consideration in Cascades is to take a look at the retirement budget: using their employment income as a starting point to determine how much retirement income they require. It is well known and generally accepted that you will require less income in your retirement years, but how much less? In making this determination the couple can consider they no longer have employment income deductions like CPP and employment insurance, retirement savings, costs related to traveling to work, retirement income tax credits, etc. Carlos used their employment income after these deductions, taxes, and employment expenses and compare that with the projected retirement income. Carlos assumes he would need approximately $120,000 annually.

Carlos believes he has a good understanding of financial planning strategies, but he finds decumulation a bit overwhelming and wanted to learn more to personalize his retirement income based on their needs: using Cascades Financial Solutions retirement Income planning software and to plan for his retirement.

After entering his data into Cascades Financial Solutions Carlos’ report determined the best retirement decumulation strategy would only allow him to receive an after-tax amount of $116,945 per year.

The couple has a few options to offset the$3,055 retirement income shortage.

Life Annuity option: The couple can consider allocating some of their savings to a life annuity that could help achieve a higher sustainable retirement income. These vehicles are a great way the shift the burden of making their money last forever and can often have attractive capital payout ratios throughout the retirement years due to their “mortality credits.” Continue Reading…

Financial planning and Tax Strategies for Business Owners

Posted By |
LowrieFinancial.com: Canva custom creation

By Steve Lowrie, CFA

Special to the Financial Independence Hub

There are plenty of perks to being your own boss, including the ability to build up tangible assets to invest in your personal portfolio, your corporate accounts, or both. But if you are a small- to mid-sized Canada-controlled private corporation (CCPC) owner, how do you know if you’re managing your personal and corporation investments as tax-efficiently as possible? Let’s take a look at that today.

Your Accountant and your Financial Advisor: A powerful pairing

In my experience, successful business owners usually have their corporate tax planning practices well in hand. Any number of reputable accounting firms can help you tax-efficiently structure your CCPC, manage its revenue and expenses, and accurately report its activities to the proper authorities. Your accountant also should be able to help you plug a lot of the taxable leaks that can otherwise siphon away excessive individual or corporate wealth.

However, I have noticed a business owner’s best, most tax-efficient corporation investment strategies often slip through unattended.

That’s no knock against accounting firms. It’s not typically in their purview to optimize tax-efficient investing across your (and potentially your spouse’s) taxable personal and corporation investment accounts, tax-favoured RRSPs and TFSAs, etc. That’s where an independent financial advisor, like Lowrie Financial, comes in. Your CA or tax attorney has the specialized expertise needed to tend to your corporate assets. We focus on the intersection between your corporation tax planning and your greater wealth planning … including how to manage all your investments as tax-efficiently as possible.

Tax-Efficient Investing: Tax Planning vs. Predicting

Before we dive into the details, I’d like to emphasize that none of us has a magic wand to make your tax bill disappear entirely. Nor do I possess a Ouija board to divine future tax code changes. Instead, I believe it’s best to avoid overly clever or predictive tax-cutting ploys that seem too good to be true — because they probably are — and focus on what we can manage here and now.

So, what are the solid tax-efficient strategies within our control? Most are the same whether you’re investing as a business entity or an individual. I’ve already covered many of them in “Tax Strategies to Boost Your Financial Savings.” Still, common-sense advice has a way of getting buried under all the financial nonsense, so let’s revisit the following four tax-planning strategies for a business owner’s personal and corporate investments alike:

1.) Don’t let Short-Lived adventures distract you from your Long-Term Financial Goals

Who isn’t attracted to the idea of scoring big on an action-packed investment? When things are going up, it’s fun, like finding extra money you’d forgotten about in your sock drawer. Managing your investments for gradual growth is more like watching paint drying on the wall.

Unfortunately, as I described in “Investment Fads and Other Destructive Behaviours,” corporate and individual investors who chase after short-term returns aren’t likely to serve their long-term financial goals. Instead, they end up with what I call a “dog’s breakfast portfolio” of whatever investments have been randomly hot or not over the past several years.

In the long run, this approach not only leaves you anxious and uncertain about how your investments are holding up, but it’s also usually not as tax-efficient. Instead of giving you the confidence to minimize your trading and adhere to some of the other best practices I’ll cover next, you end up jumping in and out of markets and positions, disregarding the tax ramifications, and assuming your accountant will dig you out of whatever mess you’ve created.

