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.

Can you retire using just your TFSA?

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Image Courtesy of Cashflows & Portfolios

By Mark and Joe

Special to the Financial Independence Hub

The opportunity for Canadians to save and invest tax-free over decades could be considered one of the greatest wonders of our modern financial world. This begs an important question:

If you start early enough – Can you retire using just your TFSA?

We believe so and in today’s post we’ll show you how!

Can you retire using just your TFSA? Why the TFSA is a gift for all Canadians!

Our Canadian government introduced TFSAs in 2009 as a way to encourage people to save money. Looking back, it was one of the best incentives ever created for Canadian savers …

Our Canada Revenue Agency has a HUGE library of TFSA links and resources to check out but we’ll help you cut to the chase along answering that leading question above:

Can you retire using just your TFSA?

Why the TFSA is just so good

Since the TFSA was introduced, adult Canadians have had a tremendous opportunity to save and grow their wealth tax-free like never before. While the TFSA is similar to a Registered Retirement Savings Plan (RRSP) there are some notable differences.

As with an RRSP, the TFSA is intended to help Canadians save money and plan for future expenses. The contributions you make to your TFSA are with after-tax dollars and withdrawals are tax-free. You can carry forward any unused contributions from year to year. There is no lifetime contribution limit.

For savvy investors who open and use a self-directed TFSA for their investments, these investors can realize significant gains within this account.  This means one of the best things about the TFSA is that there is no tax on investment income, including capital gains!

How good is that?!

Here is a summary of many great TFSA benefits:

  • Capital gains and other investment income earned inside a TFSA are not taxed.
  • Withdrawals from the account are tax-free.
  • Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits (such as Old Age Security (OAS)). This is very important!!
  • Anything you withdraw from your TFSA can be re-contributed in the following year, in addition to that year’s contribution limit, although we don’t recommend that. More in a bit.
  • While you cannot contribute directly as you could with an RRSP, you can give your spouse or common-law partner money to put into their TFSA.
  • TFSA assets could be transferable to the TFSA of a spouse or common-law partner upon death. This makes the TFSA an outstanding estate management account – leaving TFSA assets “until the end” can be very tax-smart.

Since you paid tax on the money you put into your TFSA, you won’t have to pay anything when you take money out. This feature combined with the ability to compound money, tax-free, over decades, can make the TFSA one of the best ways to build wealth for retirement.

RRSP vs. TFSA – which one is better?

There is no shortage of blog posts that highlight this debate and one of our favourites is from My Own Advisor. You can check out his post here. 

Without stealing too much of his thunder, the RRSP vs. TFSA debate essentially comes down to this: managing the RRSP-generated refund.

Let’s dive deeper with a quick example.

Contributions to the RRSP are excellent because the contribution you make today lowers your taxable income – and you may get a tax refund because of it – a pretty nice formula. The problem is, some Canadians might spend the RRSP-generated refund from their contribution. You’ll see why this is a major problem.

Consider working in the higher 40% tax bracket whereby RRSP contributions to lower your taxable income make great sense:

  • If you put $300 per month into the RRSP for the year, that’s a nice $3,600 contribution.
  • You’ll get a $1,440 refund (40% of $3,600).

When your $1,440 RRSP-generated refund comes in, and now you decide to spend it on a new iPhone, just know that your RRSP refund is effectively borrowed government money. Yup, a long-term loan from the government they are going to come back for. If you always spend your refund you are undermining the effectiveness of RRSPs because you are giving up your government loan that would otherwise be used for tax-deferred growth.  A refund associated with your RRSP contribution should not be considered a financial windfall but the present value of future tax payment you must make.

If you typically spend the RRSP-generated refund in our example then we think some Canadians are FAR better off prioritizing your TFSA over your RRSP because of the known benefits of that present-day contribution.  

TFSAs offer tax-free growth for any income earner

At some point, the money that comes out of your RRSP (or Registered Retirement Income Fund (RRIF)) will be taxed.

