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Frugal and Fun: Preparing for the unexpected and enjoying life too

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Photo courtesy of Pixabay.com

By Jim McKinley

Special to the Financial Independence Hub

Baby Boomers came of age during a period of unprecedented prosperity and affluence in America, which was reaping the benefits of a super-charged post-war economy. And, like their parents and grandparents, instead of giving into frivolous financial behavior and spending their money, Baby Boomers tend to “hedge their bets” and play it conservative when it comes to spending. If this sounds like you, don’t let a concern about the future and the need for a tidy nest egg keep you from having fun and enjoying life. There are plenty of ways to balance preparing for the unexpected with having some fun.

Cost-conscious vacations

Vacations tend to be spendy affairs. The anticipation of visiting new and exotic locations can encourage a freewheeling attitude and a considerable outlay of money. If you’re worried about spending money you should be setting aside for a rainy day, forgo that Carribean or Danube cruise and look into something a bit closer to home, a destination you can easily reach by car. Sometimes there’s a memorable vacation waiting for you just a few exits down the road.

Do some research and look for an attractive but affordable bed-and-breakfast in a location that’s near a site of historical interest or a scene of natural beauty. If you don’t want to put highway miles on your car, check into coupons or online offers from a rental car company. Instead of stopping for pricey fast food, pack a picnic lunch and hit the trail for a fun and healthy hike. If you decide to stay in a hotel with a continental breakfast, grab some leftovers and cobble together your own lunch to avoid overspending on meals later.

Rethink dining out

There’s nothing quite like heading out for a nice dinner out with your spouse. The only problem is the cost:  a nice dinner at your favorite French restaurant with wine and dessert will certainly leave you with a three-figure check. Instead, look for some of the less expensive gems every city has to offer, if only you know where to find them. Do a little homework, ask around and find a new “go-to” restaurant, perhaps a family-owned place with a great history and a menu full of homemade delights. You can also save money on wine by bringing your own bottle, which many restaurants will gladly allow.

Take care of the basics

If you have a frugal nature, you’re probably more comfortable taking care of financial responsibilities before you head out for a good time. Few things make you feel better about your money situation than having an adequate rainy day emergency fund firmly in place. It’s easier than you think: simply set up a monthly automatic transfer into a simple, interest-bearing savings account, though make certain it’s a monthly amount your budget can handle. If possible, save enough to cover at least six months of expenses in an account you can easily access. Continue Reading…

Retired Money: Can an RRSP or a RRIF ever be “too large?”

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MoneySense.ca

My latest MoneySense Retired Money column looks at a problem some think is a nice one for retirees to have: can an RRSP — and ultimately a RRIF — ever become too large? You can find the full column by clicking on the adjacent highlighted headline: How large an RRSP is too large for Retirement?

This is a surprisingly controversial topic. Some financial advisors advocate “melting down” RRSPs in the interim period between full employment and the end of one’s 71st year, when RRIFs are typically slated to begin their annual (and taxable) minimum withdrawals. Usually, RRSP meltdowns occur in your 60s: I began to do so personally a few years ago, albeit within the confines of a very conservative approach to the 4% Rule.

As the piece points out, tax does start to become problematic upon the death of the first member of a senior couple. At that point, a couple no longer has the advantage of having two sets of income streams taxed in two sets of hands: ideally in lower tax brackets.

True, the death of the first spouse may not be a huge tax problem, since the proceeds of RRSPs and RRIFs pass tax-free to the survivor, assuming proper beneficiary designations. But that does result in a far larger RRIF in the hands of the survivor, which means much of the rising annual taxable RRIF withdrawals may start to occur in the higher tax brackets. And of course if both members of a couple die with a huge combined RRIF, their heirs may share half the estate with the Canada Revenue Agency.

For many seniors, the main reason to start drawing down early on an RRSP is to avoid or minimize clawbacks of Old Age Security (OAS) benefits, which begin for most at age 65. One guideline is any RRSP or RRIF that exceeds the $77,580 (in 2019) threshold where OAS benefits begin to get clawed back. Of course you also need to consider your other income sources, including employer pensions, CPP and non-registered income.

Adrian Mastracci

“A nice problem to have.”

But the MoneySense column also introduces the counterargument nicely articulated by Adrian Mastracci, fiduciary portfolio manager with Vancouver-based Lycos Asset Management. Mastracci, who is also a blogger and occasional contributor to the Hub, is fond of saying to clients “A too-large RRSP is a nice problem to have!”

Retirement can last a long time: from 65 to the mid 90s can be three decades: a long time for portfolios to keep delivering. A larger RRIF down the road gives retirees more financial options, given the ravages of inflation, rising life expectancies, possible losses in bear markets, low-return environments and rising healthcare costs in one’s twilight years. These factors are beyond investors’ control, in which case Mastracci quips, “So much for the too-big RRSP.”

 

Should you roll the dice with your retirement savings?

