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: Work Optional and the FIRE movement

Posted By Jonathan Chevreau | April 22, 2019

My latest MoneySense Retired Money column looks at the so-called FIRE movement: (an acronym for Financial Independence/Retire Early), as well as a new book by a FIRE blogger titled Work Optional. You can find the full column by clicking on the highlighted headline here: How “Work Optional” can fit into your Retirement Plan.

You’ll see that regular Hub blogger Doug Dahmer — founder of the Retirement Navigator planning software — has been using the phrase Work Optional for at least five years, even though the new book of that name was just published in January 2019. It’s a useful phrase that describes the kind of thing Mike Dark and I refer to as Victory Lap Retirement in our jointly authored book of the same name.

There are many ways to describe this phase, but generally it refers to a period after full-time employment. FIRE proponents often declare that they “retired” in their 30s or 40s but of course most of them do not spend the next half century doing absolutely nothing. They really create encore careers based on self-employment, and often build businesses based on book-publishing, blogging and public speaking, wherein they reveal “how they did it.”

Victory Lap and Findependence

To some extent this very website does a similar thing, focused as it is on Financial Independence, or my contraction of it, Findependence. Continue Reading…

10 keys to picking the best Canadian income trusts and REITs

Posted By Pat McKeough | April 18, 2019

Canadian income trusts have always involved far more risk than most investors realize. This is why we’ve recommended so few of them in the past.

Income trusts are a type of investment trust that holds income-producing assets. Their units trade on stock exchanges, but they flow much of their income through to unit holders as “distributions.”

On January 1, 2011, Ottawa imposed a tax on distributions of income trusts. The new tax put income trusts on an equal tax footing with regular corporations.

Virtually all Canadian income trusts then converted into conventional corporations. But some are still out there: mostly real estate investment trusts (REITs).

Investing in trusts — and in particular oil and gas trusts — was risky, as the businesses that underpinned them needed steady cash flow. But that could stagnate during economic downturns. At the same time, we believed that investors should have looked for trusts with low capital expenditures and mature businesses.

More about Canadian Income Trust taxes

Canada offers special tax treatment for Canadian income trusts. When they flow their income through to their unitholders, they don’t pay much if any corporate tax. Investors pay tax on most of the distributions as ordinary income (although some distributions qualify as a tax-free return of capital).

Ottawa feels the income-trust business structure is appropriate for real estate investment trusts, or REITs, so it has exempted REITs from the income-trust tax.

Real estate investment trusts resemble Canadian income trusts, but with a key difference: REITs invest in income-producing real estate, such as office buildings, shopping centres and hotels. (We cover a number of carefully selected income trusts and real estate investment trusts in our Canadian Wealth Advisor newsletter.)

Regardless of whether or not they have converted, the basic tests we use to ferret out good investments and reject bad ones still apply, not only to Canadian income trusts, but to other types of investments, as well.

Keep “Investment Inputs” in mind when judging income trusts, or any investment

In evaluating investments, many investors focus on what we’d call “investment outputs,” such as earnings, dividends, cash flow, return on equity, sales growth and so on. These are all important, of course, but you shouldn’t focus on them to the exclusion of what you might call “investment inputs.”

Investment inputs are harder to work with than investment outputs, since it takes a judgment call to determine their risk or value. To give you a better idea of what we mean, here are 10 keys to picking the best Canadian income trusts and real estate investment trusts. We look each before recommending any income trust: Continue Reading…

3 Reasons to delay taking CPP until age 70

Posted By Robb Engen | April 5, 2019

It might seem counterintuitive to spend down your own retirement savings while at the same time deferring government benefits such as CPP and OAS past age 65. But that’s precisely the type of strategy that can increase your income, save on taxes, and protect against outliving your money.

Here are three reasons to take CPP at age 70:

1.) Enhanced CPP Benefit – Get up to 42 per cent more!

The standard age to take your CPP benefits is at 65, but you can take your retirement pension as early as 60 or as late as age 70. It might sound like a good idea to take CPP as soon as you’re eligible but you should know that by doing so you’ll forfeit 7.2 per cent each year you receive it before age 65.

Indeed, you’ll get up to 36 per cent less CPP if you take it immediately at age 60 rather than waiting until age 65. That alone should give you pause before deciding to take CPP early. What about taking it later?

There’s a strong incentive for deferring your CPP benefits past age 65. You’ll receive 8.4 per cent more each year that you delay taking CPP (up to a maximum of 42 per cent more if you take CPP at age 70). Note there is no incentive to delay taking CPP after age 70.

Let’s show a quick example. The maximum monthly CPP payment one could receive at age 65 (in 2019) is $1,154.58. Most people don’t receive the maximum, however, so we’ll use the average amount for new beneficiaries, which is $664.41 per month. Now let’s convert that to an annual amount for this example = $7,973.

