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.

Financial planning and Tax Strategies for Business Owners

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By Steve Lowrie, CFA

Special to the Financial Independence Hub

There are plenty of perks to being your own boss, including the ability to build up tangible assets to invest in your personal portfolio, your corporate accounts, or both. But if you are a small- to mid-sized Canada-controlled private corporation (CCPC) owner, how do you know if you’re managing your personal and corporation investments as tax-efficiently as possible? Let’s take a look at that today.

Your Accountant and your Financial Advisor: A powerful pairing

In my experience, successful business owners usually have their corporate tax planning practices well in hand. Any number of reputable accounting firms can help you tax-efficiently structure your CCPC, manage its revenue and expenses, and accurately report its activities to the proper authorities. Your accountant also should be able to help you plug a lot of the taxable leaks that can otherwise siphon away excessive individual or corporate wealth.

However, I have noticed a business owner’s best, most tax-efficient corporation investment strategies often slip through unattended.

That’s no knock against accounting firms. It’s not typically in their purview to optimize tax-efficient investing across your (and potentially your spouse’s) taxable personal and corporation investment accounts, tax-favoured RRSPs and TFSAs, etc. That’s where an independent financial advisor, like Lowrie Financial, comes in. Your CA or tax attorney has the specialized expertise needed to tend to your corporate assets. We focus on the intersection between your corporation tax planning and your greater wealth planning … including how to manage all your investments as tax-efficiently as possible.

Tax-Efficient Investing: Tax Planning vs. Predicting

Before we dive into the details, I’d like to emphasize that none of us has a magic wand to make your tax bill disappear entirely. Nor do I possess a Ouija board to divine future tax code changes. Instead, I believe it’s best to avoid overly clever or predictive tax-cutting ploys that seem too good to be true — because they probably are — and focus on what we can manage here and now.

So, what are the solid tax-efficient strategies within our control? Most are the same whether you’re investing as a business entity or an individual. I’ve already covered many of them in “Tax Strategies to Boost Your Financial Savings.” Still, common-sense advice has a way of getting buried under all the financial nonsense, so let’s revisit the following four tax-planning strategies for a business owner’s personal and corporate investments alike:

1.) Don’t let Short-Lived adventures distract you from your Long-Term Financial Goals

Who isn’t attracted to the idea of scoring big on an action-packed investment? When things are going up, it’s fun, like finding extra money you’d forgotten about in your sock drawer. Managing your investments for gradual growth is more like watching paint drying on the wall.

Unfortunately, as I described in “Investment Fads and Other Destructive Behaviours,” corporate and individual investors who chase after short-term returns aren’t likely to serve their long-term financial goals. Instead, they end up with what I call a “dog’s breakfast portfolio” of whatever investments have been randomly hot or not over the past several years.

In the long run, this approach not only leaves you anxious and uncertain about how your investments are holding up, but it’s also usually not as tax-efficient. Instead of giving you the confidence to minimize your trading and adhere to some of the other best practices I’ll cover next, you end up jumping in and out of markets and positions, disregarding the tax ramifications, and assuming your accountant will dig you out of whatever mess you’ve created.

How do you avoid this trap? Financial planning for business owners (or anyone else) means having an investment plan to guide the way, shaped by an evidence-based strategy; and sticking with your plan over time, adjusting it only as your business or personal goals evolve.

2.) Keep your Friends close and your Taxable Capital Gains closer

Understandably, you may think of your taxable investments’ capital gains as a burden. But as I covered in “Tax Strategies to Boost Your Financial Savings”, they can actually be one of your best tax-planning friends.

Some recent good news was that there were no changes in the recent 2022 Federal Budget on the capital gain inclusion rates. So capital gains are still taxed at half of your personal or corporate tax rate. For example, if your personal or general corporate rate is 50%, then you will pay 25% on capital gains. Yes, you read that correctly, 50% less tax! I have yet to find anyone who wouldn’t opt to pay 50% less tax on anything when they’re able.

This concept applies to realized capital gains, and even more so to unrealized gains you can defer for now. Like the snowball effect of compounding interest (earning interest on interest earned), you or your business can build up a compounding tax arbitrage by putting off paying taxes on unrealized gains, which can then stay invested to accumulate even more tax-friendly gains.