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By Dale Roberts, Cutthecrapinvesting

Special to the Financial Independence Hub

You’ve worked for decades to build your retirement nest egg. You have invested smartly. The investment portfolio is required to fund a significant portion of your retirement years. In fact, you need those monies to last for many decades. Should you invest in an all-stock portfolio? That approach might deliver greater income than the traditional stock and bond portfolio.

Yup. More stocks might deliver more growth. No one can deny that stocks are the growth engine of a portfolio. When we own stocks we become business owners and we share in the success (or failure) of those companies. In the past, owning a big basket of market-leading companies has worked out more than well.

When stocks earn 8% we can spend 8%?

Retirement funding is tricky business. It’s much more complicated than the accumulation stage. The sequence of returns does not matter that much at all when we are building our portfolios, and we have decades until that retirement start date. We might see several good years that are followed by two or three bad years. Those bad years will not affect your retirement readiness when you have decades to recover. A savvy investor will even enjoy those bad years as the stocks go ‘on sale’.

But in retirement the order of stock market and portfolio returns do matter. That’s called sequence-of-returns risk. A bad year or a few bad years early in retirement can permanently impair your portfolio and your retirement. Even before that retirement start date we are already in the retirement risk zone.

But stocks beat the crap out of bonds

Most retirees and most financial planners will add some bonds to the portfolios of retirees. Those bonds work like shock absorbers. While there is no guarantee, good bonds have a habit of going up in price when stocks get hit hard. This is typical retirement planning ‘thinking’. And yes, there are other weapons besides bonds.

On Twitter we had a very robust discussion on retirement funding and risk. Financial Planner Ed Rempel defended the all-stock portfolio for retirees. And he provided some support with this chart:

According to Mr. Rempel, the success rate for an all equity portfolio is 97% for a period that spans over 100 years. Success is defined as the retiree being able to spend at 4% of the portfolio value, every year, with an adjustment equal to inflation. Of course that’s called the 4% rule. That’s a retirement planning benchmark that is useful, but is then usually disposed of for dozens of reasons. For Boomer and Echo I had asked if there was a new normal for Canadian retirees . Continue Reading…

Sixth Sense or Nonsense? Removing intuition from the investment process

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By Noah Solomon

Special to the Financial Independence Hub

In a recent newspaper article, a Canadian investment executive described why he chose not to incorporate artificial intelligence (AI) into his firm’s portfolio management process. His reasoning was based on the distinctively human ability to “read a room” and gauge the sincerity of corporate management teams, which cannot be replicated by a machine or algorithm.

Even if you believe that investment professionals possess this “sixth sense,” the simple fact is that it has not enabled them to produce superior results. According to the latest SPIVA (S&P Index vs. Active) Canada report card, over the past 10 years:

  • 91% of Canadian equity funds underperformed the TSX Composite Index
  • 97% of U.S. equity funds underperformed the S&P 500 Index
  • 100% of Canadian dividend-focused funds underperformed the TSX Dividend Aristocrats Index

Aside from the alleged ability to gauge the truthfulness of a person’s statements, there is another human characteristic that AI lacks. Unlike their human counterparts, AI algorithms do not have emotions or cognitive biases, which often lead to poor investment decisions.

We have met the enemy – and the Enemy is Us

The field of behavioural economics studies the effects of psychological, cognitive and emotional factors on the economic decisions of individuals and institutions. This field has produced countless studies that have conclusively demonstrated that when it comes to investment decisions, people harbour subconscious biases that result in suboptimal results. Moreover, these biases are not restricted to individual investors, but also permeate the decisions of professional managers and institutions. Continue Reading…

An outline of the various types of life insurance policies

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By Lorne Marr, CFP

Special to the Financial Independence Hub

There are a variety of life insurance policies available in Canada: the best type of plan depends on the insured’s needs and budget. The following is only a snapshot of the different types of plans.

In general, life insurance policies are classified according to two criteria:

  • By length of coverage
  • By medical exam requirements

Let’s look at each of this classification in detail.

Types of life insurance based on coverage length

Life insurance in Canada is generally grouped into two major types, if it is about coverage length: temporary insurance and permanent insurance.

Here is a breakdown of these insurance types and below you will find a detailed description of each type:

Term life insurance type

Term life insurance policies cover short-term needs. Term coverage is the simplest form of life insurance. It provides the largest benefit for the minimum amount of premium. The insured can use the benefits offered by this coverage to pay off debt or to fulfill any other need. The premiums on these policies start off low, but increase as the insured gets older. Term policies can typically last for 10 years, 20 years or 30 years, but Industrial Alliance offers a Pick-a-Term policy: the insured can pick his/her Term from ten to 40 years.

If you are interested in Term Life Insurance, click here to get a Term Life Insurance quote.

Permanent life insurance type

This type of life insurance provides insurance protection till the policy matures, as long as the insured pays the premiums on time. The four major types of permanent insurance are Whole Life, Universal Life,  Limited-Pay, and Term 100. Continue Reading…