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: Is this Covid-19 bear market good reason to delay Retirement?

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MoneySense.ca: Photo by Renate Vanaga on Unsplash

Is the Coronavirus-induced bear market reason to delay Retirement? Some suggest Baby Boomers may be forced to delay their Retirement by up to five years.  My latest MoneySense Retired Money column looks at this in some depth. Click on the highlighted headline to retrieve full article: Should you delay your Retirement because of Covid-19?

Fortunately those with Defined Benefit (DB) pensions may not have to delay Retirement at all: “so long as the pension plan is healthy and well-funded their retirement plan should remain intact,” says Aaron Hector, vice president of Calgary-based Doherty & Bryant Financial Strategists.

But inflation-indexed DB pensions are increasingly rare. Those counting mostly on their RRSPs, TFSAs and non-registered savings “have more reason to be concerned,” Hector cautions, “Valuations have fallen and some companies will be forced to reduce or cut their dividends, which will put a damper on income sources. For them, it would come down to whether or not they had previously built up an adequate cushion to allow for this market correction.”

3 benefits to postponing Retirement

Fee-only financial planner Robb Engen, of the Boomer & Echo blog, says “there’s no doubt investors nearing retirement have been impacted by the Covid-19 crisis.” He sees three benefits to postponing retirement: more time to earn and save; fewer years of drawing down on portfolios; and stock investments have more time to recover their value. Continue Reading…

Hub Q&A: What is the tax impact of Covid-19 on investors?

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By Darren Coleman and Elena Hanson

Special to the Financial Independence Hub

The following Q&A is between the Financial Independence Hub and the two hosts of the new Two-Way Traffic podcast, financial advisor Darren Coleman and cross-border tax expert Elena Hanson.

Their bios are at the end of this blog. 

 

FINANCIAL INDEPENDENCE HUB:

While April 30th is usually Canada’s tax filing deadline, this has been extended this year because of the Covid-19 crisis. Our first question is whether there are other tax impacts for investors because of the Coronavirus?

DARREN COLEMAN: The stock market sell-off was broadly based and the decline  indiscriminate as both good and bad quality investments dropped about the same amount. When this happens, investors should upgrade the quality of their portfolios by moving into better quality securities. In some cases, this may mean triggering a capital loss you can carry backwards to reduce capital gains paid in the past (up to three tax years) or “bank” those losses to offset future capital gains. It’s a good idea now to review your investment portfolio and financial plan with a qualified Certified Financial Planner and investment professional. Business owners should also be tracking their losses, if they have any, as a result of closures or reduced operations.

ELENA HANSON: Most types of returns and payments have been extended, but Internal Revenue Service (IRS) and Canada Revenue Agency (CRA) operations have been curtailed and are operating at minimum capacity. This inconveniences practitioners and taxpayers as we are in tax season and continue doing business.

Both the Canadian and US governments have also introduced new, large legislative packages to address the current economic reality, stabilize the economy, and prevent a recession. US provisions have been enacted in three phases and we await phase four. The Canadian government has been modifying its economic response plan daily and only a small portion has been enacted. This requires us to stay on top of the situation, communicate with our clients in a timely manner, and advise them on their inquiries.

Are there Tax strategies we should be putting in place in lieu of Coronavirus? 

DARREN COLEMAN: First, you should harvest capital losses in investment portfolios. And second, consider moving from investments that earn interest – rates are at historic lows – to those that pay dividends. Not only will you generate a higher income, you will pay a lower rate of tax on dividends over interest.

ELENA HANSON: It depends. Are you a business owner, and if so, are you US-based or Canadian-based? Are you an employee or are you a Canadian resident or a Canadian resident who is also a US citizen? Right now, it’s about injecting cash into the hands of the business or individuals. The US CARES Act is robust and offers real economic stimulus in the form of large loans. A portion of this is forgivable with eligibility to carry losses back as far as 2013, and you can accelerate depreciation on certain capital assets, which in the past, did not have preferential treatment. The Act also provides non-taxable rebates to individuals and access to their pensions on a tax-deferred or loan basis.

On the other hand, Canadian benefits are all taxable, whether it’s the Canada Emergency Response Benefit (CERB), the 10% employment subsidy of the Temporary Wage Subsidy (TWS), or the 75% subsidy of the Canada Emergency Wage Subsidy (CEWS). This means  individuals and employers who receive these benefits will be taxed on them next year. They will also be taxed on the US benefits on the Canadian return (if they are subject to Canadian taxation) but not on the US return.

As for other strategies, consider filing early if you expect a refund. With the significant loss in marketable securities, it may be a good time to make a gift, replace assets in trusts, do estate freezing or refreezing. In addition, it’s wise to carryback losses to prior years, and on the US side you can now carryback corporate losses for both 2019 and 2018 taxation years for up to five years back. But watch out for scammers and fraudsters during the rebate season.

What are the best short-term things we should be doing?

