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.

Retired Money: Can an RRSP or a RRIF ever be “too large?”

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MoneySense.ca

My latest MoneySense Retired Money column looks at a problem some think is a nice one for retirees to have: can an RRSP — and ultimately a RRIF — ever become too large? You can find the full column by clicking on the adjacent highlighted headline: How large an RRSP is too large for Retirement?

This is a surprisingly controversial topic. Some financial advisors advocate “melting down” RRSPs in the interim period between full employment and the end of one’s 71st year, when RRIFs are typically slated to begin their annual (and taxable) minimum withdrawals. Usually, RRSP meltdowns occur in your 60s: I began to do so personally a few years ago, albeit within the confines of a very conservative approach to the 4% Rule.

As the piece points out, tax does start to become problematic upon the death of the first member of a senior couple. At that point, a couple no longer has the advantage of having two sets of income streams taxed in two sets of hands: ideally in lower tax brackets.

True, the death of the first spouse may not be a huge tax problem, since the proceeds of RRSPs and RRIFs pass tax-free to the survivor, assuming proper beneficiary designations. But that does result in a far larger RRIF in the hands of the survivor, which means much of the rising annual taxable RRIF withdrawals may start to occur in the higher tax brackets. And of course if both members of a couple die with a huge combined RRIF, their heirs may share half the estate with the Canada Revenue Agency.

For many seniors, the main reason to start drawing down early on an RRSP is to avoid or minimize clawbacks of Old Age Security (OAS) benefits, which begin for most at age 65. One guideline is any RRSP or RRIF that exceeds the $77,580 (in 2019) threshold where OAS benefits begin to get clawed back. Of course you also need to consider your other income sources, including employer pensions, CPP and non-registered income.

Adrian Mastracci

“A nice problem to have.”

But the MoneySense column also introduces the counterargument nicely articulated by Adrian Mastracci, fiduciary portfolio manager with Vancouver-based Lycos Asset Management. Mastracci, who is also a blogger and occasional contributor to the Hub, is fond of saying to clients “A too-large RRSP is a nice problem to have!”

Retirement can last a long time: from 65 to the mid 90s can be three decades: a long time for portfolios to keep delivering. A larger RRIF down the road gives retirees more financial options, given the ravages of inflation, rising life expectancies, possible losses in bear markets, low-return environments and rising healthcare costs in one’s twilight years. These factors are beyond investors’ control, in which case Mastracci quips, “So much for the too-big RRSP.”

 

Sixth Sense or Nonsense? Removing intuition from the investment process

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By Noah Solomon

Special to the Financial Independence Hub

In a recent newspaper article, a Canadian investment executive described why he chose not to incorporate artificial intelligence (AI) into his firm’s portfolio management process. His reasoning was based on the distinctively human ability to “read a room” and gauge the sincerity of corporate management teams, which cannot be replicated by a machine or algorithm.

Even if you believe that investment professionals possess this “sixth sense,” the simple fact is that it has not enabled them to produce superior results. According to the latest SPIVA (S&P Index vs. Active) Canada report card, over the past 10 years:

  • 91% of Canadian equity funds underperformed the TSX Composite Index
  • 97% of U.S. equity funds underperformed the S&P 500 Index
  • 100% of Canadian dividend-focused funds underperformed the TSX Dividend Aristocrats Index

Aside from the alleged ability to gauge the truthfulness of a person’s statements, there is another human characteristic that AI lacks. Unlike their human counterparts, AI algorithms do not have emotions or cognitive biases, which often lead to poor investment decisions.

We have met the enemy – and the Enemy is Us

The field of behavioural economics studies the effects of psychological, cognitive and emotional factors on the economic decisions of individuals and institutions. This field has produced countless studies that have conclusively demonstrated that when it comes to investment decisions, people harbour subconscious biases that result in suboptimal results. Moreover, these biases are not restricted to individual investors, but also permeate the decisions of professional managers and institutions. Continue Reading…

How to manage a Side Hustle while studying full time

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 There’s no denying that getting your MBA — or any graduate degree — is a costly endeavor. Even if financial aid covers the cost of tuition, there’s still a raft of fees and the cost of books, moving, and living, which will vary widely depending on where you attend school. On top of all that, you have to give up your income for the next X years while you study.

Or do you? If the expenses are making you sweat, then you might be one of the many full-time students who consider taking on a side hustle.

What is a Side Hustle?

A side hustle is any job you do “on the side” to earn a little extra cash, whether it’s babysitting for your next-door neighbors, running social media for start-ups, or driving for Uber. It’s not your main focus, not what you center your life around, and certainly not what you’d answer when asked, “What do you do?,” but it’s a little bit of your time each week or month that brings in extra cash. If you’re lucky enough, you can get into a list of rich side-hustlers. Side hustles have been around since, well, paid work, but with the rise of the gig economy and the advent of public university tuitions, there are more students side-hustling than ever before.

