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.

Lowering the first rung on the housing ladder

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Image courtesy of CMI/Envato Elements

By Kevin Fettig

Special to Financial Independence Hub

 

A recent report by Ontario’s Municipal Property Assessment Corporation (MPAC) highlights the scarcity of homes under $500,000 in Ontario.

In 2013, 74% of residential properties had a value below this threshold. Today,  just 19% of homes are valued below $500,000.  While this situation varies from province to province, it highlights the significant challenges faced by first-time home buyers who find the first rung of the property ladder is nearly unreachable.

Most urban centers would benefit by encouraging lower cost paths to home ownership. One avenue for this is building properties on leased land. In certain areas of Vancouver, we already see this practice, often on First Nations or university-owned lands. Leased land provides two primary paths to homeownership: one involves placing mobile or manufactured housing on the leased property, while the other entails constructing permanent homes on the leased land.

More than 50 years ago, manufactured housing made up as much as 6% of Canadian housing completions. Today, it represents less than 1%. In the U.S., supporting the availability of manufactured housing is a key component of the administration’s effort to ease the burden of housing costs. Most of these initiatives focus on improving mortgage financing for these homes through housing finance agencies Fannie Mae and Freddie Mac. Currently, Americans must rely on personal property financing (chattel lending) rather than conventional mortgages.

CMHC launched Chattel Loan program in 1988

In Canada, we’ve had a mortgage insurance product for these loan types for some time. The Chattel Loan Insurance Program (CLIP) was first launched by CMHC in 1988 as a 5-year pilot program. However, CMHC has never actively promoted the program, leading to a lack of awareness among lenders. Moreover, consumer preference for traditional stick-built housing and resistance from local communities to mobile home park developments have further hindered the adoption of the program.

Although the eligible amortization period can extend up to 25 years, some provinces have not allowed longer-term leases, making it challenging to finance structures on leased land, whether stick-built or manufactured. Even with an insured mortgage product, securing financing for manufactured homes can be difficult. Financial institutions often lack understanding of these structures, and the constraints on amortization period restrict the type of homebuyer. Consequently, the market has primarily targeted retirees seeking to downsize from larger family homes to smaller units. However, with appropriate financing options, these properties could also appeal to first-time buyers.

Building permanent homes on leased land is a second avenue to reducing home-ownership costs. Leased land communities are typically located close to small urban centres. The design ranges from townhouses to single family dwellings, and from traditionally built to manufactured. There are some larger institutional groups in this sector, including Parkbridge, a leading Canadian developer and operator of 106 residential and recreational communities across the country. CAPREIT, a Canadian real estate investment trust, also manages leased land communities but is not a developer. Continue Reading…

How to Financially Prepare for Retirement

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Before you know it, it’ll be time to retire. Will you be ready? Learn how to prepare for retirement financially with this guide.

Image courtesy Logiclal Position, licenses from Adobe/ by Khongtham

 

By Dan Coconate

Special to Financial Independence Hub

Retirement is a significant life event that requires thorough financial preparedness. If you’re striving to ensure that your golden years are your best, this guide will take you through the essential steps of securing your financial future. Read on to learn how to prepare for retirement financially.

Understanding Retirement Planning

Retirement planning is more than just a single event; it’s a dynamic process that requires fluidity and adjustment. You must make significant financial decisions with respect to when you intend to retire, how you will live post-retirement, and what you hope to leave behind. The key to successful retirement planning is to start early, understand the landscape of retirement, and make informed investments and savings decisions.

Calculating Retirement Needs

It’s important to calculate just how much you will need in retirement to live comfortably and handle unexpected expenses. This involves a careful consideration of your current income, your essential and discretionary expenses, and the inflation’s impact. One of the most challenging aspects is predicting how these factors will evolve over the years.

Saving and Investment Strategies

Saving for retirement is a marathon, not a sprint, and the most effective way to prepare is through a combination of savings and investments. Retirement accounts like 401(k)s and IRAs offer tax advantages [in the U.S., or Defined Contribution plans and RRSPs in Canada.] Diversification is a crucial strategy to manage risk and increase the likelihood of a healthy return on investment.

Debt Management

Debt is a heavy financial weight, especially in retirement. One of the healthiest steps toward financial freedom during retirement is to clear as much debt as possible. Entering retirement with less or no debt is like starting a new chapter of your life with a clean slate. It’s essential to ask questions with your registered investment advisor about how to clear debt and structure your finances for these goals.

