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Building the big Dividend Retirement Portfolio with defensive Canadian ETFs

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By Dale Roberts, Cutthecrapinvesting

Special to the Financial Independence Hub

There are a few reasons to play defense. A retiree or near retiree can benefit from less volatility and a lesser drawdown in a bear market. If your portfolio goes down less than market, and there is a greater underlying yield, that lessens the sequence of returns risk. You have the need to sell fewer shares to create income. For those in the accumulation stage it may be easier to stay the course and manage your portfolio if it is less volatile. You can build your portfolio around defensive Canadian ETFs.

For a defensive core, investors can build around utilities (including the modern utilities of telcos and pipelines), plus consumer staples and healthcare stocks. My research and posts have shown that defensive sectors and stocks are 35% or more “better” than market for retirement funding.

I outlined that approach in – building the retirement stock portfolio.

We can use certain types of stocks to help build the all-weather portfolio. That means we are better prepared for a change in economic conditions, as we are experiencing in 2022.

Building around high-dividend Canadian ETFs

While I am a total return guy at heart, I will also acknowledge the benefit of the Canadian high-dividend space. These big dividend payers outperform to a very large degree thanks to the wide moats and profitability. Those wide moats create that defensive stance or defensive wall to be more graphic. And of course, you’re offered very generous dividends for your risk tolerance level troubles.

Canadian investors love their banks, telcos, utilities and pipelines. The ETF that does a very good job of covering that high-dividend space is Vanguard’s High Dividend ETF – VDY. The ‘problem’ with that ETF is that it is heavily concentrated in financials – banks and insurance companies.

Vanguard VDY ETF as of November 2022.

Sector Fund Benchmark +/- Weight
Financials 55.4% 55.4% 0.0%
Energy 26.3% 26.2% 0.1%
Telecommunications 9.0% 9.0% 0.0%
Utilities 6.2% 6.2% 0.0%
Consumer Discretionary 1.9% 1.9% 0.0%
Basic Materials 0.6% 0.6% 0.0%
Industrials 0.4% 0.4% 0.0%
Real Estate 0.2% 0.2% 0.0%
Total 100.0% 100.0%

VDY is light on the defensive utilities and telcos. The fund also has a sizable allocation to energy that is split between oil and gas producers and pipelines. The oil and gas producers will also be more sensitive to economic conditions and recessions.

Greater volatility can go along for the ride in VDY as it is financial-heavy. And those are largely cyclical. They do well or better in positive economic conditions. But they can struggle during time of economic softness or recessions. Hence, we build up more of a defensive wall.

Building a wall around VDY

We can add more of the defensive sectors with one click of that buy button. Investors might look to Hamilton’s Enhanced Utility ETF – HUTS. The ETF offers …

█  Pipelines 26.8%

█  Telecommunication Services 23.5%

█  Utilities 49.6%

The current yield is a generous 6.5%. Keep in mind that the ETF does use a modest amount of leverage. Here are the stocks in HUTS – aka the usual suspects in the space.

BMO also offers an equal weight utilities ETF – ZUT .

And here’s the combined asset allocation if you were to use 50% Vanguard VDY and 50% Hamilton HUTS.

  • Financials 26.7%
  • Utilities 24.9%
  • Energy 26.5%
  • Telecom 16.2%

Energy includes pipelines and oil and gas producers. And while the energy producers can certainly offer more price volatility, there is no greater source of free cashflow and hence dividend growth (in 2021 and 2022). In a recent Making Sense of the Markets for MoneySense Kyle offered … Continue Reading…

TFSA contribution is Job One in 2023 and other inflation-related tax changes to consider

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A belated Happy New Year to readers. Today I wanted to start with a reminder that your first Financial New Year’s Resolution should always be to top up your TFSA contribution to your TFSA (Tax-free savings account), which because of inflation has been bumped to $6,500 for 2023. I’ll also link to two useful columns by a financial blogger and prominent media tax expert.

A must read is Jamie Golombek’s article in Saturday’s Financial Post (Dec. 31/2022), titled 11 tax changes and new rules that will affect your finances in 2023. Golombek is of course the managing director, Tax & Estate planning for CIBC Private Wealth.

