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.

Top 10 Rules for successful Retirement Income Planning

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By Doug Dahmer

Special to the Financial Independence Hub

As a Retirement Income Specialist, I have spent the past 10 years helping those transitioning from their savings years to their spending years to discover the secrets of how to optimize their future income streams, while minimizing the amount of taxes they pay. These years of experience have provided me with a great number of valuable lessons. I have reduced this learning to a list of top 10 success rules for retirement income planning.

In a world where (unless you work for a government agency – police, nurses, teachers, government employees etc.) the guarantees of a corporately sponsored retirement income stream have virtually gone the way of the dodo bird. Corporate defined benefit pension plans have been replaced with defined contribution plans and group RRSPs.

Upon retirement, the vast majority of baby boomers are now faced with the daunting challenge of determining how to convert a large lump sum of accumulated retirement savings into a recurring income stream that lasts as long as they do. These risks and responsibilities were previously carried out by disciplined and talented pension plan managers. They have now been quietly delegated to the individual – and this has occurred without providing the adequate tools to perform the tasks.

It is my hope that the following 10 rules are helpful to those who have been left to their own devices to cobble together a safe, secure retirement income.

1.) Take ownership in your future success

A plan is not a plan until, the people who have to live with the choices contained in the plan, have played an active role in crafting these choices. The level of commitment one has toward following the prescribed progression of choices contained in the plan is directly proportional to the confidence you have that these choices will lead to successful achievement of the life outcomes most important to you. By taking ownership in your own plan helps keep you focused on the aspects of your life you have control over — choices — while identifying the need to put protective mechanisms place to mitigate the potential damage of events that are beyond your control.

2.) Your Retirement Income Formula is not a static product

Retirement Income Planning is not a “One and Done” event. It is also not an exact science. Every pilot before leaving the ground files a detailed flight plan knowing full well that no flight has ever gone according to plan. The pilot must constantly monitor where they not only relative to their desired destination but also relative to their original flight plan. Retirement Income Planning, like flying, contains no roads to follow or signs to provide directions. Wondering too far off course can lead to mid-air collisions or running out of fuel. Confidence in your Retirement Income Formula comes from testing it, stressing it and constantly re-adjusting it, as life unfolds. Only by engaging in a planning process that evolves with your life, will you achieve success and security. As daunting as this may sound, like filing a flight plan, when you have access to the right tools this task can be made significantly easier.

3.) Link your life plan to your financial plan

The key to financial success in the second half of life is to directly connect your desired life plan to your investment plan. If your money managers do not have an intimate understanding of your year-by-year cash flow demands or the specific portfolios you plan to source these funds from, you are not getting the level of protection – or service – that you deserve.

4.) Create forward knowledge of how much you need and when

Better financial decisions will always be made when you have advance knowledge of the what, the when, and the how much of your desired lifestyle. People who blindly chase the unknown savings target of “more” are the people who make the most financial errors.

5.) Don’t trust your future to outdated ‘rules of thumb’

Conventional wisdom that served past generations well, is no longer applicable. Baby Boomers are in the process of redefining retirement. Governments are having to respond to the financial implications of a rapidly aging society. Within this state of flux, tremendous new opportunities exist for those who find them. Devastating risks await those who fail to recognize the new reality. Probably the largest mistake baby boomers are currently making is the date they choose to start their Canada Pension Plan. A poor start date choice can frequently cost the average couple well over $100,000 over the balance of their lives.

6.) Embrace variables, not averages Continue Reading…

Do you really need Dental Insurance?

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By Wally Thompson

Special to the Financial Independence Hub

April was Oral Health Month in Canada and while we should take care of our oral hygiene year-round, past studies show that a whopping 6 million Canadians avoid the dentist because they simply can’t afford it.

