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.

Comparing Disability Insurance and Critical Illness Insurance

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By Lorne Marr, LSM Insurance

Image courtesy LSM Insurance

Disability Insurance and Critical Illness Insurance: Why the Choice Is Not Straightforward

Choosing between disability insurance and critical illness insurance is a decision filled with complexities and nuances that go beyond simply comparing premiums and payouts. One of the primary confusions arises from the overlap in coverages between disability insurance and critical illness insurance. Both types aim to provide financial support in the event of serious health issues, yet they serve different purposes.

Disability insurance replaces a portion of your income if you’re unable to work due to an illness or injury. Critical illness insurance, on the other hand, provides a lump-sum payment upon diagnosis of specific conditions listed in the policy, such as cancer, heart attack, or stroke.

The cost of disability insurance is closely linked to one’s occupational class, with higher premiums for those in jobs deemed higher risk or seasonal. This categorization means that individuals in professions with greater physical demands or inherent risks — such as construction workers or miners — may face significantly higher costs for disability insurance. This aspect can make disability insurance less accessible or more expensive for those who potentially need it the most, complicating the decision-making process.

For freelancers, entrepreneurs, and others without a steady paychecque, obtaining disability insurance can be particularly challenging. Insurers often require proof of income to determine benefit levels, making the quoting and application process more complex for those with variable incomes.

Many people may already have some form of disability or critical illness coverage through group insurance plans provided by employers, unions, or associations. Additionally, government programs like the Workers’ Safety and Insurance Board (WSIB) in certain jurisdictions offer protection against work-related injuries and illnesses. Awareness of these coverages is essential to avoid unnecessary duplication and to identify any coverage gaps that private insurance could fill.

It is also important to note that your smoking status has a differing impact on disability insurance and critical illness insurance premiums and eligibility. Since many critical illnesses covered by these policies, such as heart disease and cancer, are directly linked to smoking, smokers may find critical illness insurance to be more expensive or harder to qualify for compared to disability insurance.

Before deciding on which one – or if both – are right for you, it’s crucial to understand these products on a deeper level. So, let’s dive in and learn more.

What are Disability Insurance and Critical Illness Products?

The table below provides a detailed comparison of disability insurance and critical illness insurance. Note that there are some areas of overlap between the two coverages.

Where Disability Insurance and Critical Illness Coverages Overlap

It is important to note that some health conditions are unique based on the type of policy selected, but there is still some crossover between what is covered on disability insurance, and what is covered by critical illness insurance.

If you are interested to read more about Disability insurance, here is a detailed overview of all long-term disability insurance components and all short-term disability insurance elements.

What Scenarios do we Compare and Why

We compare a few typical scenarios, which results in significant differences between critical illness and disability insurance quotes. For all the scenarios we use the following coverage values:

  • Disability insurance: 70% of the current monthly salary of $7,500 = $5,250/month
  • Critical illness Insurance: $300,000

 Scenario 1: Disability Insurance vs Critical Illness Insurance Premiums for An Office Employee (AKA “Safe Job”) Continue Reading…

How much do you need to invest to become a Millionaire?

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By Dale Roberts

Special to Financial Independence Hub

There was a time when becoming a millionaire was a big deal. That meant that you were “rich.” These days, becoming a millionaire might be commonplace for an investor with modest or reasonable free cash flow to invest. Most of us should become “rich.”

But of course, a million dollars ain’t what it used to be. The Bank of Canada inflation calculator suggests that in 2024 you’d need $1.87 million to have the spending power equivalent of $1 million in 1994. That said, stocks historically beat inflation over longer periods, and that is the path to wealth creation. How much do you need to invest to reach your financial goals?

Canadian rock band The Barenaked Ladies had a massive hit with their song – If I had a million dollars. I don’t think they adjust for inflation to now sing: If I had $1.87 million dollars.

Keep inflation in mind. To compensate you will increase contributions as your income increases and as you eliminate debt.

Here’s a chart shown on BNN. I took a pic and posted on Twitter / X.

Find that free cash flow

You’ll need to find the money to invest on a regular schedule. That takes a free cash flow plan, and that would usually include a personal and family budget. We need to know how much we’re spending and where. In the end we need to spend much less than we make. The financial planning basics would include paying off high interest debt and keeping your spending in check. You’ll see in that post that I found $888,000 in your takeout coffee (and other discretionary spending).

And here’s a good post on financial planning basics from Get Smarter About Money.