He doesn’t lead with the TFSA but does note that the cumulative TFSA limit is now $88,000 for someone who has never contributed to a TFSA. On Twitter there is a community of Canadian financial bloggers who often reveal their personal TFSA portfolios, which tend to be mostly high-yielding Canadian dividend-paying stocks. In some cases, their TFSA portfolios are spinning out as much as $1,000 a month in tax-free income.

On a personal note, my own TFSA was doing nicely until 2022, when it got dragged down a bit by US tech stocks and a token amount of cryptocurrency. Seeing as I turn 70 this year, I’ll be a lot more cautious going forward. I’ll let the existing stock positions run and hopefully recover but my new contribution yesterday was entirely in a 5-year GIC, even though I could find none paying more than 4.31% at RBC Direct, where our TFSAs are housed. (I’d been under the illusion they would by now be paying 5%. I believe it’s still possible to get 5% at independents like Oaken and EQ Bank.)

At my stage of life, TFSA space is too valuable to squander on speculative stocks, IPOs, SPACs or crypto currencies. Yes, if you knew for sure such flyers would yield a quick double or triple, it would be a nice play to “sell half on the double,” but it’s better to place such speculations in non-registered accounts, where you can at least offset capital gains with tax-loss selling. So for me and I’d suggest others in the Retirement Risk Zone, it’s interest income and Canadian dividend income in a TFSA and nothing else.

Inflation and Tax Brackets

Back to Golombek and inflation. Golombek notes that in November 2022, the Canada Revenue Agency said the the inflation rate for indexing 2023 tax brackets and amounts would be 6.3%:

“The new federal brackets are: zero to $53,359 (15 per cent); more than $53,359 to $106,717 (20.5 per cent); more than $106,717 to $165,430 (26 per cent); more than $165,430 to $235,675 (29 per cent); and anything above that is taxed at 33 per cent.”

Basic Personal Amount

The Basic Personal Amount (BPA) — which is the ‘tax-free’ zone that can be earned free of any federal tax — rises to $15,000 in 2023, as legislated in late 2019. Note Golombek’s caveat that higher-income earners may not get the full, increased BPA but will still get the “old” BPA, indexed to inflation, of $13,521 for 2023.

RRSP limit: The RRSP dollar limit for 2023 is $30,790, up from $29,210 in 2022.

OAS: Golombek notes that the Old Age Security threshold for 2023 is $86,912, beyond which it begins to get clawed back.

First Home Savings Accounts (FHSA). Golombek says legislation to create the new tax-free FHSA was recently passed, and it could be launched as soon as April 1, 2023. This new registered plan lets first-time homebuyers save $40,000 towards th purchase of a first home in Canada: contributions are tax deductible, like an RRSP. And it can be used in conjunction with the older Home Buyers’ Plan.

3 investing headlines to ignore this year

Meanwhile in the blogosphere, I enjoyed Robb Engen’s piece at Boomer & Echo, which ran on January 1st: 3 Investing Headlines To Ignore This Year. Continue Reading…

Preparing your Portfolio for Retirement? Income Is so Yesterday

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By Billy and Akaisha Kaderli, RetireEarlyLifestyle.com

Special to the Financial Independence Hub 

When preparing for retirement, designing your portfolio for income is over-rated. Oh, it feels good bragging about how much money you make each year, but then you also quiver about the taxes you owe each April.

What’s the point?

To make it – then give it back – makes no sense.

In today’s interest rate environment people are being forced to adjust their thinking.

Our approach 3 decades ago

When we retired over 32 years ago, having annual income was not on our minds. Knowing we had decades of life-sans-job ahead of us, we wanted to grow our nest egg to outpace inflation and our spending habits as they changed too. Therefore, we invested fully in the S&P 500 Index.

500 solid, well-managed companies

The S&P Index are 500 of the best-managed companies in the United States.

Our financial plan was based on the idea that these solid companies would survive calamities of all sorts and their values would be expressed in higher future stock prices outpacing inflation. After all, these companies are not going to sell their products at losses. Instead they would raise their prices as needed to cover the expenses of both rising resources and wages, thereby producing profits for their shareholders.