Keep in mind that you took on a graduate degree to invest in yourself; if you end up sacrificing your studies for some extra pocket change … well, you shouldn’t need a finance class to tell you that’s bad economics. There’s no way your side hustle is lucrative enough to be worth NOT getting the most out of your degree, so if it comes down to making time for one or the other, your studies should always take priority. However, it’s also possible that you could be lucky enough to find a side hustle that actually enhances your degree by giving you experience in a relevant field.

Finding a Side Hustle

Often, the best side hustles arise purely by luck. Your favorite professor happens to need someone to do a little research for him or write up some case studies, or some other task related to your field of study, and you’re the man or woman for the job. Continue Reading…

Are high rent costs a hurdle to Condo ownership?

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By Penelope Graham, Zoocasa

Special to the Financial Independence Hub

The rising cost of rent in markets across Canada has become an especially prevalent issue in recent years, as a sharp lack of supply and steep real estate prices put the squeeze on home seekers’ affordability.

The fact is, rising ownership housing values, exacerbated by the federal mortgage stress test, have kept more would-be home purchasers in the rental market for longer; a total of 31% of first-time buyers say they rented for at least a decade before buying their first home, according to a recent Canada and Mortgage Housing Corporation report.

As well, new data from Rentals.ca reveal steadily rising rent costs in Canada’s major markets: up 0.7% in Vancouver to an average of $1,987 for a one-bedroom, while Montreal unit costs rose 8.1% to $1,285. In Toronto, such a unit went for $2,262 in the third quarter of 2019, according to the Toronto Real Estate Board.

A look at one of Canada’s most expensive rental markets

With more Canadians remaining in higher-priced rentals for longer, could these overall higher shelter costs be crimping their ability to eventually move up into the ownership market?

To see whether high rental costs are limiting Canadians’ homeownership options, Zoocasa conducted a study in Toronto, one of the nation’s priciest markets, to determine the rent-to-homeownership-cost ratio in the city. The study sourced average sold prices for condo units in 35 neighbourhoods across the 416 region, as well as the average lease rates for condo rental apartments in each. It also crunched the minimum down payment required to buy a unit in every neighbourhood, as well as the equivalent number of months of rent.

The rent-free possibilities

The findings essentially reveal just how long it would take to save a condo down payment in each neighbourhood, if the saver didn’t also have to pay any rent; while this may seem a dream scenario for many of the city’s dwellers, it could be a possible approach for the 47.7% of young adults StatsCan says still live within the family home in the city. The numbers also illustrate the minimum financial cost required to own a home in each area, as well as how feasible it would be to make the jump from renting to owning.

For the City of Toronto as a whole, the numbers aren’t too daunting; in order to purchase a condo unit in the city at the average price of $628,074, savers would need to amass a down payment amount of $37,807. Doing so would take a rent-free individual 14.7 months if they didn’t need to pay the city’s average rent of $2,567 monthly. The good news is, there are a number of affordable locales where a buyer could break into the market much faster – within a year in a total of 13 neighbourhoods.

In exchange for this affordability, though, buyers will need to give up their ideals of a central location and convenient commute; the majority of these neighbourhoods are located on the eastern and western edges of the city, with less direct access to public transit route. Continue Reading…

My Review of “A Warning” by Anonymous

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Based on the arrival of my library copy of “A Warning” this weekend, it’s clear that the controversial book about Donald Trump written by “Anonymous” is now in wide circulation, and hence there will soon be a new wave of reviews.

Recall that what amounted to a sneak preview of the book came late in 2018 after the New York Times departed from normal practice and published an opinion piece credited only to “A Senior Trump administration official” that gave an inside look at what those unfortunate enough to be subordinate to Trump have to endure on an almost daily basis. Talk about the worst job in the world!

At 250 pages it’s a quick read. At one level, and as a friend of mine who also got an early copy remarked, there’s not that much new to anyone who has been following this train wreck of a presidency on CNN or MSNBC.

Indeed, many of the early reviews based on pre-release copies gave us a good flavour of what you can expect in this book. My favourite passage in the book used not the imagery of a train wreck but an even more dramatic one of air traffic control. To wit:

‘The day-to-day management of the executive branch was falling apart before our eyes. Trump was all over the place. He was like a twelve-year old in an air traffic control tower, pushing the buttons of government indiscriminately, indifferent to the planes skidding across the runway and the flights frantically diverting away from the airport.’

The book includes eight chapters, beginning with the collapse of the steady state (you remember the “grownups” who were supposed to act as guard rails, many now since departed), moves on to Trump’s numerous defects in character, his Fake Views, his Assault on Democracy, his weakness for Strongmen, and a chapter on how he has divided America with a “New Mason-Dixon Line.” Then he surveys the apologists and his enablers who put ambition and fear over service to country, and ends with an appeal to the Electorate.

Surprisingly, the author isn’t that keen on the prospect of impeachment: even though the book is current enough to include the early innings of the Ukraine scandal. Instead, and perhaps sensibly, the appeal is to American voters to come to their collective senses and vote him out in the 2020 election.

Three years too late?

A cynic might quip that the very title “A Warning” comes at least three years too late. But for anyone who believes another four years of this madness will all but destroy American democracy, the title is apt if understated. Perhaps a Trumpian superlative would be an improvement: something like “An Urgent Warning.” Continue Reading…