Victory Lap

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.

Q&A with Kornel Szrejber: Addressing major gaps in your Retirement Plan

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A good majority of my clients reach out to me looking for retirement planning advice. They want to know if they have enough assets to retire comfortably, how much longer they should work, what type of investment strategy makes sense in retirement, when to take CPP and OAS, and how to set up tax efficient withdrawals from their savings and investments.

My conversation with Kornel Szrejber for the Canadian Financial Summit this year was about addressing the major gaps in your retirement plan. Below is a summary of what we discussed – but you can check out the full interview, along with the rest of the line-up, at the Canadian Financial Summit website.

Investing is just one part of the Plan

Kornel Szrejber: A common mistake that I see Canadians make is focusing only on what investments to buy, as opposed to seeing the investments that they choose as just one piece of financial planning and their financial wellbeing. Can you talk about what trouble we as Canadians can get into, if we are only focusing on what investments to buy as opposed to looking at the whole picture?

Robb Engen: It is common for Canadians to focus on their investments rather than looking at all aspects of their finances. In fact, most of the clients that come to me want to talk about investing.Yes, investing is important. Setting up a investment strategy that matches your risk tolerance and time horizon, and more importantly one that you can stick with for the long term is crucial to your overall retirement plan. But when you step back and look at the bigger picture, you’ll see that financial planning is about so much more than investing.

It’s a comprehensive look at your spending. It’s about making sure you and your spouse are on the same page – understanding your values around money and aligning that with your spending habits. It’s about disaster proofing your life by having appropriate life and disability insurance, a will, and an emergency fund. It’s about mapping out both your short and long term goals so that you can prioritize your savings into the appropriate vehicle(s).

Attributes of an Early Retiree

Kornel Szrejber (Twitter.com)

Kornel: You’ve worked with many individuals and families here in Canada. Are there any patterns that you’ve noticed between those that are struggling financially vs those that are on-track to retire early? (i.e. actionable things that people can do to be one of those that are on-track). 

Robb: The people who seem to have it together tend to have a reasonably low cost of living and can max out at least their tax-sheltered accounts (RRSP/TFSA) each year. They have clearly defined short- and long-term goals that keep them focused on saving. Many have a high income, but that is not a prerequisite to a good financial future. They also automate many of their financial decisions, so they pay themselves first through automatic contributions, they set alerts to pay their credit card balance in full each month, and their investments automatically rebalance (through a robo-advisor or an asset allocation ETF).

Conversely, those who are struggling usually have some high interest debt and have trouble getting through the month without dipping into credit. They may or may not have a good handle on their expenses, but there’s just no wiggle room or margin for error. That means, when something comes up, and it always does, any progress made goes out the window and they can’t seem to get ahead. They treat credit card debt like a way of life and not like the ‘hair-on-fire’ emergency that it is. And, they typically don’t know exactly where their money is going from month to month.

Another major reason why so many people struggle financially is because their list of wants exceeds their ability to pay for them. I love the line from Paula Pant, author of the Afford Anything blog, that goes:

“You can afford anything, you just can’t afford everything.”

I think this is so true when it comes to our personal finances and all of those short-term goals and aspirations that we all have. Money is finite and we simply can’t do everything we want – at least not all at once. So, I think the people who are on track to retire early have a good sense of where their money goes and they’re able to prioritize saving for retirement while juggling all of their other short-term needs and wants.

Not enough attention paid to these Retirement Planning decisions

Robb Engen

Kornel: Are there any important financial decisions that you find Canadians tend to oversimplify and make quick decisions about, when in reality they actually need thorough analysis and have a very significant impact?

Robb: Usually anything involving a bit of math. One that comes to mind is when you leave a job and whether to keep your pension or take the commuted value and invest it in a LIRA. This is not a decision where you just want to take the advice of a friend or colleague. It requires some thoughtful analysis.

This is actually a decision I’ve had to make for myself when I left my day job earlier this year, and even I sought an outside expert opinion help me decide. Another critical decision is when to take CPP. I’ve heard so many myths about CPP and that you should take it as soon as possible (i.e. at 60), but in many cases the most optimal age to take CPP is to defer it to age 70. This enhances your benefit by 42% and provides longevity insurance.

Finally, there’s the question of whether to contribute to an RRSP or TFSA. If you’re below a certain tax bracket it probably makes more sense to invest in your TFSA rather than an RRSP, and vice versa.

