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.

The Case for Delaying OAS Payments has Improved

Posted By |

By Michael J. Wiener

Special to the Findependence Hub

Canadians who collect Old Age Security (OAS) now get a 10% increase in benefits when they reach age 75.  The amount of the increase isn’t huge, but it’s better than nothing.  A side effect of this increase is that it makes delaying OAS benefits past age 65 a little more compelling.

The standard age for starting OAS benefits is 65, but you can delay them for up to 5 years in return for a 0.6% increase in benefits for each month you delay.  So, the maximum increase is 36% if you take OAS at 70.

A strategy some retirees use when it comes to the Canada Pension Plan (CPP) and OAS is to take them as early as possible and invest the money.  They hope to outperform the CPP and OAS increases they would get if they delayed starting their benefits.  In a previous post I looked at how well their investments would have to perform for this strategy to win.  Here I update the OAS analysis to take into account the 10% OAS increase at age 75.

This analysis is only relevant for those who have enough other income or savings to live on if they delay OAS.  Others with no significant savings and insufficient other income have little choice but to take OAS at 65.

OAS payments are indexed to price inflation, and the increases before you start collecting are also indexed to price inflation.  So, the returns that come from delaying OAS are “real” returns, meaning that they are above inflation.  An investment that earns a 5% real return when inflation is 3% has a nominal return of (1.05)(1.03)-1=8.15%.

In many ways, the OAS rules are much simpler than they are for CPP, but two things are more complex: the OAS clawback and OAS-linked benefits.  For those retirees fortunate enough to have high incomes, OAS is clawed back at the rate of 15% of income over a certain threshold.  This complicates the decision of when to take OAS.  Low-income retirees may be eligible for other benefits once they start collecting OAS.  These factors are outside the scope of my analysis here.

A One-Month Delay Example

Suppose you’re deciding whether to take OAS at age 65 or wait one more month.  For the one month delay, the OAS rules say you’d get an additional 0.6%.  So, for the cost of one missed payment, you’d get 0.6% more until you reach 75.  After that, you’d be getting 0.66% more.

For a planning age of 100, the real return from this delay is a little over 7%.  So, your investments would have to average 7% plus inflation to keep up if you chose to take OAS right away and invest the money.

All the One-Month Delays

The following chart shows the real return of delaying OAS each month for a range of retirement planning ages, based on the assumption that the OAS clawback and delaying additional benefits don’t apply.  The returns are slightly higher than they were before CPP payments rose 10% at age 75. Continue Reading…

Defensive Sectors for Retirement

Posted By |

By Dale Roberts, cutthecrapinvesting

Special to Financial Independence Hub

Defence wins championships say many sports commentators. Defense can be a big winner for retirees as well. In fact, from the massive correction known as the financial crisis (2008-2009 and beyond) using defensive sectors was twice as effective as using bonds. Then, factor in the generous and growing dividends that Canadian retirees embrace, and we might have an unbeatable retirement funding model. Let’s take a quick look at defensive sectors for retirement.

The first question you will likely ask is – “what are the defensive sectors?”

Consumer staples / Healthcare / Utilities

For the utilities sector, we will include the modern utilities known as telco (we can’t live without being hooked up in the modern world). Pipelines are also in the mix.

The 3 defensive sectors are products and services that we can’t live without. And we often do not reduce spending in these categories, even during times of recessions and bear markets.

The sectors are more durable and will typically hold up quite well during the bear markets. Of course, bear markets can pull the rug out of your retirement plans if you are not properly prepared, and are exposed to too much stock market risk. In retirement we are looking to grow and protect.

Defensive sectors for retirees vs the market

Here’s a chart that looks at the defensive sectors in the U.S. vs the S&P 500. It is a retirement funding scenario, where the portfolios are funding retirement at a 4.8% annual spend rate. That is, a million dollar portfolio will deliver $48,000 in year one. Spending will then increase at the rate of inflation.

Here’s building the big dividend retirement portfolio.

Keep in mind that the ETFs used in the example are U.S. dollar funds and belong in U.S. dollar accounts. You may choose to build a stock portfolio from these sectors. That is what I do with great success.

What is shocking is that through just one investment cycle (bear market through bull market), the defensive sectors for retirees finished the period with twice as much as the traditional balanced portfolio approach. Team defense was also better than a mix of defensive sectors and bonds.

Disclaimer: past performance does not guarantee future returns.

Canadian defensive sector ETFs

These ETFs are Canadian dollar ETFs, suitable for Canadian dollar accounts. Some of the ETFs will offer international exposure.

Canadian healthcare ETFs

  • Harvest – HHL
  • BMO – ZHU

Canadian consumer staples ETFs

  • BMO – STPL
  • iShares – XST

Canadian utilities  ETFs

  • iShares – XUT
  • BMO – ZUT
  • BMO Covered Call Utilities – ZWU
  • Horizons – UTIL
  • Hamilton – HUTS. This ETF uses modest leverage.

