Decumulate & Downsize

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.

Review & Excerpt of Clay Gillespie’s Create the Retirement You Really Want

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The Financial Post has just published my review of a new book by Vancouver-based financial advisor Clay Gillespie: Create the Retirement You Really Want: And Retire Smarter, Richer and Happier.

You can find the online review by clicking on this highlighted headline: From Dreams to Legacy: New Book Details the 5 Stages of Retirement.

And below is an excerpt from the chapter highlighted in the review. We may also run at least one other excerpt in the coming weeks. Over to you, Clay!

By Clay Gillespie

Special the Financial Independence Hub

Retirement isn’t an event; it’s a process, and it begins years before you actually retire. Working with hundreds of clients over many decades, I’ve come to realize that retirement success is best achieved in five distinct stages. Each stage reflects a different aspect of who you are and where you want to be in retirement, and it all begins with a dream.

       1.) Dreams stage

The Dreams stage of retirement typically begins about five or six years prior to actual retirement. This is the time when people have decided to retire but aren’t yet sure of the date. It’s the time where retirement goals and hopes for the future become defined and a preliminary retirement plan is developed. For couples, especially, retiring now becomes an ongoing topic of discussion, not just something brought up in passing.

2.) Reality stage

The Reality stage usually occurs between 6 and 24 months before retirement and its temporal proximity really starts to hit home. Lifestyle issues come into greater focus, along with fears that one’s retirement nest egg may be inadequate. This is a crucial time from a planning perspective. Old Age Security (OAS) and Canada Pension Plan/Quebec Pension Plan (CPP/QPP) applications need to be made, income streams need to be consolidated, taxes need to be minimized and portfolios need to be optimized for income and growth.

3. Transition stage Continue Reading…

Q&A: How Dividends can speed Financial Independence

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I recently had a chance to discuss a new Canadian advisory on dividend stocks with the people responsible for that newsletter. The advisory comes from TSI Network, founded by Pat McKeough, whose investment approach I have always respected.

The advisory is TSI Dividend Advisor (shown above), and it grew out of a long respect for the power of dividends.

Pat and his investment team have always viewed dividends as a sign of investment quality. By extension, dividend stocks become the most reliable foundation of an investment portfolio built for growing wealth and financial independence.

This confidence in dividends is accompanied by a detailed examination of dividend-paying stocks to identify those with the greatest potential to sustain, and raise, their payouts.

The 8 key points they use to evaluate dividend stocks grew into their Dividend Sustainability Ratings. This proprietary ratings system became the backbone of the new TSI Dividend Advisor.  It was launched late in 2016 to impressive reviews in the media and a flood of subscriptions from Canadian investors.

Here are some of the keys to that success, from the editors’ point of view.

Jon Chevreau:  First of all, Pat, thanks for your time. What role do dividends play in a  successful portfolio? How can they lead to Findependence?

Pat McKeough

Pat McKeough: Top dividend stocks are a key part of a successful portfolio. Top dividend stocks can produce as much as a third of your total return over long periods. These payouts are drawn from earnings cash flow and paid to the shareholders of the company. Typically, these dividends are paid quarterly, although they may be paid annually or monthly as well.

At TSI Network, we think investing in dividend stocks is one of the best investment decisions you can make to achieve Findependence. Dividends serve as a way for companies to share the wealth they accumulate through successfully operating their businesses.

JC: Many stocks have dividends. What makes a top dividend stock?

Jon Chevreau

PM: Top dividend stocks provide steady dividends: a sign of investment quality. Some good companies reinvest profits instead of paying dividends. But fraudulent and failing companies hardly ever pay dividends. So if you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks. For a true measure of stability, focus on companies that have maintained or raised their dividends during economic and stock market downturns. These firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, top dividend stocks provide an attractive mix of safety, income and growth. Continue Reading…

Retired Money: Still a place for Spousal RRSPs

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My latest MoneySense Retired Money blog has just been published, which you can find by clicking on this highlighted link: Tax Strategies using spousal RRSPs.

This is the second in a series: the first one focused on pension splitting and can be found here: Pension splitting is now ten years old. The Financial Post also ran a related piece called Spousal RRSPs are an often overlooked retirement savings tool.

As these pieces note, income splitting usually works best for families when two spouses are in different tax brackets. Particularly if one spouse is a big earner and the second isn’t making peony at all.

