Building Wealth

For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).

Retired Money: What is the Rule of 30?

ECW Press

My latest MoneySense Retired Money column reviews actuary Fred Vettese’s new retirement book: The Rule of 30 (ECW Press).

You can find the full column by clicking on the highlighted headline here: What’s the Rule of 30? And what does it have to do with Income and Retirement?

Never heard of the Rule of 30? Neither had I, nor Fred himself until he invented it.

In a nutshell, it’s a rule of thumb financial planners can use to guestimate how much young couples starting off on their financial journeys need to save for Retirement. Rather than flatly state something like save 10 or 12 or 15% of your gross (pre tax) income each and every year, the Rule of 30 sees retirement saving as occurring in tandem to Daycare and Mortgage Repayment.

From the get go Vettese suggests young couples allocate 30% of their gross or after-tax income to the three expenses of Retirement saving, Daycare and Mortgage paydown. However, in the early years they may save less in order to handle Daycare and the mortgage. Since daycare expenses usually fall away after a few years (depending on how many children a couple has), once it has gone you can ramp up the mortgage paydown and/or retirement savings. And if – ideally five years before retirement – the home mortgage is paid off, then couples can kick their retirement saving into overdrive by allocating a full 30% or more solely to building their nest egg.

Wealthy Barber style fictional format

In a departure from his previous books — Retirement Income for Life and The Essential Retirement Guide among them — The Rule of 30 uses the tried-and-true quasi-fictional “story” pioneered by David Chilton’s The Wealthy Barber. That road has been ploughed by many subsequent financial authors, including Yours Truly in Findependence Day. 

As Vettese told me in an interview mentioned in the column, he didn’t plan it that way initially. “I did a first chapter using that format and then realized it’s a lot easier to write this way and it’s not as dry: it’s somewhat easier to read and to write. When you get a problem, a character chimes in.”

The main characters are a couple, X and Y, and — conveniently — the neighbour next door who happens to be an actuary with time on his hands.

No doubt it would have worked either way, but Vettese’s dialogs are readable enough and he even works in a minor subplot involving the actuary and his estranged daughter.

One of the people acknowledged by Vettese at the back of the book is fellow actuary and retiree Malcolm Hamilton. In an email, Hamilton said “I have always believed that middle class Canadians who marry, buy a house and have children cannot reasonably expect to save much for retirement until after the age of 45,” Hamilton told me via email, “There just isn’t enough income to cover mortgage payments, the cost of raising children and Canada’s heavy tax burden (with child care expenses and mortgage payments generally non deductible for those with incomes that suggest they need to save.”

All in all, a useful rule of thumb for young couples setting out on family formation, home ownership and ultimately Retirement. Note that Vettese says that once you are within five years of your hoped-for Retirement age, you should strive to be mortgage free. And around 55, you should move from the Rule of 30 to using a Retirement calculator like the free one Vettese developed for Morneau Shepell: PERC, or the Personal Enhanced Retirement Calculator.

PS: I am now Investing Editor at Large for MoneySense

Alert readers who got to the bottom of the column and read the author blurb will see a slight change in my status at MoneySense. In addition to writing the monthly Retired Money column I am now also the Investing Editor at Large for the site, a fact that’s also divulged in my Twitter profile.  I will continue to publish Hub blogs every business day: so much for Retirement!

 

 

 

Making investing better for every type of trader

New QuestMobile app from Questrade

By Scarlett Swain, Director, Investment Products at Questrade

Special to the Financial Independence Hub

It’s no secret that over the past few years more and more people have started trading and investing. Maybe it’s more time on their hands, maybe they’re becoming more focused on their future and want their money to work harder for them. Regardless of the reason, at Questrade we’ve seen a real increase in the influx of new customers and have heard loud and clear from them that they need trading to be less complex. This is their money, their future, and they don’t want to make mistakes while they learn or want a busy platform full of things they don’t use.

On the other hand, we’ve also heard very experienced and active traders tell us, they want more. More order types, more tools, greater speed, and they want it all in the mobile app. So, we dove deep into customer feedback and conducted a ton of research, through all this emerged themes which created the crystal clear path we’re on today: we need a platform and mobile experience for customers that only want to do basic investing AND we need an even more sophisticated mobile experience for our advanced and option trading customers. One tool could not do it all, so we got to work on building three.

Two new platforms launched

Two of our three new platforms launched on September 27: the new Questrade Trading, a web-based platform specifically designed for those who just opened their first self-directed account and also for people who want to stick to the basics of investing, and its mobile companion, QuestMobile. Screen by screen, we worked to implement the features that gave investors the information they needed to make good decisions. Continue Reading…

Why we took Social Security at age 62

By Billy and Akaisha Kaderli

Special to the Financial Independence Hub

We decided to take Social Security at age 62. We know there are as many ways to consider this decision as there are days in a year. And many experts advise against taking social security “early” so that you get a bigger check at full retirement age. It is hard to argue against that.

We have always lived an unconventional lifestyle and the fact that so many experts agree on waiting for payment gives us pause for thought. Here is our logic.

First, the S&P 500 index has averaged over 8% per year, plus dividends, since we retired in 1991. If we take social security early and invest it, we won’t be losing the 8% per year the experts claim is the annual increase of waiting – although one is guaranteed and the other is not. Maybe the markets will trend sideways or go down or even up, no one knows. For the last 30 years we have lived off of our investments through up and down markets, so investing the monthly check is definitely an option. More likely, we will just not spend our stash and look for opportunities in the markets as our cash positions grow. Plus we have control of the money at this point, adding to our net worth.

