All posts by Jonathan Chevreau

Retirement not what many were expecting, and not in a good way: Sun Life survey

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My latest Financial Post column, which is on page FP 3 of Tuesday’s paper, looks at a Sun Life retirement survey released this morning. You can find it online by clicking on the highlighted headline: Canadians finding retirement is not all it’s cracked up to be.

So if you think Retirement is about eternal sea cruises and African safaris, you may be abashed by the Sun Life finding that almost one in four (23%) describe their lifestyle as a frugal one that involves “following a strict budget and refraining from spending money on non-essential items.”

Furthermore, many can expect to still be working full-time at age 66, which just happens to be my own age. And as you can see from this blog, I’m still working, if only on a self-employed semi-retirement basis.

In fact, among the 2150 employed Canadians polled by the 2019 Sun Life Barometer poll conducted by Ipsos, almost half (44 per cent) expect they’ll still be employed full-time at age 66. Among the “frugal” retirees still working after the traditional retirement age, 65 per cent say it’s because they need to work for the money rather than because they enjoy it.

In an interview, Sun Life Canada president Jacques Goulet mentioned most of the main reasons, few of which will come as a surprise to this blog’s readers. Mostly there is a failure to plan for Retirement early enough to save the kind of sums involved. Another familiar culprit is the ongoing decline of employer-sponsored Defined Benefit pension plans, which are becoming more and more rare in the private sector. Most of us can only envy the tax-payer backed guaranteed inflation-indexed DB pensions enjoyed by most government workers, politicians and some members of labor unions: a bulletproof source of income that you can’t outlive.

47% at risk of outliving their money

The alternative for many are employer-sponsored Defined Contribution pensions (DC plans), group RRSPs or personal RRSPs and TFSAs, which means taking on market risk and longevity risk. Both are challenges in the current climate of seemingly perpetual low interest rates and ever volatile stock markets, not to mention rising life expectancy. Even then, Goulet told me Canadians with DC pensions are leaving a lot of money on the table: $3 or $4 billion a year in “free money” that is obtainable if you enrol in a DC pension where the employer “matches” the employee contributions: typically 50 cents for every $1 contributed.

Finally, there is a large group that have no employer pension of any kind, or indeed any steady job with benefits, and these people are unlikely to have saved much in RRSPs or even TFSAs, which they should if they can find the means. This group may account for a whopping 47% of working Canadians, Sun Life finds, and about the only thing they’ll be able to count on in Retirement is the Canada Pension Plan (CPP) as early as age 60, Old Age Security at 65 and probably the Guaranteed Income Supplement (GIS) to the OAS. These people would be better off continuing to work till 70 in order to get higher government benefits, a time during which they can build up their Tax-Free Savings Accounts (TFSA)s. TFSA income does not impact CPP/OAS/GIS, which is not the case for RRSPs and RRIFs.

Finally, a word about continuing to work into one’s 60s and even 70s. I know many who do, and not always for the money. I’m in the latter category myself, even though personally my wife and I could be considered the poster children for maximizing retirement savings, living frugally and investing wisely. There are worse things in life than going to a pleasant job that provides mental stimulation, structure and most of all purpose. Many of these ideas are explored in the book I jointly co-authored with Mike Drak: Victory Lap Retirement.

 

5 years of Findependence: The Hub celebrates its fifth anniversary

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How time flies! Five years ago this Sunday — Nov. 3, 2014 — the Financial Independence Hub [aka “The Hub”] was launched. From the start the idea was to publish a blog every business day, 52 weeks a year. Thanks to a wide variety of guest bloggers and other contributors, that has been achieved: as of this writing, the Hub had published almost 1,700 blogs.

For those curious, this link will take you to the very first Hub blog, which outlined the planned direction. From the get-go we tried to make a distinction between traditional full-stop Retirement and Findependence, which of course is the contraction for Financial Independence. The related book is Findependence Day (available in both Canadian and US editions).

Findependence is different from Retirement

Even some of the republished blogs the past week indicate how much the term Financial Independence has caught on, although sadly, the term Findependence less so. Just a few days ago, regular Hub contributor Mark Seed published a blog on Strive for Financial Independence not Early Retirement.  (We’re working on getting him to use the term Findependence but Rome wasn’t built in a day!)

I wrote much the same thing soon after the Hub was launched in 2014: Why Financial Independence is a better term than Retirement.

I may as well take this opportunity to clarify a few things about how the Hub operates. First though, we’d like to thank our advertisers, some of which (like Vanguard) have been with us since almost the beginning. It’s that kind of support that means the Hub remains free to users, who by now realize that most Hub blogs publish around 9:10 am, with a daily digest going out around 10 am.

