All posts by Pat McKeough

How to make realistic retirement calculations for your future

Posted By Pat McKeough | June 13, 2017

When you’re investing and planning for retirement, make realistic calculations rather than indulging in wishful thinking.

If you plan to retire at 65, and you’re 50, you won’t be dipping into your investments for 15 years. If you are in reasonably good health, you could live well into your 80s: possibly longer.

Let’s say you have $200,000 in your RRSP, and expect to add $15,000 in each of the next 15 years.

To determine if this is enough, you need to make some realistic retirement calculations about investment returns and income needs.

What you can expect

Long-term studies show that the stock market as a whole generally produces total pre-tax annual returns of 8% to 10%, or around 6% after inflation. For the purposes of retirement planning, we’ll assume a 6% yearly return, and disregard inflation. Your $200,000 grows to $479,312*, and your yearly $15,000 RRSP contributions add up to $370,088, for total retirement savings of $849,400.

*Be sure to check your math. There are many compound-return calculators available online. For example, you can find a comprehensive compound-return calculator at the Bank of Canada’s web site.

Income and outgo

If you continue to earn 6% a year, and you withdraw $50,964 a year (6% of the $849,400 in your RRSP), you can avoid dipping into capital until your mid-70s, when RRIF rules require a larger withdrawal.

However, if you start taking money out faster, or earn lower returns, you’ll run out of money.
If you withdraw $90,000 a year while earning 6%, the money you’ve accumulated will last just over 13 years. If you earn 5% but withdraw $90,000 a year, your money will be gone in just over 12 years.

Beware of getting caught in a vicious circle

Bad investment advice & clichés you should ignore

Posted By Pat McKeough | June 9, 2017

If you take bad investment advice from others, you may end up selling a stock too early or engaging in unprofitable investing strategies

Most investor sayings and clichés have at least a hint of truth. But they can still lead you to take good or bad investment advice, depending on how you apply them.

For instance, you’ll sometimes hear investors say that you shouldn’t fall in love with your stocks. This seems to make sense. You should keep an open mind on your investments, rather than falling in love with them and holding them forever, despite any adverse changes in their business or the field in which they operate. However, investors sometimes use this tidbit of advice as a justification for selling a stock that has shot up unexpectedly.

Unexpected strength in a stock you like is a bad reason to sell

The stock may be stronger than you expected because you underestimated the growth potential or competitive advantages that led you to like it in the first place. Experienced investors can tell you that some of their best stock picks started going up out of proportion to what they expected, and kept outperforming for years. By the time the first significant “dip” or setback comes along in a stock like this, it may have tripled.

Choosing ETFs: the best ones are diversified and have low MERs

Posted By Pat McKeough | June 1, 2017

If you want to include the best ETF investments in your portfolio, then it’s important to consider a variety of components. That’s because all Exchange-Traded Funds aren’t created equal

ETFs are one of the most popular and most benign investing innovations of our time: and the best ETF investments can be great low-fee ways to hold shares in multiple companies with a single investment.

The best ETFs practice “passive” fund management

The best ETFs practice “passive” fund management, in contrast to the “active” management that conventional mutual funds or some new ETFs provide at much higher costs. Traditional ETFs stick with this passive management: they follow the lead of the sponsor of the index (for example, Standard & Poors).

Sponsors of stock indexes do from time to time change the stocks that make up the index, but generally only when the market weighting of stocks change. They don’t attempt to pick and choose which stocks they think have the best prospects.

This traditional, passive style also keeps turnover very low, and that in turn keeps trading costs for your ETF investments down.

We think you should stick with “traditional” ETFs.

The best ETF investments have lower MERs

The MERs (Management Expense Ratios) are generally much lower on ETFs than on conventional mutual funds. Continue Reading…

How to find the best high-dividend-yield ETFs

Posted By Pat McKeough | May 24, 2017

High-dividend-yield ETFs can be great additions to a portfolio: here are tips that will help you find the best ones

Here’s a look at high dividend yield ETFs and our advice on finding the best ones for your diversified portfolio.

4 ways to invest in profitable high-dividend-yield ETFs

Look for ETFs that hold companies with long-term success and a long history of paying dividends. These companies are the most likely to keep paying and increasing their dividends.
The current financial health of each company in the ETF. If a company is doing well, has done so consistently, and shows signs of growth, these factors are indicative of stocks that will keep paying a dividend.
How does the company manage its relationships with investors? If there is a favourable relationship, and the company fits the other qualifications listed above, it may be a good dividend-paying stock to invest in.
Note the competition. Look for ETFs with companies with a strong hold on a growing market and a unique product or service that cuts its competition.

High-dividend-yield stocks are a key part of a successful portfolio but at the same time they can give investors a false sense of security. That’s because some investors tend to think that all high-dividend-yield stocks are safe.

When a high dividend yield means danger

A high dividend yield may be a danger sign. It may mean investors are selling and pushing the price down. A falling share price makes a stock’s yield goes up (because you still use the latest dividend payment as the numerator to calculate yield — but the denominator, the price, has dropped). But when a stock does cut or halt its dividend, its yield collapses.

The best ETF investments practice “passive” fund management

How to create a winning retirement income strategy

Posted By Pat McKeough | April 24, 2017

A successful retirement begins with a successful retirement income strategy.

One of the things that investors of all ages fear is that they won’t have a good financial plan in place so that they have enough retirement income to live on once they’ve stopped working.

Here are some ways to ease that anxiety:

In retirement, try to even out (equalize) your income with your spouse’s income, to lower overall taxes. Here’s how:

1.) Have the higher income spouse pay the household bills

The easiest way to even out income between two spouses is to have the higher-income spouse pay the mortgage, grocery bills, medical costs, insurance and other non-deductible costs of family life.

2.) Set up a spousal RRSP

Registered retirement savings plans, or RRSPs, are a form of tax-deferred savings plan designed to help investors save for retirement. RRSP contributions are tax deductible, and the investments grow tax-free.

3.) Pay interest on your spouse’s investment loans

If the lower-income spouse takes out an investment loan from a third party, such as a bank, the higher-income spouse can pay the interest on that loan.

RRIFs are a great long-term retirement income strategy