Reviews

We review books that deal with everything from financial independence topics to politics, and anything in between. We may sometimes stray into films and music if there is a “Findependence” angle.

Book Review: Retirement Income for Life (3rd edition)

Posted By |
ECW Press

By Michael J. Wiener

Special to Financial Independence Hub

Actuary Frederick Vettese has a third edition of his excellent book, Retirement Income for Life: Getting More Without Saving More.

He explains methods of making your retirement savings produce more income over your entire retirement.

These methods include controlling investment fees, optimizing the timing of starting CPP and OAS pensions, annuities, Vettese’s free Personal Enhanced Retirement Calculator (PERC), and using reverse mortgages as a backstop if savings run out.

This third edition adds new material about how to deal with higher inflation, CPP expansion, new investment products as potential replacements for annuities, and improvements to Vettese’s retirement calculator PERC.  Rather than repeat material from my review of the second edition, I will focus on specific areas that drew my attention.

Inflation

“We can no longer take low inflation for granted.”  “An annuity does nothing to lessen inflation risk, which should be a greater worry than it was before the pandemic.”  “We could have practically ignored inflation risk before COVID hit but certainly not now.”

It’s true that inflation is a potential concern for the future, but it’s wrong to say that it was okay to ignore inflation in the past.  Not considering the possibility of inflation rising was a mistake many people made in the past.  We were lulled by many years of low inflation into being unprepared for its rise starting in 2021, just as many years of safety in bonds left us unprepared for the battering of long-term bonds when interest rates rose sharply.

Inflation risk is always present, and financial planners who have treated it as a fixed constant were making a mistake before inflation rose, just as they would be wrong to do so now.  This underappreciation of inflation risk is what causes people to say that standard long-term bonds (with no inflation protection) are safe to hold to maturity.  In fact, they are risky because of inflation uncertainty.

People’s future spending obligations are mostly linked to real prices that rise with inflation, not fixed nominal amounts.  The uncertainty in future inflation should be respected just as we respect uncertainty in stock market returns.

Maximizing retirement income

Vettese does a good job of explaining that things like CPP, OAS, and annuities provide more income now because they offer your estate little or nothing after you die.  To make full use of this book, you need to understand this fact, and “you have to commit to the idea that your main objectives are to maximize your retirement income and ensure it lasts a lifetime.”

Spending shocks

Retirees should “set aside somewhere between 3 percent and 5 percent of their spendable income each year, specifically to deal with spending shocks.”  “This reserve might not totally cover all the shocks that people … might encounter, but it will definitely soften their impact.”

It’s easy to plug a smooth future spending pattern into a spreadsheet, but real life is much messier than this.  I’ve seen cases of retirees choosing to spend some safe percentage from their savings while also expecting to be able to dip in anytime something big and unplanned for comes up.  This is a formula for running out of retirement savings early.

Retirement income targets

In this third edition, Vettese assumes that retiree spending will rise with inflation until age 70, then rise one percentage point below inflation during one’s 70s, two percentage points below inflation from age 80 to 84, then 1.8% below at 85, 1.6% below at 86, 1.4% below at 87, 1.2% below at 88, 1% below at 89, and rising with inflation again thereafter.

This plan is based on several academic studies of how retirees spend.  I don’t doubt the results from these studies, but I do have a problem with basing my plan exclusively on the average of what other people do.  The average Canadian smokes two cigarettes a day.  Does that mean I should too?

The academic studies mix together results from retirees who spent sensibly with those who overspent early and were forced to cut back.  I don’t want to base my retirement plan partially on the actions of retirees who made poor choices.  Similarly, I prefer to base my smoking behaviour on those Canadians who don’t smoke. Continue Reading…

Retired Money: Taking RetireMint for a test spin

Posted By |

My latest MoneySense Retired Money column has just been published: you can find the full column by clicking on the highlighted headline here: What is RetireMint? The Canadian online platform shows retirement planning isn’t just about finances.

We provided a sneak preview of RetireMint late in August, which you can read here: Retirement needs a new definition. That was provided by RetireMint founder Ryan Donovan.

The MoneySense column goes into more depth, passing on my initial experiences using the program, as well as highlighting a few social media comments on the product and some user experiences provided by RetireMint.

