Most of your investing life you and your adviser (if you have one) are focused on wealth accumulation. But, we tend to forget, eventually the whole idea of this long process of delayed gratification is to actually spend this money! That’s decumulation as opposed to wealth accumulation. This stage may also involve downsizing from larger homes to smaller ones or condos, moving to the country or otherwise simplifying your life and jettisoning possessions that may tie you down.
My latest MoneySense Retired Money column focuses on a free retirement calculator called PERC, plus the accompanying new third edition of Fred Vettese’s book, Retirement Income for Life: Getting More Without Saving More.
As the column notes, I have previously reviewed the earlier editions of the book but any retiree or near retiree will find it invaluable and well worth the C$26.95 price. Also, there is a free eBook offer.
PERC of course is an acronym and stands for Personal Enhanced Retirement Calculator.
PERC is itself a chapter title (chapter 15 of the third edition) and constitutes the fourth of five “enhancements” Vettese describes for getting more without saving more. Vettese developed PERC while writing the first edition in 2018: it is available at no charge at perc-pro.ca.
In another generous offer, anyone who buys the print edition can get a free ebook version by emailing details of proof of purchase to ebook@ecwpress.com.
Many Canadians are aware that you can open a U.S. dollar bank account at most Canadian financial institutions.
But did you know that you can also open a U.S. dollar investment account through many different investment companies?
The following are reasons why you may wish to consider opening a U.S. dollar investment account.
Reduce the cost of U.S. dollar conversion
Every time that you convert Canadian dollars to U.S. dollars (or vice versa), you will pay a fee to the financial institution that makes the conversion for you. That fee is known as the currency spread, and can usually be noticed by looking at the difference between the “bid” and the “ask” prices displayed by the financial institution.
For example, if the current spot exchange rate is quoted as $1.35 Canadian for each U.S. dollar, the bid (or price that you will receive for selling U.S. dollars) might be $1.32 and the ask (or price that you must pay to purchase U.S. dollars) might be $1.38. So, every time you buy or sell U.S. currency you lose 3 cents per dollar. If you are regularly converting currency, that becomes very expensive!
Buying or selling U.S.-listed securities in a Canadian dollar investment account is a common example of Canadians paying unnecessary currency conversion costs, allowing the broker to pocket the currency spread on buys and sells, dividends or interest paid. The more that you buy and sell, the more that you lose. These costs can be eliminated by simply owning your U.S.-listed securities in a U.S. dollar investment account instead since there is no need to convert currency on every transaction.
Hedge the impact of currency exchange rates
Have you ever felt like you had to limit your spending on travel to the U.S. because the value of the Canadian dollar was depressingly low? Or how about not ordering that item located in New York on eBay because it was priced in U.S. dollars which made it too expensive? The value of the Canadian dollar relative to the U.S. dollar has fluctuated greatly over time. In the past few decades alone, the exchange rate has ranged from more than $1.60 Canadian per U.S. dollar to less than $1.00 – yes, the Canadian dollar has on occasion been worth more than the U.S. dollar!
But why leave it to chance? If you have a portion of your investments denominated in U.S. dollars, you can always draw from it when you need it. You won’t pay conversion costs, and the current exchange rate should not matter because you don’t have to convert anything. For folks who require the frequent use of U.S. dollars for business, travel, or shopping, a U.S. dollar investment account can make a lot of sense.
For a simple illustration, consider a shrewd Canadian investor who vacations in Orlando, Florida for one week in February every year. The typical expense for this trip each year is about $5,000 U.S. dollars. This investor opened a U.S. dollar investment account and invested $100,000 U.S. dollars in an income-oriented investment portfolio that consistently earns 5% per year. This investor should never have to worry about exchange rates, or conversion costs since $5,000 U.S. dollars can easily be withdrawn every year!
