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.

In the pursuit of financial security for all, we can’t overlook older widowed women

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Image by Pexels: Andrea Piacquadio

By Christine Van Cauwenberghe

Special to Financial Independence Hub

Canada has a bold vision – to build a more accessible, inclusive and effective financial literacy ecosystem for all. The five-year plan, laid out in the National Financial Literacy Strategy 2021-2026, is an important step forward to achieving sweeping financial literacy. But one cohort is noticeably absent from this ambitious strategy – older widowed women.

During Financial Literacy Month in November, we had an opportunity to cast a light on financial education and empowerment for this often overlooked and underserved, but statistically significant, group. In 2022, there were approximately 1.5 million widowed women compared to the roughly 472,000 widowed men, reports Statista Research Department. As our nation nears “super-aged” status, where 20 per cent of our population will be 65 years or older, these numbers will continue to climb.

Longer life expectancies for women, paired with women generally marrying or partnering with older men, leaves them more likely to spend at least some of their retirement in widowhood. As such, it’s estimated that 90 per cent of women will become the sole financial decision-maker at some point in their lifetime, representing a substantial segment of Canada’s wealth management sector.

Lower financial literacy than male counterparts

However, this same group generally reports lower levels of financial literacy than their male counterparts. While many reasons account for this disparity, traditional societal norms play a significant role – older generations of women were more likely to stay home and rear children while men typically joined the workforce, granting them greater financial exposure.

Now, we have an opportunity and a responsibility to change this. Widespread financial literacy matters, but in our effort to educate the masses we can’t leave certain groups behind. By narrowing the knowledge gap, we can empower widowed women from and after the Silent Generation with a voice – we can give them a say in their own financial future.

Women will soon control half of accumulated Wealth

By 2026, women in Canada will control roughly half of all accumulated financial wealth, estimates Strategic Insights, up from one-third a decade earlier. While this is a welcomed shift, many women’s’ lack of core financial understanding and involvement is sobering. Too often, it’s men who assume a leading role in personal wealth management, specifically retirement and estate planning. This despite the fact that women, on average, survive their husbands by roughly five years. Yet, only 17 per cent of women in Canada over the age of 65 have an up-to-date will, according to a survey from LegalWills Canada. Continue Reading…

Interview with Harvest ETFs CEO Michael Kovacs on how Retirees can generate income in volatile markets

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The following is an edited transcript of an interview with Michael Kovacs, CEO of Harvest ETFs, conducted by Financial Independence Hub CFO Jonathan Chevreau.

Jon Chevreau (JC)

Thanks for taking the time today, Michael. We all know that 2022 was a pretty bad year as markets were impacted by higher interest rates. That turbulence bled into much of 2023, although the last few weeks have seemed much rosier.

How do you respond to unitholders of funds who are currently down year over year? Does your covered call writing protect retirees?

Michael Kovacs

Michael Kovacs (MK)

Thanks for having me, Jon. It is important to remember that we offer equity income funds. That means that you have to look at the total return of the product, which includes the price of the ETF and its accumulating distributions.

Yes, there has been turbulence in 2022 and through much of 2023. However, over that period, products like the Harvest Healthcare Leaders Income Fund (HHL) have paid consistent distributions.

Let’s look at the Harvest Diversified Monthly Income ETF (HDIF). In terms of actual returns, this ETF is down nearly double-digit percentage-wise in the year-over-year period (as of early November). But, when you look at the distributions paid over that same period, HDIF has delivered positive cashflow for its unitholders, which reduces the decline by more than half.

JC

Are you saying that between the covered calls, the distribution and the leverage plus the underlying equity income, that a retiree could expect annual yields as high as 10% or 12% or higher?

MK

Yes. Yields are anywhere from 1.5% to 3%, depending on the equity category. Then you have option writing. We can go right up to 33% on any of those portfolios, which generates additional yield. So, to be able to generate 9-10% is very achievable. And we’ve been able to do that consistently for a quite a few years now.

Jon Chevreau

JC

What is your view on the current interest rate climate? Have we reached a top? If so, when will they start to come down?

MK

Many of us remember the high interest rates of the 1980s, especially some of your readers who were trying to obtain their first mortgages. We have experienced a big jump in interest rates over the past two years. However, we believe that we have probably seen the top for rates for now. Or, if we haven’t, we are very close to the top. That means there are going to be some great opportunities in fixed-income markets. The next move for interest rates may be down by mid-to-late 2024.