How do you avoid this trap? Financial planning for business owners (or anyone else) means having an investment plan to guide the way, shaped by an evidence-based strategy; and sticking with your plan over time, adjusting it only as your business or personal goals evolve.

2.) Keep your Friends close and your Taxable Capital Gains closer

Understandably, you may think of your taxable investments’ capital gains as a burden. But as I covered in “Tax Strategies to Boost Your Financial Savings”, they can actually be one of your best tax-planning friends.

Some recent good news was that there were no changes in the recent 2022 Federal Budget on the capital gain inclusion rates. So capital gains are still taxed at half of your personal or corporate tax rate. For example, if your personal or general corporate rate is 50%, then you will pay 25% on capital gains. Yes, you read that correctly, 50% less tax! I have yet to find anyone who wouldn’t opt to pay 50% less tax on anything when they’re able.

This concept applies to realized capital gains, and even more so to unrealized gains you can defer for now. Like the snowball effect of compounding interest (earning interest on interest earned), you or your business can build up a compounding tax arbitrage by putting off paying taxes on unrealized gains, which can then stay invested to accumulate even more tax-friendly gains.

You don’t want to be penny wise and pound foolish by chasing after tax savings that don’t serve your greater wealth interests. So, it remains wise to first ground all your investment decisions in your financial goals, with a portfolio built and managed accordingly. Then, the more effectively you can leave your corporate assets untouched to create gains, the more tax-efficient your results are likely to be when you do sell taxable positions according to your disciplined investment plan.

3.) Marginal Tax Rates matter

Supplementing our first two points, it’s also worth keeping an eye on the marginal tax rates you land in, based on your individual and corporate income.

For your personal income, this is especially important if it’s hovering right around the perimeters of those marginal rate points. In Ontario, if you make over $221,709 in 2022, you’ll be in the top bracket. It’s worth being aware of when you may be getting close to that threshold, so you can sharpen your income tax planning pencil, typically in concert with your financial advisor and accountant team. Continue Reading…

Updating the Canadian wide-moat portfolio

Posted By |

 

By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

It’s a trade-off. I hold a concentrated portfolio of Canadian stocks. What I give up in greater diversification, I gain in the business strength and potential for the companies that I own to not fail. They have wide moats or exist in an oligopoly situation. For the majority of the Canadian component of my RRSP account I own 7 companies in the banking, telco and pipeline space. I like to call it the Canadian wide moat portfolio.

(updated August 24, 2022) Like many Canadian investors I discovered over the years that my Canadian stocks that pay very generous dividends were beating the performance of the market. You’ll find that market-beating event demonstrated by the Beat The TSX Portfolio. Eventually, I moved to the stock portfolio approach.

Over longer periods you’ll see that BTSX beat the TSX 60 by 2% annually or more. And as always, past performance does not guarantee future returns.

For the bulk of my Canadian contingent I hold 7 stocks.

Canadian banking

Royal Bank of Canada, Toronto-Dominion Bank and Scotiabank.

Telco space

Bell Canada and Telus.

Pipelines

Canada’s two big pipelines are Enbridge and TC Energy (formerly TransCanada Pipelines).

My followers on Seeking Alpha or Cut The Crap Investing readers will know that I also own Canadian energy producers, gold stocks and gold price ETFs (holding gold) and the all-in-one real asset ETF from Purpose. I also own Canadian bonds and bitcoin.

For the U.S. component there is a basket of U.S. stocks. Here’s an update of our U.S. stock portfolio. That portfolio continues to provide impressive market-beating performance.

We hold our cash with EQ Bank.

The performance update to August 2022

Here’s the Canadian wide moat 7 from 2014 vs the TSX Composite, to the end of July 2022. I slightly overweight to the telcos and banks. The portfolio for demonstration purposes is rebalanced every year. When reinvesting I usually throw money at the most beaten-up stock. That would be a reinvestment strategy that seeks value and greater income, the general approach of the Beat The TSX Portfolio.