Impactful financial decisions

Kornel: What would you say are some of the most impactful financial decisions that we can make to set ourselves up for success? And which ones can we do ourselves vs having to seek out the help of a fee-only financial planner like yourself?

Robb: Starting to invest at a young age and, more importantly, setting up a system to make the contributions automatic. You can start with as little as $25 or $50 a month. It’s not about the starting amount, but about building the habit of saving over time. Be a savvy financial consumer and understand where incentives may be misaligned, or when the seller may not have your best interests at heart. That’s the essence of financial literacy.

Spend less than you earn, obviously, and try to avoid debt where possible. Don’t buy more house than you can afford, and if you do buy make sure you stay there for 10 years. Continue Reading…

When do most people start taking CPP benefits?

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Recently I previewed Fred Vettese’s completely updated and revised edition of Retirement Income For Life. I’m giving away an extra copy of the book and asked readers to enter to win by sharing when they took (or plan to take) CPP. The results were interesting.

The vast majority of responses were in favour of deferring CPP to age 70 (41%). One quarter of responses favoured taking CPP at age 60. And, nearly one-quarter of responses favoured taking CPP at age 65.

 

CPP Start Age # of Ppl % of Ppl
60 62 24.9%
61 4 1.61%
62 4 1.61%
63 4 1.61%
64 1 0.40%
65 57 22.89%
66 4 1.61%
67 5 2.01%
68 3 1.2%
69 3 1.2%
70 102 40.96%

 

Deciding when to take CPP is a key consideration of your retirement income plan. What I found interesting about the responses was the rationale or the stories behind these decisions. For instance, there is a lot of misinformation about the Canada Pension Plan: that it is government run (it’s not), that it will become insolvent before you collect benefits (it won’t), and that you could do better investing the money on your own (not likely).

These misconceptions can lead to poor decisions. It’s estimated that just 1% of CPP recipients elect to take their CPP benefits at age 70. Clearly more education is required.

Several of the responses in favour of taking CPP early showed this lack of knowledge or a perceived bias around the CPP program.

Some retired early and took CPP early to “avoid too many zero contribution years.”

  • While it’s true that your calculated retirement pension may decrease with each year of zero contributions, the amount of the decrease is typically less than the amount of the increase you’d get by deferring CPP (0.6% per month to age 65 and 0.7% per month to age 70).

    CPP expert Doug Runchey uses the example that by waiting you will receive a larger slice of a smaller pie, but you will almost always receive more pie.

One response called CPP a “legal pyramid scheme.” Continue Reading…

A Q&A about Fixed Income investing with Franklin Templeton’s Jon Durst

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Earlier this year, the Hub ran a blog by Franklin Templeton Canada entitled A cure for the headaches of Fixed Income investing, written by Ahmed Farooq, Vice President of ETF Business Development for the company. Franklin Templeton is a sponsor of the Hub. Today’s blog is a question-and-answer session between Ahmed’s colleague, Jon Durst, Vice President, ETF Business Development, that picks up where we left off. 

Jon Chevreau, Q1: Do you believe active management makes more sense in the fixed-income space versus the equity space? Perhaps it makes sense in both?

Jon Durst, Franklin Templeton’s Vice President, ETF Business Development

Jon Durst: There are merits to active management in both equities and fixed income; however, I feel recently, it has been a heavy skew towards active fixed income in this current market environment, and for many reasons. Early in March 2020, we saw a 50bps cut in interest rates by the Fed in the US: it was the first unscheduled rate cut since 2008 and the biggest cut since the financial crisis.  There also appears to be a strong consensus on the street that rates will be “low for longer” going forward.  If you own a passive fixed income strategy, the goal is to minimize tracking error to the index and what it cannot do is to adjust or try to anticipate any type of market events, like interest rate changes or changing company fundamentals.

This can certainly be a worrisome event for most advisors if they buy their own bonds directly or passive fixed income products covering different sectors/regions, as they have to scramble and figure out if they should continue with the same fixed income allocations in their portfolio, as the onus of making any changes to their portfolio will be on them.

Active managers with years of experience can focus solely on their investment mandates and can adjust to different types of market events, such as shape of the pandemic recovery or the consequences of the Democrats winning the 2020 US elections.