Income Sources in Retirement

Multiple streams of income make the difference between just getting by and living comfortably in retirement. Social security and pensions are a part of this picture, but a personal investment portfolio and other assets can significantly enhance your income. Maximizing these resources to get the most out of them is a testament to solid financial planning and execution. Continue Reading…

A deadline seniors don’t want to miss: RRSP-to-RRIF conversions

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My latest column looks at a topic of high importance for near-retirees or already retired folk who have reached their early 70s: the requirement to convert an RRSP to a Registered Retirement Income Fund (RRIF) and/or annuitize.. You can find the full column by clicking on the highlighted text here:  How to cope with the RRSP-to-RRIF deadline in your early 70s.

As the column mentions, this deadline is rapidly approaching for my wife and me.

Here’s how Matthew Ardrey, senior wealth advisor at Toronto-based Tridelta Financial, sees the big picture on RRSP-to-RRIF conversions: “By the year in which one turns 72, the government mandates that the taxpayer convert their RRSP to a RRIF and draw out at least the minimum payment. The minimum payment is calculated by the value of the RRIF on January 1st multiplied by a percentage rate that is tied to the taxpayer’s age. Each year older they get, the higher that percentage becomes.”

Currently, at age 72 (the latest that you can receive the first RRIF payment), the minimum withdrawal is a modest 5.28% of the market value of your RRIF assets. By age 95, this increases to 20% of the market value, says Rona Birenbaum, founder of Caring for Clients.

You need to take the RRSP to RRIF deadline seriously: you must convert by December 31st of the calendar year in which you turn 71. What if you miss it? Then, Birenbaum cautions, 100% of your RRSP becomes taxable income in that year, which will often push you into the highest marginal tax rate. Needless to say, for those with hefty RRSPs, losing almost half of it in a single tax year would be disastrous.

There is of course the option of using your RRSP to purchase an annuity, but Birenbaum observes that most clients opt for the greater flexibility of the RRIF.

Given the normal human inclination to procrastinate, most near-retirees will probably want to keep their RRSPs going until the bitter end and aim for this “latest” deadline for conversion. However, technically, Birenbaum says you can open a RRIF much earlier than is mandated. “There is no earliest age, though it’s rarely beneficial to open a RRIF during your working years.”

Note that when RRIF income is received, it’s taxed as fully taxable income, Ardrey says, “There is no preferential treatment for this income, like there would be for capital gains or Canadian dividends. Though this income is a cornerstone for many Canadians, it can also cause tax complications that were not there

While similar in several respects Birenbaum notes some important differences between RRSPs and RRIFs. Both are tax-sheltered vehicles, can hold the same investments, and withdrawals are fully taxable as income. However, RRSP contributions are tax-deductible, while you can’t contribute to a RRIF (so there are no tax deductions.)

RRSPs don’t have any mandated withdrawals, whereas RRIFs have mandated annual withdrawals, starting in the calendar year after you open the account. With RRSPs, there are no minimum withdrawals, although they are permitted: your only option is to request a one-time lump sum withdrawal (and pay tax on it at various rates depending on the amount you wish to withdraw).

RRIFs have mandated annual minimum withdrawals, which rise steadily over time. Minimums are outlined on this website. Unlike an RRSP, a RRIF lets you automate withdrawals for ease of cash flow management (monthly, quarterly, annually etc.)

Unless the taxpayer requests it, there are no withholding taxes on RRIF minimums. A second complication is that this extra income from the RRIF can also trigger clawbacks of Old Age Security (OAS) benefits. If income exceeds $90,997, OAS payments will be clawed back by $0.15 for every dollar over this amount until they reach zero, Ardrey warns.

Pension splitting and using your spouse’s age

Fortunately, there are ways to minimize these possible tax consequences. If you are one half of couple, you can benefit from a form of pension income splitting: RRIF income can be split with a spouse on their tax returns, providing the taxpayer is over the age of 65. “Even if incomes are in a situation where a RRIF income split would not seem logical, a split of $2,000 can provide a pension tax credit for the spouse. This could also be the difference between being impacted by the OAS clawback or not.”

Another trick is basing your minimum RRIF payment on your spouse’s age. This works when you have a younger spouse/ By doing this, the taxpayer gets their younger partner’s age percentage applied to their RRIF minimum payment.

The full MoneySense columns goes into the mechanics of withholding taxes and what happens upon death.

The Mechanics of Conversion

Birenbaum says you can usually expect your financial institution to reach out to you to remind you before the deadline. There will be paperwork to file at the institution where you’d like to hold the RRIF, although it’s not required that the RRIF be at the same place your RRSP is held. Your existing RRSP investment holdings can be simply transferred to your new RRIF account. The initial paperwork will ask you to set your desired payment schedule (day of month and payment frequency), to choose RRIF minimums based on your age or that of your younger spouse.

  

Introducing Wilbur: The Free Budgeting App that puts money in your Pocket

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By Mike Rodenburgh

Special to Financial Independence Hub

In the realm of personal finance, understanding where your money goes is essential for financial success. Tracking expenses provides valuable insights into spending habits and empowers individuals to align their finances with their goals. Whether you’re a seasoned budgeter or just starting your financial journey, mastering expense management is key.

