Inflation

Inflation

Preparing for Retirement: Understanding new spending patterns

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BoomerandEcho.com

Last time we talked about boosting retirement savings during your final working years. In an ideal world you’ll have the double-effect of being in your peak earning years while your largest financial obligations are in the rear-view mirror.

In the real world, however, many Canadians are faced with an uncertain retirement because they lack adequate savings, don’t have a company pension plan, they’re still carrying a mortgage, line of credit, or even (gasp!) credit card debt, or they’re still providing financial support to their adult children.

Preparing for Retirement

Much like preparing for a new addition to the family, or for one spouse to stay home with the children full-time, preparing for retirement is about understanding new spending patterns.

If your final working years aren’t spent in savings overdrive mode, perhaps there’s time to test out your retirement budget in the year or two before you retire. You might as well try living on 40 – 60% of your income while you’re still working to see if it’s realistic.

If it’s not, there’s still time to adjust course by altering your income expectations, working longer (and saving more), or revisiting your investment strategy. Speaking of which …

Investing in Retirement

One of the biggest worries for retirees is outliving their money. That’s why it’s crucial to have a proper investment strategy in retirement. Investors don’t simply sell their stocks and move to bonds, GICs and cash once they retire. Canadians are living longer and our portfolios need to be built to last.

One strategy to consider is the bucket approach. The idea is that while retirees need cash flow, they also need a diversified portfolio of stocks and fixed income. Your first bucket is for immediate needs and should contain one or two years’ worth of living expenses in easy-to-access cash. Bucket two is for medium-term needs and is filled with bonds or GICs. Bucket three is meant for long-term needs and so it’s typically filled with stocks, ETFs, or index funds.

Also read: A better way to generate retirement income

Understanding CPP and OAS benefits

Whether you think you’ll rely on government benefits or not, it’s important to understand how CPP and OAS benefits work and how they might impact your retirement income plan.

The maximum monthly payment amount for CPP in 2020 is $1,175.83 [if taken at 65], but the average monthly amount for new beneficiaries is actually $696.56. You can take CPP as early as 60, but the amount is reduced by 0.6% for every month you receive it before 65.

Alternatively you can delay taking CPP until as late as age 70. In this case your pension amount will increase by 0.7% for each month you delay receiving it up to age 70. Continue Reading…

Top 7 things to know about Social Security

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By Michael Morelli

Special to the Financial Independence Hub

When you are thinking about early retirement to fully enjoy retirement living, or thinking of postponing retirement, you need to know how and when it is best to take your Social Security benefits. When dealing with something as important as Social Security, you must make sure that you are receiving as much as possible. Comprehending the program will help to secure your future to a great extent. In this article, we have mentioned several essential things regarding Social Security that you ought to know.

What is Social Security?

Social Security happens to be the foundation of numerous Americans’ financial security, including disabled individuals, retirees, and families of the retired. Approximately 170 million Americans pay Social Security taxes at present, while 61 million individuals collect monthly benefits. Approximately one household in every 4 gets income from Social Security.

One can consider Social Security to be a pay-as-you-go scheme. This implies that today’s workers pay Social Security taxes into the program, and cash flows back out to the beneficiaries as monthly income. Social Security is not the same as company pensions, which happen to be “pre-funded” out there. The money will be accumulated beforehand in pre-funded programs such that it can be paid out to the workers of today once they retire. It is essential to fund the private plans beforehand to safeguard the employees provided the company shuts down or becomes bankrupt.

1.) Full Retirement Age (FRA)

The following paragraph mentions the full retirement age when you might be eligible to get full Social Security retirement benefits.

Here we have mentioned the year in which you were born and what will be the Full Retirement Age in that case.

1937 or before – 65

1938 – 65 + 2 months

1939 – 65 + 4 months

1940 – 65 + 6 months

1941 – 65 + 8 months

1942 – 65 + 10 months

1943 – 1954 – 66

1955 – 66 + 2 months

1956 – 66 + 4 months

1957 – 66 + 6 months

1958 – 66 + 8 months

1959 – 66 + 10 months

1960 or later – 67

2.) You can work while getting Social Security

You will have the option of taking Social Security so long as you happen to be 62 years of age. Yearly earning limitations have been set by the SSA – in case you have been getting Social Security benefits prior to your full retirement age, and you are earning in excess of the limit, there will be a reduction in your benefit payments temporarily depending on how much you are earning. Suppose you are earning $8,000 over the limit, your benefits will be minimized by $4,000. In case you can earn $12,000 over the limit, it will be reduced by $6,000.