When it comes to dental insurance, a new survey from Manulife revealed:

  • More than one third of Canadians do not have access to private health and/or dental insurance coverage
  • When choosing coverage, 42% said the most determining factor is the cost of premiums, followed by companies offering a variety of coverage options (36%)
  • While 30% of Canadians make sure they visit the dentist for regular check-ups, 29% hate having to do it
  • For those who have visited the dentist, 52% admit to feeling guilty about their oral care habits

A visit to the dentist may not be everyone’s idea of fun but regular visits are beneficial for our overall health. Getting dental insurance for you and your loved ones helps make sure the right care is available on a regular basis and when there is an emergency.

Here are four common misconceptions and what to look for when purchasing dental insurance in Canada:

I’m healthy so there’s no need for dental insurance

If you don’t have dental insurance, don’t wait until you need to deal with a tooth infection, a chipped tooth or to be in serious need of cleaning to start looking into your coverage options. Individuals and their families should consider a plan when they are healthy in order to protect themselves from conditions that may arise in the future. Individuals will need to do a complete assessment on their needs to determine their overall supplemental health insurance coverage. Health status, affordability and the types of coverage are a few key factors that would be part of your overall needs assessments.

If you work with a financial advisor, he or she can also help you and your family complete your overall needs assessment and complete the purchase. You should also ask your advisor how these premiums can be treated as a business expense for your annual tax returns.

I can’t afford insurance

Continue Reading…

How Finance Apps & Online Tools will revolutionize Millennial Financial Planning

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By Drew Hayles 

Special to the Financial Independendence Hub

When you’re young, you feel like nothing can stop you. You’re in charge of your own destiny.

Things might look different in hindsight, but don’t worry about that now. The most important thing you can do right now is set in motion a plan to achieve financial independence as soon as possible. With the means to do what you want, when you want, you’ll open doors you never even knew existed.

Before you begin in earnest, make sure you have the right digital tools and apps in your corner. These user-friendly resources all have their place in a coherent, comprehensive financial independence plan, provided you use them properly and consistently.

Perhaps you’re using a few already.

 Digital Budgeting Tools: All Your Money in One Place

 This list of the “best simple and free budgeting tools” doesn’t get to actual digital solutions until the third entry, when it calls out the trusty old Excel spreadsheet.

If you’re in the market for something a bit more robust and hands-off than a wall of spreadsheet cells, consider later entries like Mint or PearBudget (which, to be fair, began life as an Excel tool).

These aren’t professional-grade tools by any means, but they’re nevertheless robust enough to accommodate basic household budgeting and ensure that you spend well less than you earn. Remember to download mobile versions and link your bank accounts for automated cash flow tracking.

 Automated Savings Apps: Ditch the Reminders

 Tired of remembering (or forgetting) to make regular savings deposits? Take the uncertainty out of the process with automated savings apps that quietly transfer small sums to your savings accounts without any input on your end.

Tools like Digit exist wholly for this purpose. More robust online banking solutions like Chime Bank typically have built-in automated savings features that round up every debit transaction to the nearest dollar and sock away the difference

 Educational Videos: DIY, But for Money

 Are you a DIYer at heart? You can learn a lot from high-quality investing and financial education videos. After all, there’s no need to pay for entry-level information and strategic advice when you’ve got a YouTube account to your name. If you need help or want to learn more about specific topics, you can always go straight to the source with questions.

Lightweight Accounting Platforms for Entrepreneurs   Continue Reading…

Building flexibility into your Retirement Plan

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Prospective retirees want a simple formula for making their retirement plan. There are hundreds of calculators that will crank out numbers showing how many years until you can retire, how much you need to save, and how long your money will last. It’s a good place to start, but don’t stake your entire future on the results.

You spend decades preparing for a comfortable retirement, planning to spend time playing golf or travelling the world. But, if a financial disaster strikes, those dreams may not translate into reality. Unexpected financial crises that disrupt savings are far more common than anticipated.

If your retirement plan only works as long as nothing goes seriously wrong, you are not properly prepared for retirement. It’s important to plan ahead. Knowing how you will handle certain crises can go a long way toward minimizing the financial fallout.

What kind of surprises can derail a retirement plan?