Next let’s look at some numbers

For easy math, say at 62 you are going to receive $1000.00 per month in benefits, but if you wait until you are 66, your payment will be $1360 ($1000 x 8% for the four years you have waited). Sounds great, right? However, you would have missed receiving $48,000 dollars in payments from the previous 48 months. Continue Reading…

Should you own a lot or a little in Canadian stocks?

By Steve Lowrie, CFA

Special to the Financial Independence Hub

It’s not easy being a Canadian investor, is it?  Given recent elections, we’re unlikely to see a pro-business surge anytime soon … to say the least. (It’s not investable info, but did you notice I happened to accurately forecast this?)

Plus, we’ve had to watch other countries’ stock markets beat the pants off our own during the past decade.  U.S. glamour or FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) have been living especially fat and larger than life lately.

It’s no wonder I’ve been fielding questions about how to best allocate among the global equity markets these days.  How much is too much in Canada? Should we just dump everything into the U.S. market?  Is diversification dead?

My short answers are:  It depends. No. And, I wouldn’t bet on it. This is an admittedly incomplete response, so let’s consider four points and counterpoints to fill in the blanks.

1.) Canada’s market cap is tiny, and concentrated

While we’re rich in land mass, Canada represents just 3% of the world’s stock market capitalization. Plus, that 3% isn’t very well-diversified, with relatively heavy exposures to banking and natural resources.

2.) Canadians and everyone else have a home bias

Home bias means we prefer familiar objects close to home.  If (like me) you’re rooting for your kid’s hockey team, cheer on. But in the markets, this tempts most investors – and many financial professionals – to pile too heavily into their own countries’ stocks.

For example, despite recent underperformance, the typical Canadian still allocates 60% of their investments to Canadian stocks.  The Behavioral Investor author Daniel Crosby reports that U.S. investors typically allocate 90% of their holdings to the U.S. market; U.K. investors allocate about 80% of their holdings to the U.K.  No matter where you roam, home bias is right at home.

3.) Markets are unpredictable

Before you ship all your investments across the border or overseas, remember:  Markets can turn on you, abruptly and without warning.   While it might seem like a distant memory, it should be noted, from 1999–2009, Canadian stocks (S&P/TSX composite) returned 7.7% per year, whereas U.S. stocks (S&P 500 in Cdn$) seemed cursed in the new millennium, delivering  –2.5% per year … yes that is a negative return for 10 years! Continue Reading…

A look at BMO Asset Allocation ETFs

This article has been sponsored by BMO Canada. All opinions are my own.

I’m on record to say that the vast majority of self-directed investors should simply use a single asset allocation ETF to build their investment portfolios.

What’s not to like about asset allocation ETFs? Investors get a low cost, risk appropriate, globally diversified portfolio in one easy to use product. It’s a fresh take on an old idea – the global balanced mutual fund – updated for the 2020’s using low-cost ETFs.

Investors don’t even have to worry about rebalancing their portfolio when they add or withdraw money, or when markets move up and down. Asset allocation ETFs automatically rebalance themselves regularly to maintain their original target asset mix.

This article looks at BMO’s line-up of asset allocation ETFs, which include a conservative (ZCON: 40/60), balanced (ZBAL: 60/40), growth (ZGRO: 80/20), and balanced ESG (ZESG: 60/40) option.

For a YouTube video about these ETFs, click here.

These BMO asset allocation ETFs are available for self-directed investors to purchase through their online brokerage account. Notably, these ETFs can be traded commission-free through BMO InvestorLine and Wealthsimple Trade.

What’s inside BMO’s Asset Allocation ETFs?

Launched in February 2019, BMO’s core asset allocation ETFs are made up of seven underlying ETFs representing various asset classes and geographic regions.

On the equity side we have:

  • ZCN – BMO S&P/TSX Capped Composite Index ETF
  • ZSP – BMO S&P 500 Index ETF
  • ZEA – BMO MSCI EAFE Index ETF
  • ZEM – BMO MSCI Emerging Markets Index ETF

While on the fixed income side we have:

  • ZAG – BMO Aggregate Bond Index ETF
  • ZGB – BMO Government Bond Index ETF
  • ZMU – BMO Mid-Term US IG Corp Bond Hedged to CAD Index ETF

Altogether these seven ETFs represent nearly 5,000 individual stock and bond holdings from around the world.

In terms of geographic equity allocation, the BMO asset allocation ETFs hold 25% in Canadian stocks, 25% in international stocks, 40% to 41.25% in US stocks, and 8.75% to 10% in emerging market stocks.

BMO reviews their portfolios quarterly and will rebalance any fund that is more or less than 2.5% off from its target weight. In reality, these funds are rebalanced regularly with new cashflows from new investors.

BMO’s Balanced ESG ETF (ZESG) is made up of six underlying ETFs, including:

  • ESGY – BMO MSCI USA ESG Leaders Index ETF
  • ZGB – BMO Government Bond Index ETF
  • ESGA – BMO MSCI Canada ESG Leaders Index ETF
  • ESGE – BMO MSCI EAFE ESG Leaders Index ETF
  • ESGB – BMO ESG Corporate Bond Index ETF
  • ESGF – BMO ESG US Corporate Bond Hedged To CAD Index ETF

The management expense ratio for each of the BMO asset allocation ETFs is 0.20%. There is no duplication of fees or additional charges for the underlying ETFs. Continue Reading…

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