RetireMint (with a capital M, followed by a small-case letter I rather than an e) is a Canadian retirement tool that just might affect how you plan for Retirement. There’s not a lot of risk as you can try it for free. One thing I liked once I gave it a spin is that it isn’t just another retirement app that tells you how much money you need to retire. It spends as much or more time on the softer aspects of Retirement in Canada: what you’re going to do with all that leisure time, travelling, part-time work, keeping your social networks intact and so on.

In that respect, the ‘beyond financial’ aspects of RetireMint remind me of a book I once co-authored with ex corporate banker Mike Drak: Victory Lap Retirement, or indeed my own financial novel Findependence Day. As I often used to explain, once you have enough money and reach your Financial Independence Day (Findependence), everything that happens thereafter can be characterized as your Victory Lap.

As Donovan puts it, this wider definition must “break free from the tethered association of solely financial planning.”

Donovan says roughly 8,000 Canadians will reach retirement every single week over the next 15 years. And yet more than 60% of them do not know their retirement date one year in advance, and more than a third will delay their retirement because they don’t have a plan in place.

Retirement not calendar date or amount in your bank account

Donovan says  “Retirement has become so synonymous with financial planning, and so associated with ‘old age,’ that they’re practically inseparable. Yet, in reality, retirement is a stage of life, not a date on the calendar, an amount in your bank account, and is certainly not a death sentence.” He doesn’t argue that financial planning is the keystone of retirement preparation, as “you won’t even be able to flirt with the idea of retiring without it.” But it’s much broader in scope than that. As he puts it, this wider definition must “break free from the tethered association of solely financial planning.” Continue Reading…

Retirement needs a new Definition

Posted By |

By Ryan Donovan

Special to Financial Independence Hub

Before we dive into this article, let’s play a quick game: a word association game. I’ll bet you a crisp $5 bill, or a shiny loonie for the more risk averse out there, that with three chances, I can guess the first word that pops into your head. Now, it has to be the first word, so no cheating. Ready, set… the word is ‘Retirement.’

If you said ‘Retirement Income,’ ‘Retirement Savings’ or ‘Retirement Home,’ I’ll come to collect my winnings. If you said anything like ‘Travel,’ ‘Hobbies’ or ‘Exploration,  then good on you; I’ll send along an IOU.

The reason I felt so confident taking that bet is because when I tell people that I work in retirement planning, 99 out of 100 times, they assume that I work in financial services. The other time, people ask about senior living. Retirement has become so synonymous with financial planning, and so associated with ‘old age,’ that they’re practically inseparable. Yet, in reality, retirement is a stage of life, not a date on the calendar, an amount in your bank account, and is certainly not a death sentence.

One of our primary goals when creating our startup, RetireMint, was to reframe the national conversation around “what it means to retire,” which, at its core, requires redefining how Canadians prepare for retirement.

Now, I am not discounting the importance and necessity of a sound financial plan. After all, you are reading this in Financial Independence Hub … Yes, financial planning is the keystone of retirement preparation, as you won’t even be able to flirt with the idea of retiring without it. Yet, retirement planning must adopt a much wider definition and break free from the tethered association of solely financial planning.

Retirement should really be a time to enjoy the fruits of your hard labour:  a chapter that will hopefully span decades, fuelled by leisure, exploration, discovery and meaning.

Answering the ‘what, where and how’ of everything you want to see, do and accomplish in this next chapter requires conscious preparation in areas far beyond spreadsheets and bank statements. 

The industry paradigm is that you have about 8,000 days in retirement, or around 22 years. In each of those years, you will have more than 2,000 hours of new-found free time that would have been spent working throughout the majority of your life. Filling these thousands of hours with meaningful and purposeful activity is much more easily said than done.

The common approach to retirement planning (yes, we are now using the wider definition) has been to ‘punt the ball down the field’ and ‘cross that bridge when you get to it.’ Yet, we see time and time again that those who leave their lifestyle planning to their first day of retirement are the ones who have the hardest time transitioning into this next chapter.

The people who say, “I’ll never get tired of sipping Piña Coladas on a beach,” face the same fate as the ones who say “I can’t wait to golf every day.” While these may be dream activities for retirees, they ultimately see diminishing returns if they’re your only activities, because humans are funny creatures:  we need meaning and variation.

