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.

Retired Money: All about the OAS boost at age 75 and implications of deferring OAS and CPP benefits

My latest MoneySense Retired Money column looks at a rare 10% boost of Old Age Security (OAS benefits) Ottawa recently confirmed for seniors aged 75. As you’ll see there are plenty of implications and points to consider for those who are younger and contemplating deferring OAS to 70, or indeed CPP.

You can find the full column by clicking on the highlighted headline here: Delaying CPP and OAS — Is it worth the Wait?

The National Institute for Aging (NIA) confirmed OAS payments for Canadians aged 75 or older will be hiked 10%: the first permanent increase in almost 50 years. The NIA’s Director of Financial Security Research, Bonnie-Jeanne MacDonald, and Associate Fellow Doug Chandler said in the release the best way for retirees to maximize this boost is to defer OAS benefits for as long as possible, either by working longer or by using their savings to fund the delay.

By now, most retirees are aware they can boost Canada Pension Plan (CPP) benefits by 42% by delaying the onset of benefits from age 65 to 70, or 0.7% for each month of deferral after 65.  What’s less well known is that a similar mechanism works for OAS. Unlike CPP, OAS is never available before age 65, but by delaying OAS benefits for 5 years to age 70, you can boost final payments by 36%, or 0.6% more for each month you delay benefits after 65, according to the NIA. Before the August increase at age 75, the NIA said average Canadians would “leave on the table” $10,000; but after factoring in the new increase, they would now lose out on $13,000 by taking OAS at 65.

MacDonald and Chandler noted there are three other reasons to postpone OAS benefits: Reduced clawbacks of the Guaranteed Income Supplement (GIS) after age 70; Better OAS benefits despite clawbacks for those with more retirement income: and Increasing residency requirements. On point one, it says lower-income seniors wishing to avoid GIS income-tested clawbacks could draw down on RRSP savings to defer and boost OAS benefits, thereby preserving GIS payments after 70. On point 2, those subject to OAS clawbacks may find the age 75 boost in combination with delaying benefits may increase benefits but not the clawback. And on point 3, waiting may mean more years of residency for those who have not lived their entire years in Canada: to qualify for OAS you need to have been a Canadian resident for at least 10 years after age 18, so the five extra years of waiting for benefits could add to the payout.

However, on the first point retired actuary and retirement expert Malcolm Hamilton says it’s true deferring OAS until 70 and drawing more from your RRIF to compensate, means your RRIF income after 70 will be smaller and OAS pension larger. “However, by not drawing OAS until 70, low-income seniors will forfeit the full GIS benefit before 70. This doesn’t look like a good plan to me.” Continue Reading…

Can you retire with a $500,000 RRSP?

Image Courtesy of Cashflows & Portfolios

By Mark and Joe

Special to the Financial Independence Hub

Many people feel you need to save a bundle for retirement, and that can be true, depending how much you intend to spend. So, can you retire with a $500,000 RRSP? Can you retire without any company pension plan?

Read on to learn more, including how in our latest case study we tell you it’s absolutely possible to retire with no company pension while relying on your personal savings.

Financial independence facts to remember

You may recall from previous case studies on our site while achieving financial independence (FI) is desired by many it may not be possible for most to achieve.

Realizing FI takes a plan, some multi-year discipline, and ideally one or both of the following:

  1. For every additional dollar you save, you can invest that money so it can grow your wealth faster, and/or,
  2. You can realize financial independence by consuming less.

Here at Cashflows & Portfolios, we suggest you optimize both options above: if you can.

Check out these previous, detailed case studies, to see if you fall into any of these retirement dreams:

Check out how Michelle, a 20-something software engineer, plans to retire by age 40, including how much she’ll need to save to accomplish that goal.

This couple plans to retire by age 50 by using their appreciated home equity.

Here is how much you need to save to retire at age 60 rather comfortably.

There are different roads to any retirement

Members of our site have already learned the powerful math behind any retirement plan:

The more you save, the faster you are likely to achieve your goal.

However, life is not a straight line. Everyone has a unique path to retirement. Twists and turns abound. Depending on the path you took in life, including what decisions you made, your retirement planning work could be vastly different than anyone else’s.

Can you retire with a $500,000 RRSP?

Not every person has a high savings rate. In fact, most don’t.

Not every person has a company pension plan to rely on either. In fact, increasingly, many don’t!

Our case study participant today was unable to have a high, sustained savings rate and he didn’t have any company pension plan to buy into either. Is he doomed for retirement? Will $500,000 saved inside his RRSPs in his 60s be enough (in addition to $100,000 in his TFSA)?

Let’s look at his case study.

In our profile today, is Tom.

