Hub Blogs

Hub Blogs contains fresh contributions written by Financial Independence Hub staff or contributors that have not appeared elsewhere first, or have been modified or customized for the Hub by the original blogger. In contrast, Top Blogs shows links to the best external financial blogs around the world.

Managing a Windfall: Sudden increases in Net Worth and how to handle them

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Image courtesy Pexels/Tima Miroshnichenko

By Devin Partida

Special to Financial Independence Hub

The initial excitement of suddenly receiving an inheritance, lottery win or large bonus is palpable, presenting what seems like endless possibilities. However, this euphoria gives way to the daunting reality of managing significant amounts of money.

You face complex decisions that involve managing your new wealth responsibly and planning for your future in ways you might not have considered before. This transformative moment calls for careful consideration and strategic financial planning to ensure your sudden wealth leads to long-term security and success.

The Reality of Sudden Wealth

Many people believe sudden wealth is a one-way ticket to lifelong happiness, but the reality is far more complex. Despite the number of U.S. adults in the upper-income tier rising from 14% in 1971 to 20% in 2019, managing significant financial resources introduces many new challenges.

You might think money will solve all your problems, but it often brings issues, including increased responsibility, potential isolation and the need for meticulous financial planning. Instead of viewing wealth as a simple solution, recognize it as a valuable tool requiring savvy management to benefit your life. This approach ensures you handle your finances wisely, considering the intricate balance between enjoying your wealth and maintaining it for the future.

Understanding the Psychological Impacts

When you receive a sudden windfall, confusion and stress quickly cloud the initial rush of joy as you face unexpected financial decisions. People sometimes refer to this whirlwind of emotions as “sudden wealth syndrome” — a phenomenon that can lead to anxiety, poor judgment and hasty financial decisions.

Taking deliberate steps is crucial to maintaining emotional stability. They include the following:

  • Pause and allow yourself time to adjust
  • Consult with a financial advisor and tax expert
  • Seek support from professionals or support groups

These help you manage your new circumstances wisely and guarantee you make the most of your windfall without emotional turmoil.

Practical steps to manage a Windfall

Create a budget tailored to your new financial situation to manage a sudden windfall adeptly. Start by calculating your net worth to gain a clear understanding of where you stand money-wise. Before making any major decisions, place your funds in a temporary, safe location like a high-yield savings account to ensure they remain secure while you explore your options.

Additionally, take the time to educate yourself on financial management and investment strategies. Enhancing your knowledge in these areas will empower you to make informed decisions that align with your long-term financial goals. This proactive approach will help you maximize the benefits of your newfound wealth.

The Importance of a Structured Financial Plan

A comprehensive financial plan is essential to manage and sustain your wealth effectively. Harness the power of technological advancements like AI and machine learning, which can predict upcoming financial trends and assess investment risks precisely. Moreover, seek the expertise of professional financial advisors who can tailor a plan specifically suited to your unique needs and goals. Continue Reading…

NIA on Canada’s 3-pillar Model of Retirement Income

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The National Institute of Ageing is today releasing the next instalment [“the final Step 1”] of its series of papers on the Canada Pension Plan (CPP/QPP) and the Canadian retirement income system. The link invites readers to click on a download button for a full PDF of the report.

Recall that Findependence Hub’s introductory blog on this was published on April 11th here, and subsequently in my Retired Money column at MoneySense.ca on April 23: How to double your CPP Income. It also summarized in this second Hub blog on April 24th.

Below is a screenshot from the new paper: my comments follow below the graphic, which the NIA defines as a “redefined visual of the Canadian retirement income system.”

 

Recall that the entire series of papers is titled 7 Steps Toward Better CPP/QPP Claiming Decisions: Shifting the paradigm on how we help Canadians.  Step #1 is titled (Re)Introducing the Retirement Income System: A New Framework Tailored to the Retiree’s Perspective.

The accompanying text includes this overview:

“Canada’s retirement income system has traditionally been presented to the public as three pillars, consisting of government-sponsored retirement income programs (CPP/ QPP, OAS and GIS), workplace pension plans and personal savings. However, this traditional framing is a missed opportunity to help workers mentally transition into retirement, encouraging them to shift their attention toward the adequacy of their financial resources to successfully and sustainably finance their entire retirement.”

The paper goes on to point out that here is some irony involved in how the traditional “three pillar” framework of the retirement income system is presented: it does so from the perspective of providers (i.e., government, employers and the financial services industry), rather than those it is intended to inform.

“When viewed from the end user’s perspective, pensions are not a financial pillar of the retirement income system. They are the income foundation on which other financial resources rest.”

