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.

A look at BMO Asset Allocation ETFs

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This article has been sponsored by BMO Canada. All opinions are my own.

I’m on record to say that the vast majority of self-directed investors should simply use a single asset allocation ETF to build their investment portfolios.

What’s not to like about asset allocation ETFs? Investors get a low cost, risk appropriate, globally diversified portfolio in one easy to use product. It’s a fresh take on an old idea – the global balanced mutual fund – updated for the 2020’s using low-cost ETFs.

Investors don’t even have to worry about rebalancing their portfolio when they add or withdraw money, or when markets move up and down. Asset allocation ETFs automatically rebalance themselves regularly to maintain their original target asset mix.

This article looks at BMO’s line-up of asset allocation ETFs, which include a conservative (ZCON: 40/60), balanced (ZBAL: 60/40), growth (ZGRO: 80/20), and balanced ESG (ZESG: 60/40) option.

For a YouTube video about these ETFs, click here.

These BMO asset allocation ETFs are available for self-directed investors to purchase through their online brokerage account. Notably, these ETFs can be traded commission-free through BMO InvestorLine and Wealthsimple Trade.

What’s inside BMO’s Asset Allocation ETFs?

Launched in February 2019, BMO’s core asset allocation ETFs are made up of seven underlying ETFs representing various asset classes and geographic regions.

On the equity side we have:

  • ZCN – BMO S&P/TSX Capped Composite Index ETF
  • ZSP – BMO S&P 500 Index ETF
  • ZEA – BMO MSCI EAFE Index ETF
  • ZEM – BMO MSCI Emerging Markets Index ETF

While on the fixed income side we have:

  • ZAG – BMO Aggregate Bond Index ETF
  • ZGB – BMO Government Bond Index ETF
  • ZMU – BMO Mid-Term US IG Corp Bond Hedged to CAD Index ETF

Altogether these seven ETFs represent nearly 5,000 individual stock and bond holdings from around the world.

In terms of geographic equity allocation, the BMO asset allocation ETFs hold 25% in Canadian stocks, 25% in international stocks, 40% to 41.25% in US stocks, and 8.75% to 10% in emerging market stocks.

BMO reviews their portfolios quarterly and will rebalance any fund that is more or less than 2.5% off from its target weight. In reality, these funds are rebalanced regularly with new cashflows from new investors.

BMO’s Balanced ESG ETF (ZESG) is made up of six underlying ETFs, including:

  • ESGY – BMO MSCI USA ESG Leaders Index ETF
  • ZGB – BMO Government Bond Index ETF
  • ESGA – BMO MSCI Canada ESG Leaders Index ETF
  • ESGE – BMO MSCI EAFE ESG Leaders Index ETF
  • ESGB – BMO ESG Corporate Bond Index ETF
  • ESGF – BMO ESG US Corporate Bond Hedged To CAD Index ETF

The management expense ratio for each of the BMO asset allocation ETFs is 0.20%. There is no duplication of fees or additional charges for the underlying ETFs. Continue Reading…

Why would anyone own bonds now?

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By Mark Seed, myownadvisor

Special to the Financial Independence Hub

Many investors have been saying for years that rates can only go up from here, rates can only go one direction, rates will eventually go up. Will they? This begs a question I get from readers from time to time given bonds pay such lousy interest:

Why would anyone own bonds now?

Today’s post shares a few reasons to own bonds including some counter-arguments why I don’t own any – at least right now.

Why own bonds?

Personally, I believe the main role of fixed income in your portfolio is essentially safety – not the investment returns and certainly not the cash flow needs. In other words, if all else fails per se, if/when stocks crash, then bonds should historically speaking offer a flight to safety for preserving principal.

So, they are there for diversification purposes.

As Andrew Hallam, a Millionaire Teacher has so kindly put it over the years: when stocks fall hard, bonds act like parachutes for your portfolio. Bonds might not always rise when the equity markets drop. But broad bond market indexes don’t crash like stocks do.

Is that enough to own bonds in your portfolio? Maybe.

Here are a few reasons to own bonds in no particular order.

1. Bonds as a hedge for stock market volatility.

Call them parachutes or anchors or use any other metaphor you wish but bonds tend to do their jobs when stock markets tank. More importantly maybe, they provide a psychological edge to avoid tinkering with your portfolio and selling any stocks/equities when stock markets correct.

Many investors, dare I say most investors (?), have a hard time with market volatility. I’m certainly not immune to it. The ups and downs, especially the big market downs, can be gut-wrenching to live through. Owning bonds in your portfolio can help bring the overall portfolio volatility down a few notches through prudent asset allocation. It is however not always necessary to own bonds.

When you own bonds, my experience has been for the last 20+ years you are trading away long-term, more positive, generous equity returns for accepting less risk and less long-term returns.

If you don’t want to take my word for it, check out this page courtesy of Vanguard when it comes to long-term returns. Check out the “worst year” stats as well.