However, the good thing is that you will not lose your benefits permanently in case they are reduced. On the other hand, your payment account will be calculated once again, such that you will get the withheld cash as soon as you reach your full retirement age)

3.) Social Security benefits may be Taxable

As per the SSA, several Social Security beneficiaries are going to pay taxes on their Social Security benefits. It will depend on how much you make listed on the income tax return. In case you file with an excess of $25,000 as an individual (or $32,000 jointly), it will be imperative for you to pay the federal income taxes on the benefits. However, the regulations for state income taxes differ from one state to another.

4.) Your payments can help your family

Let us suppose the monthly benefits, according to your Social Security card, happen to be more than that of your spouse. Continue Reading…

Do you have enough tech in your portfolio?

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By Dale Roberts, Cutthecrapinvesting

Special to the Financial Independence Hub

And perhaps that headline could read: do you have enough growth in your portfolio? Of course tech is where they keep much of the growth these days. And certainly those tech companies have been driving the returns of the S&P 500 and other US stock index funds. For investors who create their own stock portfolio, it’s a reasonable question to ask. Do you have enough tech in your portfolio?

For our accounts we use a mix of individual stocks and ETFs. But for the US allocation it’s all stocks. I had wondered if I was missing out. While I love my dividends and dividend growth, in the end it will all come down to total returns. The most optimal arrangement for retirement funding might be a nice mix of generous and growing dividends and that growth component. We can make our own home-made dividends.

Benchmarking our techs against the Nasdaq 100

I ran our tech basket of 4 companies against the Nasdaq 100. You can read about that exercise in my recent Seeking Alpha post. And yes, I’m going to give away the ending.

Here’s … My tech basket has more growth than the Nasdaq 100.

Apologies for the brag, but that’s how we do it on Seeking Alpha. 🙂

The 4 companies are Apple, Microsoft, Qualcomm and Texas Instruments. As you might expect the tech monsters of Apple and Microsoft are the main drivers of those returns. That said, the tech 4 does not keep up with the fabled FAANG stocks. The group includes Amazon, Netflix and Google (Alphabet) in addition to Apple and Microsoft.

That one ticket portfolio has you covered

If you hold a one ticket asset allocation portfolio, you’ve got tech. Those tech giants dominate the S&P 500 or US total market ETFs that are held by the one ticket ETFs. And in Canada Shopify holds the greatest weight in the TSX 60 or TSX composite ETFs. There are other Canadian tech companies contributing, but the US is certainly the land of tech giants and tech growth.

Tech is now 11.2% of the TSX 60 ETF.

Related post – Why index investing works. Continue Reading…

Real Estate Investing: The good and bad of investing in real estate

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By David Miller, CFP, RFP

Special to the Financial Independence Hub

Real estate can be a differentiator in a diversified investment portfolio. But when you watch the pundits in the media and certain TV network shows, as seen on HGTV, buying, flipping or renting a property seems like a sure way to increase your income or get rich quick. As glamourous as it seems when you take a sledgehammer to a useless wall to ‘open up the space’, the reality of making it a marketable investment is often much more daunting. What really is daunting is the sheer number of options you have when it comes to investing in real estate, and the obvious question is:

Does it make financial sense to add real estate to your portfolio?

The Positives

Real Estate does make sense in most investment portfolios but let us back up a little bit here and provide some context:

What are the primary reasons people choose real estate as an investment?

There is something reassuring about investing in real estate, as in the case of owning a rental property. You own a tangible asset and you may feel like you can see the value and the risks just by walking through the property. You may own your home, and assuming you are mortgage free, brings an incredible feeling of security and freedom.

Real estate investing can offer a stable, reoccurring income; after all, ‘who doesn’t pay their mortgage or rent?’ It also carries a fairly high certainty of a higher value over the long term; after all, “they are not making more land” (unless you’re in the South China Sea or Dubai). These are two common positive arguments.

If you look specifically at Canada, there can be times when your rate of return can be incredibly high. We experienced this with Calgary’s real estate boom from 2005-2007. The Greater Toronto Area and Greater Vancouver area from 2015-2018 have seen incredibly high growth and price increases that have been covered extensively through the media.

Real estate investing provides an interesting option that is not directly tied to overall stock market risk, which can provide you with increased diversification. Whether the stock market goes up or down, your real estate price may move independently.

The wealthy endowment funds, private pensions, institutional money and the Canada Pension Plan invest heavily in real estate, private equity and infrastructure projects that average Canadian investors either don’t know about, can’t invest or don’t invest into.

To summarize, the benefits of a real estate investment are that it is a tangible, generally stable income producing, ‘always goes up’ investment and offers other benefits not seen in the stock market. Ready to jump in with both feet? Not so fast. There are some serious pitfalls to understand and multiple options to choose from.

How can I invest into real estate?

