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.

Case Study: Am I going to be okay when I retire?

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Photo by LinkedIn Sales Navigator from Pexels

By Ian Moyer

(Sponsor Content)

Pamela is a 63-year-old widow residing in Ontario, Canada with two adult children who live on their own. Pamela worked for more than 30 years as a Payroll Manager and was able to pay off her mortgage with the life insurance inheritance she received from her husband’s passing and put her savings towards retirement.

She is preparing to retire in two years and has increasing concerns about the amount she has saved for retirement.

Pamela earns $76,000 a year. Now age 63, she has saved:

  • $306,000 in a Registered Retirement Savings Plan (RRSP), contributing $5000 annually until retirement
  • $36,000 in A Tax-Free Savings Account (TFSA), contributing $1000 annually, which doubles as an emergency fund.
  • At age 65 Pamela plans on selling her cottage and adding $400,000 to her retirement funds.

Using Cascades Financial Solutions retirement income planning software, we help Pamela determine if she can retire at the age of 65 and sustain her lifestyle and accommodate traveling.

Pamela will decide to retire at the age of 65 if the after-tax income will meet her needs. With retirement fast approaching, she has three main questions:

  1. Do I have enough to retire? Pamala assumes she will need approximately 50% of her income to travel for five years.
  2. What are other income sources I can rely on? Pamela is concerned about the sustainability of her RRSP, TFSA and sale of the cottage alone.
  3. How do I deal with taxes? Pamela is unsure about the amount of taxes she will need to set aside.

Answering Pamela’s first question: “Do I have enough to retire?” The answer is YES! Based on her needs.

Using Cascades Financial Solutions, we’ve run a retirement income withdrawal plan resulting in three different ways to produce an after-tax annual retirement income of $45,703 for Pamela:

We’ve selected an asset allocation as moderate in the software: Moderate: 60% Fixed Income, 40% Equity,  5% rate of return and 2% inflation. All income and savings are reported in “today’s dollars” by Cascades.

Strategy Descriptions

Registered Funds First: This strategy involves creating retirement income from registered funds first, reducing the risk of leaving highly taxable investment accounts to an estate. The second priority is given to taxable non-registered accounts, leaving Tax Free Savings Accounts (TFSAs) last.

Non-Registered Funds First: This strategy involves creating retirement income from non-registered funds first, deferring the income taxes payable on registered investments. The second priority is given to registered investments, leaving Tax Free Savings Accounts (TFSAs) last.

Tax Free Funds First: This strategy involves creating retirement income from non-registered funds first and postpones the use of registered funds as long as possible. The second priority is given to Tax Free Savings Accounts (TFSAs), leaving registered funds last.

Determining a Winning Strategy: With all other factors being equal, the winning strategy provides a client longevity and the highest estate value, net of taxes and fees, at life expectancy. The differences in the net estate value represents the income tax savings of the winning strategy.  

Answering Pamela’s second question: “What are other income sources I can rely on?” There are two main programs that provide retirement income for most Canadians: the CPP or Quebec Pension Plan (QPP), and OAS.  The maximum CPP / QPP Pension you could receive starting at age 65 is $1,203.75 monthly ($14,445 annually) for 2021.[1]

Continue Reading…

New Equity-linked GICs offer equity twist on humble GIC

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By Rachel Megitt, Vice President,

Term Investments & Savings, RBC

(Sponsor Content)

If you’re looking to grow your money, the future looks a lot different than it did even a few months ago, given the current volatility in the markets and intensifying inflation.

We often hear the adage “big risk equals big reward,” but what if you want the reward but aren’t comfortable taking the risk? This is where a new twist on a traditional investment is proving to be a powerful option: equity-linked GICs (Guaranteed Investment Certificates).

In the summer of 2021, we shook up our product line-up and added two new equity-linked GICs that also represented RBC firsts and proudly shared the news, including in a Findependence blog.

New GICs with an equity twist

Within the first six months, we saw client enthusiasm about these two new “GICs with an equity twist” surge well beyond our expectations. Our clients have been clamouring for these GIC options and we believe this reflects the overall desire of Canadian investors to tap into what equity-linked GICs provide: the appealing combination of a guarantee for their initial investment, plus the higher return potential that comes with an equity investment.

While we knew we had created two truly compelling and competitive GICs, we never imagined how strongly these new GICs would resonate across the country. The buzz surrounding these equity-linked options is helping reshape investment conversations in Canada. These GICs offer investors who are reluctant to buy individual equities the opportunity to step into the world of equity investing at both a pace and level of risk they are comfortable with. Continue Reading…

An income strategy for new retirees: HDIF

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By David Kitai,  Harvest ETFs

(Sponsor Content)

One third of recently retired Canadians surveyed by RBC insurance said they retired sooner than they planned because of the COVID-19 pandemic. That same survey found that retirees, especially new retirees, are increasingly concerned about affording their retirement.