Why would anyone own bonds - bias to bonds Vanguard Canada

Sure, a 40/60 stock/bond portfolio has hardly done poorly for the last century. But overall, you are absolutely giving up (historically speaking) returns on the table when you own more fixed income in your portfolio. Will the future be the same?

Why would anyone own bonds - bias to stocks Vanguard Canada

Personally, I’ve tried to learn to live with stocks as much as possible for as long as possible. Depending on your goals, taking into account long-term potential reward against short-term price fluctuations, some investors may not be comfortable with a 100% equity or near-equity portfolio. That’s A-OK. If that’s your case, some bonds in your asset accumulation years could be right for you.

2. Bonds can be used to rebalance your portfolio. 

Even though I’m not a huge fan of bonds myself, this might be one of the most compelling reasons to own bonds at any age.

When the stock market sells off, that’s ideally the time you want to dive in and buy your stocks on sale. However, unless you are very comfortable with leveraged investing – you need money to buy such stocks on sale. That can come from cash savings for sure but for many investors, that can also come from bonds within your portfolio.

Mind you, some levels of diversification don’t work very well if you don’t have any asset allocation targets in mind. The process of rebalancing is a systematic way to buy low and sell high; sell your bonds when markets are tanking and sell-off some stocks when markets are euphoric.

In our portfolio, because we’ve largely learned to live with stocks, we tend to buy more stocks when they come on sale and/or we buy stocks periodically during the year to increase our equity holdings. More specifically, to help me gravitate away from my bias to Canadian dividend paying stocks for income we’re owning more low-cost U.S. ETFs for extra growth over time.

Check out some changes I’ve made to our portfolio to increase equity diversification.

Instead of selling bonds to buy our stocks, I use cash savings. I tend to save up cash during the year and make a few lump-sum stock or equity ETF purchases instead.

I will continue to use cash savings to make more equity purchases as I enter semi-retirement.

Consider keeping this much cash on hand yourself – in your asset accumulation years or retirement years.

3. Bonds can be used to spend cash when essential. 

Can you have too much money saved? Too much money in your RRSP?

For most people, I highly doubt it.  Continue Reading…

Some fascinating Retirement Statistics

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By Fritz Gilbert, RetirementManifesto.com

Special to the Financial Independence Hub

Call me a nerd, but I love studying retirement statistics (for the record, I prefer to consider myself curious).  When something as dramatic as COVID comes along, it really makes the numbers interesting.

If you’re curious like me, you’ll enjoy today’s post.  A compilation of some fascinating retirement statistics I recently came across, including some graphs for those of you who prefer to view the charts.

If you’re interested in how you compare to “average,” you’ll also find today’s post of interest.  Wondering what impact COVID has had on retirement confidence?  We’ve got that covered, as well.

Curiosity-seekers, unite.  This one is for you …

What’s retirement really like? What impact has COVID had? Today, a look at some fascinating retirement statistics.  

Fascinating Retirement Statistics

A while back, as I was doing some research for my post titled The Mad Retirement Rush of 2020, I came across an article with some interesting retirement statistics and saved the link into a draft post (I do that a lot, with over 100 draft posts currently holding ideas for future posts).  I wanted to do further research on retirement statistics to see how many I could compile for a dedicated post on the topic.

Today, I’m pleased to publish the resulting work and share what I’ve found during my research.  A variety of fascinating retirement statistics, dedicated to all of the fellow retirement nerds in the house.

With that, let’s dig into some numbers:

Retirement Readiness Statistics

how much people have saved for retirement

  • 51% of Baby Boomers are still paying on their mortgage in retirement, and 40% struggle to pay off their credit card debt.  (Source: Legaljobs.com)
  • 1 out of 12 Americans believes they’ll never retire at all.  (Source: Legaljobs.com)
  • 50% of retirees retired earlier than they would have liked. (Source:  TDAmeritrade Retirement Survey)

will you retire earlier than planned

  • 73% of retirees say their retirement was a “full-time stop,” with only 19% experiencing a gradual transition (e.g., fewer hours).  Among those still working, half expect a gradual transition. Related, only 30% of retirees work for money in retirement, whereas 72% of workers expect to work for some pay in retirement. (Source:  2021 EBRI Retirement Confidence Survey)
  • The average US household had $255,000 in their retirement accounts in 2019, a 5% increase from 2016 (Source: MagnifyMoney)
  • Among those with 401(k), the average balance by age is shown below: (source, Personal Capital as cited in MagnifyMoney)

what is the average 401k balance

 

COVID’s Impact on Retirement Confidence

  • While the majority of workers are still confident of their ability to retire, 34% of workers are less confident in their ability to live comfortably in retirement than they were pre-COVID.

is retirement less secure because of covid

  • COVID has caused 1 in 4 workers to adjust their expected retirement date, with 17% now planning to retire later and 6% who plan to retire earlier.
  • 32% of workers say COVID has negatively impacted their ability to save for retirement.