The all-weather models for retirees

Readers will know that I embrace the all-weather portfolio models for retirement. In the above scenario the time period is almost exclusively during a period of disinflation. Stock markets and bonds love disinflation. In the defensive portfolio there would be no meaningful protection from robust inflation.

The all-weather portfolio – ready for most anything.

Given that I would suggest that you consider adding (bolting on) inflation protection. In Canada, that can be as easy as adding the Purpose Real Asset ETF. That holds a very nice mix of dedicated inflation fighters, from energy stocks, REITs, gold and commodities. Continue Reading…

How 12 Business Leaders invest to Grow their Income

Posted By |

From getting over the fear of starting to looking into REITs, here are 12 answers to the question, “Can you share your most recommended tips for how you can invest your money to grow your wealth and increase your income, specifically for financial independence through investing?” 

  • Get Started Right Now 
  • Maximize Tax-advantaged Investments
  • Avoid Trying to Time the Market
  • Remember Diversification is More Important Than You Think
  • Put Your Tax Refunds to work
  • Create a High-Yield Savings Account
  • Think of the Market as a Game
  • Prioritize Risk Management Over Chasing High Returns
  • Be Patient and Plan
  • Raise Your Savings Rate by 5% Each Year
  • Repay High-interest Debt
  • Try REIT Index Funds 

Get Started Right Now 

Investing is one of those things that seems like an insurmountable barrier to entry for many people. How can I invest when I don’t have thousands of dollars just kicking around is a common attitude I’ve come across, and in my opinion, it is one of the biggest mistakes toward actually growing your wealth and becoming financially independent. 

The thing is that you actually have to get started: even if it’s a few dollars at a time invested in penny stocks, you’ve got to make a start. Even if the amounts are negligible, you’re gaining invaluable experience in financial markets and financial literacy that will pay massive dividends down the line. — Dragos Badea, CEO, Yarooms

Maximize Tax-advantaged Investments

Both IRAs and 401(k)s have tax advantages [and the equivalent RRSPs and group RRSPs in Canada: editor]. You can choose to deduct your contributions from your taxes or contribute after taxes and avoid taxes when you withdraw during retirement. 

IRAs and 401(k)s are easy to set up. A 401(k) is offered through employers, so if your workplace offers one and matches a percentage of your contributions, take advantage of that matching benefit.

Anyone can start an IRA. You can open an account online today with Fidelity or another firm. Many people assume it’s hard to set up, but it’s not. You can do it in half an hour. 

With both options, you can set up automatic withdrawals from your paycheck. That option helps you succeed in saving because you don’t have to think about it. — Michelle Robbins, Licensed Insurance Agent, Clearsurance.com

Avoid trying to Time the Market

Almost 80% of active fund managers fall behind the major index funds. 

So if these financial professionals can’t beat the market, what chance do ordinary people like you and me have? 

This is why my best investing tip is consistently putting money into an index fund like the S&P 500 without trying to time the market. 

By putting a portion of your salary into an index fund every month for decades, your investments compound, allowing you to build unimaginable amounts of wealth. 

For example, if you put just $300 a month into an index fund growing 8% annually, you’ll have over one million dollars after 40 years. — Scott Lieberman, Owner, Touchdown Money

Remember Diversification is more Important than you Think

Portfolio diversification is a powerful tool that can help protect your investments against large losses due to market downturns. By selecting assets with low correlation, you are essentially increasing the safety of your portfolio while pursuing rewards. This strategy has become indispensable for individual investors and financial advisors alike: after all, who wouldn’t want some extra security for their hard-earned money?

If you split them between two different companies, such as Invest A and B — one providing package deliveries and another offering video conferencing services — you’ll have far less reason for worry in times of economic hardship or other disruptive events! Look at how gas shortages can fuel success with Investment B: when stock prices dip on account of limited resources, people switch to digital communication tools from home, which ultimately benefits Investment B’s performance. — Derek Sall, Founder and Financial Expert, Life and My Finances

Put your Tax Refunds to work

Using your tax refunds to invest is a wise investing tactic to consider that you may have never thought about: for many, the short-term sacrifice is worth the long-term benefits, especially as you settle into life after work. 

This is a great way to supplement your current income or even a retirement account, or jump-start a new investment account. Tax refunds can also be used for other pivotal financial reasons, including paying off debt, funding an IRA, building a health savings account, and creating an emergency stash. — Dakota McDaniels, Chief Product Officer, Pluto

Open a High-Yield Savings Account

While savings accounts aren’t exciting ways to grow your wealth, online banks are currently paying 3-4% interest. While 3-4% might not seem like much, it only takes a few minutes to set up an account, meaning you can earn interest risk-free while also keeping your money easily accessible. — Larissa Pickens, Co-Founder, Worksion

Think of the Market as a Game

For investing, I always tell people to think of the stock market as a big game of poker.