More than 78% of survey respondents said they were concerned about the impact of inflation on their savings. 47% said they were concerned about a lack of guaranteed income and 48% said they worry about outliving their savings.

All three of these concerns come down to income. New Canadian retirees, many of whom retired early due to COVID, are worried that they don’t have a stable source of income that can overcome the rapidly rising cost of living and last for their whole lifespans.

One income asset class can help with those worries.

Inflation worries come after years of low-yielding bonds

The income concerns discovered by the survey should come as no surprise. For the better part of a decade income yields from fixed income investments have been at or near historic lows. Retirees used to live on the income these investments provided but yields at sub 2% levels have been unsustainable.

More recently, rates have begun to rise as central banks attempt to reign in inflation. However, with inflation in spring of 2022 hitting levels above 6%, those rising bond yields are still paying negative real income.

That trend is reflected in the fact that 78% of survey respondents said they were concerned about inflation. Many traditional income sources seem incapable of matching what inflation has done to ordinary retirees’ balance sheets.

Many income sources, but not all.

Equity Income ETFs for retirees

An equity income ETF takes a portfolio of equities — stocks — and uses a combination of dividends and a covered call strategy to generate consistent monthly cashflows for unitholders. This results in an ETF with a target annual yield that can be as high as 8.5%, paid in the form of a monthly cash distribution. These assets can still participate in market growth opportunity, like an ordinary equity ETF, albeit with some growth opportunities limited due to the covered call strategy. The end result is a product paying consistent income with exposure to market growth opportunities. Continue Reading…

Building the Energy Dividend portfolio

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

When it comes to sectors, energy is the most useful inflation fighter. In fact it is the only sector that has delivered positive real returns across every inflationary period, looking back some 100 years of stock market history. Energy stocks also delivered incredible returns during the stagflationary period of the 1970s and into the early 1980s. We have entered a stagflationary enviornment and (like the 70’s show) it includes an energy and commodities price shock. While I have enjoyed some very generous total returns from our energy ETFs, I am set to harvest most of those total returns, and will start building the energy dividend portfolio.

From an RBC report …

We peg free cash flow generation (before dividends) across  the Canadian majors — Canadian Natural Resources, Suncor Energy, Cenovus Energy and Imperial Oil

—at $46.0 billion in 2022 and $48.7 billion in 2023.”

The free cash flow gushers are just ridiculous. The dividends (and investors) are enriched by that free cash flow.

Here’s a Tweet thread from Larry Short that sets the table.

Yes, have a look for my “Don’t drill baby, don’t drill” reply.

You can also have a look at the quarterly update video from iA Private Wealth.

They’ve stopped drilling and now they’re filling – your brokerage account. From that very good video, Larry picks up an interesting chart from our friends at Ninepoint Partners.

You might say this is the money chart, the money shot.

Canadian energy stocks

And here is a post on Cut The Crap Investing that invited readers to consider investing in Canadian energy stocks, from October of 2020. That was about 300% ago. With even more gains available if you invested in the Ninepoint Energy Fund.

I have admitted to being late to eat my own cooking. In our accounts we have gains in the 100% to 150% range. In a TFSA account, I have sold a modest amount of shares in iShares XEG to pay our price at the pump for the next year or two. Being that I am in the semi-retirement stage with my wife being 2-5 years away from retirement, I will make that transition, selling down shares and moving the proceeds to dividend-paying stocks and specialized income-producing energy ETFs. That will take away the price risk for the energy producer sector. But certainly, the financial health of the sector and the companies is still very important. Only healthy companies (and sectors) deliver stable or growing dividends. Continue Reading…

A Canadian perspective on Health Care Overseas

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By Akaisha Kaderli

Special to the Financial Independence Hub

Q and A with Jim McLeod and Retire Early Lifestyle

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 reluctant to stay away from Canada longer than six 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! Below is our interview with Jim McLeod. He and his wife are permanent residents of Mexico, and now receive all their healthcare from there. It is our hope with this interview, to shed light on some options for Canadians who might not want to maintain two homes, be snowbirds in Mexico, or who could envision living in Mexico with its better weather and pricing.

Jim and Kathy in Mexico

Retire Early Lifestyle (REL): 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 (JM): 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.

Leaving the safety net behind

REL: 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?

JM: 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 $10,000 CAD a year by moving full time to Mexico.  And we knew we would lose our OHIP coverage. As such, we budget $2000 CAD 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 Permanent resident of Mexico.

REL: Initially, did you go home to Canada to get certain health care items taken care of and then go back to Mexico to live?

JM: 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.

REL: What sort of medical treatments have you received here in Mexico? Continue Reading…