That said, there are still great opportunities that will benefit equities and bonds in the current climate. Our first launch in the Bond area is the Harvest Premium Yield Treasury ETF (HPYT). We’ve launched with a high current yield. We are targeting long treasury bonds in this fund. This is about generating a high level of income while owning a very good credit-worthy security like a U.S. Treasury. So, if rates start declining next year, it is a great time to be holding fixed income.

JC

Findependence Hub readers tend to be retirees who want steady cash flow. What is Harvest’s view of cash flow for retirees?

MK

I think cash flow for retirees is essential. Once your employment income has gone, you must depend on your investments, your pensions, your CPP, and so on. The recent increases in interest rates have been good for retirees in the short term. Higher rates allow retirees to keep shorter-term cash and generate a safe yield of 5% or more.

Our longer-term equity products aim to have that heavy bias toward equities. For example, the Harvest Healthcare Leaders Income ETF (HHL) is typically written at about 25-28% average, with the other 70% or so fully exposed to health care stocks. The covered call option writing strategy allows us to generate a high level of income.

Cash flow is the basis behind our name: Harvest. People have spent decades building up capital, sowing the seeds. Our products allow them to harvest the fruits of their life-long labour.

We believe our equity-income and fixed-income products are a fantastic way to do that. If we can help you preserve capital and generate consistent income, we are doing our job.

JC

There is also interest among investors in asset allocation ETFs. Is HDIF essentially your answer to that demand?

MK

You’re correct. Some people prefer to allocate to specific funds, but the idea behind HDIF is to allocate to the best of Harvest’s top products that generate cash flow. In the case of HDIF, you do have a leverage component. You are increasing the yield but at the same time, you do increase your risk as well. Continue Reading…

Retired Money: What is Infinite Banking and should I consider it in Retirement?

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Image via MoneySense.ca: karlyukav on Freepik

My latest MoneySense Retired Money column looks at a topic I cheerfully admit I’d never heard of until the editors drew it to my attention: Infinite Banking (IB). Not to toot my own horn, but that’s unusual, as I have been writing about personal finance for the better part of three decades.

In any case, you can find the full MoneySense column by clicking on the highlighted headline here: Infinite banking in Canada: Should you borrow from your life insurance policy?

According to a  useful primer in Policy Advisor, Infinite banking is “a concept that suggests you can use your whole life insurance policy to ‘be your own bank.’ “ It was created in the 1980s by American economist R. Nelson Nash, who introduced the idea in his book, ‘Becoming Your Own Banker.’ He founded IBC (Infinite Banking Concept) in the U.S. and eventually it migrated to Canada.

One of the sources cited in the column evinced some skepticism when he said of Infinite Banking (IB for short): “those who have sipped rather than chugged the IB Kool-Aid say it’s a strategy that may be too complex to be marketed on a mass scale.”

If you’re not familiar with life insurance, Infinite Banking does seem a bit arcane. Rather than put your money in a traditional bank – which until the last year or so paid next to nothing in interest on accounts – you would invest in a Whole Life or Universal Life insurance product, either of which provides some “cash value” from the investment portion of those policies. Then if you want to borrow money, instead of paying hefty interest payments to a bank, you borrow against your life insurance policy.

Watch this YouTube video primer

Those new to Infinite Banking should definitely look at a YouTube primer made by Philip Setter, CEO of Calgary-based Affinity Life (Affinitylife.ca). There he readily concedes that much of the marketing hype is to portray Infinite Banking as some kind of “massive secret for the wealthy,” which essentially amounts to buying a whole life insurance policy and borrowing against it. In the video he calls out some of the conspiracy-mongering that seems to be attached to infinite banking, including the primary message from some promoters that traditional banks and governments are out to rip off the average consumer.  Continue Reading…

What Experts get wrong about the 4% Rule

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Pexels Photo by Miguel Á. Padriñán

By Michael J. Wiener

Special to Financial Independence Hub

 

The origin of the so-called 4% rule is WIlliam Bengen’s 1994 journal paper Determining Withdrawal Rates Using Historical Data.  Experts often criticize this paper saying it doesn’t make sense to keep your retirement withdrawals the same in the face of a portfolio that is either running out of money or is growing wildly.  However, Bengen never said that retirees shouldn’t adjust their withdrawals.  In fact, Bengen discussed the conditions under which it made sense to increase or decrease withdrawals.

Bengen imagined a retiree who withdrew some percentage of their portfolio in the first year of retirement, and adjusted this dollar amount by inflation for withdrawals in future years (ignoring the growth or decline of the portfolio).  He used this approach to find a safe starting percentage for the first year’s withdrawal, but he made it clear that real retirees should adjust their withdrawal amounts in some circumstances.

