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.

R.I.P. Traditional Retirement

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By Brandon Hill

Special to the Financial Independence Hub

Does the notion of grinding it out day in and day out for the next 40 years to experience the freedom of retirement scare you? Wouldn’t you rather strive to enjoy the journey along the way?

The good news is that the traditional concept of retirement is slowly dying.

With the elimination of most employer pension plans and the fact that humans are living longer than ever, we are forced to come up with a different take on how our parents/grandparents view retirement.

Today I’ll show you two different concepts that rethink our traditional retirement model and are gaining popularity amongst the next generation of workers.

Findependence

What’s Findependence? It’s a term coined by Jon Chevreau: author, former editor-in-chief of MoneySense Magazine and founder of the Findependence Hub, an online platform and community for curated content focusing on achieving Financial Independence. “Findependence” is simply a contraction of the phrase “Financial Independence.”

Financial Independence is the point at which you work because you want to, not because you have to. It’s the tipping point where you have the right level of savings and investments working for you to provide the income you need to live your ideal life.

Think about that. It sounds very similar to our definition of retirement and at the same time totally reframes the perception of what retirement should entail. Rather than focusing on when you can stop work forever, you now shift your mindset to creating enough passive income through investing so that you can pursue anything you want.

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Why rely on hindsight for retirement saving?

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By Atul Tiwari

Special to the Financial Independence Hub

New research from a colleague has me thinking about hindsight. The trouble, as the saying goes, is that hindsight is 20/20 — and you can’t benefit from it after the fact.

But why not try to benefit from someone else’s hindsight? My colleague Anna Madamba of the Vanguard Center for Investor Research found in a new study that recent retirees were largely satisfied with their financial situations in retirement, but, if they could, would still do some things differently in preparation.

With the benefit of retrospect, 43% of Canadian survey respondents “agreed” or “strongly agreed” that they would have saved more — a higher percentage than garnered by any other answer.

But perhaps it’s too simple to suggest that pre-retirees should just follow the example of others. Many people know at some level that they need to save more. Whether they do often comes down to two things: competing priorities and insight into how much money they’ll have (and need) in retirement.

Obstacles to saving more

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Q&A: How Dividends can speed Financial Independence

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I recently had a chance to discuss a new Canadian advisory on dividend stocks with the people responsible for that newsletter. The advisory comes from TSI Network, founded by Pat McKeough, whose investment approach I have always respected.

The advisory is TSI Dividend Advisor (shown above), and it grew out of a long respect for the power of dividends.

Pat and his investment team have always viewed dividends as a sign of investment quality. By extension, dividend stocks become the most reliable foundation of an investment portfolio built for growing wealth and financial independence.

This confidence in dividends is accompanied by a detailed examination of dividend-paying stocks to identify those with the greatest potential to sustain, and raise, their payouts.

The 8 key points they use to evaluate dividend stocks grew into their Dividend Sustainability Ratings. This proprietary ratings system became the backbone of the new TSI Dividend Advisor.  It was launched late in 2016 to impressive reviews in the media and a flood of subscriptions from Canadian investors.

Here are some of the keys to that success, from the editors’ point of view.

Jon Chevreau:  First of all, Pat, thanks for your time. What role do dividends play in a  successful portfolio? How can they lead to Findependence?

Pat McKeough

Pat McKeough: Top dividend stocks are a key part of a successful portfolio. Top dividend stocks can produce as much as a third of your total return over long periods. These payouts are drawn from earnings cash flow and paid to the shareholders of the company. Typically, these dividends are paid quarterly, although they may be paid annually or monthly as well.

At TSI Network, we think investing in dividend stocks is one of the best investment decisions you can make to achieve Findependence. Dividends serve as a way for companies to share the wealth they accumulate through successfully operating their businesses.

JC: Many stocks have dividends. What makes a top dividend stock?

Jon Chevreau

PM: Top dividend stocks provide steady dividends: a sign of investment quality. Some good companies reinvest profits instead of paying dividends. But fraudulent and failing companies hardly ever pay dividends. So if you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks. For a true measure of stability, focus on companies that have maintained or raised their dividends during economic and stock market downturns. These firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, top dividend stocks provide an attractive mix of safety, income and growth. Continue Reading…

Why aren’t robo-advisors being used by those who need them most?