Despite its innocent demeanour, retirement has some dark, inconvenient truths: 

  • Ages 50-64, 65-84 and 85+ have the three highest suicide rates in North America, and in the last five years, we’ve seen a 38% increase in suicides among Baby Boomers.
  • Canadians over 65 have a divorce rate three times the national average.
  • Over 25% of older Canadians are socially isolated, which causes a 50% increased risk of dementia.
  • And, 77% of older Canadians live with at least two chronic illnesses or conditions.

It’s statistics like these that starkly highlight the importance of planning for your lifestyle, wellness and purpose, as well as the need for trusted resources to help with this planning. This was the a-ha moment that sparked our urgency to develop RetireMint.

RetireMint stemmed from empirical evidence showing that once people’s finances are at least on the right track, their primary concerns and conversations with their financial advisors shift far beyond the scope of their meetings. “What am I going to do with the grandkids?,” “Where am I going to travel?” “What happens when I lose my work insurance coverage?,” are just a few of the plethora of questions that popped up time and time again.

It’s fantastic that Canadians have this level of trust and comfort with their advisors, but the truth is that financial advisors are not equipped to answer all of these broader retirement inquiries, and they’ll be the first to admit it. It’s clear that this undue burden falls on the shoulders of financial professionals, but if not for them, who is going to provide the answers? Continue Reading…

Gen Z driving surge in mobile Debit spending

Posted By |
Image courtesy Interac Corp.

An Interac survey being released today finds that more than two thirds (69%) of Canada’s Gen Z generation [defined as Canadians aged 18 to 27] have embraced the mobile wallet, while almost as many (63%) would rather leave their old-fashioned physical wallets at home for short trips. Gen Z’s Interac contactless mobile purchases also rose 27% in the first half of 2024, compared to the same period a year earlier.

Gen Z appears to be more enthusiastic than their counterparts in older cohorts: 60% of Millennials [aged 28-43]  embraced mobile wallets, compared to 44% of Gen Xers [aged 44-59] and just 27% of Baby Boomers [aged 60-78.] Only 10% of the older Silent Generation [age 79 or older] did so.

A whopping 63% of Gen Z mobile wallet users have loaded their Interac debit card on their smartphones, and 31% plan to set debit as their default method of payment. For 63% of them, the reason is perceived faster payment times compared to physical card payments.

 “Choosing your default payment method may feel like a small step, but it can play a big role in shaping Canadians’ ongoing spending habits,” said Glenn Wolff, Group Head and Chief Client Officer, Interac in a press release. “When consumers tap to pay with their phones, the decision to select a card from the digital wallet is easy to miss. Canadians could end up unintentionally using a default payment method that prompts them to take on more debt. This differs from traditional physical wallets where the consumer had to select the card they wanted to use each time.”

Majority want to be smarter with money

62% of Gen Z want to be “more mindful when spending” with 57% saying they want the option to use debit when paying in store or online; 79% of them say the cost of living is too expensive and 59% feel the need to be smarter with their money.

Interact says this generation’s desire to control overspending is heightened by back-to-school season: last year, family clothing stores saw almost twice as many Interac Debit mobile purchases in September and October compared to earlier that year in January and February. 54% of Gen Zs see the need to develop new habits to stay in control over their finances, while 56% are setting a timeline for this September to introduce new habits. Continue Reading…

Top Canadian Dividend ETFs

Posted By |

By Mark Seed, myownadvisor

Special to Financial Independence Hub 

What makes a great Exchange Traded Fund (ETF)?

What makes a great Canadian dividend Exchange Traded Fund? 

What are the top Canadian dividend ETFs to own?

You’ve come to the right site and the right post for these answers and my thoughts. Let’s go in this updated post!

Top Canadian Dividend ETFs – what is an ETF?

An ETF (Exchange Traded Fund) is a diverse collection of assets (like a mutual fund) that trades on an exchange (like a stock does).

This makes an ETF a marketable security = it has trading capability. Since you and buy and sell ETFs on an exchange during the day, ETF prices can change throughout the day as they are bought and sold.

ETFs may typically have lower fees than mutual funds (although not always), which can make them an attractive alternative to mutual funds.

Based on my personal experiences approaching 20 years as My Own Advisor I find ETFs very easy to buy using a discount brokerage and ETFs can provide a low-cost way to diversify your portfolio.

Although you don’t need to buy equity ETFs, it is my personal belief that you’re FAR better off owning more equities than bonds over long investing periods.

