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.
My latest MoneySense Retired Money column looks at one unexpected upside of inflation; the government’s indexing to inflation of tax brackets, retirement savings limits and OAS thresholds. You can find the full column by clicking on the link here: Inflation a scourge for retirees? Ottawa’s silver lining(s)
TFSA room rises to $7,000
Fans of the popular Tax-free Savings Account (TFSA) will experience this as early as Jan. 1, 2024, when the annual maximum contribution room rises to $7,000, up from $6,500 in 2023. As of January 2024, someone who has never before contributed to a TFSA now has cumulative contribution room of $95,000.
In November Kyle Prevost’s weekly Making Sense of the Markets column included an item titled Make inflation work for you. “We shouldn’t ignore or discount the more advantageous aspects of inflation, such as increased government benefits and more contribution room in our RRSPs and TFSAs.”
Prevost linked to a spreadsheet posted on X (formerly Twitter) by financial advisor Aaron Hector, posted late in October, after the CPI announcement that Ottawa’s official inflation indexing rate for 2024 would be a sizeable 4.7%. While below 2023’s 6.3% indexation rate, it’s well above 2022’s 2.4% and 2021’s 1%.
Also quoted in the MoneySense column is Matthew Ardrey, wealth advisor with Toronto-based TriDelta Financial. “One of the main benefits is paying less taxes.” Income tax brackets increase with inflation each year. For example, in 2021 the lowest tax bracket in Ontario ended at $45,142 of income. “Starting in 2024, this lowest tax bracket now ends at $51,446. This is a 14% increase over just a few years.” Continue Reading…
With people living longer than ever, retirement now makes up a significant portion of our lives. Could it be the perfect time to start a business? Here are the pros and cons of becoming an entrepreneur in your golden years.
Important Considerations
Entrepreneurship can enrich your life in immeasurable ways. However, before launching your own business, you should consider the following challenges.
Financial Risk
According to a 2018 study by Harvard Business Review, older entrepreneurs tend to run more successful companies. The businesses that financially thrive in their first five years are, on average, started by 45-year-old entrepreneurs, probably due to this cohort’s experience and willingness to take risks.
Although the odds may be in your favor, it’s still important to consider whether you have the capital to run a business — and to pick up the pieces if it doesn’t work out. Over 80% of small businesses fail because of cash flow problems. Decide how much money you’re willing to invest and potentially lose in your new venture.
Time Commitment
How do you envision retirement? If you’re considering entrepreneurship, you’re probably not the type of person who wants to lounge around sipping drinks on a beach.
If you do want a more relaxed retirement, however, you might find the time commitment required to run a business overwhelming. Entrepreneurs often put in long days to get their businesses up and running. Even after your company gets off the ground, you may find yourself having to work longer hours than you were expecting.
Of course, as a business owner, you also have a lot of sway over how big you want to let your venture get. If things start getting out of hand, you can always scale back.
Social Security Deductions
If you’re younger than full retirement age in the U.S. — which can range from 66-67, depending on when you were born — becoming an entrepreneur during retirement can affect your Social Security benefits.
Before you reach full retirement age, the IRS will deduct one dollar from your benefit payments for every two dollars you earn above $21,240. The year you reach full retirement age, the IRS will subtract one dollar from your Social Security benefits for every three dollars you earn above $56,520.
Consider whether these fees will impact your ability to retire comfortably. You might find you’re earning more money from your business than you would from Social Security anyway, so the deductions may be of little consequence.
Benefits of Entrepreneurship
Although it may be challenging, starting your own business will likely enrich your life. Here are some ways it could positively affect your retirement: Continue Reading…
As Canadians shop for last-minute gifts and search for deals, our Interac transaction data predicts that the busiest shopping day of the year will fall this year on December 22nd.
According to the transaction data, nearly 27.8 million purchase transactions are expected to take place next Friday (Dec. 22), representing roughly 2.7 million more transactions than the same date last year.
While Canadians are still planning to partake in gift giving, hosting, and more this holiday season, they’re feeling the constraints of today’s economic climate. Recent Interac survey* findings reveal that nearly four in ten Canadian shoppers (38 per cent) say they are feeling the pressure to spend during the holiday season even though their finances are tight.
Our survey revealed this phenomenon is felt as well among newcomers to Canada. Nearly seven in ten newcomers (69 per cent) say they feel more pressure to spend money around the holidays now that they live in Canada. What’s more, 71 per cent say their financial stress during the holidays has grown since moving to this country.
Amid rising prices, the holidays can be a stressful time of year. More than two thirds of Canadians (68 per cent) say they’re stressed about at least one aspect of spending during the holiday season and some sources of stress beat out others. Among those who are stressed, our survey shows us that buying gifts (77 per cent), spending money hosting and entertaining family and friends (41 per cent) and giving money to family members (34 per cent) are the top sources of stress.
For newcomers who are experiencing at least some holiday spending stress (82 per cent), spending money travelling to visit family and friends (48 per cent) is a prominent stressor.
As stressful as holiday spending can be, there are ways to make things a little easier:
Plan ahead
Try creating a gifting budget well in advance of any spending plans to help stay on track. Where possible, you can also look for a sale, consider a refurbished item or tap into purchases that make you and those around you feel good. You can also lean on Interac Debit to track your payments easily and take charge of your own money
Share the love, split the cost
When purchasing gifts for loved ones, organizing festive outings or hosting your family and friends, split the cost using Interac e-Transfer. Sharing the cost is one of the best ways to make sure you’re maximizing fun while staying in control of spending.
Embrace experiences
The holidays are a time to get together with friends and family and enjoy one another’s company. Consider sharing in an experience, rather than giving a physical gift. Interac research shows us that feel-good experiences are more likely to deliver happiness than material goods.
