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.

MoneySense Retired Money: Should GICs be the bedrock of Canadian retirement portfolios?

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My latest MoneySense Retired Money column, just published, looks at the role Guaranteed Investment Certificates (GICs) should play in the retirement portfolios of Canadians. You can find the full column by going to MoneySense.ca and clicking on the highlighted headline: Are GICs a no-brainer for retirees? 

(If link doesn’t work try this: the latest Retired Money column.)

Now that you can find GICs paying 5% or so (1-year GICs at least), there is an argument they could be the bedrock of the fixed-income portfolios, especially now that the world is embroiled in two major conflicts: Ukraine and Israel/Gaza. Should this embolden China to invade Taiwan, you’re starting to see more talk about a more global conflict, up to an including the much-feared World War 3.

Of course, trying to time the market — especially in relation to catastrophes like global war and armageddon — generally proves to be a mug’s game, so we certainly maintain just as much exposure to the equity side of our portfolios.

I don’t think retirees need to apologize for sheltering between 40 and 60% of their portfolios in such safe guaranteed vehicles. Certainly, my wife and I are glad that the lion’s share of our fixed-income investments have been in GICs rather than money-losing bond ETFs: the latter, and Asset Allocation ETFs with heavy bond exposure, were as most are aware, badly hit in 2022. But not GICs; thanks to a prescient financial advisor we have long used (he used to be quoted but now he’s semi-retired chooses to be anonymous), we had in recent years been sheltering that portion of our RRSPs and TFSAs in laddered 2-year GICs. Since rates have soared in 2023, we have gradually been reinvesting our GICs into 5-year GICs, albeit still laddered.

The MoneySense column describes a recent survey by the site about “Bad Money advice,” which touched in part on GICs. Almost 900 readers were polled about what financial trends they had “bought into” at some point. The list included AI, crypto, meme stocks, side hustles, tech and Magnificent 7 stocks and GICs. Perhaps it speaks well of our readers that the single most-cited response was the 49% who said “none of the above.” The next most cited was the 16% who cited a “heavier allocation to GICs.” You can read the full overview here but I did find a couple of other findings to be worthy of note for the retirees and would-be retirees who read this column: Not surprisingly, tech stocks (FANG, MAMAA. etc. were the first runnerup to GICs, receiving 13.24% of the responses. Not far behind were the 10.55% who plumped for crypto and NFTs (Non-fungible tokens). AI was cited by 3.7%: less than I might have predicted; and meme stocks were only 2.81%.

As I said to executive editor Lisa Hannam in her insightful article on the 50 worst pieces of financial advice, GICs are at the opposite end of the spectrum from such dubious investments as meme stocks and crypto. (I’d put Tech stocks and A.I. in the middle).

GICs won’t grow Wealth for younger investors, aren’t tax-efficient in non-registered accounts

The GIC column passes on the thoughts of several influential financial advisors. One is Allan Small, a Toronto-based advisor who occasionally writes MoneySense’s popular weekly Making Sense of the Markets column. He is among GIC skeptics. He told me his problem with GIC is that they “don’t grow wealth. They can act as a parking lot for money for some people but over time there have been very few years in which people have made money with GICs, factoring in inflation and taxation.” Continue Reading…

2024 Canadian Retirement Income Guide: 10 potential sources of income

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By Ted Rechtshaffen, CFP

Special to Financial Independence Hub

Over the years, we have received thousands of questions from clients related to a wide range of financial and planning issues.  Without doubt, the highest volume of questions relate to how to manage the transitions from working to retirement.

To help address many of these questions, we have put together the 2024 Canadian Retirement Income Guide.  This can be found on the link here: Canadian Retirement Income Guide – TriDelta Private Wealth.

The Guide highlights ten different sources of retirement income.  Some range from the very common, Canada Pension Plan, to those that may only apply to some – life insurance, corporations, or home equity. The Guide is free and doesn’t require any input to get it (such as name or email.)

Perhaps the most common question is whether to take CPP at age 60 or 65 or even 70.  The thoughts around a potential answer are discussed in the Guide as well as providing a link to a CPP calculator (CPP Calculator – TriDelta Private Wealth) and guidance on how to work with Service Canada.  Similar discussions and links relate to Old Age Security (OAS), ranging from taking it at 65 to age 70, and also factors that might help you to avoid any clawbacks.

Other factors that need to be considered include minimizing taxes, not just for one year, but over the entire post-work period.  One of the reasons for looking at every possible source of retirement income is that this can be the key to planning out the lowest tax retirement.

Some strategies discussed that could lower taxes could include:

  • Delaying OAS and CPP to age 70, but drawing down RRSPs between retirement and age 70 – if you are healthy. The lower income drawdown of RRSPs will result in lower taxes, while helping to maximize government pensions and potentially maintaining full OAS payments.
  • Using a balance of non-registered assets or a home equity line of credit, to keep taxable RRIF income a little lower. Continue Reading…

4 Financial Scams all Senior Citizens should know about

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As senior citizens get closer to retirement, scammers see them as financial prey. Learn about different financial scams so you can protect your money.