Where the Hub’s content comes from

Why daily content? I guess it goes back to my days as a newspaper reporter and columnist, when my personal motto was “A story a day keeps the editor away.” Of course, it wouldn’t be much of a Semi-Retirement if I had to write a blog for the Hub every day all by myself so from the get-go we were open to guest blogs. An early supporter was Robb (and Marie) Engen of Boomer & Echo: skip over to the Hub’s search function and you’ll find dozens of stories by them. And by the way, that search tool can be very useful in accessing any of the 1700 blogs or so that the Hub has published: they’re still there; you just have to retrieve them with the tool.

Also early in giving us permission to republish blogs were Patrick McKeough of The Successful Investor, Adrian Mastracci of KCM Wealth Management, Mike Drak, my co-author on Victory Lap Retirement, Billy and Akaisha Kaderli of RetireEarlyLifestyle.com and many more. Just this year we’ve added a few more excellent bloggers: Mark Seed of MyOwn Advisor, Michael Wiener of Michael James on Money, Dale Roberts of Cut the Crap Investing, Fritz Gilbert, the Plutus award winning blogger behind Retirement Manifesto and a few more I hope I’ve not forgotten.

I can hear critics questioning the rationale of this republishing approach: all I can say is that you can consider it sort of the Greatest Hits of Financial Independence, given that our goal has always been to be — as you can see in our slogan elsewhere on this site — North America’s Portal to Financial Independence. We are chiefly an aggregator, although there is also original content.

Yes, I try to write a blog most weeks, though as regular readers may realize, they tend to be “throws” — summaries of paid columns or blogs I’ve written elsewhere, including MoneySense.ca, the Financial Post, Motley Fool Canada, the Globe & Mail on occasion, and Money.ca. Think of it as a sort of one-stop-shopping for what I personally write, even as I retrench a bit as my Semi-Retirement unfolds. (I’ll be 67 in April). In a way, the outside revenue I get from writing for the mass media helps defray the Hub’s modest costs, and of course helps to promote the site to new readers.

Apart from republished blogs, the Hub also regularly tries to publish at least two pieces a week of fresh content written by a variety of other contributors: financial advisors and other investment professionals, occasionally marketers or  firms representing a cross-section of the financial services industry.

The Hub’s 6 categories for the Human Financial Life Cycle

We try to publish a wide selection of topics corresponding to the human financial life cycle: if you’ve not noticed, take a look at the blue menu near the top of the site and you’ll see that our blogs are categorized in six sections. We start with young people (Millennials) who are just getting started in their financial lives. So we start with Debt and Frugality, followed by Family Formation and Housing: they will be interested in topics like real estate and buying their first home, mortgages, interest rates, credit cards etc. From almost the Hub’s inception, Zoocasa.com’s Penelope Graham has contributed excellent articles monthly on the real estate industry. Continue Reading…

Retired Money: Should big savers still fear outliving their money?

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MoneySense.ca: Photo created by freepik – www.freepik.com

My latest MoneySense Retired Money column looks at the topic of whether average savers transitioning to Retirement really need to fear outliving their money. The piece picks up from a blog this summer from Michael James on Money, which will be republished in its entirety tomorrow here on the Hub.

You can access the full MoneySense column by clicking on the highlighted text: How long will your retirement nest egg last?  In addition to citing Michael J. Wiener’s work, the piece passes on the views of two prominent recently retired actuaries: Malcolm Hamilton and Fred Vettese, as well as my co-author on Victory Lap Retirement, ex corporate banker Mike Drak.

Like this blog, despite being online the column’s scope is somewhat constrained by a word limit. In fact, in an email, Hamilton told me he didn’t think such a topic could be addressed in just 800 or 900 words.

Actuary and retirement expert Malcolm Hamilton

“Why? We presume that good advice is universal … that it applies to everyone. It does not, particularly when addressing concerns about running out of money. For years I have looked for evidence that large numbers of seniors spent too much and suffered as a consequence. I haven’t found anything persuasive.”

No one knows how much Canadians should save or how quickly they should draw down their savings after retirement, Hamilton added: “Some people are frugal. They save heavily before retirement and spend sparingly after retirement, leaving large amounts to their children when they die. We all want parents like this. Others are spendthrift. They save little before retirement and live frugally after retirement because they have no money except government pensions.”
Finding balance between extremes of Over-Saving and Over-Spending

FP: Navigating ETF Overload through Robo advisors and one-decision asset allocation ETFs

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FP/Getty Images

My latest Financial Post column has just been published: online and in the Wednesday paper (page FP4): Click on the highlighted headline for the full column: Spoiled for Choice: How investors can navigate the New World of ETF Overload.

While Canadian ETF assets are still about a tenth those of mutual funds, a similar 10-fold disparity in the costs of Exchange Trade Funds versus Canada’s notoriously high mutual fund Management Expense Ratios (MERs) has the ETF industry rapidly playing catch up to the entrenched mutual fund industry.

