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3 long-term ways to build Wealth

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By Gary Bordeaux

Special to the Financial Independence Hub

Money is a consistent focus in the life of an individual. This makes sense, because nothing comes for free, so one needs money in order to get by. Therefore, working for a living is an essential part of participating in society. However, there are means by which one may accrue wealth, and it is wise to invest early and often in order to maximize prosperity later on in life. Proper investment now means an increase in overall financial security. Here are a few ways you can reap the long term benefits of long term savings.

Stocks and Investments

Investing is a tried and true strategy of increasing wealth, but it’s not without its own potentially more substantial risks. Stock trading involves making value judgements and predictions, as the buying and selling of stocks depends on a company’s net worth at the time of a given transaction. This means that there is an inherent risk in buying stocks, as the value may actually decrease and is likely to fluctuate in general.

A keen eye for business trends is an essential part of trading stocks successfully. Likewise, investing directly into a business requires good business sense. Investing in a business has a steeper upfront cost, but this is countered with a more substantial payout. Investments are how many businesses get up and running to begin with, as it provides an alternative to paying that tremendous cost out of pocket. The upshot for investors is that any return on that invest is coupled with interest, though the return itself is never guaranteed.

Retirement Fund

A retirement fund is another form of long-term savings that is focused on end of life security, but the intended purpose is that of providing ample income for retirees so that they can live without financial worries once they have left the workforce. Without a retirement fund, retirement benefits are often insufficient, meaning that one may need to wait much longer to retire safely or come out of retirement in order to make ends meet.

Continue Reading…

The Pros and Cons of Mortgage Forbearance during the Pandemic

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By Holly Welles

Special to the Financial Independence Hub

Millions of Americans have lost their jobs, experienced furlough and applied for unemployment during the COVID-19 pandemic. As a result, many are struggling financially, and some must even choose between buying food to feed their families and paying the bills. If you find yourself in the same predicament, you may wonder how you’ll be able to afford your mortgage payments in the coming months.

While rethinking your budget may help you scrounge up a few extra dollars here and there, it likely won’t be enough to pay your mortgage without a steady stream of money coming in. If you’re unable to make payments any longer, mortgage forbearance may be the route you need to take. Here’s what you need to know as you pursue this option.

Pros of Mortgage Forbearance

While mortgage forbearance shouldn’t be your first option when seeking financial assistance, it can be helpful, especially as you cope with short-term financial emergencies. Here are a few advantages of pursuing mortgage forbearance.

1.) Suspends mortgage Payments

If and when you agree to mortgage forbearance with your servicer, they will likely temporarily defer your payments for a specified period or allow you to skip some. This setup will help you avoid foreclosure or damaging your credit score.

Most importantly, a temporary suspension of payments gives you time to find a job, recover from the pandemic and begin saving money and eventually making payments again.

2.) Protection under the CARES Act

Under the CARES Act [in the United States], homeowners can receive certain protection benefits if they have a federally backed mortgage. One such benefit is that your lender or servicer may not foreclose on you until June 30. Another advantage includes having the right to request mortgage forbearance for up to 180 days, plus an additional 180-day extension.

Moreover, lenders don’t require documentation proving you qualify for forbearance. Speak with your servicer and answer a few questions about your financial hardship to qualify.

3.) Better Alternative to Foreclosure

The alternative option to forbearance is foreclosure: which often goes hand in hand with bankruptcy. This combination can easily sink your credit score for years and result in months, and even years, of legalities and paperwork. It’s also incredibly expensive for lenders to foreclose on a home, so allowing borrowers forbearance is a more affordable option.

Cons of Mortgage Forbearance

All of those benefits may make mortgage forbearance sound like a great deal. However, there are consequences to pursuing this option, even if it does solve your financial problems in the short-term.

1.) Possible Credit penalties

Pursuing forbearance during the coronavirus pandemic should not affect your credit score. In fact, the CARES Act states that no negative credit reporting or late charges will occur during your forbearance agreement. However, credit penalties and dips may still happen as your lender reports your account information to credit bureaus. Continue Reading…

Tackling changes to your Retirement Income Plan

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Spending money is easy. Saving and investing is supposed to be the difficult part. But there’s a reason why Nobel laureate William Sharpe called “decumulation,” or spending down your retirement savings, the nastiest, hardest problem in finance.