DARREN COLEMAN: The first priority of every financial plan is to have cash, or immediate access to cash, so you can fund up to three months of expenses. That primary rule is being tested right now for many individuals, professionals and businesses. If you don’t have sufficient cash, you may need to adjust your holdings to free some up.

ELENA HANSON: The immediate need of our clients is to assist them with any tax benefits available from the stimulus packages, especially if they were laid off or terminated. For businesses, owner-managers want to better understand how they can preserve cash to maintain their operations. They want to know which of the newly introduced laws are best suited for their business – Economic Injury Disaster Loan (EID) or Paycheck Protection Program Loan (PPP) on the US side, or which of the two wage subsidies on the Canadian side. We’ve also been dealing with some loss tax planning, including bad debt, related to business operations or individual marketable securities for individuals.

What are the best long-term things we should be doing?

DARREN COLEMAN: The global equity markets had a historic decline in February and March. This has impacted the investment and retirement portfolios of millions of investors. What does this mean for your financial plan? It’s time to review that. For some, it may mean you need to keep working longer. For others, it may be a rare opportunity to improve your portfolios by buying great long-term securities that are on sale.

ELENA HANSON: If you’re a business owner it’s a great time to review and optimize your business strategy, revisit your supply chain, and look at disaster-response measures. This will better prepare you for the next time you face a challenging economic environment. Also, we will likely end up living in a different reality after the pandemic, so start thinking now about how to ensure your business can be more competitive and innovative.

If you’re an individual who is seeing a large portion of your portfolio disappear, perhaps it’s time to have an honest conversation with your money manager, update your risk tolerance in your portfolio, and do estate planning. As people reflect more on their mortality, you should also schedule a meeting with your lawyer (once businesses are open) to draft or update your will. We all want to hope for the best, but need to plan for the worst and this experience proves it.

What is the overall impact of Covid-19 on the market and on your investments?

DARREN COLEMAN: Most diversified portfolios are down between 15-25% in 2020. This has likely concerned most investors and has certainly changed their financial plans. It has also tested the risk tolerance of many, especially after a ten-year bull market. Continue Reading…

Retired Money: A new CPP calculator, and why I took my CPP at 66

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MoneySense.ca: Photo created by senivpetro – www.freepik.com

My latest MoneySense Retired Money column has just been published and looks at CPP survivorship issues. Tucked in there I reveal for the first time my personal decision to take the Canada Pension Plan at age 66, which I did last summer a few months after reaching that

It was more of a cash flow issue in light of the fact that just prior to this, my wife had left her full-time and well-paid job in the transportation industry. But I mention another consideration: the quirky CPP survivorship rules. Now I realize most couples in their 60s don’t dwell on our mortality much if they are in good health and keep care of themselves. And bear in mind my decision was long before the Coronavirus pandemic, which disproportionately affects seniors.

The first of a two-part series on this issue you can find by clicking on the highlighted headline: When is the best time to start taking your CPP payments?

We will look at the followup tomorrow.

Normally, those ready to retire contact Service Canada to get a record of past CPP contributions. They send you benefit estimates (both for CPP and OAS) some months before you turn 65 but you can also obtain this information before or after by visiting Canada.ca. There you can find a CPP/OAS calculator provided by Ottawa, providing an estimate of expected sources of income.

Doug Runchey and David Field team up on a new CPP calculator

While OAS is straightforward, optimizing CPP is surprisingly complicated, so much so that Doug Runchey (one of the country’s preeminent experts on both programs) provides calculation services to help individuals make optimal decisions on timing the start of benefits. Runchey used to be at Service Canada, so is intimately familiar with the ins and outs of the timing of receipt of these programs. Continue Reading…

Are you creating Loneliness in your future?

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Empty park benches… waiting for YOU to fill them up!

By Billy and Akaisha Kaderli, RetireEarlyLifestyle.com

Special to the Financial Independence Hub

I’m a little troubled.

Twice now in the last year, two friends of almost four decades have confided in me that they no longer have an interest in making new friendships. The man said “It’s too much work” and the other, a woman, said she is “without enthusiasm or desire for it.”

Couple that with the fact that my friends and I are all proceeding to the milestone age of 70.

Articles abound on how loneliness is an epidemic and adds to our health problems. Loneliness feeds on itself creating terrible self-talk (what do I have to offer? What would I talk about, anyway? It’s not safe to express an opinion, and besides I’m not up on the news …) that keeps us housebound.

A recent article about a study in the UK says hundreds of thousands of people often go a week without speaking to a single person. Nearly half of all the seniors interviewed said they’d feel more confident to head out each day if they knew their neighbors. This begs the question … why don’t we know our neighbours?

Why aren’t we looking into the eyes of people we live next to and giving them a smile? Or talking about the roses in their gardens, or the pup they walk daily?

Are we just so afraid of each other that we cannot afford to make small talk anymore? I have lived outside the US for many years now, and forgive me for asking … But is this chatting up a stranger considered impolite these days? Or hazardous?