Invest in real estate: “I like to think of real estate as the gift that keeps on giving. With rental properties, you’re not just earning income from tenants, but also building equity over time.”

Start your own business: “Entrepreneurship is not for the faint of heart, but neither is settling for a mediocre 9-5 job. Starting your own business is like taking a leap of faith and trusting that you’ve got what it takes to make it happen. Just remember to pack a parachute.”

Invest in yourself: “Investing in yourself is like planting a money tree, except instead of watering it with H2O, you’re watering it with knowledge and experience. So, go ahead and take that online course, attend that industry conference, or volunteer for that new project. Your future self will thank you.” — Russ Turner, Director, GallantCEO 

Prioritize Risk Management over Chasing High Returns

Although even small returns can accumulate into significant wealth through compounding, a single failed investment can cause a substantial loss. 

To mitigate risk, I employ the dollar-cost averaging (DCA) strategy when investing in the S&P 500. The S&P 500 is already a diversified index, reducing the risk associated with individual stock investing. Furthermore, the DCA strategy further minimizes risk by investing fixed amounts of money at regular intervals, regardless of the market’s ups and downs.  Continue Reading…

Tawcan: 5 stocks we plan to buy this year

Posted By |
Photo unsplash/Yiorgos Ntrahas

By Bob Lai, Tawcan

Special to Financial Independence Hub

A new year is here and many investing-focused Canadians like us are overjoyed. Because this means new contribution room for TFSA and RRSP.

If you look at our dividend portfolio, you’ll see that we currently own 50 individual dividend stocks and 1 index ETF. Interestingly, despite making an effort at reducing the number of holdings last year, we ended up now at the end of the year with the same number as we had at the beginning of 2022.

The individual stocks we own consist of a mix of US and Canadian stocks:

With the new contribution room for TFSA and RRSP, we are eager to purchase more shares of the stocks and index ETF that we already own, rather than initiate new positions. But again, plans are only plans and can change if a new potential new position becomes too attractive to ignore.

Here are 5 stocks we plan to buy in 2023 and our rationale for each:

5 stocks we plan to buy in 2023

Before we proceed further, please note that I’m not a professional financial advisor. Whatever I write and share on this blog is purely my personal opinion. It should not be treated as advice or recommendations. Please always do your own research and due diligence before buying and selling stocks or ETFs. Thank you.

1.) Apple (AAPL)

Despite only owning an iMac at home and no other Apple products, both Mrs. T and I like Apple a lot. We are probably one of the rare households that are not deeply tied into the Apple ecosystem despite owning a Mac.

For some reason, we continue to use Android-based phones and do not own iPad, Apple laptops, and other Apple products. But as I stated, we’re probably one of the rarities. Many people, once they purchase an Apple product, end up purchasing more Apple products and become deeply rooted in the Apple ecosystem. For example, it may start with a MacBook, then an iPhone. Soon the purchases of AirPods, an Apple Watch, and perhaps an iPad and even an Apple TV. And that’s not to mention all the Apple services the Apple users would end up using and paying for once they’re entrenched deep in the Apple ecosystem. For example, Apple Music and Apple cloud storage.

Why do we like Apple? Well, what’s not to like when the company makes billions and billions of dollars each quarter?

apple Q1 2023 income statement

While iPhones make up the bulk of Apple’s revenues, revenues from services have increased over the years as you can see from the chart below.

Apple revenues
Source: Statista

Yes, Apple’s Q1 2023 results look a bit disappointing – down 5% YoY, a bigger drop than many analysts expected due to iPhone supply issues. The EPS was $1.88 versus the $1.94 estimated, and down 10.99% YoY.

While the hardware revenues struggled in Q1 2023, services revenue finally broke the $20 billion mark after four straight quarters being in the $19 billion range. This is quite significant as Apple tries to transition and become a services-centric company.

We all know that Apple products are usually more expensive than its competition, yet people continue to buy them. Due to its brand name, Apple is able to charge a premium over its competition (aka the Apple tax) and as a result, enjoy a higher gross margin (in case you’re wondering Apple’s Q1’23 gross margin was 42.96%!).

Apple’s share price has struggled a bit in 2022, mostly caused by uncertainties in the rising interest rate environment. But Apple’s share price has continued to go up over the long term.

Apple share price

Apple has a 10-year dividend increase streak with a 10 year dividend growth rate of 25.26%. Although the dividend yield is extremely low, the overall total return has been quite impressive.

I believe 2023 will be a big year for Apple as we expect many new products to be announced. Just last month, Apple announced M2 Pro and M2 Max based MacBook Pro and Mac mini as well as HomePod.