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By Edward Kholodenko,  Questrade

Special to the Financial Independence Hub

Uber has quickly become the largest personal transportation company in the world, yet it  doesn’t own a single vehicle. That’s because there’s more to Uber than just hailing a ride from your phone. It’s providing more convenience at a lower price and in turn, transforming the transportation industry.

Substitute Uber for Amazon, Airbnb, or any other tech disruptor and a common theme emerges. On the road to becoming mainstream, applications that reduce cost and improve convenience are often first adopted by millennials and the tech-savvy. While the early adopters reap the many benefits of these innovations, those who hesitate are missing out.

Retirement challenge and the Robo-Revolution

When it comes to financial technology, there are certain populations that can no longer afford to be late adopters. Thanks to the innovation in the investment space, preparing for retirement has become easier than ever. Enter robo-advisors: an online wealth management service that provides diversified investing, much like a mutual fund, but at a much lower cost.

Given the current state of retirement savings in Canada, it’s apparent that this technology has great value to those willing to take the leap.

There is concern that 80 per cent of middle-income Canadians nearing retirement won’t have enough to support themselves. The average Canadian’s retirement savings of $71,000 will last only a few years, and, 50 per cent of Canadians are not confident they will have enough to retire comfortably.

Not only are Canadians saving far too little for their retirement, but also many can no longer depend on company pension plans to provide the income needed to stop working.  Our golden years are increasingly self-funded and investment decisions now fall on the shoulders of the individual. There’s a fantastic opportunity for new solutions in this space, and those willing to embrace a solution provided by fintech providers are reaping the reward.

Robo-advisors, in spite of the name, aren’t actually robots. Professional (human) portfolio managers handle all of the investments. In fact, there are two types of managed robo-advisor accounts: actively- and passively-managed:

Actively-managed advisors have a dedicated team of portfolio managers who select investments and adjust the portfolio to take advantage of market opportunities, all of this at a low cost. Passively-managed advisors typically invest according to set investment rules that only track the market.

These advisors use leading technology and proven strategies to provide a better investment experience at a lower cost to the consumer. And, by reinvesting the money you save in fees, individuals are able to increase their retirement savings and returns.

Robo-advisors are helping Canadians retire wealthier

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Retired Money: Still a place for Spousal RRSPs

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My latest MoneySense Retired Money blog has just been published, which you can find by clicking on this highlighted link: Tax Strategies using spousal RRSPs.

This is the second in a series: the first one focused on pension splitting and can be found here: Pension splitting is now ten years old. The Financial Post also ran a related piece called Spousal RRSPs are an often overlooked retirement savings tool.

As these pieces note, income splitting usually works best for families when two spouses are in different tax brackets. Particularly if one spouse is a big earner and the second isn’t making peony at all.

As CIBC Wealth’s Jamie Golombek observed in this piece in the FP — Tax Season is Upon Us — the Family Tax Cut is no more as of 2016: that was a version of income splitting that let families with children under 18 transfer up to $50,000 of income to his or her lower-income spouse or partner. But “seniors need not worry,” Golombek added: seniors can still split eligible pension income with spouses or common-law partners.

And spousal RRSPs still present non-seniors with another valid income-splitting alternative, again assuming that a couple occupy disparate tax brackets.  As the MoneySense piece phrases it, all those years the high-earning spouse is saving for retirement, the ideal solution would be to get a tax deduction for RRSP contributions but when it comes time to receive the income, to receive it in the hands of the lower-income spouse.

And that’s exactly what a spousal RRSP does. The contributor can deduct the amount of the spousal RRSP deposit from his/her (higher) earned income, while the recipient (the husband in our example) owns the investments. The aim is to equalize retirement income of both spouses, and to have the RRSP funds withdrawn by the recipient spouse at his or her lower tax rate.

Unlike pension splitting, you’re not restricted to splitting just 50% of the income: you can have 100% of it taxed in the lower-earning spouse if so desired. This income splitting also helps the couple each qualify for the $2,000 pension credit.

There are plenty of nuances to this, such as splitting CPP or QPP income after age 60. But as Chris Cottier, an investment advisor with Richardson GMP Limited, says, the spousal RRSP is generally a “no-lose” proposition.