Indeed, retirement planning would be easy if we knew the following information in advance:

  • Future market returns and volatility
  • Future rate of inflation
  • Future tax rates and changes
  • Future interest rates
  • Future healthcare needs
  • Future spending needs
  • Your expiration date

You get the idea.

We can use some reasonable assumptions about market returns, inflation, and interest rates using historical data. FP Standards Council issues guidelines for financial planners each year with its annual projection assumptions. For instance, the 2020 guidelines suggest using a 2% inflation rate, a 2.9% return for fixed income, and a 6.1% return for Canadian equities (before fees).

We also have rules of thumb such as the 4% safe withdrawal rule. But how useful is this rule when, for example, at age 71 Canadian retirees face mandatory minimum withdrawals from their RRIF starting at 5.28%?

What about fees? Retirees who invest in mutual funds with a bank or investment firm often find their investment fees are the single largest annual expense in retirement. Sure, you may not be writing a cheque to your advisor every year. But a $500,000 portfolio of mutual funds that charge fees of 2% will cost an investor $10,000 per year in fees. That’s a large vacation, a TFSA contribution, and maybe a top-up of your grandchild’s RESP. Every. Single. Year.

For those who manage their own portfolio of individual stocks or ETFs, how well equipped are you to flip the switch from saving to spending in retirement? And, how long do you expect to have the skill, desire, and mental capacity to continue managing your investments in retirement?

Finally, do you expect your spending rate will stay constant throughout retirement? Will it change based on market returns? Will you fly by the seat of your pants and hope everything pans out? What about one-time purchases, like a new car, home renovation, an exotic trip, or a monetary gift to your kids or grandkids?

Now are you convinced that Professor Sharpe was onto something with this whole retirement planning thing?

One solution is a Robo Advisor

One solution to the retirement income puzzle is to work with a robo advisor. You’ll typically pay lower fees, invest in a risk appropriate and globally diversified portfolio, and have access to a portfolio manager (that’s right, a human advisor) who has a fiduciary duty to act in your best interests.

Last year I partnered with the robo advisor Wealthsimple on a retirement income case study to see exactly how they manage a client’s retirement income withdrawals and investment portfolio.

This article has proven to be one of the most popular posts of all time as it showed readers how newly retired Allison and Ted moved their investments to Wealthsimple and began to drawdown their sizeable ($1.7M) portfolio.

Today, we’re checking in again with Allison and Ted as they pondered some material changes to their financial goals. I worked with Damir Alnsour, a portfolio manager at Wealthsimple, to provide the financial details to share with you.

Allison and Ted recently got in touch with Wealthsimple to discuss new objectives to incorporate into their retirement income plan.

Ted was looking to spend $50,000 on home renovations this fall, while Allison wanted to help their daughter Tory with her wedding expenses next year by gifting her $20,000. Additionally, Ted’s vehicle was on its last legs, so he will need $30,000 to purchase a new vehicle next spring.

Both Allison and Ted were worried how the latest market pullback due to COVID-19 had affected their retirement income plan and whether they should do something about their ongoing RRIF withdrawals or portfolio risk level.

Furthermore, they took some additional time to reflect on their legacy bequests. They were wondering what their plan would look like if they were to solely leave their principal residence to their children, rather than the originally planned $500,000. Continue Reading…

Retired Money: What I’m reading this summer in personal finance

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My latest MoneySense Retired Money column is a mini review of roughly a dozen personal finance or Retirement books I’ve been reading of late, or intending to finish. You can find the full column by clicking on the highlighted headline here: 12 Top Personal Finance books to read this summer.

First up are a couple of macroeconomics books: Graham Summers’ The Everything Bubble: The Endgame for Central Bank Policy, first published in 2017. It describes what the author calls “serial bubbles” – not just stocks but virtually every asset class, including fixed income and real estate. The book also tackles the two sources of financial repression for retirees hoping to live on interest income: ZIRP and NIRP, which stand respectively for Zero Interest Rate Policy and Negative Interest Rate Policy.