You don’t want to be penny wise and pound foolish by chasing after tax savings that don’t serve your greater wealth interests. So, it remains wise to first ground all your investment decisions in your financial goals, with a portfolio built and managed accordingly. Then, the more effectively you can leave your corporate assets untouched to create gains, the more tax-efficient your results are likely to be when you do sell taxable positions according to your disciplined investment plan.

3.) Marginal Tax Rates matter

Supplementing our first two points, it’s also worth keeping an eye on the marginal tax rates you land in, based on your individual and corporate income.

For your personal income, this is especially important if it’s hovering right around the perimeters of those marginal rate points. In Ontario, if you make over $221,709 in 2022, you’ll be in the top bracket. It’s worth being aware of when you may be getting close to that threshold, so you can sharpen your income tax planning pencil, typically in concert with your financial advisor and accountant team. Continue Reading…

Updating the Canadian wide-moat portfolio

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

It’s a trade-off. I hold a concentrated portfolio of Canadian stocks. What I give up in greater diversification, I gain in the business strength and potential for the companies that I own to not fail. They have wide moats or exist in an oligopoly situation. For the majority of the Canadian component of my RRSP account I own 7 companies in the banking, telco and pipeline space. I like to call it the Canadian wide moat portfolio.

(updated August 24, 2022) Like many Canadian investors I discovered over the years that my Canadian stocks that pay very generous dividends were beating the performance of the market. You’ll find that market-beating event demonstrated by the Beat The TSX Portfolio. Eventually, I moved to the stock portfolio approach.

Over longer periods you’ll see that BTSX beat the TSX 60 by 2% annually or more. And as always, past performance does not guarantee future returns.

For the bulk of my Canadian contingent I hold 7 stocks.

Canadian banking

Royal Bank of Canada, Toronto-Dominion Bank and Scotiabank.

Telco space

Bell Canada and Telus.

Pipelines

Canada’s two big pipelines are Enbridge and TC Energy (formerly TransCanada Pipelines).

My followers on Seeking Alpha or Cut The Crap Investing readers will know that I also own Canadian energy producers, gold stocks and gold price ETFs (holding gold) and the all-in-one real asset ETF from Purpose. I also own Canadian bonds and bitcoin.

For the U.S. component there is a basket of U.S. stocks. Here’s an update of our U.S. stock portfolio. That portfolio continues to provide impressive market-beating performance.

We hold our cash with EQ Bank.

The performance update to August 2022

Here’s the Canadian wide moat 7 from 2014 vs the TSX Composite, to the end of July 2022. I slightly overweight to the telcos and banks. The portfolio for demonstration purposes is rebalanced every year. When reinvesting I usually throw money at the most beaten-up stock. That would be a reinvestment strategy that seeks value and greater income, the general approach of the Beat The TSX Portfolio.

2021 was a very good year for the wide moat portfolio. It beat the TSX, but did underperform the Beat The TSX Portfolio model and Vanguard’s High Dividend ETF (VDY). The outperformance of the Wide Moat 7, over the market, is accelerating in 2022.

In 2022 the Canadian Wide Moat 7 is up 1.14%. The TSX Composite is down 5.56%. For the record, the Vanguard High Dividend (VDY) is up 2% in 2022 to the end of July.

Charts courtesy of Portfolio Visualizer

Annualized returns and volatility

The Canadian Wide Moat 7 has delivered greater total returns and with less volatility and less drawdowns in corrections. The market beat is somewhat consistent with the Beat The TSX Portfolio beat of over 2% per year.

And of course the portfolio dividend income is more than impressive. I did not create portfolio exclusively based on the generous and growing income, but it is a wonderful by-product. The following is based on a hypothetical $10,000 portfolio start amount. The starting yield is above 4%, growing towards a 10% yield (on cost) based on the 2014 start date.

In the above, the dividends are reinvested. For example, the Telus dividend is reinvested in Telus. While I will take a total return approach for retirement funding, the generous portfolio income contribution will add a dimension that will help reduce the sequence-of-returns risk. I am in the semi-retirement stage.

Performance update to the end of May 2022

In this chart I begin with the inception date of the Vanguard High Yield VDY, 2013. We see the Canadian Wide Moat 7 vs VDY and the TSX Composite – XIC.

The Wide Moat stocks have outpeformed for the full period, but that is thanks mostly to better returns out of the gate. The outperformance is also aided by lesser drawdowns in market corrections. We see that both the Wide Moat approach and VDY have beat the market, with ease.

