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.

Is FIRE impossible for reasonable people?

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By Michael J. Wiener

Special to the Financial Independence Hub

“Whether you think you can, or you think you can’t ― you’re right.”
― Henry Ford

Retiring in your 30s or 40s seems like an impossible dream for most people. But the FIRE (Financial Independence Retire Early) movement is filled with people whose goal is to retire well before the usual retirement age. Critics say these FIRE penny-pinchers deprive themselves of any joy in their lives, and that FIRE is impossible for reasonable people. There is some truth to this, but not much.

The truth is that most adults have created a life for themselves that makes FIRE impossible without huge changes. They bought a big house far from where they work and own cars for commuting. They’ve committed almost all their income for the foreseeable future to a lifestyle they’ve chosen. No amount of eating in or other penny-pinching will make a big enough change to make FIRE possible.

That isn’t to say that smaller changes don’t help. Cutting out small amounts of spending here and there can improve your life tremendously. The key is to identify spending that isn’t bringing you happiness. But this type of change won’t shorten your working life by decades.

Best to start FIRE before making huge financial commitments

For FIRE to be a reality, it’s best to start before you make huge financial commitments. Instead of buying a big house far from where you work, you choose to rent or buy a modest place close to work. The savings can be huge. Reducing your commute by 25 km each way saves about $5,000 per year. Renting or owning a smaller place can save much more. By avoiding building an expensive life, it’s possible to save much more of your income and build toward early financial independence.

If you’ve already built an expensive life, changing to the FIRE path requires big changes. It likely means selling your home, selling expensive cars, and moving to a modest place closer to work. Few people are willing to make these changes.

None of this means it’s wrong to buy a big house for your family in the suburbs and commute a long way to work. It’s just that this choice precludes early retirement. Life is about choices. FIRE is not impossible; it just requires the right set of choices on the most expensive things in life. However, most people tend to push big choices like houses and cars right up to the limit of their income supports. Continue Reading…

10 ways to get retirement ready

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By Mark Seed

Special to the Financial Independence Hub

You’ve worked your entire life. You put some money away; invested, watched that money now and then over time.

Yet instead of living it up for everything you’ve worked so hard for you’re counting coins to make ends meet.

I don’t want this to happen to me. I don’t want it to happen to you either.

Inspired by an article I read some time ago, why retirement might not work out for you, I’m going to go on the offensive: here are 10 ways I plan to get retirement ready.

Retirees or prospective retirees please chime in!

1.) I will favour stocks over bonds

Most retirees are worried about out-living their savings. With inflation as a massive wildcard in our collective financial future, this fear is not unwarranted.

One way to combat inflation is to own more stocks (for growth) than bonds (for income security when equities tank) in retirement. You could argue that a 70/30 stock to bond split might be a good starting point to enter retirement with.

I own 100% equities in our portfolio now. We have that bias to equities because I consider my future defined benefit pension plan “a big bond.” Eventual Canada Pension Plan (CPP) and Old Age Security (OAS) payments in our 60s will also be part of our fixed-income component.

Got a pension plan?  Lucky you.  Consider that a big bond.

Here is when to take CPP.

Here are the facts about taking OAS you need to know.

While it might be scary (for some) to watch the volatility of your stock portfolio go up and down like a yo-yo short-term, owning a nice blend of stocks and bonds should help you combat inflation rather well.

What % of stocks and bonds and cash do retirees out there use today?

2.) I will embrace diversification

Diversification is important when it comes to investing because by doing so, you can enhance returns while reducing the portfolio risk long-term. A pretty great deal.

For most of us, diversification means an appropriate mix of stocks and bonds, a blend of small-cap, medium-cap, and large-cap stocks; owning various sectors of the economy; owning stocks from countries or investing in economies from around the world.

It can also mean owning assets that are not always correlated to common stocks, like real estate investment trusts (REITs).

Source: NovelInvestor.com

While diversification will never guarantee you big profits, it will help you eliminate the risk of investment losses given that not all assets move in the same direction at the same time.

When it comes to getting ready for my semi-retirement, I may consider owning some low-cost, all-in-one asset allocation Exchange Traded Funds (ETFs) to increase the diversification across my portfolio while simplifying my investing approach for my senior years.

These are some of the best all-in-one ETFs to own.

3.) I will consider a die-broke plan

My parents are very fortunate to have defined benefit pension plans and have a bit of RRSP/RRIF money to draw down in the coming few years. I’ll be working on their strategy this year.

They also own most (not quite all) of their home.

With good planning and careful spending in their 70s, they will definitely have enough money to live comfortably for a few more decades: thanks to their workplace pensions and government benefits.

However, they are not planning to leave any inheritance: and that’s more than OK with the kids (!).

They have a die-broke or at least a near die-broke plan to around age 95

I think this makes great sense.  Working backwards (from age 95), you can calculate a more measured approach to spending money now while earmarking some funds to fight any longevity risk.

At the end of the day, as our lawyer said recently to us when we closed on our condo purchase:  “it’s only money.”