How long has Coca-Cola been around? Well over 100 years and the company went public in 1919 when a bottle of Coke cost five cents.

Inflation cannot take credit for all of their stock price growth as they created markets globally and expanded their product line.

This is just one example of the creativity involved in building the American Dream. The people running Coke had a vision and have executed it through the years. Yes, “New Coke” was a flop as well as others, but the point is that they didn’t stop trying to grow because of a setback.

Coca-Cola is just one illustration of thousands of companies adapting to current trends and expanding with a forward vision.

Look at Elon Musk. He has dreams larger than most of us can imagine.

Sell as needed

Another benefit we have in designing our portfolio in this manner, is that when we sell shares for “income,” they are taxed at a more favorable rate as a long-term capital gain. Dividend output is low, our tax liability is minimal, yet our net worth has grown.

We are in control of our income stream.

Our suggestion is not to base your retirement income on income-producing investments but rather to go for growth. You can always sell a few shares to cover your living expenses.

Money Never Sleeps

Just because you retire, your money doesn’t have to.

In the words of Gordon Gecko from the 1987 movie Wall Street, “money never sleeps.” And your money definitely won’t once you leave your job.

Reading financial articles about what if retirees run out of money, we get the impression that the authors do not understand that once retired, your money can – and should – continue to work for you.

Working smart not hard

Once you walk out of the 9-5 for the last time, that doesn’t mean your investments are frozen at that point. The stock market is still functioning and now your “job” is to become your own personal financial manager. Actually, you should have been doing this all along, but if not, start now.

You need to get control of your expenses by tracking your spending daily, as well as annually. This is so easy – only taking minutes a day – and this will open your eyes as to where your money is going. Not only that, but it will give you great confidence to manage your financial future. Every business tracks expenses and you need to do the same. You are the Chief Financial Officer of your retirement.

The day we retired the S&P 500 index closed at 312.49. This equates to a better than 10% annual return including dividends. We know that we have stated this before, but it’s important.

Chart of S&P Market Returns January, 1991 to September 2022

That’s pretty good for sitting on the beach working on my tan.

Making 10% on our portfolio annually while spending less than 4% of our net worth has allowed our finances to grow, while we continue to run around the globe searching for unique and unusual places.

But what if you’re fifty?

You need to take stock of your assets and determine what your net worth is, with and without the equity in your home. Selling the house and downsizing may be a windfall for you, again utilizing the tax code to your benefit. Continue Reading…

Another take on 5 Important factors to consider in deciding to Retire

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Image from myownadvisor

By Mark Seed, myownadvisor

Special to the Financial Independence Hub

As I consider some form of semi-retirement in the coming years, I’m learning there is a host of factors to consider in the decision to semi-retire or retire.

For today’s post, I’m going to take a recent quiz of sorts published on Financial Independence Hub with Fritz Gilbert, the founder and mastermind of a popular U.S. blog: The Retirement Manifesto.

After 30+ years in Corporate America, Fritz retired (as planned) in June 2018 at Age 55.

In running a respected U.S. personal finance blog, Fritz has written about pretty much everything on his site, including on retirement, and still does. A few years ago, as he was working through his own decision to retire, he admits some obsession about the transition. After doing his homework and analysis, he successfully made the leap and hasn’t looked back since.

As Fritz puts it when it comes to transitioning to retirement: some folks do well, and some don’t.

I hope to be in the former camp (!) and I hope this post (and answers to Fritz’s quiz factors) helps you too!

Here are 5 important factors to consider in your decision to retire including what Fritz wants to share about the transition process …

5 Important Factors to Consider In Your Decision to Retire

Fritz factor #1: Do you have enough money?

I hope so!?

Fritz comments in his article that having enough is “a necessary factor, but far from sufficient.”

I agree witih Fritz that retirement or even semi-retirement starts with a math problem to solve.

To understand how much you need, you need a process, a formula to outline as many unknowns as possible before you pull the trigger. One of the biggest unknowns in any retirement plan is your potential retirement spending.

You need to consider what you will spend to determine your “enough number.”

After that, you need to consider how to build your retirement paycheque per se to fund that lifestyle.