With TFSAs, the government has eliminated the guesswork about taxation. Because the TFSA is like the RRSP, but in reverse (you don’t get any tax break on the TFSA contribution), TFSA withdrawals are tax-free.

For far more details including answering dozens of questions about this account, read on about our comprehensive TFSA post below:

If you haven’t contributed much towards your retirement and/or you can’t possibly save enough with so many competing financial priorities – that’s OK – striving to max out your TFSA contributions each year, every year, is still very valuable and admirable goal. In fact, focusing diligently on just maxing out your TFSA (and ignoring the RRSP account entirely) will still serve your retirement plan well.

Regardless of your income, any Canadian who is 18 years of age or older with a valid social insurance number (SIN) can open a TFSA. All you need to do is reach out to a financial institution, credit union or insurance company that offers TFSAs and open an account.

Whether you set up your automatic savings plan to your TFSA weekly, monthly, or other – striving to make the maximum contributions to this account can be a significant wealth-building tool as part of the Four Keys to Investing Success. 

Let’s use a case study to demonstrate just how good this account can be for you too – and why you can retire just using your TFSA!

Can you retire using just your TFSA – A Case Study

The big question in his article is – given enough time (ie. if you start young enough), can someone retire using only their TFSA?  The answer may surprise you, at least it surprised us!

To help accurately model this scenario to account for government benefits, inflation, taxes, tax credits, and optimized withdrawal schedules, we dove into the software that we are using to manage our own early retirement plans.

Here are the assumptions we made: Continue Reading…

A sensible RRSP vs. TFSA Comparison

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A Sensible RRSP vs. TFSA Comparison

Should you contribute to your RRSP or your TFSA? It’s one of the most frequently asked questions here and on other financial forums, yet the answers couldn’t be more divided. Furthermore, there is a growing sentiment among Canadians that somehow RRSPs are a government scam because you’ll be forced to pay tax on any withdrawals in retirement. That leads many to (sometimes) incorrectly declare that a TFSA is the better savings vehicle for retirement due to the tax-free treatment of withdrawals.

Let’s start by clearing up one important fact in the RRSP vs TFSA debate: The accounts are mirror images of each other. When you put money in an RRSP and invest the tax refund, you’re using pre-tax dollars. The money grows inside a tax sheltered account and then you pay taxes on your withdrawals years later in retirement.

The opposite is true of a TFSA – you contribute with after-tax dollars but won’t have to pay taxes when you take money out. If you’re in the same tax bracket when you withdraw from your RRSP as you were when you made the contributions, the RRSP and TFSA work out to be exactly the same.

RRSP vs TFSA Comparison

Here’s a simple chart that David Chilton used in The Wealthy Barber Returns to help drive this point home:

TFSA RRSP
Pre-tax income $1,000 $1,000
Tax $400 n/a
Net contribution $600 $1,000
Value in 20 years @ 6% growth $1,924 $3,207
Tax upon withdrawal (40%) n/a $1,283
Net withdrawal $1,924 $1,924

Two important caveats to keep in mind:

  1. You need to invest the tax refund in order for RRSPs to work out as designed. Unfortunately, most Canadians spend their refund and so they don’t end up with as much money in their retirement account.
  2. A TFSA is flexible in that you can take out money at any time without penalty. For Canadians who use a TFSA as their primary retirement savings vehicle that means resisting the temptation to raid the account whenever “something” comes up. You should also replace the ‘S’ in TFSA with an ‘I’ and make sure to invest that money for the long-term. Continue Reading…

Rethinking the 4% Safe Withdrawal Rate

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By Fritz Gilbert, TheRetirementManifesto

Special to the Financial Independence Hub

The 4% safe withdrawal rule is a well-known “rule of thumb” for those planning for retirement.

One thing it has going for it is that it’s simple to apply.