Those incredible stock markets Continue Reading…

Can Savvy Stock-picking outperform Investment Funds?

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By Ian Duncan MacDonald

Special to the Findependence Hub

Why spend days building a stock portfolio when you can almost instantly invest the same amount of money in the units of a popular mutual fund or Exchange Traded Fund [ETF]?

One of the most popular are the Standard and Poor’s  500 Index Exchange Traded Funds and Mutual Funds that are sold by probably hundreds of banks and investment dealers. The rise and fall of the S&P index has become a standard by which the success of all portfolios are often measured against.

The Standard and Poor’s 500 Index is a compilation of stocks selected by a committee called the S&P Dow Jones Indices. It is managed by S&P Global Inc., which sells financial information and analytics. This company is an evolution of the century old McGraw-Hill publishing company.

The S&P 500 tracks the 500 largest American companies selected by their stock market capitalization, which is the value of all the shares held by investors in a company. Fund management companies selling units in their S&P 500 mutual funds and ETFs are quick to brag that just nine of the 500 companies account for 31% of the market capitalization of all 500 companies. These nine are Apple, Microsoft, Amazon, Nvidia, Alphabet, Meta, Tesla, Berkshire Hathaway, and JP Morgan Chase. The sales pitch for buying fund units is, how you can lose with such well known, successful companies in your S&P 500 fund.

These very high-profile companies are the bait to distract you from considering the hundreds of mediocre, but large low-profile stocks in the S&P 500.

I have described the “Magnificent Seven,” which are included in the above nine, as being overvalued when you compare such things as their very high share prices to their much lower book values. For example, Apple’s book value was $4.00 compared to its share price at the time, which was $185. Book values are calculated by professional auditors subtracting what is owed by a company from their assets. The net figure is then divided by the number of outstanding shares to arrive at the stock’s book value. A book value’s logical calculation is far removed from the chaos of optimistic and pessimistic speculators bidding daily for millions of Apple shares in a stock market influenced by media hype, greed, and fear.

Many Investors seek safe stocks that will provide them with a reliable income to support them in their retirement. They look for companies that have demonstrated for years that they share the company profits with the company owners, who are the shareholders. This sharing is done through significant regular dividends.

Only 2 Mag 7 stocks pay dividends

Only two of the Magnificent Seven pay dividends. Their dividends are so small you wonder why they bother. Nvidia is paying a token dividend yield of 0.03% and Microsoft is paying 0.71%.

There are about 25 million companies in the United States. Surely “owning” shares in the 500 largest stocks must be a good investment? However, that very much depends on what your definition of a “good investment” is? My definition of a good, strong, safe stock investment has nothing to do with high market capitalization, which is the primary qualification for being classified as an S&P 500 company.

To me a good stock investment primarily includes:

  • A share price that has steadily increased over the last 20 years.
  • A high operating margin percent that is calculated from the percentage of the amount remaining after you have subtracted the expenses to generate the revenues from the revenues.
  • A company that shares its profits with its shareholders by paying ever-increasing annual dividends yields of at least 5% over the last 20 years.  These would include even the market crash years of 2000, 2008 and 2020.
  • The profitability of a company as reflected in a price-to-earnings ratio that would be below 20.
  • A book value for the company that would be close to or even higher than the share price.

Perfect stocks meeting all these criteria rarely, if ever exist.  You thus are required to make compromises based on how close you can come to your ideal stock.

Creating stock-scoring software

To make such compromises easier, I invented for myself stock scoring software that calculates an objective number from zero to 100. This number allows the sorting of stocks from the most to least desirable. The higher the number the more desirable the stock. Having scored thousands of stocks, the lowest I have ever calculated was an 8 and the highest was a 78. I avoid stocks scoring under 50.

For safe diversification and to avoid disastrous surprises you should aim at investing equally in 20 carefully chosen stocks. Your expectation from historical trends of strong companies is that most of your dividend payouts and your share prices will increase steadily.  This will keep your dividend income well ahead of inflation.

There are about 16,000 stocks available in North America to choose from. Sorting through these thousands of stocks for your “best” 20 is not difficult once you are shown how to do it. It can be done in hours, not days.

When I reviewed all the stocks that make up the S&P 500, I found only 5 stocks that would qualify for consideration in my portfolio. 113 of the S&P 500 had been immediately eliminated for consideration because they pay no dividend. Even some of the very largest companies in the S&P 500 like Amazon, Alphabet, Tesla, Berkshire Hathaway, Facebook, and Disney pay no dividends. A further 288 of the S&P 500 stocks only paid dividends between 3.5% and 1%.