I’m intending to use a modified bucket strategy to deliver my income in semi-retirement.

Your mileage may vary. 

My Own Advisor Bucket Strategy - December 2022

Bucket 1 is cash savings. It’s simply a large emergency fund we don’t have to use but it’s there if we need it.

Bucket 2 is earning income from dividend-paying stocks. Income will be earned inside some key accounts (such as our non-registered account(s), TFSA(s), and RRSPs) to pay for living expenses.

Bucket 3 is earning income from equity ETFs. This income will come from mainly our RRSPs, as we intend to “live off dividends and distributions” and withdraw capital from our RRSPs/RRIFs over time as we work part-time.

The purpose of having buckets is simple but effective: this retirement bucket strategy is an investment approach that segregates your sources of cash or income into three buckets. Each of these buckets has a defined purpose based on what or when the money is for: now, (short-term), intermediate (near-term) or long-term (multi-year or decade).

My bucket approach, while maybe not perfect, helps for a few reasons:

  • It can help ensure I stay within a reasonable withdrawal plan, starting off retirement or semi-retirement with a low withdrawal rate of 3% or 4%.
  • It can help avoid sequence of returns risk (especially in the early years of retirement)* *Review these graphs below from BlackRock for an example.
  • It can help “smooth out taxation” over time by liquidating accounts, slowly and methodically.
  • It can help offset longevity risk, thanks to preserving capital early in retirement and letting assets compound away.

This is our more detailed bucket approach to earning retirement income. 

*On sequence of returns risk

Exhibit A – pre-retirement:

BlackRock - Sequence-of-returns-one-pager-va-us - December 2022 Page 1.pdf

BlackRock - Sequence-of-returns-one-pager-va-us - December 2022 Page 2.pdf

Fritz factor #2: Are you mentally prepared for retirement?

Yes, getting there, but it’s more semi-retirement for me/us.

As Fritz puts it in his post on Jon’s site:

“Almost everyone thinks about money when they’re making the decision to retire, but far too few consider the non-financial factors.  If I were to choose one point to make from all the things I’ve learned in the 7 years of writing this blog, it’s that the non-financial factors are the most important for putting yourself on track for a great retirement. Important enough that I wrote an entire book on the topic.”

Instead of just focusing on the financial-side of things, I’m really ramping up my mental-game.

I’ve given quite a bit of thought about what semi-retirement might look like, including answering many of these Frtiz-factor questions and more:

How much do you want to travel? (A bit, not all the time.)

Where do you want to live? (In Ottawa, as a home base.)

Are you going to downsize? (Already done!)

Are you going to do more entertainment with that increased free time? (Yes, but also more volunteer work.)

So, to Fritz’s points and recommendations: we dream a bit, we talk a lot, and we keep our mind open to new opportunites. I think everyone should consider the same.

Fritz factor #3: Have you made a realistic spending estimate?

You bet!

As we enter semi-retirement, we essentially intend to “live off dividends.”

Meaning, we will live off dividends from our non-registered accounts as we make some slow, methodical withdrawals from our RRSPs, while working part-time. We won’t touch TFSA assets at all and we’ll be far too young to tap any government benefits.

In a few years, we will be at this Crossover Point [also shown at the top of this version of the blog]:

Including some cash buffer, we figure that’s a good starting point for semi-retirement to begin. Continue Reading…

10 Tips to help save Money on Healthcare Expenses

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From taking advantage of tax deductions to keeping a healthy sleep schedule, here are the 10 answers to the question, “What are some tips to help save money on personal healthcare expenses?”

  • Take Advantage of Tax Deductions
  • Keep a Healthy Diet
  • Opt For Services In Your Network 
  • Save With Pre-Tax Accounts
  • Ask Questions and Advocate for Yourself
  • Get Robust Health Insurance
  • Compare Quotes to Get the Best Deals
  • Buy Generic Drugs
  • Use Free Screenings
  • Just Sleep It Off

Take Advantage of Tax Deductions

Make sure you are taking advantage of the tax deductions you are eligible for when paying for your healthcare. These include deducting the costs of your health insurance premiums, medical expenses, and dependent care expenses. You can also deduct the costs of travel for medical care and the cost of child care for medical appointments. 