  • Buy a rental property (putting at least 20% down)
  • Buy a commercial building
  • Real Estate Investment Trusts (REITs)
  • Exchange Traded Funds (ETFs) of REITs
  • Mutual funds specializing in real estate
  • Private equity or debt (Mortgage pools/investment corps)

Primary Issues

Price Risk

Can real estate values fluctuate? The real answer is yes. Nationally, Canadian housing prices reduced by 4.9% on average in 2018, the worst performance since the 2008 financial crisis. Toronto and Vancouver skew the average price to high side, but even they are starting to fall off their 2017/18 highs and there are obvious concerns of a bubble bursting.

Prices for real estate are difficult to gauge as every property is different and value is in the eye of the beholder. To sell your property, you likely need to employ a realtor to get a starting price and you need to find someone else who agrees on the price to buy. Real estate negotiations can go awry quickly, which causes further delays regarding the liquidity. For this service, there is a sales cost paid to the realtor, usually 7% of the first 100,000 and 3% after, although this can be sometimes negotiated.

In an example of how poor the Calgary commercial real estate market is; this*is an article that explains how the city of Calgary is losing over $300 million in tax revenue every year as downtown core commercial property values have decreased by a collective $12 billion. This is an example of how real estate values can fluctuate to the downside and how unstable a source of income a real estate investment could be.

See the chart below for the relative volatility of the selected Calgary, Toronto and Vancouver markets when compared with the US Equity and Canadian Equity markets. While the annual volatility in the S&P 500 and TSX has been much higher relatively, this chart shows that you could lose out if you sell your real estate holding at the wrong time or pick the wrong city or neighbourhood to invest in.

 

Calgary data via CREB Monthly Average Sale Price “Attached, Detached, Apartment”, Jan 2005 to Dec 2018. Vancouver Data via CREA.ca HPI Tool Greater Vancouver Composite historical price data Jan 2005 to Dec 2018. Toronto Data via CREA.ca HPI Tool Greater Toronto Composite historical price data Jan 2005 to Dec 2018. TSX data via tmxmoney.com price history. S&P 500 data via http://www.multpl.com/s-p-500-historical-prices/table/by-year. The chart above only looks at price change and does not factor the effects of leveraging or reinvestment of interest or dividends.

Liquidity Risk

Liquidity refers to how quickly you can get your money out if you change your mind about your investment. Are you prepared to invest money into a residence only to find out it’s a money pit? What happens when you struggle to sell it when the market turns, and you could really use the extra money for something else? What if there is an emergency and you need those funds and there is no liquidity? If you are buying a stock or ETF on a major open market, the level of liquidity can be measured in volume of shares bought or sold and shares usually change hands instantaneously. While investing in stocks should be a long-term investment, at least you have the option to get out at any time almost instantly. The same is generally true in real estate; however, the liquidity premium is significantly higher. Continue Reading…

Is 2019 gold’s year to shine? A Q&A with Harvest president & CEO Michael Kovacs

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Harvest Portfolios Group Inc. launched a global gold ETF yesterday (on January 15, 2019.) In the sponsored Q&A below, Harvest President & CEO Michael Kovacs explains why the company is launching the Harvest Global Gold Giants Index ETF (TSX: HGGG) now, the thinking behind this unique ETF and why the ETF aligns with the Harvest value strategy of conservative growth and income.

Why is Harvest launching a gold ETF?

We are not gold bugs, but we have been looking at the gold market for some time, especially gold company shares. They have been in a bear market for the better part of six years, so share prices are low. We see considerable value there.

A lot of the smaller companies are out of business because they couldn’t make money at these lower prices. Others that are struggling are being acquired by the big companies. Consolidation is a sign of a market bottom and while there is always downside risk in investing, we think a lot of that risk is out of the market.

So your focus is just the largest global producers?

Yes. If you’re a large firm you’re able to take advantage of the situation.  So we looked at the top global gold companies – the biggest by market cap – and are focusing on just the top 20. So if gold rises there is a lot of upside potential.

The other thing is that we’re in the late stages of the economic cycle. I don’t know whether we are in the ninth inning, or we have some extra innings ahead, but at some point US markets will start to weaken. Interest rates will top out and probably decline. We will see some decline in the US dollar as well. The US dollar has been on a tear and like any cycle it will probably come to an end.

At that point investments like gold make a lot of sense. There’s inherent leverage in the equities if gold prices rise.

Why is that?

In a simplified example, let’s say you are Barrick Gold Corporation producing gold at $800 an ounce. Gold is worth about $1,250 an ounce, so your margin is $450. If gold rises by $250 to $1,500, you’re increasing your profit margin by 55%. That goes directly to the bottom line.  So we think it is an opportune time to be looking at large gold producers.

Are you worried about inflation?

We do not see a lot of inflation. There may be some inflationary pressures, but the world has changed so much with technology. Continue Reading…