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.
Money management is essential to help your savings thrive and benefit your [U.S.] retirement accounts. Discover movements to minimize taxable income.
By Dan Coconate
Special to Financial Independence Hub
Navigating the path to a financially secure retirement can often seem like navigating a labyrinth with no exit. With so many potential strategies and considerations, it’s easy to feel overwhelmed. However, efficient tax management is key to unlocking a financially comfortable retirement.
By adeptly managing your taxable income, particularly through individual retirement accounts (IRAs) [or in Canada, RRSPs], you can pave a clear path through the complexities of retirement planning, positioning yourself for a secure, worry-free future. Understanding the necessary movements to minimize taxable income in a retirement account will help you optimize and maximize your retirement savings.
Contribute to a Traditional IRA
Investing in a traditional IRA can be a smart move to effectively reduce your taxable income. Your contributions may be tax deductible, depending on your income and whether your work’s retirement plan also covers your spouse.
The more you contribute to your traditional IRA within the IRS contribution limits, the more you can reduce your taxable income for the year.
Consider a Roth IRA Conversion
A Roth IRA conversion is a strategic financial decision that can secure tax-free income during retirement. When you convert from a traditional IRA to a Roth IRA, you pay taxes on the converted amount in the year of conversion. [Roth IRAs are the U.S. equivalent of Canada’s Tax-Free Savings Accounts or TFSAs] Continue Reading…
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…
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…
It’s that time of year. The leaves have started to shift to brilliant shades of crimson, orange, and yellow. The days are getting shorter. And, suddenly, it’s “jacket weather” again. For many Canadian families, the transition into cooler months signals a time to begin the process of reviewing their finances from the past year with the goal of being better prepared in the years ahead.
With the cost of living in Canada incrementally higher than it has been in recent memory, there is a renewed opportunity for families to ask a familiar question: what is a simple, one-step investment strategy that they can use to help stretch the most out of their money, both now and for the long haul?
Well, like the changing seasons, it may be a good time for families to consider changing up a dated investment approach in favour of one that will take their money a little further. That is, using a low-fee, low-touch, robo-advisor in place of costly mutual fund investments … and, here are a few reasons why:
Accessibility
Robo-advisors have ushered in a new era of accessible investing. Designed to be user-friendly from the get-go, they are an excellent choice for both novice and experienced investors. With just a few clicks, investors can select a portfolio that matches their risk tolerance and fund it with little to no hassle.
Diversification
A well-constructed portfolio needs variety. Robo-advisors excel at this by spreading investments across different asset classes, thus reducing risk. Mutual funds, while also diversified, often lack the customizability and personalization offered by low-fee robo-advisors.
Automated Rebalancing
Investing with a robo-advisor provides nimble, automated rebalancing, ensuring that investments stay aligned to goals, even as market conditions shift. Mutual fund investors often need to manually (and worse, reactively) adjust their portfolios, potentially missing out on market opportunities or exposing them to unnecessary risk. Continue Reading…
Investors are starting to notice that their portfolios have been treading water for a couple of years. Over the last two years, a global balanced growth portfolio would essentially be flat. Of course, move out to 3-year, 5-year and 10-year time horizons and we have very solid to generous returns.
At times investors have to wait. We build and springload the portfolio waiting for the next aggressive move higher. In fact, these holding periods can be beneficial: we are loading up on stocks at stagnating or lower prices. We’re able to buy more shares. The waiting is the hardest part for investors. But it is essential that we understand the benefits to sticking to our investment plan.
In January of 2021 I wondered aloud in a MoneySense post if the markets might not like what they see when we get to the other side of the pandemic. That’s an interesting post that looks back at the year 2020, the year the world changed with the first modern day pandemic. That suspicion is ‘kinda’ playing out as the markets stall and try to figure things out.
That’s not to suggest that my hunch was an investable idea. We have to stay invested.
Stick to your plan when the market gets stuck
Patience is the most important practice when it comes to wealth building. When done correctly, building life-changing wealth happens in slow motion and it is VERY boring.
Boring is good.
Waiting can be boring. But maybe it can look and feel more ‘exciting’ if we know what usually happens after the wait. Stock markets work like evolution. There are long periods of stagnation and status quo and then rapid moves and change.
Instead of boring, maybe it should feel like a kid waiting for Christmas. The good stuff is on its way.
Here’s an example of a waiting period, from 1999. The chart is from iShares, for the TSX 60 (XIU/TSX). The returns include dividend reinvestment.
And here’s the stock market ‘explosion’ after the wait.
That’s more than a double from the beginning of the waiting period.
And here’s the wait from 2007, moving through the financial crisis. Ya, that’s a 7-year wait. Talk about the 7-year itch, many investors filed for divorce from the markets.
It was a costly divorce.
Markets went on a very nice run for several years. Continue Reading…
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