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.

Capital gains tax is one of the lowest you’ll ever pay

Posted By Pat McKeough | September 22, 2016

There are three forms of Investment Income in Canada: Interest, Dividends and Capital Gains. Each Is taxed differently. Here’s a reminder of how smart investors use their knowledge to taxation rates, especially tax on Capital Gains, to protect their returns.

With stocks, you only pay capital gains tax when you sell or “realize” the increase in the value of the stock over and above what you paid for it. (Although mutual funds generally pass on their realized capital gains each year.)

Several years ago, the Canadian government cut the capital gains inclusion rate (the percentage of gains you need to “take into income”) from 75% to 50%. For example, if an investor purchases stock for $1,000 and then sells that stock for $2,000, then they have a $1,000 capital gain. Investors pay Canadian capital gains tax on 50% of the capital gain amount. This means that if you earn $1,000 in capital gains, and you are in the highest tax bracket in, say, Ontario (49.53%), you will pay $247.65 in Canadian capital gains tax on the $1,000 in gains.

The other forms of investment income are interest and dividends. Interest income is 100% taxable in Canada, while dividend income is eligible for a dividend tax credit in Canada. In the 49.53% tax bracket, you’ll pay $495.30 in taxes on $1,000 in interest income, and you will pay $295.20 on $1,000 in dividend income.

Three capital-gains strategies

Dividends: The Foundation of the Smart Beta Movement

Posted By Financial Independence Hub | September 16, 2016

By Christopher Gannatti, Associate Director of Research, WisdomTree

Special to the Financial Independence Hub

Smart beta exchange-traded funds (ETFs) are rapidly proliferating and capturing assets at a faster clip than the broader ETF industry. In 2015, 143 smart beta ETFs came to market, [Note 1] representing half of the year’s new ETF launches, or double the percentage of traditional beta products born last year.

Dividend strategies are one of the primary drivers of smart beta ETF growth. Smart beta ETFs had about $616 billion in assets under management at the end of 2015, [Note 2] and more than a quarter of that total was allocated to dividend-oriented funds.

Since the publication of the widely followed Fama-French research in 1993, outperformance of fundamentally weighted indexes has mostly been attributed to the market factor, the size factor (mid- and small caps outperforming larger stocks) and the value factor. [Note 3] Later, momentum factor was added as an accepted driver of fundamental weighting’s ability to top market cap-weighted strategies.

At WisdomTree, we believe weighting by dividends elevates fundamental indexing or smart beta. In 2006, 25 dividend ETFs [Note 4] came to market, 22 of which courtesy of WisdomTree. Our Dividend Stream® weighting methodology offers distinct advantages over weighting by market capitalization, dividend yield or focusing on the number of consecutive years that companies have increased payouts. Continue Reading…

Optimizing CPP: the later you start taking it, the better

Posted By Jonathan Chevreau | September 15, 2016

Here’s my latest MoneySense Retired Money blog, which looks at the perennial topic of when to take the Canada Pension Plan, or CPP. Click on the highlighted text that follows: The best time to take CPP to maximize payouts. (It may be necessary to subscribe to get full access to the piece after a certain limited number of monthly views to the site).

In an earlier blog in the series, I revealed why personally I planned to take Old Age Security as soon as it was on offer, at age 65.

In this followup, I come to the diametrically opposite conclusion that the longer you commence deferring the onset of CPP benefits, the better — assuming normal health and longevity expectations.

I consulted three major sources for the piece. One is Doug Dahmer, founder of Burlington-based Emeritus Retirement Solutions. You can also access a useful CPP tool he runs at www.cppoptimizer.com. Run Dahmer’s name in the Hub’s search engine and you can find a number of guest blogs on the topic of decumulation.

In a nutshell, Doug thinks most of us — including me and my wife — should defer CPP as late as 70, choosing instead to start withdrawing from RRSPs in our 60s, assuming the money is needed on.