Wide Moats with an energy kick

I also hold Canadian energy stocks in the mix. That energy allocation is near 10%. Here’s what it looks like over the last year with that energy kicker. The following table looks at from January of 2021 to the end of July 2022. Continue Reading…

5 factors for millennials considering their retirement

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By David Kitai, Harvest ETFs

(Sponsor Content)

Millennials — the generation born between 1981 and 1997 — are beginning to enter their 40s. With the passing of that milestone comes a new consideration: retirement.

Canadians are living longer and longer, retirement at or around age 65 may need to last 30+ years. Millennials in their 30s and early 40s are ideally placed to plan for their eventual retirement. In those typically peak working years, millennials can take major strides towards a stable financial future and the achievement of their retirement goals. Preparing for retirement, though, is more than just putting a magic number away in a bank account. There are myriad factors a millennial should consider as they begin to plan for retirement. Below are five of those factors.

 1.) Understanding RRSPs and RRIFs

Registered Retirement Savings Plan (RRSP) accounts are a key tool Canadians can use to save for retirement. Their mechanism is simple: contributions to these accounts within the annual limit are tax-deductible. Income earned by investments held in the RRSP is also tax exempt, provided that income stays in the account. RRSPs give you an annual tax incentive to save for your retirement.

When RRSP holders turn 71, however, those RRSPs turn into Registered Retirement Income Funds (RRIFs). These accounts are subject to a government-mandated minimum withdrawal, on which some of the deferred tax from these contributions is paid. You can learn more about the problems with RRIF withdrawals, and how to navigate them here.

Millennials considering their retirement should look at how RRSPs can give them a tax benefit for saving now, while also planning for how the eventual transition to RRIFs will change their financial realities.

 2.) How the Canada Pension Plan factors into retirement

Canadians between the ages of 60 and 70 who worked in Canada and contributed to the Canada Pension Plan (CPP) can elect to activate their CPP benefits. Those benefits will be paid as monthly income based on how much you earned and contributed during your working years, as well as the age you chose to begin receiving benefits.

The longer you wait before turning 70, the higher your CPP benefits will be, though that appreciation doesn’t go beyond age 70. Millennials planning for retirement at any age could consider how they’ll finance their lifestyles while maximizing their CPP benefits at age 70. It’s notable that even the highest levels of CPP benefits pay less than $2,000 per month in 2022. That won’t be enough for many Canadians to live on, and millennials considering retirement may want to think about other sources of income.

3.) Equity Income ETFs

One of the issues that retirees have struggled with over the past decade has been the extremely low yields of traditional fixed income products like bonds. In 2022 those rates rose somewhat, but only following record inflation eating away at the ‘real yields’ of an income investment.

Many equity income ETFs pay annualized yields higher than most fixed income and higher than the rate of inflation. These ETFs hold portfolios of equities — stocks — but pay distributions generated through a combination of dividends and other strategies. Harvest equity income ETFs use an active and flexible covered call option writing strategy to help generate their monthly cash distributions.

These ETFs still participate in some of the market growth opportunity a portfolio of stocks would, while also delivering consistent monthly cash flow for unitholders. The income they pay can help retirees finance their lifestyle goals and help millennials as they prepare themselves to retire.

4.) Tax efficiency of retirement income

Tax is a crucial consideration for any younger person thinking about retirement. Aside from the tax issues surrounding RRSPs and RRIFs, any income-paying investments held in non-registered accounts, or any income withdrawn from a registered account, will be subject to tax. Dividend payments and interest payments from fixed-income investments are taxed as income. Continue Reading…

Beware the Retirement Risk Zone

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I often recommend deferring CPP until age 70 to secure more lifetime income in retirement. It’s also possible to defer OAS to age 70 for a smaller, but still meaningful, increase in guaranteed income.

While the goal is to design a more secure retirement, there can be a psychological hurdle for retirees to overcome. That hurdle has to do with withdrawing (often significant) dollars from existing savings to fill the income gap while you wait for your government benefits to kick in.

Indeed, the idea is still to meet your desired spending needs in retirement – a key objective, especially to new retirees.

This leads to what I call the retirement risk zone: The period of time between retirement and the uptake of delayed government benefits. Sometimes there’s even a delay between retirement and the uptake of a defined benefit pension.

Retirement Risk Zone

The challenge for retirees is that even though a retirement plan that has them drawing heavily from existing RRSPs, non-registered savings, and potentially even their TFSAs, works out nicely on paper, it can be extremely difficult to start spending down their assets.