Image courtesy Logical Position/Summit Art Creations

By Dan Coconate

Special to Financial Independence Hub

Approaching retirement is an exciting time for senior citizens. You’re about to experience the golden years of your life and have worked hard to save up a nest egg to enjoy this relaxing time.

Unfortunately, many scammers know that you probably have that nest egg, and they want to drain it. Scammers are growing increasingly creative in how they target people. All senior citizens should know about the following four financial scams so they can see through this creative criminal behavior.

Loved-One Impersonation

While some technology has changed the world for the better, some has fallen into the hands of criminals. Scammers can now use various voice-changing and phone-cloning technology to impersonate the people we know and love. They often pretend to be a loved one who is in a sudden difficult situation, such as a grandchild in need of bail money or a friend stuck on an overseas trip.

Before you try to help your loved one, verify who and where they are through another communication channel. For example, contact your grandchild’s parents to check where the family is or hang up and call your friend on the number saved in your phone.

Dating-Service Swindle

The retirement years open up free time for seniors, which is a boon when you’re looking for a special someone to date. However, many scammers know that senior citizens may not be as tech-savvy when it comes to the personals. They create fake profiles on dating websites and try to foster a connection with the senior. Before the relationship can develop in-person, they mention financial trouble or ask for money.

The best way to avoid scams while looking for love is to meet prospective dates in person after getting to know them either through email or phone/video conversations. Arrange to meet in a public place that you’re familiar with. But above all, don’t share financial information or lend/give money.

Job-Interview Scam

Everyone should have a chance to love what they do. As you get ready to retire from one career, you may consider transitioning to a job you love instead of a job you need. Unfortunately, scammers can create fake job posts and even hold fake interviews so they can offer you a job. Once you accept, they request your financial information so they can supposedly start your human resources paperwork. Continue Reading…

Defined Benefit pensions likely to see improved financial health of their plans

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By Jared Mickall, Mercer Canada

Special to Financial Independence Hub

Canadians have faced cost pressures in many facets of their daily lives, including housing costs, food and gas prices, and insurance premiums to name a few. At the same time, Canadians may be thinking about how inflation and volatile interest rates may have impacted their retirement savings over Q4.

Canadians that participate in defined benefit (DB) pension plans are likely to have seen the financial health of their DB pension plans weaken in Q4, but show an overall improvement over the whole of 2023. DB pension plans that used fixed income leverage may have experienced stable or improved solvency ratios over the quarter.

The Mercer Pension Health Pulse (MPHP) is a measure that tracks the median solvency ratio of the defined benefit (DB) pension plans in Mercer’s pension database. At December 31, 2023 the MPHP closed out the year at 116%, which is a decline over the quarter from 125% as at September 30, 2023, but an improvement from 113% at the beginning of the year. The solvency ratio is one measure of the financial health of a pension plan.

In the final quarter, plans saw positive asset returns, but these returns were not enough to offset an increase in DB liabilities due to a decline in bond yields. While we saw a decline in the financial health of DB pension plans over Q4, it improved over the whole of 2023. In addition, compared to the beginning of year, there are more DB pension plans with solvency ratios above 100%.

Canadian inflation and interest rates

Canadian inflation came down over 2023 and is approaching the upper end of the Bank of Canada’s inflation-control target of 3%. General views are that inflation will continue to decline in 2024 and reach the policy target of 2% in 2025. In 2023 the Bank of Canada increased the overnight rate to 5.00% from 4.25%, which was a continuation of increases that commenced in 2022, to mitigate inflation and to balance against the risk of a recession.

However, DB pension plan benefits are accumulated and paid over periods that are significantly longer than the overnight rate. Interest rates on Canadian bonds with longer terms were volatile throughout the year and finished at lower levels than at the start of the year. It’s unclear whether the interest rates that apply to DB pension plans will stabilize in 2024, and if so, at what level. As such, interest rates continue to pose a significant risk for many DB pension plans. Continue Reading…

The Burn Your Mortgage Podcast: Home ownership, the Foundation of Financial Independence with Jonathan Chevreau

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Below is an edited transcript of a podcast interview conducted late in 2023 between myself and Burn Your Mortgage podcaster and author Sean Cooper.

The conversation starts with our thoughts on the high price of housing in Canada and how newcomers trying to get on the first rung of the housing ladder can get a start by saving up in Tax-Free Savings Accounts (TFSAs) and the new First Home Savings Accounts (FHSAs.)

From there we move on a discussion of saving for Retirement, my concept of Findependence (or Financial Independence) and Semi-Retirement: aka Victory Lap Retirement.

Click any of the links below to hear the full audio podcast on your favorite podcast app. Below that is a shortened edited transcript of the interview.