has covid made it harder to save for retirement

All statistics in the above section compliments of  2021 EBRI Retirement Confidence Survey

  • 30% of Americans with retirement accounts reported making withdrawals from them in the first two months of the COVID pandemic.  The average withdrawal was $6,757 (Source:  Investment News)

Baby Boomer Statistics

  • Every day, 10,000 Baby Boomers turn 65 years old.  (Source: Legaljobs.com)
  • 8 in 10 retirees report that their overall lifestyle is as expected or better. Only 26% of retirees report spending is higher than expected. (Source:  2021 EBRI Retirement Confidence Survey)
  • Baby Boomer retirements increased significantly in 2020 vs. prior years.  By September 2020, 40% of Baby Boomers were retired. (Source:  Pew Research) Continue Reading…

Small Business: How revised Corporate Passive Income Rules impact your Corporate Tax Planning

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Lowrie Financial/Unsplash

By Steve Lowrie, CFA

Special to the Financial Independence Hub

Proactive Business Owners Can Manage Corporate Investments and Income for Optimal Tax Efficiency

As a small business owner, you no doubt have active interests in your bottom line. That’s why it’s worth knowing about some recent changes to the tax treatments on corporate passive income.

For those currently creating passive income through corporate investments, we’ll describe how this income might impact your small business tax planning, and offer some corporate tax strategies for keeping more of that money in your coffers.

Even if you are not currently generating corporate passive income, some of these same tax strategies remain sound. After all, smart tax strategies and sensible corporate tax planning is perennially popular. At the end of a busy work day, the more of any sort of income you get to keep, the better off you and your small business will be.

The Highlights: What has Changed about Corporate Passive Income and How Does It Impact You?

How have corporate passive income rules recently changed?

Starting in 2019, the CRA adjusted corporate tax rates and broadened the definition of passive income.

How do the changes impact your corporate passive income?

These changes brought good news and bad. Under the broader definitions for passive income, you may exceed the passive income limits to qualify for the coveted small business deduction (SBD). Corporate tax strategies that may have worked for you in the past may no longer be ideal for optimal tax integration. But with the tax rate changes, some applicable corporate tax strategies are even more powerful.

That’s the broad sweep. Now let’s take a closer look.

The Details: Small Business Tax Planning and Passive Corporate Income Changes

Small business owners typically manage two interests in their owner/individual roles. Rather than earning your keep by working for someone else, you create corporate wealth. You then decumulate that wealth by transitioning it from your corporation to yourself and your family. Once the dust settles, the goal is to retain as much wealth as possible by being deliberate and tax-efficient throughout the process. Broadly speaking, there are a couple of ways to take wealth out of your business for personal use:

If you take your annual CCPC income as a salary:

  • Your corporation takes it as a deduction, so no corporate tax is due on the income.
  • Instead, you pay personal tax on the income at your graduated personal tax rate.

If you take your after-tax CCPC income as a dividend:

  • Initially, your annual CCPC income will be subject to corporate tax.
  • That year or in the future, you can distribute the after-tax income as a dividend to yourself.
  • In the year you receive the dividend, you’ll pay personal tax on the distribution at your graduated marginal tax rates.

Which is better?

As you might expect, it all depends, and typically requires you to crunch your particular numbers to see how they compare. By design, how you take the money is supposed to end up being a tax-planning wash … at least as far as the CRA is concerned. However, the ability to tax-defer dividends to future years has often been beneficial as part of overall corporate tax-planning.

What’s changed?

The concern is, business owners in general, and small business owners in particular, may have had an unfair advantage over individual taxpayers. By deferring a salary or dividend payments while building up wealth within your corporation, you also can defer paying annual personal taxes, which are typically at higher rates … especially if you qualified for Small Business Deferral (SBD) rates. Continue Reading…

When was the last time you Rebalanced?

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https://advisor.wellington-altus.ca/standupadvisors/

By John De Goey, CFP, CIM

Special to the Financial Independence Hub

There are several approaches that individual investors and advisors alike might take to portfolio management.  One of those is rebalancing.  In simple terms, rebalancing is simply selling a portion of something that is up and re-positioning the proceeds into something that is down (or perhaps merely up relatively less).  It is a longstanding, tried and true approach to both portfolio management in general and risk management, in particular.

Now that we are in October with a steady stream of portfolio gains booked into most peoples’ accounts, it might be worth your while to consider taking a few profits from those things in your portfolio that have done particularly well of late and using the proceeds to be a value investor who buys things that are currently out of favour.

Trading more reduces both Risk and Return

Some people offer suggestions as to what should be sold and bought.  I won’t, because everyone’s holdings are different.  Some people will offer suggestions as to what the thresholds ought to be.  I won’t, because there is no obvious right answer.  Trading more reduces both risk and return while increasing transaction charges.  Doing so less frequently typically leads to the opposite outcome. Continue Reading…