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.

Why would anyone own bonds now?

Posted By Financial Independence Hub | October 12, 2021

By Mark Seed, myownadvisor

Special to the Financial Independence Hub

Many investors have been saying for years that rates can only go up from here, rates can only go one direction, rates will eventually go up. Will they? This begs a question I get from readers from time to time given bonds pay such lousy interest:

Why would anyone own bonds now?

Today’s post shares a few reasons to own bonds including some counter-arguments why I don’t own any – at least right now.

Why own bonds?

Personally, I believe the main role of fixed income in your portfolio is essentially safety – not the investment returns and certainly not the cash flow needs. In other words, if all else fails per se, if/when stocks crash, then bonds should historically speaking offer a flight to safety for preserving principal.

So, they are there for diversification purposes.

As Andrew Hallam, a Millionaire Teacher has so kindly put it over the years: when stocks fall hard, bonds act like parachutes for your portfolio. Bonds might not always rise when the equity markets drop. But broad bond market indexes don’t crash like stocks do.

Is that enough to own bonds in your portfolio? Maybe.

Here are a few reasons to own bonds in no particular order.

1. Bonds as a hedge for stock market volatility.

Call them parachutes or anchors or use any other metaphor you wish but bonds tend to do their jobs when stock markets tank. More importantly maybe, they provide a psychological edge to avoid tinkering with your portfolio and selling any stocks/equities when stock markets correct.

Many investors, dare I say most investors (?), have a hard time with market volatility. I’m certainly not immune to it. The ups and downs, especially the big market downs, can be gut-wrenching to live through. Owning bonds in your portfolio can help bring the overall portfolio volatility down a few notches through prudent asset allocation. It is however not always necessary to own bonds.

When you own bonds, my experience has been for the last 20+ years you are trading away long-term, more positive, generous equity returns for accepting less risk and less long-term returns.

If you don’t want to take my word for it, check out this page courtesy of Vanguard when it comes to long-term returns. Check out the “worst year” stats as well.

Sure, a 40/60 stock/bond portfolio has hardly done poorly for the last century. But overall, you are absolutely giving up (historically speaking) returns on the table when you own more fixed income in your portfolio. Will the future be the same?

Personally, I’ve tried to learn to live with stocks as much as possible for as long as possible. Depending on your goals, taking into account long-term potential reward against short-term price fluctuations, some investors may not be comfortable with a 100% equity or near-equity portfolio. That’s A-OK. If that’s your case, some bonds in your asset accumulation years could be right for you.

2. Bonds can be used to rebalance your portfolio.

Even though I’m not a huge fan of bonds myself, this might be one of the most compelling reasons to own bonds at any age.

When the stock market sells off, that’s ideally the time you want to dive in and buy your stocks on sale. However, unless you are very comfortable with leveraged investing – you need money to buy such stocks on sale. That can come from cash savings for sure but for many investors, that can also come from bonds within your portfolio.

Mind you, some levels of diversification don’t work very well if you don’t have any asset allocation targets in mind. The process of rebalancing is a systematic way to buy low and sell high; sell your bonds when markets are tanking and sell-off some stocks when markets are euphoric.

In our portfolio, because we’ve largely learned to live with stocks, we tend to buy more stocks when they come on sale and/or we buy stocks periodically during the year to increase our equity holdings. More specifically, to help me gravitate away from my bias to Canadian dividend paying stocks for income we’re owning more low-cost U.S. ETFs for extra growth over time.

Check out some changes I’ve made to our portfolio to increase equity diversification.

Instead of selling bonds to buy our stocks, I use cash savings. I tend to save up cash during the year and make a few lump-sum stock or equity ETF purchases instead.

I will continue to use cash savings to make more equity purchases as I enter semi-retirement.

Consider keeping this much cash on hand yourself – in your asset accumulation years or retirement years.

3. Bonds can be used to spend cash when essential.

Can you have too much money saved? Too much money in your RRSP?