2021 was a very good year for the wide moat portfolio. It beat the TSX, but did underperform the Beat The TSX Portfolio model and Vanguard’s High Dividend ETF (VDY). The outperformance of the Wide Moat 7, over the market, is accelerating in 2022.

In 2022 the Canadian Wide Moat 7 is up 1.14%. The TSX Composite is down 5.56%. For the record, the Vanguard High Dividend (VDY) is up 2% in 2022 to the end of July.

Charts courtesy of Portfolio Visualizer

Annualized returns and volatility

The Canadian Wide Moat 7 has delivered greater total returns and with less volatility and less drawdowns in corrections. The market beat is somewhat consistent with the Beat The TSX Portfolio beat of over 2% per year.

And of course the portfolio dividend income is more than impressive. I did not create portfolio exclusively based on the generous and growing income, but it is a wonderful by-product. The following is based on a hypothetical $10,000 portfolio start amount. The starting yield is above 4%, growing towards a 10% yield (on cost) based on the 2014 start date.

In the above, the dividends are reinvested. For example, the Telus dividend is reinvested in Telus. While I will take a total return approach for retirement funding, the generous portfolio income contribution will add a dimension that will help reduce the sequence-of-returns risk. I am in the semi-retirement stage.

Performance update to the end of May 2022

In this chart I begin with the inception date of the Vanguard High Yield VDY, 2013. We see the Canadian Wide Moat 7 vs VDY and the TSX Composite – XIC.

The Wide Moat stocks have outpeformed for the full period, but that is thanks mostly to better returns out of the gate. The outperformance is also aided by lesser drawdowns in market corrections. We see that both the Wide Moat approach and VDY have beat the market, with ease.

Wide Moats with an energy kick

I also hold Canadian energy stocks in the mix. That energy allocation is near 10%. Here’s what it looks like over the last year with that energy kicker. The following table looks at from January of 2021 to the end of July 2022. Continue Reading…

5 factors for millennials considering their retirement

Posted By |

 

By David Kitai, Harvest ETFs

(Sponsor Content)

Millennials — the generation born between 1981 and 1997 — are beginning to enter their 40s. With the passing of that milestone comes a new consideration: retirement.

Canadians are living longer and longer, retirement at or around age 65 may need to last 30+ years. Millennials in their 30s and early 40s are ideally placed to plan for their eventual retirement. In those typically peak working years, millennials can take major strides towards a stable financial future and the achievement of their retirement goals. Preparing for retirement, though, is more than just putting a magic number away in a bank account. There are myriad factors a millennial should consider as they begin to plan for retirement. Below are five of those factors.

 1.) Understanding RRSPs and RRIFs

Registered Retirement Savings Plan (RRSP) accounts are a key tool Canadians can use to save for retirement. Their mechanism is simple: contributions to these accounts within the annual limit are tax-deductible. Income earned by investments held in the RRSP is also tax exempt, provided that income stays in the account. RRSPs give you an annual tax incentive to save for your retirement.

When RRSP holders turn 71, however, those RRSPs turn into Registered Retirement Income Funds (RRIFs). These accounts are subject to a government-mandated minimum withdrawal, on which some of the deferred tax from these contributions is paid. You can learn more about the problems with RRIF withdrawals, and how to navigate them here.

Millennials considering their retirement should look at how RRSPs can give them a tax benefit for saving now, while also planning for how the eventual transition to RRIFs will change their financial realities.

 2.) How the Canada Pension Plan factors into retirement

Canadians between the ages of 60 and 70 who worked in Canada and contributed to the Canada Pension Plan (CPP) can elect to activate their CPP benefits. Those benefits will be paid as monthly income based on how much you earned and contributed during your working years, as well as the age you chose to begin receiving benefits.

The longer you wait before turning 70, the higher your CPP benefits will be, though that appreciation doesn’t go beyond age 70. Millennials planning for retirement at any age could consider how they’ll finance their lifestyles while maximizing their CPP benefits at age 70. It’s notable that even the highest levels of CPP benefits pay less than $2,000 per month in 2022. That won’t be enough for many Canadians to live on, and millennials considering retirement may want to think about other sources of income.

3.) Equity Income ETFs

One of the issues that retirees have struggled with over the past decade has been the extremely low yields of traditional fixed income products like bonds. In 2022 those rates rose somewhat, but only following record inflation eating away at the ‘real yields’ of an income investment.