If you have $1 Million, the 4% safe withdrawal rule says you can spend $40,000 (4% of $1M) in year one of retirement, increase your spending by the rate of inflation each year, and you’ll never run out of money.

Simple, indeed.

But, I’d argue that simplicity comes at a potentially very serious cost.  Like, potentially running out of money in retirement.

Today, I’ll present my argument against the 4% safe withdrawal rule given our current economic situation, and propose 3 modifications I’d recommend as you determine how much you can safely spend in retirement.

Rethinking the 4% Safe Withdrawal Rule

I read a lot of information on retirement planning, and lately, I’ve been seeing more content challenging the 4% safe withdrawal rule.  I agree with those concerns and felt a post outlining my position was warranted.

As a brief background, the 4% Safe Withdrawal Rule is based on the “Trinity Study,” which appeared in this original article by William Bergen in the February 1998 issue of the Journal of the American Association of Individual Investors.  For further background, here’s an article that Wade Pfau published on the study.  I’ll save you the details, you can study them for yourself at the links provided.

The conclusion, based on the study, is summarized below:

“Assuming a minimum requirement of 30 years of
portfolio longevity, a first-year withdrawal of 4 percent,
followed by inflation-adjusted withdrawals in
subsequent years, should be safe.”

My Concerns With The 4% Safe Withdrawal Rule

In short, some key factors about the study are relevant, especially as we “Rethink The 4% Safe Withdrawal Rule”

  • It’s based on historical market performance from 1926 – 1992.  

My Concern:  Relying on past performance to predict future returns can mislead the investor, especially given the unique valuations in today’s markets (more on that below).  This point is driven home by this recent Vanguard article that projects future returns based on current market valuations:

4% safe withdrawal rule assumptions

If you think the Vanguard outlook is depressing, check out this forecast from GMO as presented in this Wealth of Common Sense article titled “The Worst Stock and Bond Returns Ever”:

stock and bond forecast

  • Note the VG forecast is nominal (before inflation) whereas the GMO is real (after inflation).

Why Are Future Returns Expected to Be Below Average?

The biggest driver for the projected below-average returns is the high valuation in today’s equity market (particularly in the USA), and the fact that interest rate increases would negatively impact bond yield.  In my view the CAPE Ratio is one of the best indicators of market valuations.  Below is the current CAPE ratio as I write this post on November 16, 2021:

CAPE Ratio

The reason current valuations matter is the fact that they’re highly correlated to future returns, as indicated from this concerning chart that I saw last weekend on cupthecrapinvesting:

CAPE ratio correlation to future returns

Based on today’s CAPE ratio, the historical correlation suggests the forward total returns over the next 10 years could be close to 0%.  Scary stuff for someone who’s planning on equity growth to pay for their retirement expenses.  Scary stuff for someone who’s committed to the 4% safe withdrawal rule.

In addition to the bearish outlook for US equities, bonds could be negatively impacted if when interest rates increase.  To get a sense of how low the US 10-year Treasury yields are now compared to long-term averages, below is the current chart of 10-year yields from CNBC:

4% safe withdrawal rate rule - bond impact

Bond prices are inversely related to interest rates, so as rates go up, bond prices go down.  So, if you’re holding 60% stocks and 40% bonds, it’s possible that you could see decreases in both asset classes.

As cited in this Marketwatch article, The Fed has begun signaling that interest rates are “on the table” for 2022, especially if the current bout of inflation proves to be less than a transitory event (for the record, I suspect it will be more than transitory, but what do I know?).

This brings us to the next concern …

My Other Big Concern With The 4% Safe Withdrawal Rule:

In addition to my concern above (the risk of an extended period of below-average market returns), I don’t like the part of the rule which states you should “increase your spending the following year based on the rate of inflation.”  As most of you know, inflation has been on a bit of a tear lately, as demonstrated in this chart from usinflationcalculator.com:

Based on the 4% Safe Withdrawal Rule, you would be increasing spending next year based on the higher inflation rate, which could well be the same time you’re seeing lower than expected returns.