Tom is aged 63 and wonders if he can retire with $500,000 invested inside his RRSP and $100,000 in his TFSA. Here are some snippets from his email to us:

Hi there,

I was hoping you can help since I know you perform some financial projections for clients … I was just wondering if you have any articles or would you know the answer to this question. I’m a single guy with a simple life. Let’s say I have only my RRSP (for the most part) to rely on for retirement beyond government benefits. I have almost $500,000 invested there. I have no non-registered account although my TFSA is maxed and now worth $100,0000. (I don’t want to use my TFSA for retirement spending right now, I consider it a big safety net as I get older so maybe you can help me run some math?) Anyhow, I am wondering if I could start taking money from my RRSP, and retire soon. Any money I don’t need for retirement, I would move in-kind into my TFSA. (I know from reading your site I cannot make a direct transfer from my RRSP to TFSA – thanks guys but I will take any excess cash I don’t spend and likely move it there. We’ll see.) I have very modest spending needs. I have no debt. I own my home in rural, small town Ontario.

What do you think?

I make decent money now, definitely not $100,000 per year but “enough” to meet my needs and to continue to invest inside my RRSP and TFSA for the next couple of years. 

Do I have enough to retire and spend about $3,000 per month well into my 80s and 90s?

Thanks very much!

Thank you Tom!

 

To help Tom out in the future, we shared some low-cost investment ideas for his TFSA and RRSP:

  1. Everything You Need to Know about TFSAs.
  2. Everything You Need to Know about RRSPs.

Here are the cash flow and investing assumptions for Tom beyond what he told us above. Continue Reading…

How to avoid your own retirement crisis

By Myron Genyk

Special to the Financial Independence Hub

The Canadian working population feels anxiety about retirement. Numerous surveys have shown that Canadians lack knowledge about how to save for retirement and stress about it. And for good reason – it’s difficult for someone with no personal finance background to know where or how to start. Canadian workers recognize that retirement investing is becoming increasingly important, as 75 per cent of Canadian employees believe there’s an emerging retirement crisis.

So how can you avoid your own retirement crisis? What do you need to do to get started? Generally, the first step is to open an investment account, and to do what is commonly referred to as “self-directed investing” or “DIY investing.”  Once set up, here are five tips to ensure you are successfully investing for retirement:

1.) Start early

Compounded returns work their magic over longer periods of time, so it’s crucial to invest for retirement as early as possible.

For instance, if you invested $1,000 at age 25 and earned a return of 5.00% over 40 years, you would have $7,040 at age 65 (in today’s dollars). If you invested that same $1,000 at age 45, you would need to realize annual returns of 10.25% to have that same amount at age 65. This percentage only increases as you age. Starting early lowers your hurdle rates.

2.) Be consistent

Create a realistic savings plan. Whether it’s setting aside $20 or $200 of your paycheck, it’s important to set the amount and stick to it.

Avoid trying to time the market. So much has been written about how nobody can time markets; some people can be lucky over short periods, but nobody can do this consistently – not a fund manager, not your brother-in-law, not your neighbour.

You might also be enticed to put off saving for a couple of months, putting that money towards a vacation or something.  Deviating from your savings plan could lead to forgetting to resume with your plan, or believing that you don’t need to continue with it.

3.) Keep fees low

Most people might not think much about a 1% or 2% difference in fees.  After all, whether you tip 15% or 16% at your local breakfast diner might be the difference of a few dimes.  However, when incurred over years and decades, these fees can substantially eat into your investment portfolio. Continue Reading…

Healthcare sector offers unique combination of Defense and Growth

Harvest ETFs CIO explains that as markets take a breather, the healthcare sector continues to show defensive characteristics with exposure to growth prospects

The healthcare sector offers a unique combination of defensive and growth-oriented prospects. Photo Shutterstock/Harvest ETFs

By Paul MacDonald, CIO, Harvest ETFs

(Sponsor Content)

US large-cap healthcare has been a bastion for investors in an otherwise rough market. While not fully insulated from the broad sell-off we’ve seen in recent months, the sector has outperformed due to stable demand, high margins and relatively low commodity price exposure. The Harvest Healthcare Leaders Income ETF (HHL:TSX) combines a portfolio of diversified large-cap healthcare companies with an active covered call strategy to generate consistent monthly cash distributions. The portfolio’s defensive positions, plus its income payments, has resulted in significant outperformance of broader markets.

In the wake of July earnings data, however, we saw some relief come to the broader markets as companies across sectors reported largely in line with expectations, providing much-needed visibility. As markets breathed a sigh of relief, growth-oriented sectors like tech started to pare back losses from earlier in the year. While the healthcare sector has shown its reputation for defensiveness in recent months, we are also seeing that the sector’s growth tailwinds are making a greater impact.

This whole space is innovative: whether that’s a company leading the way on robotic-assisted surgery, or a huge established player like Eli Lily making strides in obesity medication. Healthcare companies have significant growth tailwinds and, in our most recent rebalance of HHL we’ve taken some steps to capture more of those growth prospects.