Outsourcing in this market environment and buying active fixed income exposures that align with your client’s outcomes will hopefully provide a calming effect that is certainly needed.  Not to mention, active fixed income ETFs in particular are now often priced very similarly to passive indexed products, which is even more important in this low rate environment to help maximize clients cash flow.

Jon Chevreau, Q2: For income-oriented retirees, do you generally see more opportunity in corporate or government bonds?

Jon Durst: I do see more opportunity in corporates debt, as the yields are higher, they also tend to be less sensitive to interest rate movement, but the risk level and volatility do tend to slightly go up.

A passive aggregate bond strategy that encompasses both corporate and government debt in Canada yields around 2.55%, a pure passive Canadian government bond strategy at 2.11%, and a passive Canadian corporate strategy around 2.77%.  On the other hand, for example, an active Canadian corporate strategy FLCI – Franklin Liberty Canadian Investment Grade Corporate ETF, yields 3.12%. An active manager can select certain bonds over others, perhaps looking for higher coupons and/or YTMs, or overweighting certain sectors that will benefit from the pandemic trade or the Biden Presidency.

Jon Chevreau, CFO of Financial Independence Hub

Jon Chevreau, Q3:  How much exposure should Canadian investors have in US and international bonds and through what vehicle? On that note, what is your stance on currency hedging?

Jon Durst: We do need to think outside of Canada; even from a fixed income perspective, Canada’s total debt in comparison to the world is about 3-4%.  Also, there is no tax incentive to buying solely Canadian debt, unlike the Canadian Dividend Tax credit provided on distributions from Canadian equities.  There are many fixed income opportunities to take a look at – a solution based option via a Canadian Core Plus strategy is one – where you would still keep 70-75% in Canadian bonds and have an active manager select the 25-30% in the US and/or globally.  You could also consider a more broad-based global aggregate option, having the portfolio manager look for opportunities from a global stand-point, which offers the PM a lot of flexibility to diversify geographically and from a currency perspective.  Yields in different countries can vary significantly which can create a lot of opportunity for higher yields and capital appreciation, not to mention diversification benefits.

In terms of buying a pure-based exposure – in other words, buying direct US, EAFE or EM debt, either by purchasing individual bonds or a managed product — I find most advisors are still tippy toeing into pure US, EAFE or EM debt spaces: most still maintain a home country bias and the complexity of selection, weighting, and trading these exposures is difficult, to say the least. Those that see the value in investing outside of Canadian debt usually outsource this complexity by using active fixed income strategies that provide access to the US/Global exposure, in addition to Canadian bonds.

I am for 90-100% in currency hedging fixed income exposures.  With interest rates and yields being at historical lows, another level of worry should not be placed on how the global currencies are going to perform relative to the CAD$, especially in fixed income, which is supposedly the conservative component of a client’s portfolio.  In my opinion, currencies should be hedged out as much as possible in fixed income.

Jon Chevreau, Q4: Your blog back in February compared bond funds to GICs. Do you see a role for both and in what proportion?

Jon Durst: In this environment, it can get even trickier: do you really want to lock into GICs for a certain period of time at a certain rate? Or want to be nimble and have liquidity? It’s a question on how to balance stable income that is locked in (currently at historically low rates) and/or including a short term bond strategy that can yield a little more in this environment and provide liquidity in the event of a requirement. I am beginning to see a fair number of advisors who have started to allocate to short term bonds funds as client GICs mature. Usually cash, GICs and short-term bond funds make up about 5-10% of a clients portfolio, but GIC investors are being compensated very little, so short term bond funds are being used for those with a higher need for income, and cash now being used for those with a 100% capital preservation requirement (not taking inflation into the equation).  GICs appear to be losing some steam.

Continue Reading…

Book Review: The New Long Life

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By Mark Venning, ChangeRangers.com

Special to the Financial Independence Hub

“In the face of longevity, if we want to reimagine age then we must first decouple the idea of a simple link between time and age. That requires imagining your age as malleable… It is this malleability that underpins the redesign of life stages.” Andrew J. Scott & Lynda Gratton, The New Long Life, 2020

Back together in The New Long Life: A Framework for Flourishing in a Changing World, Scott and Gratton have written the sequel to their highly lauded well-structured book from 2016, The 100-Year Life: Living and Working in and Age of Longevity. In the first book, the scene was set for deconstructing the concept of a traditional three-stage life; one where we shaped from 20th century clay, our social policies and societal norms, essentially into a lockstep world of education, employment, retirement.