Many equity income ETFs pay annualized yields higher than most fixed income and higher than the rate of inflation. These ETFs hold portfolios of equities — stocks — but pay distributions generated through a combination of dividends and other strategies. Harvest equity income ETFs use an active and flexible covered call option writing strategy to help generate their monthly cash distributions.

These ETFs still participate in some of the market growth opportunity a portfolio of stocks would, while also delivering consistent monthly cash flow for unitholders. The income they pay can help retirees finance their lifestyle goals and help millennials as they prepare themselves to retire.

4.) Tax efficiency of retirement income

Tax is a crucial consideration for any younger person thinking about retirement. Aside from the tax issues surrounding RRSPs and RRIFs, any income-paying investments held in non-registered accounts, or any income withdrawn from a registered account, will be subject to tax. Dividend payments and interest payments from fixed-income investments are taxed as income. Continue Reading…

9 Housing Market Predictions for the next 5 Years

Posted By |

What is one prediction you have for the housing market in the next five years?  

To help you stay abreast of developments in the housing market, we asked real estate professionals and business leaders this question for their best predictions. From more people heading south to buyers shifting toward simple and functional homes, there are several insightful predictions that may help inform your decisions as a buyer, homeowner, developer or other stakeholder in the housing market within the next 5 years.

Here are nine housing market predictions for the next 5 years:

  • People Will Be Heading South
  • Expect a Good Degree of Stabilization
  • Lending Requirements Will Get Tighter
  • Home Values are Steadily Rising and Stabilizing
  • Look for Sell-Off by Big Owners
  • More Smaller and Affordable Houses
  • Expect More Use of Digital Tools to Promote Sales
  • Home Prices Will Continue Upward but Much More Gradually
  • Tastes Will Shift Toward Simple and Functional Homes

 

People will be Heading South

With remote work becoming the norm, we’ll continue to see people fleeing big cities for more land, warmer weather, and better amenities. Southern states such as Florida, South Carolina, Alabama, and Tennessee will see an increase in home buyers. Fewer people will be moving to the Northeast in favor of a lower cost of living, mild winters, and the ability to be outside 365 days of the year. — Isaiah Henry, Seabreeze Management

Expect a good degree of Stabilization

I think the market will stabilize somewhat, short of any significant downturn. Prices have shot up dramatically in recent years, so if they come down a bit now, that’s not a crash, it’s just a return to Earth. Anyone fearing something like the crash of 2008 should rest easy, as the same conditions are simply not there in terms of inventory, unemployment, and subprime lending. Expect prices in the near future to be somewhat closer to normal, but not dramatically so. — Marcus Hutsen, Patriot Coolers

Lending Requirements will get Tighter

One prediction I have for the housing market is that lending requirements will become tighter. This is because, after a period of loose lending standards, there has been an increase in the number of people defaulting on their mortgages. Lenders are becoming more cautious, and as a result, it will become harder for people to get mortgages. This could lead to a slowdown in the housing market, as fewer people will be able to buy homes. However, it could also create opportunities for investors who are willing to buy properties and rent them out. In any case, the housing market activity is likely to slow down in the next few years. — Lorien Strydom, Financer.com

Home Values are steadily rising and stabilizing

While we can’t magically forecast the future of real estate, it’s pretty safe to assume that home values are going up steadily just as they historically have. That doesn’t mean we won’t see the typical peaks and valleys that result from economic and other variable factors, rather confirm that the housing market fluctuates slightly over time which is normal. Those concerned the 2008 crisis could repeat can be at ease when considering the regulatory measures taken since to avoid straining our economy. It seems unlikely we would see such an event in the US again, and though buyer trends have been irregular in recent years, the data would support steady home values for the foreseeable future. — Tommy Chang, Homelister

Look for Sell-Off by Big Owners

One prediction I have is that the big companies that have been paying outrageous amounts for homes will suffer financially and need to sell them off. The idea behind these conglomerates, which some are foreign-owned, is to buy up private properties and either rent them or flip them for a profit. That is what has caused rents to soar and has pushed many would-be homeowners or independent house flippers out of the market because they can’t compete with the bid price.  Continue Reading…