Eliminate PFIC reporting (for U.S. citizens living in Canada)
Unfortunately for U.S. citizens living in Canada, Uncle Sam requires you to continue filing U.S. income tax returns. Also unfortunately, the I.R.S. requires additional reporting requirements for Passive Foreign Investment Corporations (PFICs), which may result in additional taxes owing. If you own any mutual fund or exchange traded fund issued by a Canadian company, it is considered a PFIC. Regulations require that all mutual funds purchased in Canada, must be issued by a Canadian company. Unless you enjoy the extra reporting requirements, this can be problematic for some investors. Continue Reading…
Jim and Kathy McLeod in Mexico/RetireEarlyLifestyle.com
By Akaisha Kaderli, RetireEarlyLifestyle.com
Special to Financial Independence Hub
Billy and I are Americans. For most of our adult lives we have been self-employed, paying for our own health insurance out-of-pocket.
We retired at age 38, and while initially we paid for a US-based Health Insurance policy, we eventually “went naked” of any health insurance coverage. Wandering the globe, we took advantage of Medical Tourism in foreign countries and again, paid out-of-pocket for services.
This approach served us very well.
However, we understand that choosing the manner in which one wants to pay-for-and-receive-health-services is a personal matter.
In our experience, it seemed that Canadians generally were reticent to stay away from Canada longer than 6 months because they would lose their access to their home country’s health care system.
We did not know the full story of why many Canadians preferred not to become permanent residents of another country due to this healthcare issue. So, we asked Canadian Jim McLeod if he would answer a few questions for us to clarify! And then, to give that information to you.
Below is our interview with Jim McLeod. He and his wife are permanent residents of Mexico, and now receive all their healthcare from this country.
It is our hope with this interview, that there would be options explained to other Canadians who might not want to maintain 2 homes, be snowbirds in Mexico, or could vision living in Mexico with its better weather and pricing.
Take a look!
Jim and Kathy in Mexico
Retire Early Lifestyle: In the beginning, did you choose to do a part-time stint in Mexico before fully jumping in? You know, like to test the waters?
Jim McLeod: Yes. Because of the following stipulations for our Ontario Health Insurance Plan (OHIP) and the possibility of getting a maximum of 180 days on a Mexican Tourist Card, we decided to do the “snowbird” thing initially: 6 months in Ontario during the warmer months, and 6 months in Mexico during the colder months.
“You cannot be out of Ontario for more than 212 days (a little over 6 months) in *any* 12 month period (ex. Jan – Dec, Feb – Jan, Mar – Feb, etc.)”
During this time, we used World Nomads for trip insurance to cover us while in Mexico. For us, this wasn’t too bad. However, according to other couples we’ve spoken with, after a certain age, depending on your health, this can become quite expensive.
Retire Early Lifestyle: When you retired early and left your home country of Canada, was leaving the guaranteed health care system that your country provides a large hurdle to your plans? How did you factor that cost in?
Jim McLeod: After doing the “snowbird” thing twice, we had enough data from tracking all our spending, as per Billy and Akaisha’s The Adventurer’s Guide to Early Retirement, that we knew we would save approximately $10,000cdn a year by moving full time to Mexico. And we knew we would lose our OHIP coverage. As such, we budget $2000cdn a year for out-of-pocket medical expenses. But we also knew that, at that time, we qualified for the Mexican Seguro Popular insurance coverage. Note: Seguro Popular has since been replaced with a new health Care system, el Instituto Nacional de Salud para el Bienestar (INSABI), which has the following requirements:
• Be a person located inside Mexico
• Not be part of the social security system (IMSS or ISSSTE)
• Present one of the following: Mexican Voter ID card, CURP or birth certificate
As an expat, in order to obtain a CURP, you must be a Temporal or Permanente resident of Mexico.
Retire Early Lifestyle: Initially, did you go home to Canada to get certain health care items taken care of and then go back to Mexico to live?
Jim McLeod: No, we have not gone back to Ontario for any health care. Having said that, there is one medication that Kathy needs, that she is allergic to here in Mexico, so she gets a prescription filled in Ontario whenever we return and we pay for it out-of-pocket. Continue Reading…
Unlike some financial experts, I’ve long since touted the merits of making RRSP withdrawals before waiting until the age of 71 for RRSP>RRIF conversion to take effect, when minimum RRIF withdrawal rates kick in.
I’m hardly 70. Not even close (since I just left my 40s)!
Rather, I’ve learned these benefits from others:
While personal finance and investing is always personal, I believe, being forced into managing your portfolio in any way is usually the wrong decision. Successful folks have told me so.