Most people have multiple financial institutions, credit cards, store cards, etc., making expense tracking complicated. It’s also easy to lose track of automatic subscriptions that renew on a monthly basis, like that local gym you joined but have got out of the habit of using.

Luckily, there are tools available to simplify our ever-increasing complex financial lives.  For many years Mint was a popular budgeting tool owned by Intuit. But as of March 23, 2024, Mint is being decommissioned, leaving many people searching for a free replacement.

One tool that has recently launched as a replacement for Mint in Canada is Wilbur, a free budgeting app that automatically connects to your bank account.   In addition, Wilbur allows people (at no obligation) to answer surveys for a little extra side cash.

 

The personal finance experts at Wilbur have put together the following series of tips to help people get a handle on their finances.

1.) Assess Your Accounts

Begin by reviewing your financial accounts, including bank statements and credit card transactions. Take note of recurring expenses and identify patterns in your spending. Understanding your financial habits lays the groundwork for effective expense tracking. Wilbur has a handy feature in that it automatically identifies those recurring subscriptions, giving you the necessarily information to plan for the payment or simply cancel it to save money!

2.) Categorize Your Expenses

Organize your expenses into categories to gain clarity on your spending habits. Categories may include essentials like housing and utilities, as well as discretionary spending on entertainment and dining out. Utilize features in apps like Wilbur to automatically categorize transactions and simplify the process.

3.) Craft Your Budget with Wilbur

Once you’ve categorized your expenses, create a budget that reflects your financial priorities. Allocate funds for necessities, wants, and savings/debt repayment using the 50/30/20 budgeting method. Use the budgeting app to track expenses and set budgeting goals for each expense category.

4.) Consider a Side Gig

If you find you’re not making ends meet, find a side hustle.  A survey by H&R Block in March 2023 found that 28% of Canadians had some kind of side gig. Side hustles are found everywhere, even in the Wilbur budgeting app. Wilbur offers the opportunity to earn between $1 and $5 by answering a survey, simply by clicking a link from within the app. It’s a convenient way to monetize a spare 10 minutes of your day. Clearly not going to get rich off it, but in today’s inflationary times, every little bit counts. Continue Reading…

Passive Investing with ETFs: Don’t throw the baby out with the bathwater

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Image courtesy Outcome/EpicTop10

By Noah Solomon

Special to Financial Independence Hub

Barbarians at the Gate

The dramatic increase in the popularity of ETFs [Exchange Traded Funds] represents one of the biggest changes in financial markets over the past three decades. The tremendous growth of ETFs has come largely at the expense of actively managed mutual funds. Investors are increasingly shunning the latter in favour of the former. I will attempt to shed some light on whether this shift is justified from a performance perspective.

The Trillion Dollar Question

The vast majority of ETF assets are passive vehicles. The underlying portfolios of these securities are constructed to mimic a given index, such as the S&P 500 or the TSX Composite. In contrast, most mutual funds are actively managed, whereby portfolio managers and securities analysts conduct extensive research to overweight stocks they believe will outperform while underweighting those they believe will be laggards to outperform their benchmarks. Relatedly, the costs of running actively managed funds are higher than those associated with passive ETFs. As such, the former tend to charge higher management fees.

Logically speaking, active managers’ higher fees should not necessarily be an issue. To the extent that they are capable of more than offsetting the negative impact of their higher fees with higher returns, their investors are better off on a net basis. As such, the trillion-dollar question is whether active managers’ skill is sufficient to justify their higher fees. If this is indeed the case, it follows that the shift away from active management into passive ETFs is ill-founded. Similarly, if active managers have failed to outperform, then the massive growth of ETF assets can be simply explained as investors following the money.

Active Management: The Author of its own Fate

By and large, active management has failed to live up to its promise. Specifically, most active managers have underperformed their benchmarks over both the medium and long-term.

S&P Global’s most recent SPIVA (S&P Index vs. Active) Canada Scorecard, which covers the period ending June 30, 2022, clearly illustrates that the vast majority of active managers have struggled to add value.

Percentage of Funds Underperforming their Benchmarks

As the above table illustrates, the inability of active management to add value over the past 10 years has been nothing short of pervasive. There is not one category in which the majority of active managers did not underperform their respective benchmarks. Importantly, this observation holds true over one-, three-, five-, and ten-year periods.

Outrunning a Bear

To be fair, active management is not alone in its underperformance. While the majority of managers have underperformed, any index-tracking ETF is 100% guaranteed to do so for the simple reason that their returns should be equal to those of their benchmarks less management fees, administrative costs, and trading commissions. Continue Reading…