All posts by Jonathan Chevreau

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

Posted By |
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

Posted By |

 

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

Posted By |

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.

The Pros and Cons of Dividend Investing

Posted By |
Photo created by rawpixel.com – www.freepik.com

My latest MoneySense Retired Money column has just been published, which you can retrieve by clicking on the highlighted headline: The Pros and Cons of Dividend Investing.

As with most of the Retired Money articles I write for the site, the piece looks at dividend investing from the perspective of someone in their 60s who is nearing retirement or semi-retired, as well as full retirees in their 70s.

It notes there are two major schools of thought on income investing.

In his book, You can retire sooner than you think, author and financial planner Wes Moss makes the case for retirees 60 or older having 100% of their portfolio in income-generating vehicles: whether interest, dividends, rental income from REITs or other securities: “Everything should be paying you an income from age 60 on.”

But there is a “total return” camp that argues total returns are what counts, whether generated by capital gains or cap gains combined with a growing stream of dividend income. In his series of “Stop doing” blogs, Toronto-based advisor Steve Lowrie argued investors should Stop chasing dividends.

One of the most romanticized ideas in personal finance?

Also in the total-return camp is PWL Capital portfolio manager Benjamin Felix, who tackled this in a Q&A column where a young Gen Y investor asked how he could create an all-dividend portfolio so he could retire early. Felix has said dividend investing is “one of the most romanticized ideas in personal finance”—citing a 2013 study by Dimensional Fund Advisors (DFA) that found 60% of U.S. stocks and 40% of international stocks don’t pay dividends, plus the fact that Warren Buffett declared dividends should not matter in making great investments. So, he concluded, an all-dividend approach would lead to “poor diversification.” Felix also dispelled the misconceptions that dividends are a guaranteed source of returns, offer protection in down markets, and that companies that grow their dividends necessarily beat the market. Continue Reading…

Theranos’ Elizabeth Holmes and Wolff’s new Trump book: parallel cautionary tales?

Posted By |
Theranos founder Elizabeth Holmes and the book exposing the scam

Being a frugal kind of guy in Semi-Retirement, whenever possible I like to get books out from the library, whether old-fashioned physical books, e books or audio books. The main problem with this, however, is that you usually have to wait several weeks or even months to get to the head of the line for the latest bestsellers.

On a recent long weekend (the one before this one!) two bestsellers arrived the same day, which meant the pressure was on to read them in the three weeks allotted. Neither was likely to qualify for renewal, since there was a long queue of other readers waiting for their return.

The first, which arrived in e-book format, was Bad Blood, a book I had ordered several weeks earlier and has only recently slipped off the bestseller list. The other one was brand new: Michael Wolff’s followup book on Donald Trump, entitled Siege: Trump under Fire. On this one, I got really lucky, just happening to be in the library a day or two after the local branch’s local copy went on display.

Still, suddenly I had two books to read at once, which meant that anything else I either owned or was more likely to be renewable had to be put aside. No one said being frugal was easy!

I ended up reading both books over a long three-day weekend by adopting a strategy of reading a chapter in one, then switching to the next chapter in the other. Which is how I realized there were some fascinating parallels between the two books. It was something of a surreal experience, as I’m sure no one else on the planet would have read these two books simultaneously in this fashion.

Billionaires, or Thousandaires?

Both involve supposed American billionaires, although this point is debatable about both subjects. Trump’s billions are often supposed to be fanciful, which is why one New York Times columnist once earned Trump’s ire by dubbing him a “thousandaire.”

The other was a billionaire for awhile, at least on paper but these days she may not even be a thousandaire. I’m referring to Elizabeth Holmes, a young Stanford dropout who hero-worshipped Apple’s Steve Jobs and started a blood-testing company in California called Theranos.

The only problem, as Bad Blood recounts at length, is that apparently Theranos supposed ground-breaking technology didn’t work. Google Elizabeth Holmes and you can find a bunch of short videos that describe the sordid tale if you missed it the first time around and don’t wish to join the library queue for the book.

Blinded by ambition and the quest for fame and wealth, it appears Holmes and her much older partner/lover (Ramesh “Sunny” Balwani), cut numerous corners and forgot the first rule of health care is to first do no harm. They raised billions from investors, in the process fooling such retail giants as Walgreens and Safeway. Holmes had founded the firm in her early 20s and used her influential rolodex to suck in many investors who should have known better.  She also was famous for emulating Jobs and his attire of a black turtleneck sweater. And finally, as any number of Google searches will demonstrate, she pitched her voice a few octaves lower so as to impress prospects and investors with a deep baritone she must have felt would allow her to be taken more seriously.

Will Trump’s reign also end in tears?

Wolff’s Siege was released just a year after his previous Trump bestseller, Fire & Fury, and relies just as much on input from Steve Bannon. As I read and alternated chapters between the two books, it was fascinating to watch the unravelling of Holmes and to wonder whether Wolff was describing a similar unravelling of the Trump presidency. Certainly, Wolff depicts an isolated and desperate president and has predicted it will all end in tears: not necessarily ours but of Trump’s. Continue Reading…