While the healthcare costs are high, you can save money by simply keeping track of the expenses you are already paying and ensuring you itemize your deductions to get the most out of them. –– Matthew Ramirez, CEO, Rephrasely

Keep a Healthy Diet 

Invest in quality nutrition now to save money on health care later. Many people give in to the convenience and comfort of fast food, but it really shouldn’t be a regular part of anyone’s life. Eating whole, colorful foods is the best way to keep your body healthy, and yes: it can be quite expensive to eat healthily.

While organic produce, free-range eggs and meats with no added hormones may bump up your grocery bill, it’s far less expensive than managing a chronic condition like diabetes or cardiovascular disease. My best advice is to take care of your body now so you can save money on health care expenses later. — Jae Pak, MD, Jae Pak MD Medical

Opt for Services in your Network 

Finding strategies to pay for medical expenses without going bankrupt is a daily effort for persons with chronic diseases and long-term treatment demands. Fortunately, the news is not all negative. 

The clever consumer may find big discounts in many typical healthcare circumstances if they know where to search. It is tempting to visit the first care facility with an open appointment when you’re feeling under the weather. However, the costs of various provider alternatives vary. 

Do you need to go to an emergency room? You may see physicians who are in-network or out-of-network depending on your health insurance. Because in-network providers have an agreement with your health plan, you pay less to see them. This translates into reduced prices. — Isaac Robertson, Fitness Trainer & Co-Founder, Total Shape

Save with Pre-Tax Accounts 

Using Health Savings Accounts (HSAs) or Flexible Savings Accounts (FSAs) is a great way to save money on healthcare expenses. You can put money into an HSA or FSA each year and use it to pay for qualified medical expenses, including doctor visits, prescription, and over-the-counter drugs, home medical supplies, and even mental health services. 

These accounts can cover a variety of personal daily products related to first aid, feminine care, family planning, skincare (such as acne treatment and sunscreen), respiratory health, and pain relief. 

The money you put into an HSA or FSA is not taxed, and any money you spend on qualified medical expenses is not taxed either. You can use the money in your HSA or FSA to pay for medical expenses, even if a health plan does not cover you. — Michaela Ramirez, MD, Founder, O My Gulay

Ask Questions and Advocate for Yourself

Sometimes being in a healthcare setting can be overwhelming, especially if you aren’t feeling your best. However, it’s important not to get railroaded into agreeing to things that don’t serve you in the long run. 

For example, a medical professional may suggest a test, treatment, or procedure which you’re uncertain you can afford. Don’t be afraid to ask questions. Why is this necessary? Is there a cheaper alternative? 

Make sure you’re informed about all your options before agreeing to anything. There can be pressure to make snap decisions, but this is your health, nobody else’s. 

“Can I just take a moment to consider this?” is a great phrase to use in order to gain some breathing space. If a medication is recommended, it’s always worth asking whether there is a generic equivalent. These are often cheaper than brand-name products and just as effective. A curious, considered, and calm approach should help you make the best choices. — Alex Mastin, CEO & Founder, Home Grounds

Get Robust Health Insurance

One of the best ways to save money on personal healthcare expenses is to have a robust health insurance plan. Many people think health insurance plans with low premiums are workable. But that’s not true. 

Health insurance plans with low premiums come with other liabilities. They have higher deductibles, and you may get a higher co-pay. Also, low-premium plans don’t cover many things. These plans don’t include particular procedures or tests. 

As a result, your medical expenses can get out of control. Sometimes health plans offer discounts and valuable services. They deliver services that give a boost to your health. You can get all the details from the health insurance company or your health insurance card. — Sean Harris, Managing Editor, FamilyDestinationsGuide

Compare Quotes to get the Best Deals

One great tip that has increased my savings on personal healthcare expenses is to compare the costs of service providers. 

When I was shopping around for a primary care physician, I called various medical offices and asked about their appointment fees. Even though each office listed different pricing, one stood out because it was lower than the other options. 

By taking the time to shop around, I could save money in the long run. Compare-and-save strategies can be used not only with doctors but also with many other areas of healthcare, such as medications and lab tests.  Continue Reading…