Once you achieve Financial Independence, you may choose to leave salaried employment but with decades of vibrant life ahead, it’s too soon to do nothing. The new stage of life between traditional employment and Full Retirement we call Victory Lap, or Victory Lap Retirement (also the title of a new book to be published in August 2016. You can pre-order now at VictoryLapRetirement.com). You may choose to start a business, go back to school or launch an Encore Act or Legacy Career. Perhaps you become a free agent, consultant, freelance writer or to change careers and re-enter the corporate world or government.
Recently, Braden Warwick at PWL Capital created an excellent CPP calculator that we can all use. One of the numbers this calculator reports is the IRR (Internal Rate of Return) you’ll get between your CPP contributions and the CPP pension you’ll collect. Some financial advisors (but not Braden) decide it makes sense for their clients to take CPP as early as possible (age 60), and invest the proceeds. Their reasoning is that they believe they can earn a higher return. Here I explain why this logic compares the wrong returns.
The return you’ll get on your CPP contributions depends on the contributions you and your employer have made and the benefits you’ll get. These amounts depend on many factors about your life as well as some assumptions about the future. Typically, the return people get on CPP is between inflation+2% and inflation+4%. (However, it can go higher if you took time off work with a disability or to raise your children. It also goes higher if you ignore the CPP contributions your employer made on your behalf, but I think this makes a false comparison.)
If we examine people’s lifetime investment record, not many beat inflation by as much as CPP does. However, some do. And many more think they will in the future. In particular, many financial advisors believe they can do better for their clients.
But what are we comparing here? These advisors are imagining a world where CPP doesn’t exist. Instead of making CPP contributions, their clients invest this money with the advisor. In this fictitious world, the advisor may or may not outperform CPP. However, this isn’t the world we live in. CPP is mandatory for those earning a wage.
The choice people have to make is at what age they’ll start collecting their CPP pension. The CPP rules permit starting anywhere from age 60 to 70. The longer you wait, the higher the monthly payments get. Consider an example of twins who are now 70. The first started CPP a decade ago at 60 and the payments have risen with inflation to be $850 per month now. The other waited and has just started getting $2000 per month. The benefit of waiting is substantial if you have enough savings to bridge the gap between retiring and collecting CPP, and don’t have severely compromised health.
Those with enough savings to bridge a gap of a few years have a choice to make. Should they take CPP immediately upon retiring, or should they spend their savings for a while in return for larger future CPP payments? Some advisors will say to take CPP right away and invest the money, but this is motivated reasoning. The more money we invest with advisors, the more they make. Continue Reading…
A Retirement Income Solution: How Milestones Retirement Insights helped one Alberta Couple Save $16,500 annually
By Ian Moyer
Special to Financial Independence Hub
Retirement is meant to be a time of relaxation and enjoyment, but for many Canadians, managing retirement income efficiently can be a major challenge. This was the case for a couple in Alberta, aged 70 and retired for five years. They were concerned about depleting their savings too quickly and needed a tax-efficient withdrawal strategy to better sustain their retirement lifestyle.
The Problem: Overspending Without a Plan
The couple had a mix of financial assets, including:
RRSPs: $400,000 remaining
TFSAs: $75,000 remaining
Joint Non-Registered Savings: $50,000 remaining
They were spending $80,000 a year without a clear withdrawal strategy, leading to inefficiencies and over-taxation. This lack of guidance was costing them $16,500 annually, money that could have been used to enhance their lifestyle.
The Solution: A Tailored Withdrawal Strategy
Using Milestones Retirement Insights, they were able to restructure their withdrawals to maximize after-tax income while preserving their savings for the long term. Here’s how:
Prioritizing TFSA Withdrawals: We tapped into their tax-free savings account first, allowing them to access funds without triggering additional taxes.
Splitting RRSP Withdrawals Over Time: By drawing from their RRSP in smaller increments, we kept their income within lower tax brackets.
Non-Registered Savings for Gaps: Joint savings were used strategically to fill gaps, minimizing tax exposure while ensuring consistent income.
Optimal RRIF Conversion: We structured their RRSP to RRIF transition to further reduce taxes and take advantage of pension income splitting.
Key Consideration: RRSP to RRIF Conversion
When you reach retirement, a registered retirement savings plan (RRSP) has the option of converting to a registered retirement income fund (RRIF). To provide a sustainable retirement income and minimize your income and estate taxes, we’ve calculated an average annual RRIF payment of $28,112 starting at age 70. At an assumed rate of return of 5%, this investment will deplete to $0 at age 88. Continue Reading…
When the Canadian asset allocation ETFs were introduced several years ago, the investment community hailed them as “game changers.” That is, the final nail in the coffin for high-fee / low-performance Canadian mutual funds.