By viewing pensions as “a foundation rather than a pillar,” the NIA continues,  “the resulting framework provides a structure that is more focused on spending, with an ‘income’ foundation that securely and sustainably replaces employment income. Private assets accumulated on an individual or collective basis — including tax-deferred savings such as registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs), and defined contribution (DC) pension plans — are ‘spending buckets’ on top of this foundation, providing flexibility to support non-routine spending throughout different retirement stages.” Continue Reading…

Inflation is getting to retirees and some pre-retirees, Fidelity survey finds

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2024 Fidelity Retirement Report (CNW Group/Fidelity Investments Canada ULC)

More than four in five (82%) Canadian retirees say inflation is having a negative financial impact on them in retirement, according to a just-released report from Fidelity Investments Canada ULC.

The 2024 Fidelity Retirement Report also found that 43% of pre-retirees say the rising cost of living is delaying when they think they will retire. In addition, 59% of retirees report helping their non-student adult children in retirement: both with day-to-day expenses as well as big-ticket items like home purchases, weddings and even education savings for their grandchildren.

“It comes as no surprise that retirees are feeling the bite of inflation. Other macroeconomic issues such as a slowing economy, rising rates and volatile markets are also common factors that have negatively affected retirees financially,” says the report, “Pre-retirees are also feeling the pinch. We find that compared with last year, a larger share of pre-retirees are considering delaying their retirement in response to the rising cost of living.”

As you can see from the graphic below, the percentage of pre-retirees who plan to retire later than originally expected rose from 37% in the 2023 survey to 47% in the new 2024 edition.

While less than a third of those already in retirement have worked in some capacity once they have left full-time work, most pre-retirees anticipate that they will work at least part-time once they’re retired, according to the report.

While Fidelity cites rising inflation as one reason for this trend, it also says “most pre-retirees would like extra money for recreational purposes.” Further, the report says, “We also find that there isn’t a clear relationship between those working in retirement and their level of household income, suggesting that in general, many Canadians may be working or anticipating working to maintain a higher material standard of living, rather than just to keep up with the rising cost of essentials.”

 

Continue Reading…

Capital Gains Tax Increase? This new Calculator helps Corporation and Trust accounts

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By Ted Rechtshaffen, CFP

Special to Financial Independence Hub

As you may know, the recent Federal Budget announcement had a few important changes that can have an impact for some, but certainly not all.  The most discussed has been the increase to the capital gains tax.

The most directly impacted are those with investments in a Corporation or a Trust.  Not only will they face an increase in taxes on every dollar of capital gains (not just after $250,000 as it is on personal accounts), but this is forcing some important near term decision making.

For many people in this situation, the question for investments with unrealized capital gains is whether to hold those securities longer term or sell them prior to June 25th to avoid the new higher tax rate.

To help with that choice, we have just launched a new calculator aimed at this group.

It is free for anyone to access.  They don’t have to provide any details.

The calculator can be found at New Capital Gains Tax – Sell or Hold Calculator – TriDelta Private Wealth

Continue Reading…

Gold glitters amid Persistent Inflation and Rate Uncertainty

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Image courtesy BMO ETFs/Getty Images

By Chris Heakes, CFA

(Sponsor Blog)

Gold prices have gained more than 14% since late last year, renewing market interest for the precious metal.

Recent gains have been driven by an expectation that the U.S. Federal Reserve (Fed) is getting closer to reducing its trendsetting overnight rate, which led to a weaker U.S. dollar index to close 2023.

In recent months, inflation concerns have ramped back up with recent U.S. CPI data coming in slightly ahead of expectations. While consumer prices continue to trend in the right direction, higher shipping costs are becoming a concern with cargo ships having to avoid the Suez Canal. Shipping costs have surged 150% as a result, potentially add 0.5% percentage points to core inflation1: and re-igniting worries that CPI could accelerate again.

These developments have created a favourable environment for gold, given bullion tends to be used as a multi-purpose hedge for portfolios.

BMO Global Asset Management has launched a gold ETF that is backed by physical bullion. This ETF stores physical 400-oz. bars, secured in a local vault operated by BMO. Investing in the new BMO Gold Bullion ETF is efficient for investors as it is listed on the Toronto Stock Exchange (TSX) and trades like any stock or ETF. Additionally, since the underlying bullion holdings are professionally vaulted, investors do not have to worry about safe-keeping on their own. The BMO Gold Bullion ETFs are available at a cost-efficient management fee of 0.20%.

The BMO Gold Bullion ETF

Benefits

  • Amid reaccelerating inflation concerns and interest rate uncertainty, gold could be used as a defensive hedge.
  • Macro as well as weaker-U.S. dollar risks have risen in recent years, and could remain elevated going forward.
  • Gold offers effective diversification from stocks and bonds, which have experienced a notable rise in correlation3.

Why Gold could continue to Glitter

Gold is often used to hedge three main risks: macro-economic/geopolitical and inflation risks, as well as against a weaker U.S. dollar and fiat currencies4. All of these risks have risen in recent years and it is quite possible and perhaps probable that they will remain elevated going forward, spurring further demand. Continue Reading…