Another useful source I consulted is Doug Runchey of Victoria-based DR Pensions Consulting. For a small fee, Runchey — who used to work with the CPP — will take your government-issued CPP contribution statements and crunch the numbers to tell you how to optimize your benefits.

5 things you shouldn’t put off until Retirement

Posted By Marie Engen | September 14, 2016

We’ve all had times we’ve dreamed about our eventual retirement when we’ll have all the free time available to pursue whatever we want to do.

We don’t have the time to do everything while working full-time, so we have a long list of things we’d like to do later on.

But why wait until you retire? Here are five things you shouldn’t put off until retirement.

1.) Travel

Travel is often number one on the list of activities people want to do when they retire. They will finally be free to see the sights they’ve dreamed of all these years.

But, why not make plans to go on that long awaited trip now? Travelling with your family can create a bond and memories that last a lifetime.

Many travel experiences are easier when you’re younger – and cheaper too.

It’s much more difficult to travel when you have certain health conditions and physical limitations. Even if you’re still healthy and in great shape you probably won’t have the same level of energy and endurance.

Older people tend to want more comfort – and that can be costly. You may not have the money if your portfolio takes a downturn, or living expenses are higher than expected.

2.) Downsize your home

One way to trim expenses is to sell your oversized home and move to a smaller, more efficient place now rather than waiting for retirement. Relocating to a more affordable area is also a great option. If your kids are out of the house, you don’t need the extra space, and costly home maintenance it taking over your weekends, why not downsize now?

Check out “active living” or “adult lifestyle” communities where ownership starts as low as age 45.

Not only can this slash your housing costs now, it’ll free up cash for you when you finally do retire.

3.) Exercise

Exercise is one activity that’s typically put off when we’re busy, but lack of exercise is a major cause of many chronic diseases to which we can become susceptible when we age. Incorporating an exercise program of at least 30 minutes a day leads to a healthier lifestyle once you retire.

Retired life will be more enjoyable if you’re not dealing with health problems, and medical expenses can be greatly reduced.

4.) Living on a reduced budget

Once your major expenses of children and home mortgage have disappeared, why not start living within your future means with a reduced budget that would reflect your lower retirement income?

Run the numbers. You can determine a realistic view of your cash flow and be prepared to make significant changes if you need to.

5.) Hobbies

People tend to put off their hobbies and personal interests. They have a low priority when you’re busy with work.

Try out new hobbies or other activities to see if you find them enjoyable before you jump in whole-hog at your retirement.

If you wait you may find some activities harder to master.

Barry had always been interested in fine woodworking and was looking forward to this new hobby once he retired. But, as he got older, his eyesight started to deteriorate so he was no longer able to see the fine detail work clearly. He became frustrated and quit.

Final thoughts

Don’t postpone your life until you retire. Making retirement your lifelong primary goal could end up in disappointment once you get there.

Make the best life you can right now and at retirement you’ll have a different kind of fun.

3 retirement investment “strategies” to avoid

Posted By Pat McKeough | September 13, 2016

Here are 3 retirement investment “strategies” that will kill your returns and put your retirement goals in jeopardy.

If you’re headed into retirement, you’ve probably read about a range of different retirement investment strategies to follow. One we’ve been asked about a number of times is whether we can supply one last can’t-miss trading idea that can make up for the shortfall in savings (brokers sometimes refer to this as a “rescue stock”).

This, of course, is unrealistic. If we could find stocks with that rare combination of low risk and high potential, why would we ever recommend anything else?

In fact, if you’re heading into retirement and are short of money, you should move your investing in the opposite direction: aim for safer investments, rather than taking one last gamble. As well, here are three other examples of really bad retirement investing strategies:

First retirement Investment strategy to avoid: Stock options

Stock options are not a smart idea if you’re headed into retirement. Stock options are expensive to trade. You pay commissions each time you buy or sell stock options. Commissions eat up a large part of any profits you may make with stock options, particularly if you trade in small quantities. What’s more, every trade costs you money in “slippage,” or the difference between the bid and the ask price. With options, this difference is larger than it is with stocks. Continue Reading…

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