That makes sense, because one of the biggest fears that retirees face is the prospect of outliving their savings. And, even though delaying CPP and OAS helps mitigate that concern, spending down actual dollars in the bank still seems counterintuitive.

Consider an example of a recently divorced woman I’ll call Leslie, who earns a good salary of $120,000 per year and spends modestly at about $62,000 per year after taxes (including her mortgage payments). She wants to retire in nine years, at age 55.

Leslie left a 20-year career in the public sector to work for a financial services company. She chose to stay in her defined benefit pension plan, which will pay her $24,000 per year starting at age 65. The new job has a defined contribution plan to which she contributes 2.5% of her salary and her employer matches that amount.

Leslie then maxes out her personal RRSP and her TFSA. She owns her home and pays an extra $5,000 per month towards her mortgage with the goal of paying it off three years after she retires.

Because of her impressive ability to save, Leslie will be able to reach her goal of retiring at 55. But she’ll then enter the “retirement risk zone” from age 55 to 65, while she waits for her defined benefit pension to kick in, and still be in that zone from 65 to 70 while she waits to apply for her CPP and OAS benefits.

The result is a rapid reduction in her assets and net worth from age 55 to 70:

Retirement risk zone example 55-70

Leslie starts drawing immediately from her RRSP at age 56, at a rate of about 7.5% of the balance. She turns the defined contribution plan into a LIRA and then a LIF, and starts drawing the required minimum amount. Finally, she tops up her spending from the non-registered savings that she built up in her final working years.

When the non-registered savings have been exhausted at age 60, Leslie turns to her TFSA to replace that income. She’ll take that balance down from $216,000 to about $70,000 by age 70. Continue Reading…

4 ways Life Insurance can fund Retirement

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By Lucas Siegel

Special to the Financial Independence Hub

The infamous retirement crisis that’s been talked about for years just became real, with inflation and interest rates reaching record highs in the past few months. Consumer prices skyrocketed by 9.1% as of June 2022, the largest increase we’ve seen in 40 years. Couple that with a growing senior population living off a fixed income, many of which retired early during the pandemic, and you have yourself a massive problem.

Most senior Americans are unaware that their life insurance policy could be one of their most valuable liquid assets. Contrary to popular belief, life insurance isn’t just a way to care for loved ones after you die through the death benefit. In fact, permanent life insurance policies can also be used to access funds for retirement planning and healthcare when you need it most. Life settlements are legal throughout the US and regulated in all except six states, as well as the provinces of Quebec and Saskatchewan in Canada.

Regardless of age or financial standing, understanding the true value of your assets is essential to living out the retirement you deserve. Check out the following four ways you can use your life insurance policy to help fund retirement:

1.)   Sell your life insurance policy through a life settlement

For millions of Americans who own a life insurance policy, selling it through a life settlement can be a great way to access cash when it’s most needed. A life settlement involves selling a life insurance policy for lump-sum cash payment that is more than the cash surrender value, but less than the death benefit. Despite decades of industry innovation and growth, some 200 billion dollars[US$] in life insurance is lapsed each year that could have been sold as a life settlement.

While the life settlement process once took two to four months, AI technology has expedited the process, making it easier than ever the get a life settlement valuation. Policyholders can now use a free life settlement calculator to instantly see how much their policy is worth based on a few simple questions. Just as you track the value of your house on Zillow or your car on Autotrader, understanding the value of your life insurance policy is critical to make the best financial decisions for you and your family.

2.)   Obtain the cash value from a permanent policy

When you pay your premium on a permanent life policy, only a portion goes toward covering the cost of your life insurance. The remainder of these payments goes into an investment account where cash value can grow on a tax-deferred basis. As you age, you’ll also eventually be able to tap into the interest earnings from this investment account to help keep your policy active, thus bringing down your out of pocket premium payments. Essentially, the money in this account can be treated as emergency savings with tax advantages.

3.)   Borrow from your policy through a loan

Americans with whole life insurance that have accrued enough cash value to cover the debt can also use their policy as collateral through a whole life loan program. One major benefit is the interest rate will be much lower than what you’d see with credit card debt or an unsecured personal loan. This allows the policyholder to get a one-time, tax-free distribution that can be paid off with interest in life, or be withdrawn from your life insurance policy’s death benefit. Retirees might be able to go through their insurance carrier if whole life loans are offered, or utilize a third-party whole life loan program instead. Continue Reading…