Money management is essential to help your savings thrive and benefit your [U.S.] retirement accounts. Discover movements to minimize taxable income.
By Dan Coconate
Special to Financial Independence Hub
Navigating the path to a financially secure retirement can often seem like navigating a labyrinth with no exit. With so many potential strategies and considerations, it’s easy to feel overwhelmed. However, efficient tax management is key to unlocking a financially comfortable retirement.
By adeptly managing your taxable income, particularly through individual retirement accounts (IRAs) [or in Canada, RRSPs], you can pave a clear path through the complexities of retirement planning, positioning yourself for a secure, worry-free future. Understanding the necessary movements to minimize taxable income in a retirement account will help you optimize and maximize your retirement savings.
Contribute to a Traditional IRA
Investing in a traditional IRA can be a smart move to effectively reduce your taxable income. Your contributions may be tax deductible, depending on your income and whether your work’s retirement plan also covers your spouse.
The more you contribute to your traditional IRA within the IRS contribution limits, the more you can reduce your taxable income for the year.
Consider a Roth IRA Conversion
A Roth IRA conversion is a strategic financial decision that can secure tax-free income during retirement. When you convert from a traditional IRA to a Roth IRA, you pay taxes on the converted amount in the year of conversion. [Roth IRAs are the U.S. equivalent of Canada’s Tax-Free Savings Accounts or TFSAs] Continue Reading…
There seems to be some confusion around what to expect for monetary policy in 2024. There’s a strong consensus that cuts are coming, but what is far less certain is how many – and why they are implemented.
Let’s assume that all cuts are of the traditional 25 basis point variety. Since the bank rate is adjusted every six weeks, there will be eight or nine opportunities to adjust it in 2024 in both Canada and the United States.
There are as many as three narratives making the rounds about what might be in store. Each narrative has a combination of rate cuts for monetary policy and corresponding outcomes for the broader economy. I attended a luncheon last week hosted by Franklin Templeton, where senior representatives outlined three possible scenarios with three different narratives accompanying them. A similar perspective was offered earlier this week by the Vanguard Group.
The three narratives are as follows:
#1 We have a soft landing.
The soft landing involves the economy remaining relatively robust, employment remaining strong, delinquency is modest, and rates are normalizing at a level close to but somewhat lower than where they are right now. Most people would suggest that scenario involves no more than two cuts in 2024.
#2 We have a routine recession.
To be more precise, the second narrative involves a garden-variety recession that lasts perhaps a couple of quarters that involves only modest reductions in economic activity over that time frame. Nonetheless, this scenario includes five or six rate cuts to stimulate the economy to the point where things can become stable going forward.
#3 We have a severe recession.
The final narrative involves massive cuts that are made out of desperation to keep the economy from plunging into an abyss. This scenario is not only the most drastic, but also seems to be the least likely. Nonetheless, if things get really ugly, seven, eight or nine rate cuts might be needed to stanch the bleeding. One or more of those cuts might even be for 50 basis points or more.
While I accept the logic associated with all three scenarios, I cannot help but notice that much of the financial services industry is conflating those scenarios in a way that strikes me as being intellectually inconsistent. The financial services industry has long been overly optimistic in the way it portrays outlooks and forecasts. It routinely engages in something I call bullshift, which is the tendency to shift your attention to make you feel bullish about the future.
There can be little doubt that stimulative cuts are positive developments for capital markets. What the industry seems disinclined to acknowledge is that cuts are often made out of desperation. People need to look no further then what happened throughout the entire industrialized world in the first quarter of 2020. Central banks in all major economies cut rates to essentially zero by the end of March of 2020 in the aftermath of the COVID pandemic. At the time it was seen as being both necessary and reasonable, given the severity and breadth of the challenge.
Reining in Inflation
As we all know, inflation became the primary public policy challenge by the beginning of 2022. Central banks needed to take what looked like draconian measures to rein in inflation, which had risen to generational highs and needed to be brought under control lest a sustained period of inflation like what was experienced in the 1970s were to recur. By the end of 2023, inflation is still higher than the high end of the range that is deemed to be acceptable for most central banks.
There is still work to be done, yet many pundits seem eager to take a victory lap, as if a reduction in inflation is somehow akin to bringing inflation under control. Much has been done over the past 20 months, but more work is needed. The admonition that rates will have to stay higher for longer is a very real constraint on economic activity and long-term growth prospects. We head into the new year on the horns of a dilemma. Bond market watchers are now suggesting that rate cuts will come no later than Q2 2024, whereas central bankers are insisting that those cuts will be modest and will only begin in Q3 of 2024 at any rate. They cannot both be right.
It gets worse. Most commentators have taken to suggesting that we will have both a soft landing and five or six rate cuts in the New Year. That strikes me as being fantastic – not to mention intellectually inconsistent. If we have a soft landing, it will likely entail the economy being remarkably resilient as it has been throughout 2023. There is absolutely no reason to have a parade of rate cuts in such an environment.
Stated differently, the financial services industry needs to pick a lane. If it believes we will have a soft landing in 2024, it should also be anticipating a very small number of very modest cuts in the second half of the year. Conversely, if it believes a recession is on the horizon, it should be forecasting multiple cuts only after it is clear a recession is underway. These would likely be needed to stimulate the economy in an environment where inflation will likely be modest as a direct result of economic weakness.
To hear the industry tell it, the economy will remain strong, but we’ll get multiple rate cuts anyway. You can’t have it both ways. I call Bullshift.
John De Goey is a Portfolio Manager with Designed Securities Ltd. (DSL). DSL does not guarantee the accuracy or completeness of the information contained herein, nor does DSL assume any liability for any loss that may result from the reliance by any person upon any such information or opinions.
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