Suppose our retiree decides to take her CPP benefits at the earliest possible time (age 60). That annual amount will get reduced by 36 per cent, from $7,973 to $5,862: a loss of $2,111 per year.

Now suppose she waits until age 70 to take her CPP benefits. Her annual benefits will increase by 42 per cent, giving her a total of $11,322. That’s an increase of $3,349 per year for her lifetime (indexed to inflation).

2.) Save on taxes from mandatory RRSP withdrawals and OAS clawbacks

Mandatory minimum withdrawal schedules are a big bone of contention for retirees when they convert their RRSP to an RRIF. For larger RRIFs, the mandatory withdrawals can trigger OAS clawbacks and give the retiree more income than he or she needs in a given year.

The gradual increase in the percentage withdrawn also does not jive with our belief in the 4 per cent rule, which will help our money last a lifetime.

You can withdraw from an RRSP at anytime, however, and doing so may come in handy for those who retire early (say between age 55-64). That’s because you can begin modest drawdowns of your retirement savings to augment a workplace pension or other savings to tide you over until age 65 or older.

Tax problems and OAS clawbacks occur when all of your retirement income streams collide simultaneously. But with a delayed CPP approach your RRSP will be much smaller by the time you’re forced to convert it to a RRIF and make minimum mandatory withdrawals. Continue Reading…

Maximizing your CPP benefits: 65 isn’t always the answer

Posted By Financial Independence Hub | April 3, 2019

By Steve Lowrie, CFA

Special to the Financial Independence Hub

As I prepared to write this month’s blog post, I came across an interesting U.S. study exploring how the structure of a company’s self-directed retirement plan might impact its participants’ investment selections. When investment choices were listed alphabetically, the study found employees were apparently favouring the first few funds on the list.

Arbitrary? You bet. But before we laugh too hard, I’ve noticed similar behaviours closer to home, especially when it comes to making best use of the Canada Pension Plan (CPP).

Assuming you’ve contributed to the CPP during your career, when should you start drawing your benefits?

If you guessed age 65, that’s understandable. Unless you decide to receive a reduced benefit at a younger age (as early as 60), it’s when Service Canada automatically mails you your CPP application form, as if it’s a given you should fill it out right away. 65 is also the age many younger folks talk about when they dream of the day they’ll stop working. It’s a number that’s become almost synonymous with “retirement.”

That said, it’s an entirely arbitrary number when it comes to your own best financial plans. I can cite any number of reasons 65 might or might not be the right number for you.

There’s the prospect of receiving more benefit by waiting until age 70 to get started: currently 42% more than if you start taking it at age 65. On the flip side, it may make more sense to start drawing a smaller benefit sooner if you are single and in poor health.

As Financial Post columnist Jason Heath suggests, it’s worth treating your CPP like an RRSP for planning purposes. To put this in perspective, Heath calculated that a lifetime CPP benefit starting at age 65 and assuming an age 90 life expectancy would be the same as having a $277,000 RRSP, earning 4% per year. As Heath explains, “Whether you withdraw from other sources, or start your CPP, you are reducing the future income that you can earn from that source.”

So, when is it best to take these significant benefits compared to others that may be available to you? Instead of simply signing up at age 65 as a given, why not give it some thought (or hire a planner to help you)? Continue Reading…

8 things you need to know about termination and severance pay

Posted By Financial Independence Hub | March 29, 2019

By Kevin Press

Special to the Financial Independence Hub

Earlier this year I shared what I hope was a good-humoured look back at my being shown the exit after 14 years with one of the country’s major insurance companies. Because the news did not come as a surprise, I went into my “touchpoint” that Tuesday morning with a pretty good idea of what to look for in the package they put in front of me.

Like anything else, the more you know about what you’re owed and what you can reasonably negotiate, the better. In Ontario, for example, provincial employment law requires either written notice of termination, termination pay or a combination of the two, assuming you didn’t quit, you’ve been employed a minimum three consecutive months and you’re not guilty of misconduct. (There are additional exceptions; consult a lawyer.) Termination pay runs one to eight weeks in the province, depending on how long you were employed.

Severance pay is a separate matter for those forced to leave an employer. Your age, what kind of profession you’re in, how senior you are, what shape the job market is in and other factors will all be taken into consideration if you end up in court. Chances are though – with the help of a lawyer – you and your former employer can negotiate a satisfactory settlement.

It is a learning experience, to say the least. Eight big lessons:

What’s put in front of you is a starting point for discussion, not unlike a job offer. Do not sign off on a severance offer the day you’re fired. Hire a lawyer. Sleep on it. Discuss what you need with your partner or spouse. Think carefully about what you want and negotiate through your representative.
You’ve probably been told to expect one month of severance for every year of service. There is no guarantee you’ll land there. You may be offered less. Don’t be discouraged. If you’re offered more, don’t let that dissuade you from negotiating a better deal. Continue Reading…