They can include:

  • Lost income.
  • Providing financial support to an adult family member.
  • Paying significant health care costs for yourself or a family member.
  • Divorce or loss of spouse.
  • Investment underperformance, or investment fraud.
  • Unanticipated major home repairs, especially after a natural disaster.
  • Changes in tax rates and legislation.

Let’s look at three situations that can derail your financial plan.

1.) Unpredicted early retirement

How would your retirement plan be impacted if you lost your job due to company downsizing? Do you have the marketability to find comparable employment elsewhere in a reasonable amount of time? Would you receive the same salary, or be forced to accept a lesser amount?

Lost income might be due to forced retirement for health reasons.

Not only would there be loss of income, you might have to dip into your savings earlier than expected. There could be expensive medical costs not covered by your provincial health plan.

2.) Providing financial support to family members

People over the age of 50 have the opportunity to beef up their retirement accounts with additional contributions. What if your child is forced to return home and/or require financial support due to a job loss, divorce, or health crisis? There may not be room in the budget to make those catch-up contributions.

As life expectancies increase, aging parents may require some expensive medical support or long-term care.

A lot of people currently care for two generations of family members.

3.) Investing challenges

Key investment objectives for retires are income and preservation of capital. Liquidity is important. Growth as well.

Investment challenges facing retirees include: Continue Reading…

By James Gauthier, CIO, Justwealth

Special to the Financial Independence Hub

When investors run out of contribution room in their tax-sheltered investment accounts such as RRSPs and TFSAs, they often continue investing in a non-registered account that does not have the same automatic benefit of avoiding or deferring taxes. Managing investments in a taxable portfolio then becomes a much more complicated exercise: one that attempts to maximize wealth on an after-tax basis instead of a pre-tax basis, which is how investments would be structured in a registered account.

Any investment income that is earned in a non-registered account is subject to taxation annually and can therefore be thought of as a “fee,” similar to the annual fees charged by your financial institution or advisor. As a robo-advisor that provides low-cost investment options for investors, we devote much time and resources to educating investors about the negative impact that investment management fees can have on their overall wealth. But unlike management fees, which are generally easy to identify and compare amongst different investment options, it is virtually impossible to find after-tax rates of returns for making apples-to-apples comparisons between various products and providers.

Most investment providers, including robo-advisors, use the exact same portfolio recommendations for their clients’ non-registered accounts as they do for their registered accounts, as long as the “risk” level is deemed to be the same. To illustrate the true cost of tax inefficiency, we can show how altering a portfolio recommendation, without materially altering the risk level or other characteristics of the portfolio, can improve the after-tax return of the portfolio.

Consider an investor in the top marginal tax bracket who is considered to have an “average” risk tolerance and is invested in a Balanced portfolio of 40% bonds, 20% Canadian equity, 20% U.S. equity and 20% international equity. A reasonable long-term expected annual rate of return on this portfolio, on a pre-tax basis, is 5.6%. Applying tax rates to the interest, dividends (Canadian and foreign) and a conservative estimate for capital gains, the after-tax return on the portfolio is reduced to 4.0%.

By making some minor changes to the portfolio’s asset allocation, such as emphasizing asset classes that receive more favourable tax treatment and finding investment vehicles (ETFs in our case) that are innovatively structured to receive more favourable tax treatment, we can create a new portfolio that is very similar from a high-level asset allocation and risk perspective. The expected pre-tax return on this new, tax-efficient portfolio is slightly lower at 5.5%, but after taxes are applied, the return is a more favourable 4.5%.

 

The difference of 0.50% in after-tax returns should be considered the MINIMUM cost of tax inefficiency, since we have not yet addressed any other tax-inefficient practices. Extending the analysis across our entire range of investor risk tolerances (from Conservative to Aggressive) shows that the cost of tax inefficiency can vary from a low of 0.40% up to 1.00%. In most cases, the cost exceeds our 0.50% management fee, meaning that you would be better off paying our fee rather than having your assets managed for FREE at any another institution that does not use tax-efficient portfolios!

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