The asset allocation ETFs are well-diversifed, managed global portfolios available at 5 risk levels. The fees represent about a 90%-off sale compared to the typical mutual fund. The fees range from 0.17% to 0.25%. It’s a no-brainer for most Canadians. You can open an account with a discount brokerage, enter one ticker symbol (XEQT for example), enter an amount, press Buy and own thousands of companies around the globe. Are these the best funds available in Canada? Yes, that’s a rhetorical question.
Cut The Crap Investing is the only blog that tracks the performance of the leading Asset Allocation ETF providers. I also sort them by risk level. For example, you’ll see the performance comparison between the balanced portfolios from Vanguard and BlackRock and the rest of the AA gang. You’ll also see the surprising outlier “winner” that includes modest amounts of bitcoin in its offerings.
Check out the ultimate Canadian asset allocation ETF page. Here’s a teaser: the balanced growth models. They range from 80% stocks / 20% bonds to 90% stocks / 10% bonds. The returns listed are average annual.
Build your own portfolio
While the asset allocation ETFs are the easiest, hands-off way to go, you can certainly build your own ETF portfolio. You’ll save modestly on fees, and you will be allowed some flexibility on how you would like to shape the portfolio. I’ve offered examples of core portfolio models.
Here’s the updated (to the end of 2024) total returns for the core Canadian ETF Portfolios on Cut The Crap Investing. The build-your-own models have outperformed the asset allocation ETFs, in modest fashion. Continue Reading…
Navigating the unpredictable waters of dividend stocks requires a steady hand and a well-informed strategy. To help you master the art of managing volatility and work toward Financial Independence, seven seasoned business leaders share their invaluable advice. From adopting a long-term perspective to assessing the fundamentals of dividend stocks, these insights are grounded in real-world experience. Whether you’re a seasoned investor or just starting out, this article delivers practical strategies from top professionals to strengthen your investment approach and achieve sustained success.
Focus on Long-Term Perspective
Track Dividend Payout Ratios
Maintain a Cash Cushion
Diversify Across Multiple Sectors
Stay the Course
Reinvest Dividends Automatically
Check Dividend Stock Fundamentals
During periods of volatility, I focus on maintaining a long-term perspective with dividend stocks and ensuring that the underlying companies have strong fundamentals. I recommend prioritizing dividend growth over just high yields, as companies with a history of increasing dividends, even in turbulent times, tend to be more resilient. One specific piece of advice I offer is to avoid panic selling when the market dips. Instead, consider reinvesting dividends or using the volatility as an opportunity to acquire shares at a lower price, provided the company’s outlook remains strong. This strategy allows you to take advantage of market fluctuations while staying focused on the long-term growth potential of the dividend stream. — Peter Reagan, Financial Market Strategist, Birch Gold Group
Track Dividend Payout Ratios
I discovered that tracking dividend payout ratios has been crucial during market swings: I specifically look for companies maintaining ratios below 75% even in tough times. Just last quarter, when the market got shaky, I held onto Procter & Gamble despite price drops because their steady 60% payout ratio showed they could sustain dividends through the volatility. — Adam Garcia, Founder, The Stock Dork
Maintain a Cash Cushion
As a financial expert, I’ve learned that the best defense during volatile periods is maintaining a cash cushion equal to about 2-3 years of living expenses alongside my dividend stocks. Last month, this strategy helped me stay calm when one of my core holdings dropped 15%: instead of panic-selling, I actually bought more shares at a discount because I knew my basic needs were covered. — Jonathan Gerber, President, RVW Wealth
Diversify across Multiple Sectors
As a financial advisor specializing in income investments, I understand that periods of market volatility can be unsettling: especially for dividend investors who rely on steady income. However, my approach is centered on maintaining a long-term perspective and staying disciplined with my strategy. Here’s how I handle volatility in my dividend stock portfolio:
In volatile markets, it’s easy to get caught up in short-term price swings. However, I prioritize the fundamentals of the companies I invest in. Are they consistently generating revenue and profits? Are they able to maintain their dividend payouts, even if the stock price fluctuates? Companies with a history of stable earnings and reliable dividend payments are generally better equipped to withstand market downturns.
