My latest MoneySense Retired Money column looks at one unexpected upside of inflation; the government’s indexing to inflation of tax brackets, retirement savings limits and OAS thresholds. You can find the full column by clicking on the link here: Inflation a scourge for retirees? Ottawa’s silver lining(s)
TFSA room rises to $7,000
Fans of the popular Tax-free Savings Account (TFSA) will experience this as early as Jan. 1, 2024, when the annual maximum contribution room rises to $7,000, up from $6,500 in 2023. As of January 2024, someone who has never before contributed to a TFSA now has cumulative contribution room of $95,000.
In November Kyle Prevost’s weekly Making Sense of the Markets column included an item titled Make inflation work for you. “We shouldn’t ignore or discount the more advantageous aspects of inflation, such as increased government benefits and more contribution room in our RRSPs and TFSAs.”
Prevost linked to a spreadsheet posted on X (formerly Twitter) by financial advisor Aaron Hector, posted late in October, after the CPI announcement that Ottawa’s official inflation indexing rate for 2024 would be a sizeable 4.7%. While below 2023’s 6.3% indexation rate, it’s well above 2022’s 2.4% and 2021’s 1%.
Also quoted in the MoneySense column is Matthew Ardrey, wealth advisor with Toronto-based TriDelta Financial. “One of the main benefits is paying less taxes.” Income tax brackets increase with inflation each year. For example, in 2021 the lowest tax bracket in Ontario ended at $45,142 of income. “Starting in 2024, this lowest tax bracket now ends at $51,446. This is a 14% increase over just a few years.” Continue Reading…
With people living longer than ever, retirement now makes up a significant portion of our lives. Could it be the perfect time to start a business? Here are the pros and cons of becoming an entrepreneur in your golden years.
Important Considerations
Entrepreneurship can enrich your life in immeasurable ways. However, before launching your own business, you should consider the following challenges.
Financial Risk
According to a 2018 study by Harvard Business Review, older entrepreneurs tend to run more successful companies. The businesses that financially thrive in their first five years are, on average, started by 45-year-old entrepreneurs, probably due to this cohort’s experience and willingness to take risks.
Although the odds may be in your favor, it’s still important to consider whether you have the capital to run a business — and to pick up the pieces if it doesn’t work out. Over 80% of small businesses fail because of cash flow problems. Decide how much money you’re willing to invest and potentially lose in your new venture.
Time Commitment
How do you envision retirement? If you’re considering entrepreneurship, you’re probably not the type of person who wants to lounge around sipping drinks on a beach.
If you do want a more relaxed retirement, however, you might find the time commitment required to run a business overwhelming. Entrepreneurs often put in long days to get their businesses up and running. Even after your company gets off the ground, you may find yourself having to work longer hours than you were expecting.
Of course, as a business owner, you also have a lot of sway over how big you want to let your venture get. If things start getting out of hand, you can always scale back.
Social Security Deductions
If you’re younger than full retirement age in the U.S. — which can range from 66-67, depending on when you were born — becoming an entrepreneur during retirement can affect your Social Security benefits.
Before you reach full retirement age, the IRS will deduct one dollar from your benefit payments for every two dollars you earn above $21,240. The year you reach full retirement age, the IRS will subtract one dollar from your Social Security benefits for every three dollars you earn above $56,520.
Consider whether these fees will impact your ability to retire comfortably. You might find you’re earning more money from your business than you would from Social Security anyway, so the deductions may be of little consequence.
Benefits of Entrepreneurship
Although it may be challenging, starting your own business will likely enrich your life. Here are some ways it could positively affect your retirement: Continue Reading…
Image Creator: Fortune Live Media Credit: Fortune The Most Powerful Women
By Noah Solomon
Special to Financial Independence Hub
Warren Buffett is widely regarded as one of the best stock-pickers in history. Among the Oracle of Omaha’s most famous pieces of investment advice is “Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.”
It goes without saying that when it comes to investing, it is impossible never to lose money. Even the longtime Berkshire CEO has occasionally taken his lumps. This begs the question of what Buffett meant by his statement. To best interpret the Oracle’s words, I took an actions speak louder than words approach and analyzed his historical returns over the past 30 years ending December 2022.
Unsurprisingly, Buffett & Co. trounced the S&P 500 Index, delivering a 13.1% compound annual rate of return vs. 9.6% for the benchmark. Had you invested $1 million with the Oracle rather than in the Index, your investment would have grown to $39,883,361, exceeding the benchmark investment’s value of $15,843,412 by a whopping $24,039,949 (it’s with good reason that people call him the Oracle!).
Moving beyond the headline numbers, the specific pattern of Berkshire’s returns is highly anomalous. In years when the S&P 500 Index had a positive return, Buffett’s performance tended to be undifferentiated. On average, for every 1% the index rose, Buffett’s holdings gained almost exactly the same amount. Clearly, the Oracle’s massive outperformance doesn’t come from knocking the lights out in good times.
In stark contrast, in years when the S&P 500 Index fell, Buffett gained 4.2% on average (no, that’s not a mistake!). This does not mean that the Oracle never loses money. In 2008, Berkshire declined 31.78% vs. 36.0% for the S&P 500. However, in down markets he has either tended to lose far less than the Index or not suffer any losses. The latter occurred during 2000-2002, when the Oracle gained 29.7% vs. a decline of 37.6% for the Index.
John Kelly & Fortune’s Formula: An Unsung Hero of Investing
Very few business school graduates or investment professionals have heard of the Kelly Criterion, which was developed in 1956 by American scientist John Kelly. Despite its relative obscurity and lack of mainstream academic support, the Kelly Criterion has attracted some of the best-known investors on the planet, including “Bond King” Bill Gross, Renaissance Technologies’ James Simons, Warren Buffett, and Charlie Munger (may the great man rest in peace).