Simply put: learn to live with stocks for wealth-building. I’m trying to do the same!

What goes into a good ETF? What should you consider?

Before we get into my favourite Canadian dividend ETFs, here are some elements to consider as you select your ETFs for your portfolio:

1. Style – ETFs can track an index, follow an industry sector, be rules-based like some smart-beta funds are, or be much more. For the most part, I prefer plain-vanilla, broad market equity indexed ETFs. While I used to own a few dividend ETFs I no longer invest this way. I’ll link to that post later on. That said, Dividend ETFs can provide income to you as an investor; tangible money to use or reinvest as you please.

2. Fees – Hopefully by now from my site you know that high money management fees kill portfolio values over time. I try and keep my management expense ratio (MER) (the fee paid to the fund’s manager, as well as taxes and other costs) low (for as long as possible). Dividend ETFs often come with higher fees due to portfolio turnover. Something to think about.

Further Reading: Learn about MERs, TERs and more about ETF fees here.

3. Tracking error – In short, tracking error is the difference between the performance of the fund (the ETF) and its benchmark (what it tracks). I would advise you to look at the fund’s prospectus before you buy it and strive to own ETFs with low tracking errors.

4. Diversification – Along the same lines ‘Style’, you should be very mindful of the assets within an ETF before you buy it. ETFs are not created equal.

If you’re just starting out your investing journey, you can learn more about ETFs here.

Top Canadian ETFs vs. Dividend ETFs

When in doubt about buying any individual stock, I’ve been a huge fan of Canadian broad market ETFs like XIU, XIC, ZCN, VCN, along with others over the years.

I like XIU in particular.

XIU holds the largest 60 stocks in Canada and most of those stocks held in XIU pay dividends, although not all of them. Paying a dividend comes down to company policy. There are certainly many ways shareholder value is created.

While XIU has nowhere near the number of holdings that VCN has, XIU has delivered stellar long-term returns better than most.

I referenced this above: diversification can be a great ally as a risk mitigation tactic against stock picking but that doesn’t mean owning an ETF is bulletproof. Indexed ETFs hold all the stock studs and duds. Dividend ETFs might do the same. Dividend ETFs may limit your investing universe and your returns compared to other funds. Things to think about.

5. Tax efficiency – If you never intend to max out your TFSAs, RRSPs, kids’ RESPs, or other registered accounts then this is a non-issue for you. For some investors, however, who invest outside registered accounts (such as the aforementioned RRSPs, RRIFs, TFSAs, RESPs, LIRAs) like I do, then you need to consider the tax efficiency of your ETFs.

XIU in particular is very tax efficient. There are other ETFs to consider for tax efficiency as well.

In taxable accounts, I would advise you to look at the fund’s prospectus before you buy it and strive to own ETFs for your taxable account that are tax efficient; for the dividend tax credit or for capital gains.

Further Reading: How to invest for tax efficiency investing in taxable accounts.

6. History – While past performance is never indicative of future results unfortunately ETF/fund history is all we have since nobody can predict the financial future with any accuracy. Consider the track record of the ETF when it comes to returns.

What are my Top Canadian Dividend ETFs?

All data and information was updated in late-July 2024 and is approximate (for total returns) at the time of this post.

ETF Symbol MER # of holdings Total 5-Year Return Total 10-Year Return
VDY 0.22% 56 61% 100%
ZDV 0.39% 51 46% 67%
XEI 0.22% 75 50% 70%
XIU 0.18% 60 55% 103%
Comparison only: XAW 0.20% 8,700+ stocks 71% N/A – 2015 inception date

I’ve added global ETF XAW for comparison purposes only to the other four (4) Canadian dividend ETFs.  (Dislosure: I own XAW ETF and will continue to do so.)

Why I don’t own any Top Canadian Dividend ETFs…

Readers of this site will know I don’t own any Canadian dividend ETFs. I’ll share those reasons:

While the Vanguard Canadian High Dividend Yield Index ETF (VDY) is a good consideration, I own all the top-10 VDY stocks outright / on my own at the time of this post and have done so for 10+ years in many cases. So, no point in duplicating things …  Also, VDY is heavy on Canadian banks so there is sector concentration risk there I could avoid by owning some individual Canadian stocks. I can also decide to own some lower-yielding and higher=growth stocks inside my taxable account. Continue Reading…