Here are two key experiences from others to share related to RRSP/RRIF withdrawals:
Unless retirees have very high taxable income already; lots of assets (in the millions) whereby they already stomach paying higher taxes most retirees or semi-retirees should at least consider some RRSP withdrawals in their retirement years to help “smooth out taxation.”
Beyond RRSP/RRIF income, should any retiree have a workplace pension and/or who may have other significant income streams in retirement (like non-registered investments that generate healthy dividends) they may find themselves in a higher tax bracket as they age into their 70s and 80s, via forced RRIF withdrawals, potentially losing out on government Old Age Security (OAS) benefits.
I thought the punchline was spot on for this 80-something (Amy), who has a wealth/tax problem to navigate now:
“In summary, Amy, there is no magic bullet to help with your large RRIF account. You will pay a high rate of tax during your life or upon your death on those withdrawals.”
While any retiree’s cashflow objectives will differ, unless you’re in the extreme minority, most successful early and traditional retirees with whom I chat and engage seem to plan WAY ahead on such matters whereby they consistently choose to make some RRSP withdrawals well ahead of when there are forced to.
In making financial decisions before they are forced to, I’ve observed four key benefits: Continue Reading…
Fixed-income securities are financial instruments that have defined terms between a borrower, or issuer, and a lender, or investor. Bonds are typically issued by a government, corporation, federal agency, or other organization. These financial instruments are released so that the issuing institution can raise capital. The borrower agrees to pay interest on the debt security in exchange for the capital that is raised.
The maturity refers to the date when a bond’s principal is paid with interest to the investor. In the modern era, interest rates tend to fluctuate over long periods of time. Because of this, shorter-duration bonds have predictable rates. The longer investors go down the maturity spectrum, the more volatility they will have to contend with in the realm of interest rates.
On January 16, 2024, Harvest ETFs unveiled its full fixed income suite. That means investors will have access to ETFs on the full maturity spectrum: short, intermediate, and long-duration bonds.
The two types of short-term bonds for investors chasing security
Short-term fixed income tends to refer to maturities that are less than three years. In the realm of short-term fixed income, we should talk about the relationship between money market and short-term bonds.
Money market securities are issued by governments, financial institutions, and large corporations as promises to repay debts, generally, in one year or less. These fixed-income vehicles are considered very secure because of their short maturities and extremely secure when issued by trusted issuers, like the U.S. and Canadian. federal governments. They are often targeted during periods of high volatility. Predictably, money market securities offer lower returns when compared to their higher-duration counterparts due to the liquidity of the money market.
Short-term bonds do have a lot in common with money market securities. A bond is issued by a government or corporate entity as a promise to pay back the principal and interest to the investor. When you purchase a bond, you provide the issuer a loan for a set duration. Like money market securities, short-term bonds typically offer predictable, low-risk income.
The Harvest Canadian T-Bill ETF (TBIL:TSX) , a money market fund, was launched on January 16, 2024. This ETF is designed as a low-risk cash vehicle that pays competitive interest income that comes from investing in Treasury Billds (“T-Bills”) issued by the Government of Canada. It provides a simple and straightforward solution for investors who want to hold a percentage of their portfolio in a cash proxy.
Medium-term bonds and their influence on the broader market
When we are talking about intermediate-term bonds, we are typically talking about fixed income vehicles in the 4-10 year maturity range. Indeed, the yield on a 10-year Treasury is often used by analysts as a benchmark that guides other interest rate measures, like mortgage rates. Moreover, as yields increase on intermediate-term bonds so too will the interest rates on longer duration bonds.
Recently, Harvest ETFs portfolio manager, Mike Dragosits, sat down to explore the maturity spectrum and our two new ETFs. You can watch his expert commentary here.
US Treasuries avoided an annual loss in 2023 as bonds rallied in the fourth quarter. These gains were powered by expectations that the US Federal Reserve (the “Fed”) was done with its interest rate tightening cycle. The prevailing wisdom in the investing community is that the Fed will look to pursue at least a handful of rate cuts in 2024. Continue Reading…
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My latest MoneySense Retired Money column focuses on a free retirement calculator called PERC, plus the accompanying new third edition of Fred Vettese’s book, Retirement Income for Life: Getting More Without Saving More.
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