Figure out your estate plan and work backwards.  I suspect in doing so that will help your retirement preparedness.

Do retirees reading this site have a die-broke plan or an estate plan?

4.) I will track my spending (in more detail)

Ideally, all any retiree would need to know is: is enough money coming in to cover what expenses are going out?

Consider the following as part of your back-of-the-napkin calculations:

  • Do you have a rolling monthly credit card balance? If so, you’re spending too much.
  • Do you have a growing line of credit balance? If so, you’re spending too much.
  • Are you able to keep a cash wedge or an emergency fund topped up with cash? If not, you’re spending too much.

To get to retirement in the first place, you probably needed a budget.  There is no reason why you shouldn’t keep one throughout retirement.

I plan to up my game in the coming years, to keep a more detailed tracking log of our spending as we enter semi-retirement.  This will allow me to better forecast any travel expenses we intend to incur.

For now though, I believe this is a better way to budget.

How do you budget?

5.) I will rely on multiple income streams

Canada Pension Plan (CPP) and Old Age Security (OAS) won’t be enough for us.  It might not be enough for you.

While a base-level of income security will be provided from both government programs, for most adults who have worked and lived in Canada for many decades, the sum of this income probably won’t be enough to cover all housing, food, transportation and health-related expenses.

By relying on multiple income streams, beyond government benefits, this will increase your chances to meet retirement income needs and wants.

Here are our projected income needs and wants in retirement.  Do you know yours?

6.) I will disaster-proof part of my life Continue Reading…

A short blueprint for starting an e-Commerce business

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By Nelly Murad

Special to the Financial Independence Hub

E-commerce businesses are rapidly thriving. In fact, the 2019 statistics according to US Census Bureau News reveal that: “Over the past ten years, the percentage of retail sales in the U.S. that have come from e-commerce has increased by nearly 300%, from 3.3% to 9.7%.” Moreover, the sales coming from ecommerce sites are predicted to increase around 78% by 2020

For the past decade, the number of people worldwide who patronized e-commerce has increased tremendously. Following the latest survey, 21.8% of the population worldwide now shopped online. And in 2021 retail e-commerce sales worldwide are expected to reach US$4.8 trillion.

These stats show that more people now prefer to transact online than going to a traditional store. And it’s no wonder, owing to the fact that e-commerce has transformed the way we shop: in the most convenient and innovative way. So, if you are not well adept about the specifics of running an ecommerce business or you are not even sure what it is, then keep reading.

Basically, the term e-commerce is the purchasing and selling of goods, which includes the transfer of money and the data needed to complete the operation with the use of an electronic device and the internet. It is simply an activity where business transactions — the buying and selling of goods and services —  occur over the internet.

Currently, there are five recognized e-commerce business models:

  • Business to consumer (B2C)
  • Business to business (B2B)
  • Consumer to business (C2B)
  • Consumer to consumer (C2C)
  • Government / Public Administration Ecommerce

Unique features of e-commerce

The most popular characteristics of e-commerce are: its ability to establish relationships, ability to exchange information, pre and post-sales support, among others. Interestingly, according to UKessays, ecommerce has seven unique features. These are:

  • The ability to transact anywhere at anytime. For example, the ability to order goods online, pay bills or deposit money, which in ecommerce, eliminates the need to go to a physical store.
  • Global reach. It permits commercial transaction easily performed across other countries, which is less tedious and inexpensive.
  • Universal standards. The internet has adopted universally accepted standards on how information is presented in order to level the playing field for businesses, specifically about obtaining information on market entry cost and the price of the item.
  • It refers to the amount of content found on the website such as written content and links that contribute in advertising and branding of merchant’s products, and are useful to enhance customers’ experience.
  • Interactivity. It affords businesses and customers to communicate. Ecommerce businesses have the ability to connect to their customers on an emotional level coupled with their effort to establish trust and confidence.
  • Information Density. It refers to the amount and quality of information found in an ecommerce website like text, pictures and videos.
  • Personalization. Merchants can easily change their products and services according to user preferences. The ability to customize marketing content to cater specific user needs is also possible. Continue Reading…

Retirement planning software and the 70% Rule

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By Ian Moyer

(Sponsor Content)

Individuals who are following conventional retirement-planning may be in disbelief as they approach retirement and discover that they cannot afford to retire just yet or are likely to outlive their retirement funds.

The 70% Rule

Common practice is to save enough so that your annual retirement income equals about 70% or more of your current income. Of course, many Canadians are not aware of such information entirely and have saved little or not enough for their retirement.

With this being said, there are still some fundamental issues with this understanding. One, few people have a complete understanding of their retirement resources or a realistic view of their retirement funds. In some cases, 70% retirement pay usually isn’t enough to sustain them in retirement.

Example

We’ll use the fictitious name Tom for this example. Tom is making $60,000 annually living a modest lifestyle. Tom will qualify for CPP and OAS. Tom only contributes through his employer-directed contribution program, which is $2500 a year.

