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.

 Timeless Financial Tip #10: Making Legacy Planning more Meaningful

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By Steve Lowrie, CFA

Special to Financial Independence Hub

Let’s face it: When families list their favorite financial planning projects, legacy planning rarely makes the cut. It may feel as if you’re putting the emphasis exclusively on death and taxes, rather than your lifetime pursuits such as building a career, pursuing your personal interests, stewarding your kids into adulthood, and retiring in style.

Then again, I believe the term “legacy planning” is misleading to begin with. It sounds so dry and formal — as if it’s only for uber-rich, multigenerational dynasties, or the tail end of your lifespan.

No wonder most people put off planning for it.

In reality, legacy planning can be worthwhile for almost anyone. And it’s not just for later in life; key aspects of it can help you enjoy a more enriched life today. In today’s Timeless Tip, we’ll cover the possibilities.

What is Legacy Planning?

Instead of treating legacy planning as a tedious, end-of-life chore, I like to think of it as being more like a bonus round of lifestyle planning across four core quests:

  1. Family Ties: Legacy planning helps you keep more of your wealth in the family. Importantly, it lets you define who your family is, in a world where multiple marriages and blended families may more often be the norm than an exception to the rule.
  2. You or your Heirs: Legacy planning can also be defined by what it is not. If your top priority is having enough to enjoy your retirement in style, your legacy planning will differ from someone who dreams of leaving the largest possible inheritance to their heirs.
  3. Charitable Giving: Legacy planning also helps you chart out how and when you’d like to support your causes and charities of interest. Hint: You don’t have to wait until you’re gone to leave a legacy.
  4. Tax Reduction: Even if you’re fine with letting inheritance laws guide how your estate will be distributed, most of us would prefer a tax-efficient transfer. Legacy planning strategies abound here.

How do you define “Family”?

First, let’s address the piece most of us associate with legacy planning: Who gets what stuff after you’re gone? If your estate seems perfectly straightforward, you may be tempted to just let your heirs sort it out. Unfortunately, this can leave you and your loved ones uneasy — not just moving forward, but right now.

Unintended Consequences: Check your provincial inheritance laws, and you may be surprised by what will happen to your assets if you die intestate (without a will). Your preferences may differ dramatically from the government’s.

Unresolved Heirlooms: Resolving which loved ones are to receive which treasured heirlooms and other portions of your wealth, can bring you and your family more peace — today, and moving forward.

The Angst of Uncertainty: Most of us also feel better knowing we’ve done what we can to spare our heirs the pain of having to untangle an unplanned estate at the same time they are grieving a profound loss.

The logistics of estate planning need not be extensive. They can range from essential to more advanced:

Wills: A basic will might suffice if you simply want to ensure particular people directly inherit particular pieces or portions of your estate, as permitted by law — especially when your preferences differ from provincial law.

Trusts and Foundations: You may want to up the ante with targeted trusts to cover additional nuances in your life. For example, trusts can provide for underage heirs, an heir with special needs, or other complexities, such as if your family owns a business in which some, but not all family members are involved. Private foundations come into play if you are interested in increasing the scope of your multigenerational charitable giving.

Insurance: Life insurance is also an often-overlooked tool for providing gap funding to cover taxable wealth transfers, especially when family businesses are involved.

Bottom line, making plans today for your wealth transfer to happen with minimal muss, fuss, costs, and complications can free you to better enjoy your assets throughout your life.

Spending or Preserving?

As we covered in “Retiring Reliably, Leaving a Legacy or Balancing Both?, ” another key question is: Do you want to earmark excess wealth for your optimal retirement, an optimal legacy, or a balance of both? Different lifestyles call for different legacy plans.

You may not think of investment management as part of traditional legacy planning. But you’ll be better at both if you combine forces. For example, if you want to emphasize leaving a legacy, your investment portfolio’s average expected return should exceed your withdrawal rate, so inflation doesn’t eat away at the balance. This usually means keeping more of your investments working in the markets, while also arranging for a way to take out cash on a regular, tax-efficient basis. Continue Reading…

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…