Why would a 3.5% minimum dividend yield be important? For the last 100 years the average inflation rate is reported to have averaged 3.5%. If you had bought a share that never increased or decreased in value but paid out a steady 3.5% in dividends your stock would theoretically have stayed ahead of inflation if it were invested back into the portfolio.

Strong shares have histories of steadily rising share prices.

As share prices increase many companies steadily increase their dividend payouts out of pride and competitive reasons to at least maintain their traditional high dividend yield percents. Usually, the dividend payout increase percentages rise much faster than share prices. This can be easily observed.

Only 100 S&P500 stocks pay dividends higher than 3.49%

Within the 500 stocks you are left with only 100 that are paying dividends higher than 3.49%. To give you a reasonably generous income, the ideal is to realize an annual dividend income generating at least 6% of your portfolio’s value. On a million-dollar portfolio this would be $60,000.

There are only 12 of the S&P 500 companies paying a dividend greater than 5.97%. Two of the 12, AT&T and Altria Group, had return-on-expense percentages of zero or less which eliminated them from consideration. When the remaining 10 were scored it was found that 7 of them were now paying a dividend of less than 6% which eliminated them. Of the remaining three only one had an operating margin greater than zero. This left just one company, Verizon, out of all 500 that would meet my minimum requirements for inclusion in my portfolio. It had a good score of 62.

Verizon’s score was based on a share price of $40.48, a price 4 years previously of $58.22, a book value of $21.98, Ten analysts recommending it as a buy, a dividend yield percent of 6.57%, an operating margin of 16.57%, a daily trading volume of 12,645,534 shares and a price-to-earnings ratio of 14.7.

We still needed 19 more stocks to create a strong diversified portfolio.  Fortunately, there is a wide choice of companies with lower capitalization who are paying dividends of 6% and will have scores higher than 50. Some of these are foreign based companies traded on the New York Stock Exchange who were automatically excluded from being included in the American centric S&P 500. Some had high capitalizations that could have easily included them. Foreign stocks can give a portfolio a geographic diversification which strengthens it.

If you had $200,000 to invest, you could do far better investing the $200,000 in 20 carefully chosen, high-scoring, high-dividend stocks than investing that $200,000 in S&P 500 fund units. While the 20 stocks could generate a dividend income of $12,000, the dividend income  generated from the fund units of an S&P 500 fund would be a diluted 1.3% or an annual dividend return of $2,600. The total dividend income received from all 500 stocks becomes diluted when it is split among all those S&P 500 stocks paying little or no dividends. Continue Reading…

Greed, Expectations & Goldilocks

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“Where there are no expectations, there is no disappointment.”

  • Charles Krauthammer
Image courtesy Outcome/QuoteInspector.com

By Noah Solomon

Special to Financial Independence Hub

Although April’s slide in risk assets was by no means disastrous, it was uninspiring to say the least. Almost every single bourse suffered losses, with the notable exception of Chinese equities. In this month’s missive, I will discuss both the “setup” behind April’s market volatility as well as the catalysts which triggered it.

Greed is Good, Except When it’s Not

In the 1987 film Wall Street, Michael Douglas portrays Gordon Gekko, a Wall Street tycoon who is utterly devoid of morals. In 2003, the American Film Institute named Gekko number 24 on its top 50 movie villains of all time. Gekko’s classic line, “Greed, for lack of a better word, is good,” is perhaps one of the most iconic lines in the history of cinema.

Notwithstanding that greed is generally frowned upon (Gekko was, after all, a villain) there are times in markets when greed should be encouraged. When investors suffer severe losses during bear markets, there is little appetite for risk and sparse demand for stocks. At such junctures, equities become “washed out” and valuations reach levels where the risk of owning stocks is below average and their prospective returns are above average.

In contrast, there are times when greed, and its close relative, FOMO (fear of missing out) can have painful consequences. When stocks have experienced a largely uninterrupted string of above average returns, greed tends to be in abundance, while its counterpart, fear, is nowhere to be seen. Such lopsided sentiment pushes up valuations to the point where stocks offer little (or negative) return and pose elevated risk. Putting fresh money to work in such environments is akin to picking up pennies in front of a steam roller.