Positioning HHL for growth prospects

We would stress that the recent rebalance in HHL maintained the ETF’s commitment to subsector and style diversification within the healthcare sector. However, some of the new additions to HHL have positioned the portfolio for greater growth opportunity.

The first move was replacing Agilent Technologies with Danaher in the portfolio holdings. Both companies focus on life sciences, tools & diagnostics, but Danaher has a more diverse line of businesses and a larger market share, which in our experience better positions Danaher for any potential market recovery.

The second move in the rebalance was to remove HCA Healthcare Inc, a value position which had shown worsening earnings visibility and rising costs due to labour issues and add Intuitive Surgical. Intuitive Surgical is the market leader in robotic-assisted surgery, with technology almost a decade ahead of its closest competitor. The robotic-assisted surgery market is currently underpenetrated, and a number of companies are making strides in the space: including Stryker, another HHL portfolio holding. The addition of Intuitive Surgical positions HHL to better participate in that subsector’s growth prospects.

While moves like these are designed to position HHL for improved growth prospects, we should emphasize that the whole portfolio is designed for diversified exposure to the growth opportunities and defensive characteristics inherent in the healthcare sector.

Maintaining defense while capturing growth opportunity

It’s ironic. We can easily think of specific investment sectors as a value-growth binary, trading off one for the other. But the healthcare sector isn’t so simple. Some of the largest companies in this sector have incredible growth prospects due to innovations in treatments, pharmaceuticals, and patient service. At the same time, given the large-cap focus we take in HHL, even our more growth-oriented names have market shares and barriers to entry that can be seen as highly defensive.

Those characteristics have shown themselves throughout 2022, as low commodity price exposures and high margins kept the sector in a state of outperformance. HHL is also one of the 6 Harvest ETFs held in the Harvest Diversified Monthly Income ETF (HDIF:TSX), where it contributes to the overall defensive position of that core portfolio.

There are also two aspects of HHL that beef up its defensive traits: diversification and covered calls. Continue Reading…

Building the All-Stock Retirement portfolio

By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

How do you build a suitable retirement portfolio, made of stocks? I gave that a go recently on Seeking Alpha. That may lead to a greater debate about ‘can you really build a suitable retirement stock portfolio?’ I’d say that yes you can, but we have to cover off all of the bases (economic conditions). And we have to have a portfolio that takes a defensive stance. Also, the Canadian investor might be in a very fortunate position thanks to defensive wide-moat stocks that pay generous dividends. They can work as bond replacements. We’re building the retirement stock portfolio.

I will give you the juicy bits, but if you are able to access Seeking Alpha here is the original retirement post on Seeking Alpha.

The concept of the retirement all-stock portfolio is to take an all-weather portfolio approach. But instead of using bonds, cash, gold and commodities, we’re going to put stocks in the right place. And we’re going to use the appropriate amount of stocks to cover off the risks.

A good starting point for the all-weather portfolio is the venerable Permanent Portfolio. That model includes only one asset for each economic quadrant.

Stocks. Bonds. Cash. Gold.

Here is an outline of a study from Man Institute that details the types of stocks and sectors that worked in various economic conditions. Keep in mind that REITs have worked for inflation and stagflation from the 1970s. I’ve given REITs a pass for inflation.

Defense wins championships

At its core, the retirement stock portfolio is quite defensive. Certain types of stocks will do the job of bonds. They will help in times of bear markets and recessions. They can also deliver ample income: much more than bonds these days.

The Canadian retirement stock portfolio will take full advantage of the wide moat stocks.

I’ll cut to the chase. Here are the assets to cover off the economic quadrants:

Defensive bond substitute stocks – 60%

Utilities / Pipelines / Telecom / Consumer Staples / Healthcare / Canadian banks

Growth assets – 20%

Consumer discretionary, retailers, technology, healthcare, financials, industrials and energy stocks

Inflation protectors – 20%

REITs 10%

Oil and gas stocks 10%

Not listed in this inflation-protection section is consumer staples, healthcare, utilities and pipeline stocks. Those stocks can do double duty. They work during times of market stress (corrections/recessions) and they can often deliver modest inflation protection as well.

Maybe consider gold and commodities?

While you may opt for a stock/cash portfolio, it may be wise to consider gold and commodities, even if in very modest amounts.

Nothing is as reliable and explosive for inflation as commodities. The most optimal balanced portfolios do include gold.

A 5% allocation to each of gold and commodities may go a long way to protecting your wealth.

An inflation bucket might then look like:

  • Gold 5%
  • Commodities 5%
  • Energy stocks 5%
  • REITs 5%

A cash wedge is not a bad idea

Cash helps your cause during stock market declines, stagflation and deflation. Mark Seed at My Own Advisor plans to use a stock and cash approach for retirement funding.

Given all of the above considerations, a retiree might go off the stock-only-script modestly with 5% weighting to each: gold, commodities and cash. It’s quite likely that the 15% allocation will come in very handy one day. Continue Reading…