Two more first-hand experiences

Some years back I witnessed two of my relatives in curious circumstances. One elderly aunt said “I don’t need any more friends. I have my husband, my church group, children and grandchildren. Why would I need more?”

To myself I responded “Do we have so many friends that we can’t squeeze in another one? Someone who can make us laugh, or teach us something? Who in the world has too many friends?”

Another elderly relative, on the way to breakfast after church, had a well-dressed gentleman say hello to her and something about “what a nice day it was” — and she was aghast.

She responded, “Do I know you? Why are you talking to me?”

To me this situation was incomprehensible. It seemed obvious that the man meant no harm and he was actually on the way to his car in the restaurant parking lot – right where we were – after finishing his morning meal.

Heads up here

If loneliness is the epidemic disaster that health studies say it is, then maybe we could prepare for this ahead of time.

Ask yourself how might we be part of our own problem here? Or if you are inclined to take action, I have a couple of suggestions below which you might find useful. Continue Reading…

Where are you parking your cash these days? GICs vs. High-interest savings accounts

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Cash is king during times of economic trouble. Working families need emergency savings to pay the bills in case of job loss or a reduction in wages. Retirees or near retirees need a cash cushion to avoid selling stocks at a loss. But should you park your cash in a high interest savings account or a GIC?

For a short time, not too long ago, we lived in the golden age of high interest savings. The competition was lively, as online banks and credit unions pushed interest rates well above 2 per cent (LBC Digital briefly paid 3.3 per cent).

Rising interest rates on savings deposits made GICs look less attractive. GICs paid the same rates or lower, yet savers had to lock-in their deposits for 1-5 years. Where did the liquidity premium go?

High Interest Savings Account rates

The situation quickly changed when the coronavirus pandemic forced central banks to take emergency action and cut interest rates. The Bank of Canada lowered its key interest rates by 50 basis points on two occasions. The ripple effect caused high interest savings account rates to plummet.

LBC Digital had already lowered its rate to 2.8 per cent – now it sits at a still respectable 2.25 per cent. Wealthsimple Cash had arguably the worst-timed launch when it came out with a 2.4 per cent interest rate for its chequing/savings account hybrid. That rate was quickly dropped to 1.9 per cent, and then lowered again to 1.4 per cent.

EQ Bank lowered the interest rate on its Savings Plus account to 2 per cent, while motusbank dropped its rate to 1.75 per cent. What a difference a month makes!

Here are the top high interest savings account rates today (March 25, 2020):

Bank Interest rate
LBC Digital 2.25%
Motive Financial 2.20%
Implicity Financial 2.10%
Outlook Financial 2.10%
EQ Bank 2.00%
Oaken Financial 2.00%

 

As always, savers need to look beyond the big banks to maximize the interest earned on their deposits. If inflation averages 2 per cent, then you need to earn at least 2 per cent on your savings to maintain purchasing power. Even still, at best you’re treading water.

Despite the recent drop in rates, a high interest savings account is still the best place to park your emergency savings. You never know when you’ll need to access cash for an unexpected bill, or to pay for your living expenses during a period of unemployment.

A high interest savings account is also a must-have for retirees and near-retirees to stash one year’s worth of spending – the first bucket in the three-bucket approach to retirement income planning.

What this current rate crisis has highlighted is the fact that high interest savings account rates are not guaranteed. Those who eschewed GICs to chase higher yielding savings accounts now find their savings account paying 0.50 – 1.00 per cent less than it was a month ago. Not ideal.

GIC rates

One of my clients recently alerted me to an email sent by Oaken Financial advertising an increase in GIC rates. Its one-year GIC now pays 2.5 per cent, which is a full 25 basis points more than the top-paying high interest savings account. Oaken’s five-year GIC now pays 2.95 per cent interest. It looks like the liquidity premium is back.

You’ll easily find one-year GIC rates paying at or above the best high interest savings account rate.

Bank Interest rate
Oaken Financial 2.50%
Canadian Tire Bank 2.50%
EQ Bank 2.40%
Wealth One Bank of Canada 2.40%
Peoples Trust 2.30%

 

Longer-term rates vary widely so be sure to shop around for promotions. Here are the top five-year GIC rates as of this writing:

Bank Interest rate
Oaken Financial 2.95%
Wealth One Bank of Canada 2.60%
Canadian Tire Bank 2.55%
EQ Bank 2.55%
Peoples Trust 2.55%

 

Readers should know that GICs are typically non-redeemable, so you should be absolutely certain that you won’t need the money when you lock it in for 1-5 years.

That means GICs are ill-suited for an emergency fund, but ideal for a goal with a specific time period.

Using High Interest Savings Accounts and GICs for Retirement Income

For retirees and near-retirees, GICs are best-suited for “bucket two” in your three-bucket approach to retirement income. Bucket two is where you build a GIC ladder with three to five years of annual retirement spending. Continue Reading…