I don’t know about you, but that doesn’t sit well with me.

Suggested Modifications to the 4% Safe Withdrawal Rule

It wouldn’t be fair to cite my concerns with the 4% Safe Withdrawal Rule without suggesting an alternative. Following are the 3 modifications I’d suggest for your consideration.  I’m applying all 3 of these modifications in our personal retirement strategy. Continue Reading…

Promoting the Health of Older Adults: a worthy read for all

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By Mark Venning, changerangers.com

Special to the Financial Independence Hub

As an everyday person taking a fast read of the title of the new book – Promoting the Health of Older Adults: The Canadian Experience – you wouldn’t exactly get the sense of what to be surprised by or expect what content would be covered within. In the first place, unfortunately, it’s not likely that this book will make it into the hands of everyday people any time soon.

You might ask, what are we promoting, what’s so specific for older adults – eat a nutritional diet of foods, exercise to stay fit, keep your brain active and get your proper sleep? Isn’t that what anyone through their life course should be doing? Yes, maybe. But that’s not at all exactly what you will get here.

Appreciating focus, as the writers in the preface state, the book’s main purpose is for knowledge building on issues related to older adults and their care, primarily for target audiences such as, “undergraduate and graduate students in gerontology and aging, health promotion… and other fields….” and the five groups identified include, educators, learners, policy makers, researchers and practitioners and leaders working with older adults in civic society organizations.

While that may sound too academic, after reading this book my belief is that the general public of everyday people, older adults and others younger, will also benefit greatly from an education presented here on this important subject. If you do flip through this 600-plus page tome, you might think of it at first as “insider dialogue” on health promotion; but not so fast, don’t put the book down.

Serving to heighten knowledge & awareness to engage in social health dialogue.

Choose as many words as you want; for me, Promoting the Health of Older Adults is a social health dialogue, inclusive for all Canadians – interconnected subject areas, holistic, comprehensive, diverse. The arrival of this book is timely, to promote conversation with friends and family, considering our collective journey through the COVID world to date has heightened our awareness of the workings of our own health and our social and healthcare systems.

Briefly, on the structure of this book; it certainly is more of a study text book on over thirty topic areas in seven well laid out parts. However nothing I’ve read talks over the heads of readers, and if facilitated well in a real time group discussion format, there is a set of critical thinking questions at the end of each chapter that would further serve to heighten knowledge and awareness of readers, enough to make you want to be a more engaged in this social health dialogue. Continue Reading…

Three in four Canadian Women want to start a Side Hustle

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Side hustling is on the minds of a majority of Canadian women, according to a survey conducted by Angus Reid for Simplii Financial.

Fully 90% of Canadian women aged 18 to 34 are interested in exploring opportunities to earn money outside their day jobs, the survey found. And across all age groups, 76% are interested in starting a side hustle.

Most of these women are hoping to find more ways to save for major life events, including early retirement, making a down payment on a home, and growing overall savings for their futures.

This Tuesday, March 8th is International Women’s Day, and to celebrate, Simplii Financial will be hosting a special virtual event: the #SimpliiSideHustle panel [Link below.] It brings together three barrier-breaking Canadian women who have launched successful businesses, and who will offer their advice to those looking to start their own side hustles.

The panel features Canadian entrepreneurs Abby Albino (@abbyalbino on Twitter), Avery Francis (@averyfrancis), and Zehra Allibhai (@zallibhai), who will share the challenges they faced in starting their sneaker, consulting and fitness businesses, respectively. They’ll also share how they’ve challenged gender stereotypes that disempower women, to support a more equitable future.

Start-up capital a barrier for women seeking side hustles

Despite the high number of women looking to launch side hustles, more than a third of all women surveyed, and nearly half of those aged 18 to 34, indicated that lack of start-up capital was a barrier to pursuing their side hustles. Continue Reading…