In his thought experiment, Bengen had 51 retirees, one retiring each year from 1926 to 1976.  He chose a percentage withdrawal for the first year, and calculated how long each retiree’s money lasted based on some fixed asset allocation in U.S. stocks and bonds.  If none of the 51 retirees ran out of money for the desired length of retirement, he called the starting withdrawal percentage safe.

For the specific case of 30-year retirements and stock allocations between 50% and 75%, he found that a starting withdrawal rate of 4% was safe.  This is where we got the “4% rule.”  It’s true that this rule came from a scenario where retirees make no spending adjustments in the face of depleted portfolios or wildly-growing portfolios.  So, he advocated choosing a starting withdrawal percentage where the retiree is unlikely to have to cut withdrawals, but he was clear that retirees should reduce withdrawals in the face of poor investment outcomes. Continue Reading…

The changing perceptions of Normal

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Image courtesty Outcome/Creative Commons

By Noah Solomon

Special to Financial Independence Hub

In response to rapidly accelerating inflation, central banks began raising rates aggressively at the beginning of 2022. Ever since, wild swings in bond markets have had a tremendous impact on virtually every single asset class.

This month, I examine the recent spike in rates from a historical perspective. Importantly, I will discuss the likely range of interest rates over the foreseeable future and the associated implications for financial markets.

When the Fed and other central banks were confronted with financial disaster in late 2008, they slashed interest rates to zero and deployed additional stimulative measures to ward off what many thought could be another Great Depression. Global rates then remained at levels that were both well below historical averages and the rate of inflation for the next 13 years.

In 2008, the runaway inflation of the 1980s and the painful medicine of record high rates that were required to subdue it were still relatively fresh in people’s minds. At that time, had you asked anyone what would be the most likely result of keeping rates near zero for over a decade, their most likely response would have been runaway inflation. And yet, inflation remained strangely subdued. According to most experts, this unexpected result is largely attributable to a relatively benign geopolitical climate and a related push toward global outsourcing.

This led to the notion of a “new normal” in which inflation was permanently expunged. Over the span of only 13 years, people went from fearing inflation to believing that it was a relic of the past unworthy of serious consideration. This false sense of comfort caused central banks and investors alike to be caught off guard in late 2021 when they realized that inflation had not been permanently vanquished but was merely hibernating.

These sentiments were evident in bond markets. After rates were slashed to zero during the global financial crisis, investors were skeptical that they would remain there for long before stoking inflation. Longer-term rates remained well above their short-term counterparts, with the yield on 10-year U.S. Treasuries retaining an average 1.9% premium above the Fed Funds rate from 2009 – 2020.

However, 13 years of ultra-low rates with no sign of inflation allayed such fears, with the yield spread crossing into negative territory late last year and reaching a low of -1.5% in May of 2023. Even the rapid acceleration in inflation in late 2021 failed to fully disavow investors of the notion that the era of low inflation had come to an end, with current 10-year rates falling below their overnight counterparts.

10 U.S. Treasury Yield Minus Fed Funds Rate (1995 – Present)

 

Equity markets danced to the same tune as their bond counterparts. When central banks cut interest rates to zero during the global financial crisis, investors were dubious that inflation would not soon rear its ugly head. Multiples remained relatively normal, with the P/E ratio of the S&P 500 Index averaging 16.4 for the five years beginning in 2009.

Over the ensuing several years, investors became complacent that the world would never again experience inflation issues, with the S&P 500’s P/E ratio climbing as high as 30 by early 2021. Multiples have since remained somewhat elevated by historical standards, indicating that markets have not fully embraced the fact that inflation may not be as well-behaved as what they are used to.

S&P 500 P/E Ratio (1995 – Present)

 

The Rising Tide of Declining Rates: Not to be Underestimated

According to legendary investor Marty Zweig:

“In the stock market, as with horse racing, money makes the mare go. Monetary conditions exert an enormous influence on stock prices. Indeed, the monetary climate – primarily the trend in interest rates and Federal Reserve policy – is the dominant factor in determining the stock market’s major direction.”

The 2,000-basis point decline in interest rates from 1980 to 2020 not only turbocharged aggregate demand (and by extension corporate revenues), but also dramatically lowered companies’ cost of capital. In tandem, these two developments were nothing short of a miracle for corporate profits and asset prices. Continue Reading…