For most people, I highly doubt it. Continue Reading…

Some fascinating Retirement Statistics

Posted By Financial Independence Hub | October 8, 2021

By Fritz Gilbert, RetirementManifesto.com

Special to the Financial Independence Hub

Call me a nerd, but I love studying retirement statistics (for the record, I prefer to consider myself curious). When something as dramatic as COVID comes along, it really makes the numbers interesting.

If you’re curious like me, you’ll enjoy today’s post. A compilation of some fascinating retirement statistics I recently came across, including some graphs for those of you who prefer to view the charts.

If you’re interested in how you compare to “average,” you’ll also find today’s post of interest. Wondering what impact COVID has had on retirement confidence? We’ve got that covered, as well.

Curiosity-seekers, unite. This one is for you …

What’s retirement really like? What impact has COVID had? Today, a look at some fascinating retirement statistics.

Fascinating Retirement Statistics

A while back, as I was doing some research for my post titled The Mad Retirement Rush of 2020, I came across an article with some interesting retirement statistics and saved the link into a draft post (I do that a lot, with over 100 draft posts currently holding ideas for future posts). I wanted to do further research on retirement statistics to see how many I could compile for a dedicated post on the topic.

Today, I’m pleased to publish the resulting work and share what I’ve found during my research. A variety of fascinating retirement statistics, dedicated to all of the fellow retirement nerds in the house.

With that, let’s dig into some numbers:

Retirement Readiness Statistics

Nearly 2/3 of 40-year-olds have <$100k saved for retirement (Source: TDAmeritrade Retirement Survey)

51% of Baby Boomers are still paying on their mortgage in retirement, and 40% struggle to pay off their credit card debt. (Source: Legaljobs.com)
1 out of 12 Americans believes they’ll never retire at all. (Source: Legaljobs.com)
50% of retirees retired earlier than they would have liked. (Source: TDAmeritrade Retirement Survey)

73% of retirees say their retirement was a “full-time stop,” with only 19% experiencing a gradual transition (e.g., fewer hours). Among those still working, half expect a gradual transition. Related, only 30% of retirees work for money in retirement, whereas 72% of workers expect to work for some pay in retirement. (Source: 2021 EBRI Retirement Confidence Survey)
The average US household had $255,000 in their retirement accounts in 2019, a 5% increase from 2016 (Source: MagnifyMoney)
Among those with 401(k), the average balance by age is shown below: (source, Personal Capital as cited in MagnifyMoney)

COVID’s Impact on Retirement Confidence

While the majority of workers are still confident of their ability to retire, 34% of workers are less confident in their ability to live comfortably in retirement than they were pre-COVID.

COVID has caused 1 in 4 workers to adjust their expected retirement date, with 17% now planning to retire later and 6% who plan to retire earlier.
32% of workers say COVID has negatively impacted their ability to save for retirement.

All statistics in the above section compliments of 2021 EBRI Retirement Confidence Survey

30% of Americans with retirement accounts reported making withdrawals from them in the first two months of the COVID pandemic. The average withdrawal was $6,757 (Source: Investment News)

Baby Boomer Statistics

Every day, 10,000 Baby Boomers turn 65 years old. (Source: Legaljobs.com)
8 in 10 retirees report that their overall lifestyle is as expected or better. Only 26% of retirees report spending is higher than expected. (Source: 2021 EBRI Retirement Confidence Survey)
Baby Boomer retirements increased significantly in 2020 vs. prior years. By September 2020, 40% of Baby Boomers were retired. (Source: Pew Research) Continue Reading…

Small Business: How revised Corporate Passive Income Rules impact your Corporate Tax Planning

Posted By Financial Independence Hub | October 7, 2021

By Steve Lowrie, CFA

Special to the Financial Independence Hub

Proactive Business Owners Can Manage Corporate Investments and Income for Optimal Tax Efficiency

As a small business owner, you no doubt have active interests in your bottom line. That’s why it’s worth knowing about some recent changes to the tax treatments on corporate passive income.