As CIBC Wealth’s Jamie Golombek observed in this piece in the FP — Tax Season is Upon Us — the Family Tax Cut is no more as of 2016: that was a version of income splitting that let families with children under 18 transfer up to $50,000 of income to his or her lower-income spouse or partner. But “seniors need not worry,” Golombek added: seniors can still split eligible pension income with spouses or common-law partners.

And spousal RRSPs still present non-seniors with another valid income-splitting alternative, again assuming that a couple occupy disparate tax brackets.  As the MoneySense piece phrases it, all those years the high-earning spouse is saving for retirement, the ideal solution would be to get a tax deduction for RRSP contributions but when it comes time to receive the income, to receive it in the hands of the lower-income spouse.

And that’s exactly what a spousal RRSP does. The contributor can deduct the amount of the spousal RRSP deposit from his/her (higher) earned income, while the recipient (the husband in our example) owns the investments. The aim is to equalize retirement income of both spouses, and to have the RRSP funds withdrawn by the recipient spouse at his or her lower tax rate.

Unlike pension splitting, you’re not restricted to splitting just 50% of the income: you can have 100% of it taxed in the lower-earning spouse if so desired. This income splitting also helps the couple each qualify for the $2,000 pension credit.

There are plenty of nuances to this, such as splitting CPP or QPP income after age 60. But as Chris Cottier, an investment advisor with Richardson GMP Limited, says, the spousal RRSP is generally a “no-lose” proposition.

Retired Money: Pension Splitting is now ten years old

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Pension Income Splitting can dramatically lower taxes for senior couples considered as a family unit

The latest instalment of my MoneySense Retired Money column is now available: click on the highlighted text to access the full version of the column: Pay Less Tax with Pension Income Splitting.

As I note, It’s hard to believe but the great boon of pension income splitting has now been available to Canadian retirees for a full decade. Coupled with the 2009 introduction of TFSAs, these two tools have certainly been a welcome addition to the arsenal of retirees and semi-retirees.

Pension splitting can generate many thousands of dollars in additional after-tax income for retired couples, particularly if – as is often the case – one of them enjoys a generous defined benefit (DB) pension and the other does not.  Pension splitting is based on the fact that Canada’s graduated income tax system imposes far higher rates of tax on big earners than on modest or non-existent earners. Pension splitting can result in a highly taxed income and a low-taxed one being merged (conceptually speaking) into what amounts to a modest mid-level amount of tax for the couple as a whole, putting thousands of extra dollars into the family’s collective pocket each year.

The tax benefits vary with the marginal tax rates of both spouses.  With pension splitting, if one spouse has no pension and the other has a $60,000 pension the couple as a whole ends up being treated exactly like a couple with two $30,000 pensions. The bonus is that both spouses can claim the $2,000 pension income s and the higher-income spouse may no longer be subject to clawbacks of Old Age Security.

Pension Splitting is a paper transfer at tax time

Continue Reading…

Vanguard Canada launches four new domestic Fixed Income ETFs

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Vanguard Investments Canada Inc. has announced that four new domestic fixed-income ETFs began trading on the TSX today, doubling a lineup that previously included a couple of short-term bond index ETFs, an aggregate bond index ETF and two currency-hedged foreign bond ETFs.

The new funds add coverage to government and corporate bonds,  long-term bonds, and to domestic short-term government bonds. The full release is here on Canada Newswire. Here are the names, ticker symbols and Management fees of the four new ETFs:

ETF

TSX Symbol

Management Fee1

Vanguard Canadian Corporate Bond Index ETF

VCB

0.23%

Vanguard Canadian Long-Term Bond Index ETF

VLB

0.17%

Vanguard Canadian Short-Term Government Bond Index ETF

VSG

0.18%

Vanguard Canadian Government Bond Index ETF

VGV

0.25%

These four new ETFs round out a list of domestic fixed-income ETFs that also include the Canadian Aggregate Bond Index ETF (VAB), the Canadian Short-term Bond Index ETF (VSB), the Canadian Short-term Corporate Bond Index ETF (VSC) and two foreign (US and global) bond index ETFs hedged back into the Canadian dollar (VBU and VBG respectively). You can find the full list, including the four new products, here. (Select Fixed Income as the asset class to zero in on the full list of nine bond ETFs.)

In the press release, Vanguard Canada head of product Tim Huver said “These ETFs provide the flexibility to position portfolios along the yield curve and take advantage of targeted exposure to corporate and government bonds.”