Partial  Transcript

Sean Cooper  

Let’s get started with our interesting discussion today on findependence as well as your daughter’s journey to homeownership. I remember you being on a segment of CBC on the money back in the day a few years ago, with your daughter. So yes, the first thing I want to ask you about is the challenge of younger folks buying a property around that housing affordability issue, so maybe we can talk a bit about your daughter’s journey to homeownership and also about the new First Home Savings Account (FHSA.)

Jonathan Chevreau  

Sure. first of all, as an only child, we remind her that eventually we’ll be gone and that this current house will be hers in any case. So that removes some pressure. Is it a challenge right now in places like Toronto and Vancouver to buy a first home? Yes, it is. Is it impossible? No, it’s like anything else in personal finance. It’s priorities. I think I’ve educated her to the point that she’s been saving in a TFSA and maximizing it since she was 18 years old.

The point is between the TFSA and now the First Home Savings Account, it’s a lot better to receive interest than to pay it out once you commit to a house, which is a lot more expensive than the baby boomers ever had to pay … We’d rather collect rent, in effect, or interest income than than pay it out.

FHSA versus TFSA and Homebuyers Plan

Sean Cooper  

Could you share your thoughts on how the FHSA compares to the TFSA and the RRSP homebuyer plan?

Jonathan Chevreau  

As you know, the FHSA has only been out for about a year. And it allows you to invest $8,000 a year into basically anything that an RRSP or a TFSA would allow you to invest in. So not just fixed income, but you can invest in stocks, ETFs, asset allocation ETFs, etc. And you get a deduction similar to how an RRSP generates one.

But the beauty of it is it’s very flexible, like a TFSA. You don’t have to buy a first home. But it’s only good for people who have never bought a home yet, so it’s a one-time only deal. I would say it would be a priority. But whether or not you think you’re going to buy a home, you certainly will want to retire at some point. And therefore the FHSA does double duty.

Sean Cooper  

I agree completely. And the FHSA is a lot more flexible than the homebuyer plan, you can actually use both of them together. So if you have a lot of money in your RRSP, then you can use them in combination. But a couple cool things that I learned is that with the RRSP home buyers plan, there’s actually the rule that basically any contributions that you make, it has to sit in the account for 90 days before you can take the money out. But with the FHSA, it doesn’t have that same rule, you can essentially contribute money and then pretty much take it out. And you don’t have to wait 90 days or anything like that.

 Jonathan Chevreau  

The good thing about home equity and a paid for-home because as you know, Sean, I’ve written that the foundation of financial independence is a paid-for home, but once it’s paid for there is home equity, then, if you have to, in the last five years of Old Age would tap it to pay for, I don’t know, $6,000 or $7,000 a month for a nursing home or retirement home. Nice to have in the back of your pocket, the home equity.

My view is, there’s no rush to get out there and buy a first home at these high interest rates and home prices are also almost near record high though they’ve come down a bit.

Retirement savings, pensions, CPP, OAS

Sean Cooper  

Why don’t we switch gears and talk about the second topic that we want to discuss: financial independence.  If all the money is in the house, and you don’t have a gold-plated pension plan, you have a bit of a challenge there. Now, certainly you can downsize but then there is the cost of moving and the land transfer tax, and all that.

Jonathan Chevreau  

Well, I don’t have a gold-plated pension. I would call it more like a bronze-plated one. Mostly from National Post, since I was there for 19 years. My wife has no employer pension, but always maximized her RRSP. And we obviously eat our own cooking, so we have maximized our TFSAs since it began. We delayed CPP as long as we could, but didn’t quite wait until 70 because actuary and author Fred Vettese had an article in The Globe the last couple of weeks arguing that those who are 68 or 69 now are probably better off taking CPP a year or two earlier, so you get the inflation adjustment.

Most financial planners would say you should look at CPP and OAS really nice additions to savings and that can be the foundation or your findependence, especially if you don’t have an employer-provided Defined Benefit pension plan.  Some worry that if the worst happens, like Alberta leaving CPP, what if somehow they renege on the CPP promise? But I don’t think it’s going to happen.

Retiree money fears and Asset Allocation

Still, it doesn’t hurt to have financial assets so in the end, you’re not going to be dependent on the government or any one employer.  One thing you can count on is your personal investments like RRSPs/RRIFs, TFSAs, and non registered savings. Then of course, if you’re managing your own money , you have to worry about the fear of every retiree: running out of money or losing money if the stock market crashes. Asset allocation is the proper protection there: my own financial advisor recommends 60% fixed income to 40% stocks, I guess we’re close to that. Right now GICs — guaranteed investment certificates — are paying roughly 4 or 5%, depending where you go. If you ladder them so they mature one to five years from now, then you don’t have to worry about the reinvestment risk. You just reinvest whenever they come due at current rates. Continue Reading…