S&P 500 Index: Performance Following Valuation Extremes

By the end of 1999, euphoric sentiment had pushed the S&P 500 to nearly 30 times forward earnings, which marks its highest valuation over the past 30 years and set the stage for a “lost decade” for investors. At the other end of the spectrum, the global financial crisis caused investors to sour on stocks to the point where the S&P 500 Index was valued at less than 12 times forward earnings, which placed it in the bottom 1% of its valuation range over the past 30 years. From this starting point, U.S. stocks subsequently rose at a breakneck pace.

Since time immemorial, one of the constants in markets is that human behavior and emotions lead to unsustainable conditions. Losses tend to follow extremes of confidence, while outsized gains tend to follow extremes of despondency. Buffett best summarized this cycle in his statement, “Be fearful when others are greedy and greedy when others are fearful.”

What can go Wrong? Nothing and Everything … Depending on your Expectations

As 2023 was drawing to a close, the prevailing narrative was that:

  • The U.S. economy would avoid a recession and expand at a healthy clip.
  • Inflation would continue its downward trajectory, which would allow the Fed to enact six quarter-point rate cuts over the course of the following year.

Short of a future which entailed solid economic growth coupled with a return to zero interest rates, investors could not have hoped for a better environment than the one which was anticipated for 2024.

We acknowledge that there were good reasons for this optimism, including the recent decline in inflation and a surprisingly resilient economy. However, these sentiments were fully reflected (and perhaps over-reflected) in asset prices.

Whether things go right or wrong per se is not what moves markets. At least as important is what is embedded in asset prices at the time when things go right or wrong. At the beginning of 2024, valuations were discounting a scenario in which pretty much everything would go the “right way” for equities. As such, when April’s inflation readings failed to register the anticipated improvement, stocks had an adverse reaction. Had markets (and by extension valuations) been less optimistic prior to this negative surprise, it is likely that April’s decline in prices would have either been less severe or nonexistent.

Goldilocks has left the Building: from Tailwinds to Headwinds

Between 2008 and 2020, inflation remained extremely well-behaved, often running below 2%. This gave the Fed little reason to tighten monetary policy, especially since markets tended to react adversely to any sign of rising rates. Central bankers were in the enviable position of having their cake and eating it too. They left rates at record low levels for an extended period and stimulated economic growth while simultaneously keeping the inflation genie safely contained in its bottle. This fostered a near-perfect backdrop for strong gains in asset prices.

Perhaps the single most important factor that enabled this Goldilocks environment was a dramatic increase in international trade and global integration. From the 1990s through mid-2016, total international trade rose from roughly 39% to 56% of global GDP, propelled largely by the consistently rapid growth of the Chinese economy. According to the National Bureau of Economic Research, this surge in trade led to an annualized reduction in U.S. inflation of between 0.1% and 0.4% between 1997 and 2018. Continue Reading…

Real Life Investment Strategies #3: What is the Difference Between a Lifestyle Reserve and an Emergency Fund / Financial Cushion?

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Image Lowrie Financial/Canva Custom Creation

By Steve Lowrie, CFA

Special to Financial Independence Hub

Having an emergency fund is common advice, whether you are reading this in the financial media or hearing it from a financial advisor. Many people who are later in life and feeling comfortable with their financial situation might disregard this advice, assuming it only applies to those that don’t have as much financial stability.

The truth is that an Emergency Fund is something that everyone (even you!) should have. In addition, the added financial security planning of a Lifestyle Reserve should also be part of your financial plan. So, let’s explore exactly what an Emergency Fund is, how a Lifestyle Fund is different, and why both should be in place to ensure long-term financial alternatives and adaptability. Most importantly, I’ll highlight how this applies to Suzie & Trevor Hall (The Accumulators) and Jim & Carol Oates (Almost Ready to be Retirees), so you can see how it can work for you.

What is an Emergency Fund / Rainy-Day Fund / Financial Cushion and Why do I Need it?

Let’s talk about an Emergency Fund, which is often used interchangeably with Financial Cushion or Rainy-Day Fund. They are close but have slightly different purposes. An Emergency Fund / Rainy-Day Fund is a safety net for unexpected financial surprises; this could be an immediate need to replace a furnace or roof, an unforeseen job loss, or a medical condition requiring unpaid time off from work. An Emergency Fund / Rainy-Day Fund would generally be kept in cash in a separate account from day-to-day-expenses, usually in a high-interest savings account.

On the other hand, a Financial Cushion is more of a buffer to cover elevated or lumpy day-to-day or month-to-month costs like a higher than usual heating or grocery bills, etc. A Financial Cushion is often kept in the main bank account in cash, just to keep a financial safety margin-of-error to allow for a secure feeling about covering regular expenses.