Like it or not, the November 2020 U.S. election is likely to have an impact on investors and would-be retirees, no matter how it works out. Two years ago, my MoneySense column reviewed several other Trump books in an attempt to understand the investment implications of his presidency.

Have we reached Peak Trump?

Amazon

Since then, I’ve also read Peak Trump: The Undrainable Swamp and the Fantasy of MAGA, by David Stockman, published in 2019.  Peak Trump includes a chapter also titled The Everything Bubble. Stockman believes the Trump boom – aided by the Federal Reserve’s “rotten regime of Bubble Finance” — has been a mirage and is fated to fade away. Presidential incumbents usually win re-election if the economy and stock market stay strong, but that’s hardly a slam dunk after the depression-level unemployment and social unrest that has come about in the wake of Covid-19.

Dual citizen and political pundit David Frum has just released his second Trump book: Trumpocalypse: Restoring American Democracy, a followup to his earlier Trumpocracy, which was mentioned in the link above. The blizzard of online and media reviews seem to suggest Frum believes Trump has lost the plot and may be vulnerable in the upcoming election.

With all this talk of asset bubbles and negative interest rates, it seems everyone is fated to worry about money and not just near-retirees. Worry-Free Money, by financial planner Shannon Lee Simmons, was published in 2017, and will primarily interest younger investors with a long time horizon. Simmons declares “everyone is worried about money” and says social media has only aggravated the situation. But if you’re worried she will nag you about things like budgeting, fear not: she gives reasons why “you need to stop budgeting.” Rather, you have to control your spending, living within your “hard limit” and say “No” to unhappy spending.

The Joy of Being Retired

For those closer to Retirement The Joy of Being Retired, by the prolific Edmonton-based international self-publishing master Ernie J. Zelinski, is a light read, with 365 reasons (and cartoons) on why Retirement Rocks “and Work Sucks.” Continue Reading…

Accelerating digital trends create opportunities in U.S. equities

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By Grant Bowers, Franklin Templeton Canada

(Sponsor Content)

The economic downturn caused by the global COVID-19 pandemic is accelerating major themes in digital transformation as businesses and workers adjust to new ways of providing goods and services. This acceleration of trends is creating opportunities for investors in the equities of U.S. companies in sectors such as technology, health care and pharmaceuticals.

There are pockets of opportunity now in U.S. equities for selective investors and if you can look through the near-term uncertainty, you can buy great long-term companies at good prices.

The technology sector has benefitted during the shift to a “work from home” environment: especially products and services related to cloud computing, remote access, digital payments, and online security. This technology is in higher demand as individuals, companies and organizations rely on technology to work, communicate with clients and staff, and perform transactions in a virtual platform during pandemic restrictions. The COVID-19 crisis is also highlighting the powerful combination of technology and health care in areas like gene sequencing and data analytics, which will benefit pharmaceutical and biotech firms in the future.

Outlook for U.S. economy

Overall, the U.S. economy likely will remain affected by weakness driven by the pandemic for some time, but the economy should begin to show improvement in the fourth quarter, accelerating into 2021. Decisive stimulus actions taken by the U.S. Federal Reserve will likely help bridge the downturn for many businesses and consumers.

If progress is made on developing a medical treatment for the coronavirus — including a vaccine — then there could be a fairly rapid “healing of the U.S. economy” and a rebound of pent-up consumer demand when restrictions are loosened.

A health care crisis needs a health care solution: there is a massive research effort under way to develop an effective medical treatment of the coronavirus.

Positioned for opportunities in trend acceleration

As the digital technology transformation advances, companies in some of the most innovative sectors of the U.S. economy are positioned for growth during the downturn. For example, we see opportunities in the wireless tower space as part of the wider shift to 5G wireless technology and the increased focus on data usage and mobility for individuals and businesses. Providers of software for back-office business processes, which are essential for workers at home during the crisis, are another opportunity. Continue Reading…