Tom also saves $13,000 in a regular checking account, an additional $3,000 in non-registered savings and $12,000. Tom is a conservative investor and he thought he was doing pretty well saving what he can and living a modest lifestyle.

Using Cascades to do retirement planning at the age of 54 using the above figures. Tom discovers his annual income will only be approximately $38,250. After taxes per year. Going back to the common practice of 70% Tom needed minimum $42,000 per year as retirement income. This leaves Tom needing to find a way to make an additional $3750 a year. Tom would need a part-time job, choose not to retire or drastically change his lifestyle in retirement.

For a lot of individuals, they will have to work longer than they planned or seek part-time employment during retirement. This could be a problem for retirees and employers. In order to navigate this issue before it starts employers need to assist their employees with retirement planning.

Sample Cascades recommendations for maximizing an estate

How can we change this?

The first step would be for employers to become more effective at helping employees realistically prepare for and manage their retirement. For example, this could include a process or program to build up wealth accumulation prior to retirement, which could be a mix of LIRA, Capital Gains or RRSP just to name a few.

A second step would be for employees to change their behaviours and thoughts around retirement savings. Employees can make changes by becoming more proactive when it comes to saving. When some individuals think about saving for retirement after they attend school, buy a home, raise children and send them to college sometimes it can be too late. Continue Reading…

Retired Money: How retirees can lower RRIF tax shock by taxing “at source” wherever possible

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My latest MoneySense column takes a look at the supposed “tax nightmare” new retirees sometimes face on the forced annual (and taxable) withdrawals of Registered Retirement Income Funds or RRIFs. Click on the highlighted headline for the full article: How to avoid tax payment nightmares when the RRIF withdrawals start.

It’s a simple idea really. Salaried employees take for granted the automatic deduction of income taxes “at source.” They receive their regular paycheque with “net” or after-tax deposits that go directly into their bank accounts.

RRIFs are famously taxable: once you reach the end of your 71styear, you are required to pay an ever-rising minimum percentage withdrawal, all fully taxed like earned income or interest. However, notes Aaron Hector, a financial planner with Calgary-based Doherty & Bryant Financial Strategists, there is no mandatory withholding tax on RRIFs, unlike the 10, 20% or 30% tax that must be withheld at source on RRSP withdrawals (which rises with amount withdrawn.)

Fortunately, you can ask your financial institution to deduct tax at source every time you make a RRIF withdrawal. Alternatively, new retirees or semi-retirees may wait till 71 to start a RRIF but choose to withdraw money from their RRSP whenever they need it during their 60s. Here, the problem is the minimum withholding required can prove to be inadequate if you take out chunks of RRSP cash that are too small. Take them out in $5,000 chunks or less and the 10% (5% in Quebec) withholding tax is unlikely to be sufficient once you file your annual return.

Try and take out at least an amount between $5,000 and $15,000, which results in a 20% withholding tax (10% in Quebec.). Better yet, make the withdrawals $15,000 or more and pay the 30% withholding tax (15% in Quebec). Don’t fret that this may be “too much” tax: if so, it will be rectified once you file your next tax return. You can find a summary of RRSP withholding rates at this Government of Canada website.

Hector says RRIF withdrawals in excess of the minimum annual required payment are treated the same as regular RRSP withdrawals for withholding tax. So if your minimum RRIF payment one year is $50,000 but you withdraw $100,000, the extra $50,000 will be taxed at 30% on withdrawals and come tax time, you’d pay tax on the entire $100,000. You can elect to have taxes withheld at source on the minimum RRIF payments as well: Hector estimates a third of his clients do just that. Others may end up making quarterly tax installments instead.

This situation is aggravated by the fact non-registered investment income is typically taxable.             Fortunately, you can choose to deliberately overtax yourself as you go on many common sources of retirement income: if you receive pensions from former employers and/or the Government (CPP, OAS), you can set things up to mimic the “taxed at source” setup salaried workers have. While not mandatory, pension administrators will deduct whatever percentage of tax you wish to arrange with them, whether a minimal amount or a near-confiscatory 50%, or somewhere between those extremes.

In my case, I set 30% as my withholding tax on corporate pensions, 25% on OAS and eventually the same amount for CPP. You may feel small pensions don’t have to be taxed at source if they are less than the Basic Personal Amount that is tax free to everyone: $11,809 in 2018, $12,609 in 2019.

The alternative is quarterly tax installments. Retired advisor Warren Baldwin says theCRA sends notices for payments based on simple arithmetic applied to the previous year’s taxes. “So if, for example, 2017 was a high-income year and you had a high tax liability on filing, CRA will request large payments in March and June of 2019. If income and the liability declines in 2018/19, then you might have overpaid and need to wait until spring of 2020 for the refund.”

Ideally, things will balance out when it comes time to file your taxes: if you went overboard in taxing yourself at source, you may end up with a refund; if you underestimated your taxes due, you may end up having to cut yet another cheque to Ottawa. Some object to giving the CRA an “interest-free” loan but personally, I’d rather receive a small refund than have to pay still more at tax time.