One very important to note, as I pointed out in the tweet above, is that every Apple desktop and laptop (except Mac Pro) now all have integrated components. This means the desktops and laptops are not user upgradable at all. To-be-Mac-owners must decide whether to buy additional RAM and SSD storage at the time of purchase.

Let’s not forget Apple charges an arm and a leg for these upgrades! For example, going from 16 GB unified memory to 32 GB on a 14-inch MacBook Pro will cost you $500 CAD. And going from a 1TB SSD to a 2 TB SSD will cost you $500 CAD.

Did I mention that these laptops and desktops aren’t cheap to start with?

14 inch MacBook pricing
14-inch MacBook Pro pricing. Hardly affordable for students

It sucks to be an Apple customer when you have to buy a new laptop or desktop and need memory and storage upgrades. But this is really good news for Apple shareholders.

2.) iShares All Country World Ex-Canada International ETF (XAW)

Yes, XAW isn’t a stock, but rather an index ETF. Since we plan to add more XAW shares throughout 2023, I thought I’d include it on the list.

Why buy more XAW shares?

One word – diversification.

XAW holds more than 9,000 international stocks with more than 60% exposure to the US market, 6% exposure to the Japanese market, 4% exposure to the UK market, 3% exposure to the Chinese market, and exposure to other global markets. So by holding XAW, we are able to get an instant asset and geographical diversification. This kind of diversification is nearly impossible to do when holding individual dividend stocks.

Furthermore, XAW is also good for many Canadian investors who have an inherent Canadian bias, holding arguably an overly high percentage of their portfolio in Canadian stocks.

We plan to add more XAW throughout this year in our RRSPs and non-registered accounts and take advantage of the commission-free ETF purchase that Questrade offers.

At the time of writing, XAW is one of the top five holdings in our dividend portfolio. We are hoping to purchase more XAW so it can rise to be the top or second-place holding in our portfolio.

3.) Waste Connections Inc (WCN.TO)

We started buying WCN shares in late 2021 but didn’t get a chance to get more when the stock market was volatile in the latter half of 2022. Overall, I really like the business sector WCN is in – people will produce garbage and waste and companies like Waste Connections will collect, transfer, dispose of them, and make a profit.

Because people produce garbage regardless of whether it’s a bull or a bear market, WCN’s business should be quite stable. In other words, the waste management sector is a recession-proof area. Given a potential recession in the future, it makes sense to add more shares of WCN.

WCN’s dividend yield is below 1%, so many income-focused investors may ignore it. However, WCN has been raising its dividend for 13 straight years with a 10 year dividend growth rate of 14.4% and a 5 year dividend growth rate of 13.6%. Whichever you slice it, WCN’s dividend growth rate has been quite impressive. Continue Reading…

Coping with the Fear of Market Downturns

Posted By |
Image courtesy RetireEarlyLifestyle.com/Kiplinger

By Billy and Akaisha Kaderli

Special to Financial Independence Hub

On our latest adventure, we were on the beach in Isla Mujeres, Mexico when a lady recognized us from our website RetireEarlyLifestyle.com. After some pleasantries, she asked if we could address the fears of the market declining and how to handle it.

We appreciated that input from one of our Readers.

Previous market declines

Since the surviving of the 1987 crash when the Dow Jones Industrial Average fell over 20% in one day, there have been other downturns including the recent ones of 2007-2008 and the Covid meltdown in March of 2021. We have learned from each of them.

They can be trying on one’s patience and confidence, so how is it best to handle them?

Noise, corrections and bears

First, let’s define these meltdowns.

Between a 5-10% decline in the averages is called noise and can happen at any time.

Many individual issues have these gyrations which is why we own the Indexes. They are more stable.

Over a 10% drop is called a correction, meaning it is wringing the excesses out of the markets. The markets are constantly being over-extended and under-extended and these 10% moves correct for those times.

If the averages drop 20% or more, it is considered to be a bear market and we tend to have these every 56 months.

On average, bear markets last 289 days or 9.6 months with an average loss of 36.34%. These can be painful for one’s financial health – or an opportunity – depending on where you are in the investment cycle.

A number of events can lead to a bear market including higher interest rates, rising inflation, a sputtering economy, and a military conflict or geopolitical crisis. Seems we have all of these presently.

If you are in the accumulation phase and buying more shares at cheaper prices, this can be a bonus for you. However, if you are now retired and living off your investments with your account values dropping, that can be difficult to swallow.

How to calm your nerves to prevent panic selling

It’s important to note the difference between trading and investing.

Traders drive the day-to-day activity, booking profits and hopefully taking losses quickly. We investors take a longer view to ride out these cross currents of the markets knowing that – over the long run – we will be fine. Continue Reading…