The first well-known user of the Kelly Criterion is legendary investor and grandfather of quantitative finance Edward O. Thorp, who referred to it as “fortune’s formula.” He used Kelly’s theory to develop a system for calculating the odds and altering one’s bets accordingly in blackjack, which forever changed the game. Thorp then launched investment firm Princeton Newport Partners (PNP), which produced an annualized return of 15.8%, as compared to 10.1% for the S&P 500 Index. PNP achieved this return with 75% less volatility than the market and lost money in only three of its 230 months in operation.
The Kelly Criterion seeks to maximize long-term wealth by optimally adjusting the amounts of capital to commit to investments as their expected returns and risks fluctuate. Importantly, the formula dictates that you should increase your allocation when the odds are more favorable and curtail your commitment as the odds deteriorate. The imperative of adjusting one’s stance in response to changing circumstances was also espoused by the father of modern macroeconomic theory John Maynard Keynes. When criticized for being inconsistent during a high-profile government hearing, Keynes responded “When the facts change, I change my mind. What do you do, sir?”
Interestingly, this premise stands in stark contrast to the traditional approach to money management, whereby client portfolios maintain a fixed allocation to stocks, bonds, etc., regardless of changes in the market environment or economic backdrop.
What Does John Kelly Have in Common with Warren Buffett?
Having stated that “Our favorite holding period is forever,” Buffett is well known for buying quality companies and holding them for the long term. However, there is another, lesser-known side to the Oracle’s approach which harbors a more than subtle resemblance to Kelly’s.
In her book, “The Snowball: Warren Buffett and the Business of Life,” author Alice Schroeder explains that Buffett’s best opportunities have always arisen during periods of crisis and uncertainty. In Buffett’s view, the opportunity cost of holding cash is low when compelling investment opportunities are few and upside is limited. Conversely, when downside is limited and compelling prospects are abundant (typically during the uncertainty that reigns during or after a market crash), the opportunity cost of holding cash becomes unjustifiably high. At such times, investors should aggressively deploy their cash holdings into assets that offer higher returns. This sentiment is well-summarized by Buffett’s assertion that “Cash and courage in a time of crisis is priceless.” Continue Reading…
As Canadians shop for last-minute gifts and search for deals, our Interac transaction data predicts that the busiest shopping day of the year will fall this year on December 22nd.
According to the transaction data, nearly 27.8 million purchase transactions are expected to take place next Friday (Dec. 22), representing roughly 2.7 million more transactions than the same date last year.
While Canadians are still planning to partake in gift giving, hosting, and more this holiday season, they’re feeling the constraints of today’s economic climate. Recent Interac survey* findings reveal that nearly four in ten Canadian shoppers (38 per cent) say they are feeling the pressure to spend during the holiday season even though their finances are tight.
Our survey revealed this phenomenon is felt as well among newcomers to Canada. Nearly seven in ten newcomers (69 per cent) say they feel more pressure to spend money around the holidays now that they live in Canada. What’s more, 71 per cent say their financial stress during the holidays has grown since moving to this country.
Amid rising prices, the holidays can be a stressful time of year. More than two thirds of Canadians (68 per cent) say they’re stressed about at least one aspect of spending during the holiday season and some sources of stress beat out others. Among those who are stressed, our survey shows us that buying gifts (77 per cent), spending money hosting and entertaining family and friends (41 per cent) and giving money to family members (34 per cent) are the top sources of stress.
For newcomers who are experiencing at least some holiday spending stress (82 per cent), spending money travelling to visit family and friends (48 per cent) is a prominent stressor.
As stressful as holiday spending can be, there are ways to make things a little easier:
Plan ahead
Try creating a gifting budget well in advance of any spending plans to help stay on track. Where possible, you can also look for a sale, consider a refurbished item or tap into purchases that make you and those around you feel good. You can also lean on Interac Debit to track your payments easily and take charge of your own money
Share the love, split the cost
When purchasing gifts for loved ones, organizing festive outings or hosting your family and friends, split the cost using Interac e-Transfer. Sharing the cost is one of the best ways to make sure you’re maximizing fun while staying in control of spending.
Embrace experiences
The holidays are a time to get together with friends and family and enjoy one another’s company. Consider sharing in an experience, rather than giving a physical gift. Interac research shows us that feel-good experiences are more likely to deliver happiness than material goods.
Money management is essential to help your savings thrive and benefit your [U.S.] retirement accounts. Discover movements to minimize taxable income.
By Dan Coconate
Special to Financial Independence Hub
Navigating the path to a financially secure retirement can often seem like navigating a labyrinth with no exit. With so many potential strategies and considerations, it’s easy to feel overwhelmed. However, efficient tax management is key to unlocking a financially comfortable retirement.
By adeptly managing your taxable income, particularly through individual retirement accounts (IRAs) [or in Canada, RRSPs], you can pave a clear path through the complexities of retirement planning, positioning yourself for a secure, worry-free future. Understanding the necessary movements to minimize taxable income in a retirement account will help you optimize and maximize your retirement savings.
Contribute to a Traditional IRA
Investing in a traditional IRA can be a smart move to effectively reduce your taxable income. Your contributions may be tax deductible, depending on your income and whether your work’s retirement plan also covers your spouse.
The more you contribute to your traditional IRA within the IRS contribution limits, the more you can reduce your taxable income for the year.
Consider a Roth IRA Conversion
A Roth IRA conversion is a strategic financial decision that can secure tax-free income during retirement. When you convert from a traditional IRA to a Roth IRA, you pay taxes on the converted amount in the year of conversion. [Roth IRAs are the U.S. equivalent of Canada’s Tax-Free Savings Accounts or TFSAs] Continue Reading…
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