During times of volatility, I make sure my dividend stocks are well-diversified across multiple sectors. Some sectors—such as utilities and consumer staples—are typically more stable during economic downturns. Diversification helps mitigate the risk that a downturn in one sector will significantly impact my overall income stream. Continue Reading…
Just as I thought it was going alright I found out I’m wrong when I thought I was right It’s always the same, it’s just a shame, that’s all I could say day and you’d say night Tell me it’s black when I know that it’s white Always the same, it’s just a shame, and that’s all
— That’s All, by Genesis
Shutterstock/Outcome
By Noah Solomon
Special to Financial Independence Hub
As we enter 2025, the general consensus is that stocks are set to deliver another year of decent returns. Most strategists contend that we will be in a goldilocks environment characterized by positive readings on economic growth, profits, inflation, and rates.
This sentiment is particularly evident in the current valuation level of the S&P 500 Index. Regardless of which metric one uses, the index is extremely elevated relative to its historical range. Interestingly, U.S. stocks are an outlier when compared to other major markets (including Canada), which are trading at valuations that are in line with historical averages.
The Best of Times and the Worst of Times
Unfortunately, the history books are quite clear about what can happen to markets that attain peak valuations. The four largest debacles in the history of modern markets were all preceded by peak valuations.
In 1929, the U.S stock market traded at the highest PE multiple in its history up to that time. This lofty multiple presaged the worst 10 years in the history of the U.S. stock market.
In 1989, the Japanese stock market was trading at 65 times earnings. The aggregate value of Japanese stocks exceeded that of U.S. stocks despite the fact that the U.S. economy was three times the size of its Japanese counterpart. Soon after, things went from sensational to miserable, with Japanese stocks suffering a particularly prolonged and steep decline.
In early 2000, the S&P 500 Index, aided and abetted by a tremendous bubble in technology, media, and telecom stocks, reached the highest multiple in its history. Not long thereafter, the index suffered a peak trough decline of roughly 50% over the next few years.
In early 2008, the S&P 500 stood at its highest valuation in history, with the exception of the multiples that preceded the Great Depression and the tech wreck. The ensuing debacle brought the global economy to the brink of collapse and required an unprecedented amount of monetary stimulus and government bailouts.
The bottom line is that markets have historically been a very poor predictor of the future. At times when asset prices were most convinced of heaven, they could not have been more wrong. The loftiest valuations have not merely been followed by tough times, but by the worst of times. Time and gain, peak multiples have foreshadowed the worst results, which brings to mind one of my favorite quotes from John Kenneth Galbraith:
“There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.”
The Common Feature
There is one common feature to these sorrowful tales of peak multiples which ended in tears. In each case, peak valuations followed a prolonged period of near-perfect environments characterized by strong economic and profit growth unmarred by any obvious clouds on the horizon.
The years preceding the Great Depression entailed an economy that had not merely been growing but booming.
Prior to 1989, the Japanese economy enjoyed decades of torrid growth, prompting some economists and strategists to predict that it would eventually eclipse the U.S. economy.
In early 2008, the U.S. economy was being propelled by a real estate bubble underpinned by an “it can only go up” mindset and a related explosion in lax credit and lending standards.
The S&P 500 Index currently stands at its highest multiple in the postwar era, save for the late 1990s tech bubble. Optimists justify this development by pointing to what they believe to be a rosy future with respect to the U.S. economy, earnings, inflation, and interest rates. Sound familiar?
I’m not saying that highly elevated multiples necessarily foreshadow imminent doom. However, when juxtaposing the current valuation of the S&P 500 with historical experience, one should consider becoming more defensive. As famous philosopher George Santayana stated, “Those who cannot remember the past are condemned to repeat it.”
Driving without Airbags or Seatbelts
The underlying cause of the aforementioned market crashes is not merely economies and profits that were contracting, but that asset prices were priced for exactly the opposite. This left markets woefully exposed when the proverbial music stopped.
Think of market risk like you think about driving a car. If you are driving a car with airbags and you are wearing a seatbelt, then chances are you will emerge with minimal or no injuries if you get into an accident. However, if your car has no airbags and you are not wearing a seatbelt, then the chances that you will sustain serious injuries (or worse) are materially higher. Similarly, when multiples are at or below average levels and profits hit a rough patch, the resulting carnage in asset prices tends to be muted. Conversely, if any financial bumps in the road occur when valuations lie significantly higher than historical averages, then the ensuing losses will be much more severe. Also, even if you manage to complete your journey without any mishaps, it’s not clear that having no airbags and not wearing a seatbelt made your ride much more enjoyable or comfortable than if this had not been the case. Continue Reading…
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