For those currently creating passive income through corporate investments, we’ll describe how this income might impact your small business tax planning, and offer some corporate tax strategies for keeping more of that money in your coffers.

Even if you are not currently generating corporate passive income, some of these same tax strategies remain sound. After all, smart tax strategies and sensible corporate tax planning is perennially popular. At the end of a busy work day, the more of any sort of income you get to keep, the better off you and your small business will be.

The Highlights: What has Changed about Corporate Passive Income and How Does It Impact You?

How have corporate passive income rules recently changed?

Starting in 2019, the CRA adjusted corporate tax rates and broadened the definition of passive income.

How do the changes impact your corporate passive income?

These changes brought good news and bad. Under the broader definitions for passive income, you may exceed the passive income limits to qualify for the coveted small business deduction (SBD). Corporate tax strategies that may have worked for you in the past may no longer be ideal for optimal tax integration. But with the tax rate changes, some applicable corporate tax strategies are even more powerful.

That’s the broad sweep. Now let’s take a closer look.

The Details: Small Business Tax Planning and Passive Corporate Income Changes

Small business owners typically manage two interests in their owner/individual roles. Rather than earning your keep by working for someone else, you create corporate wealth. You then decumulate that wealth by transitioning it from your corporation to yourself and your family. Once the dust settles, the goal is to retain as much wealth as possible by being deliberate and tax-efficient throughout the process. Broadly speaking, there are a couple of ways to take wealth out of your business for personal use:

If you take your annual CCPC income as a salary:

Your corporation takes it as a deduction, so no corporate tax is due on the income.
Instead, you pay personal tax on the income at your graduated personal tax rate.

If you take your after-tax CCPC income as a dividend:

Initially, your annual CCPC income will be subject to corporate tax.
That year or in the future, you can distribute the after-tax income as a dividend to yourself.
In the year you receive the dividend, you’ll pay personal tax on the distribution at your graduated marginal tax rates.

Which is better?

As you might expect, it all depends, and typically requires you to crunch your particular numbers to see how they compare. By design, how you take the money is supposed to end up being a tax-planning wash … at least as far as the CRA is concerned. However, the ability to tax-defer dividends to future years has often been beneficial as part of overall corporate tax-planning.

What’s changed?

The concern is, business owners in general, and small business owners in particular, may have had an unfair advantage over individual taxpayers. By deferring a salary or dividend payments while building up wealth within your corporation, you also can defer paying annual personal taxes, which are typically at higher rates … especially if you qualified for Small Business Deferral (SBD) rates. Continue Reading…

When was the last time you Rebalanced?

Posted By Financial Independence Hub | October 6, 2021

https://advisor.wellington-altus.ca/standupadvisors/

By John De Goey, CFP, CIM

Special to the Financial Independence Hub

There are several approaches that individual investors and advisors alike might take to portfolio management. One of those is rebalancing. In simple terms, rebalancing is simply selling a portion of something that is up and re-positioning the proceeds into something that is down (or perhaps merely up relatively less). It is a longstanding, tried and true approach to both portfolio management in general and risk management, in particular.

Now that we are in October with a steady stream of portfolio gains booked into most peoples’ accounts, it might be worth your while to consider taking a few profits from those things in your portfolio that have done particularly well of late and using the proceeds to be a value investor who buys things that are currently out of favour.