Whether we say Emergency Fund or Rainy-Day Fund or Financial Cushion, they are similar, so let’s simplify the definition: a liquid/cash reserve to cover unforeseen and unbudgeted for expenses which allows for financial stability and peace of mind.

You may already have this is place, without formal planning. The next question you should ask yourself is whether you’ve set up your Emergency Fund / Financial Cushion in a way that truly provides the stability and comfort that you need.

Before we dive into that, let’s hear what New York Times Bestselling author and one of MarketWatch’s 50 most influential people, Morgan Housel, shared in his book, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness:

“The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future.”

How much should my Emergency Fund be?

So, let’s explore some questions about an Emergency Fund:

  • How much of an Emergency Fund / Financial Cushion is needed?
  • How long will it take to build a strong Emergency Fund /Financial Cushion?

I know you hate to hear it but, as with many financial planning questions, the answer is “It depends!” But I won’t leave you hanging; let me give you an idea of factors to consider when building your Emergency Fund:

  • Current and Future Financial Outlook: Have you just started a new business and don’t have a good handle on your upcoming income? Alternately, do you have a stable job that you feel fairly confident on relying on that income for the foreseeable future? Another consideration is potential upcoming surprises – Is a new baby on the horizon? Will your grown kids need financial support? Do your properties and/or vehicles have any approaching maintenance or replacement needs? Or, do you have parents who may need financial support as they age? Keeping these, and other potential unforeseen expenses in mind, will help you determine the ideal size of your Emergency Fund; at least 3-6 months of necessary expenses is ideal, but a 1-month Emergency Fund might be appropriate, in some financially stable situations.
  • Risk Tolerance: The size of your Emergency Fund / Financial Cushion is also dependent on your own personal financial risk tolerance. Although some people may feel completely comfortable with 1–2-months of necessary expenses for their Financial Cushion, others may feel the strong urge to keep 12 months aside. Whatever the amount is that will allow you to sleep at night is a good indicator.
  • Balancing the Budget for Current & Future Needs: How quickly you can build your Emergency Fund is highly dependent on how much of your existing income can be diverted to fund it. That may mean reallocating a portion of your long-term savings or tightening the discretionary spending belt until you’ve built your Financial Cushion to the level of comfort you need.
  • Opportunity Cost: Some people want to hold too much in cash, which may be a financial security blanket, but keeping more than needed is detrimental in the long run because “money in the mattress” could be used to build wealth. So, when deciding how much your Financial Cushion should be, consider that keeping too much will cost you in lost investment opportunity.

To hammer home the importance of an Emergency Fund / Financial Cushion and the financial benefits it provides, let’s hear a little more advice from Morgan Housel in The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness:

“Saving does not require a goal of purchasing something specific. You can save just for saving’s sake. And indeed, you should … Saving is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment … Savings without a spending goal gives you options and flexibility, the ability to wait and the opportunity to pounce. It gives you time to think. It lets you change course on your own terms.”

“Six months’ emergency expenses means not being terrified of your boss, because you know you won’t be ruined if you have to take some time off to find a new job.”

Even though everyone’s talking about Emergency Funds and Financial Cushions (and that’s a great starting point), let’s look at the bigger picture and think about long-term financial security. To do that, we want to focus on Lifestyle Reserve.

What is a Lifestyle Reserve / Cash Wedge and Why do I need it?

You may have heard me talk about a Lifestyle Reserve in my previous blogs, Using a Lifestyle Reserve To Ride Out Market Storms and Play It Again, Steve – Timeless Financial Tips #6: Aligning Your Investments with Your Investment Time Horizon. A Lifestyle Reserve, or sometimes referred to as a Cash Wedge, is essentially enough money in safe investments to cover your spending needs; this can be (and often is) at retirement or it could also be needed to supplement income in working years to meet your lifestyle needs. For clarity, I’m talking about the lifestyle to which you’ve become accustomed or the level of lifestyle you want, which would include both “needs” spending (non-discretionary) and “wants” spending (discretionary). So, your lifestyle needs would include vacations, club memberships, gifts to kids, charitable donations, etc.

A Lifestyle Reserve / Cash Wedge should be secured in a low-risk manner: cash or high-quality, short-term fixed income investments, which may produce a lower-than-expected return on investment but is exposed to significantly less volatility to ensure that your principle is preserved. Continue Reading…