Scott and Gratton challenged our minds, that if we were to look at the promise of living a longer life that would mean the lockstep three-stage experience would evolve and stretch, and we would have to reimagine a multi-stage life, more fluid, perhaps not so orderly. It would mean we would need to rethink how we finance this potential longer life, transform our personal journeys and as suggested now here in the sequel: rediscover our human ingenuity.

For all the side steps and jump-starts that a fluid and frequently interruptive multi-stage life may bring us, we will need to be better as masters of our own transitions.

“Human ingenuity has led us to extraordinary new technologies and substantial gains in healthy life expectancy. Yet … the answers to the question we have posed will be solved with social ingenuity.”

Continuous advance of technology and longevity

One of the great powers our two authors have is the ability to draw linkages between factors that are now shifting our society, and a prime example of that is both the continuous advance of technologies and longevity. By extension, this particular linkage recasts our notion of work and careers, wealth and health. What we do, where and how we work and for how long we choose to work. All this in mind the question left for us is: in what ways will we as individuals, employers, educators and governments reshape our society?

To answer that, The New Long Life poses leaning forward questions and threads many plausible possibilities around all this transitioning we will undoubtedly face regardless of age. Human questions is where the book begins and then nourishes our minds sprinkling ideas at us, somewhat like fish food for thought, right through each chapter. This is what makes this book together with the first, one masterful opus. Thus, my recommendation is to begin with a read of The 100-Year Life. (Reviewed by Mark here.) Continue Reading…

Fundamental Digital Marketing practices for 2020

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By Mike Khorev

Special to the Financial Independence Hub

It’s no secret that the world of digital marketing is continually changing, and every individual marketing channel in it is also rapidly changing all the time. Meaning, if you want to utilize digital marketing to grow your business effectively, you’ll need to stay up-to-date with the current trends. 

Although some digital marketing parts stay relatively the same, like how search engine optimization works and the importance of email marketing, there are also significant changes and even brand new channels that can significantly change the game. 

In creating any digital marketing strategy, however, it is essential to focus on creating a strong fundamental that you can easily expand to other digital marketing tactics; these fundamental tactics can act as a vital building block for your business, so even when you’d need to adopt a new trend, you can easily integrate it with this existing fundamental.

That said, here are the fundamental digital marketing practices in 2020 and onwards:

1.) Content Marketing and SEO

In this age of social media, content is king. 

Whether you can be successful in your digital marketing or not would ultimately depend on whether you can attract and engage enough audience through your content:  

  • You generate leads by attracting prospects with valuable content.
  • You nurture leads by using content to educate your prospects about your product/service and establish your credibility via consistent content quality.
  • You convert leads into customers by using content to convince people to buy 

So, content should be the backbone of your overall digital marketing strategy, and SEO (Search Engine Optimization) would be the primary way for people to find your B2B brand. 

However, since more businesses are now focusing on content marketing, the competition in attracting the audience’s attention with content is now much tighter. Simple and informative, educational content that worked in 2017 simply won’t cut it anymore these days, as readers now expect the highest quality of information and authoritative data. 

Also, consumers now expect various forms of content in textual blog posts and white papers and videos, podcasts, infographics, and other mediums. Diversifying your content is very important and offers more personalized and interactive content for each audience, which will bring us to the next point below. 

2.) Conversational and Personalized Marketing

 The rise of various AI and machine learning technologies has provided us with more ways to implement highly-customized and conversational marketing tailored for each prospect. 

One of such technologies is the chatbot, which has been popular among many businesses in recent years. A 2017 survey by Gartner has predicted that 47% of organizations will implement chatbots for customer service in the years to come. 

Chatbots can allow businesses to implement personalized marketing with different implementations. For example, in a sales inquiry conversation,  the chatbot can ask for preliminary questions about the prospect’s preferences, available budget, and so on, so when the chatbot finally passes this prospect to a human sales rep, the process would be much more seamless for both the sales rep and the prospect. 

According to Fractional CMO Mark Evans, conversational and personalized marketing channels can help marketers create highly-targeted marketing campaigns and gather more information about your prospects and customers. 

3.) Video Marketing

Video is technically a part of content marketing, which we have discussed above. Still, in the past half-decade, video marketing has grown to be a powerful digital marketing channel that deserves its attention.  Continue Reading…