Trading more reduces both Risk and Return

Some people offer suggestions as to what should be sold and bought. I won’t, because everyone’s holdings are different. Some people will offer suggestions as to what the thresholds ought to be. I won’t, because there is no obvious right answer. Trading more reduces both risk and return while increasing transaction charges. Doing so less frequently typically leads to the opposite outcome. Continue Reading…

The Dividend Aristocrats for Retirement

Posted By Financial Independence Hub | October 4, 2021

By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

The Dividend Aristocrats are U.S. stocks (members of the S&P 500) that have increased their dividends for at least 25 years or more. That index methodology will find incredible quality and it also offers a large cap bias. Large cap (capitalization) means that the companies are at the higher end with respect to what it would take to buy the company outright. It is the number of shares multiplied by the share price. The Aristocrat methodology has outperformed the market, and with lesser volatility. That might make it a solid approach for the U.S. stock component for a retiree, or for one who seeks better risk-adjusted returns. We’re looking at the Dividend Aristocrats for retirement, on The Sunday Reads.

Now certainly, when we bring up the subject of dividend investing, that will split many investors and stock market watchers into two separate camps. Many feel that it is a superior form of investing. At the other end of the entrenched opinion – dividends have absolutely nothing to do with investment success. They will argue that it is a zero sum game, the company is simply giving you money by way of a dividend and that reduces the value of the company by an equal amount.

What do those dividends find?

If we want to think of dividends or dividend investing as a factor, the argument can be that dividends find certain kinds of companies. Of course dividend investing will almost always find profitability (unless they’re faking it). Most dividends seek dividend growth and that can find companies with a longer history of increasing profits and increasing free cash flow. And when you stretch that dividend growth history to 10, 15, 20, 25 or 50 years that can find higher quality companies with incredible track records, sustainable moats and durable business models. While certainly not foolproof, the approach can lessen the chance of failure within a stock or large basket of stocks.

This post from S&P Global, the importance of stable dividend income offers this quote and fact …

Across all of the time horizons measured, the S&P 500 Dividend Aristocrats exhibited higher returns with lower volatility compared with the S&P 500, resulting in higher Sharpe ratios.

Better risk adjusted returns is appealing for many. But it can have even more importance for the retiree, as we have that sequence of returns risk.

On Seeking Alpha, author Ferdis tracks and measures the quality of each Dividend Aristocrat. Here’s the most recent Dividend Aristocrats ranked by quality scores.

Readers will know that for our U.S. stock portfolio the approach has found many U.S. Dividend Aristocrats, so I like to check in on the Ferdis reports to see where our Aristocrats stand on the Ferdis scale. I continue to find that our Aristocrats are in the top echelons of quality. In fact the only stock at the bottom of the scale is our only loser – Walgreens.

The Dividend Achievers skims

From that U.S. portfolio link you’ll see that I skimmed 15 of the largest cap Achievers in early 2015. That index methodology insists on at least 10 years of dividend growth, and the Dividend Achievers (Appreciation) index applies proprietary financial health screens. Our stock performance suggests that the index skimming exercise found enough growth and truly excelled at that quality ‘thing’. Within the original mix of stocks were several Dividend Aristocrats.

I took a look at our U.S. portfolio returns and then offered this comment on the Ferdis post …

From my 2015 start date I beat the Aristocrats Index (ETF NOBL) by about 2.7% annual with much better risk adjusted returns. So ya, quality works. In the COVID correction I had about 35% less draw down. Dale’s Achievers were down by less than 21% in the correction.

Solid returns with lesser volatility and less draw down in major corrections was exactly the rationale for embracing the Achievers and Aristocrats for retirement.

And then when you add in a few solid quality U.S (no brainer) picks with decent growth prospects.

Our total U.S. returns are even more exaggerated as the 3 picks beat the Appreciation fund by 7.5% annual. They are AAPL, BLK and BRK.B (as a defensive stock market correction hedge – that’s an underperformer for the period).

That growth kicker has contributed greatly to the wonderful performance. As always past performance does not guarantee future returns.

Here’s the summary in chart form.

And setting the table for retirement.

Equal weight by stocks or ETF

An additional ‘bonus’ is that you can choose to equal weight the stocks. And that’s exactly what also happens within the Dividend Aristocrat Index. Here’s the current sector mix. The index is equal-weighted, that can contribute to a value tilt as well (finding greater current earnings accompanied by generous growth prospects). Continue Reading…