As one of the ETF experts quoted notes (Dale Roberts, a regular Hub contributor and the blogger behind CutthecrapInvesting), ETF sales have already caught up with mutual funds. And while the early ETF growth was fuelled by Do it Yourself investors buying their own investments (including ETFs) at discount brokerages (with or without the help of fee-based advisors) the next stage of growth is being fuelled by the drive to simplicity and convenience.

Robo advisors came first, with several Canadian operations launching in 2004 or soon thereafter. True, the Robos are slightly more costly than a pure DIY ETF strategy implemented at a discounter, but the extra 0.5% charge (in most cases) is arguably well worth it in terms of hand-holding, asset allocation and automatic rebalancing.

Which is the bigger game changer?

As of 2018, though, investors have been able to get the best of both worlds with the one-decision asset allocation ETFs pioneered by Vanguard Canada, and soon imitated by BMO, iShares and Horizons. Continue Reading…

Retired Money: How retirees can lower RRIF tax shock by taxing “at source” wherever possible

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My latest MoneySense column takes a look at the supposed “tax nightmare” new retirees sometimes face on the forced annual (and taxable) withdrawals of Registered Retirement Income Funds or RRIFs. Click on the highlighted headline for the full article: How to avoid tax payment nightmares when the RRIF withdrawals start.

It’s a simple idea really. Salaried employees take for granted the automatic deduction of income taxes “at source.” They receive their regular paycheque with “net” or after-tax deposits that go directly into their bank accounts.

RRIFs are famously taxable: once you reach the end of your 71styear, you are required to pay an ever-rising minimum percentage withdrawal, all fully taxed like earned income or interest. However, notes Aaron Hector, a financial planner with Calgary-based Doherty & Bryant Financial Strategists, there is no mandatory withholding tax on RRIFs, unlike the 10, 20% or 30% tax that must be withheld at source on RRSP withdrawals (which rises with amount withdrawn.)

Fortunately, you can ask your financial institution to deduct tax at source every time you make a RRIF withdrawal. Alternatively, new retirees or semi-retirees may wait till 71 to start a RRIF but choose to withdraw money from their RRSP whenever they need it during their 60s. Here, the problem is the minimum withholding required can prove to be inadequate if you take out chunks of RRSP cash that are too small. Take them out in $5,000 chunks or less and the 10% (5% in Quebec) withholding tax is unlikely to be sufficient once you file your annual return.

Try and take out at least an amount between $5,000 and $15,000, which results in a 20% withholding tax (10% in Quebec.). Better yet, make the withdrawals $15,000 or more and pay the 30% withholding tax (15% in Quebec). Don’t fret that this may be “too much” tax: if so, it will be rectified once you file your next tax return. You can find a summary of RRSP withholding rates at this Government of Canada website.

Hector says RRIF withdrawals in excess of the minimum annual required payment are treated the same as regular RRSP withdrawals for withholding tax. So if your minimum RRIF payment one year is $50,000 but you withdraw $100,000, the extra $50,000 will be taxed at 30% on withdrawals and come tax time, you’d pay tax on the entire $100,000. You can elect to have taxes withheld at source on the minimum RRIF payments as well: Hector estimates a third of his clients do just that. Others may end up making quarterly tax installments instead.

This situation is aggravated by the fact non-registered investment income is typically taxable.             Fortunately, you can choose to deliberately overtax yourself as you go on many common sources of retirement income: if you receive pensions from former employers and/or the Government (CPP, OAS), you can set things up to mimic the “taxed at source” setup salaried workers have. While not mandatory, pension administrators will deduct whatever percentage of tax you wish to arrange with them, whether a minimal amount or a near-confiscatory 50%, or somewhere between those extremes.

In my case, I set 30% as my withholding tax on corporate pensions, 25% on OAS and eventually the same amount for CPP. You may feel small pensions don’t have to be taxed at source if they are less than the Basic Personal Amount that is tax free to everyone: $11,809 in 2018, $12,609 in 2019.

The alternative is quarterly tax installments. Retired advisor Warren Baldwin says theCRA sends notices for payments based on simple arithmetic applied to the previous year’s taxes. “So if, for example, 2017 was a high-income year and you had a high tax liability on filing, CRA will request large payments in March and June of 2019. If income and the liability declines in 2018/19, then you might have overpaid and need to wait until spring of 2020 for the refund.”

Ideally, things will balance out when it comes time to file your taxes: if you went overboard in taxing yourself at source, you may end up with a refund; if you underestimated your taxes due, you may end up having to cut yet another cheque to Ottawa. Some object to giving the CRA an “interest-free” loan but personally, I’d rather receive a small refund than have to pay still more at tax time.