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).
When I started in the business in September of 1993, it was a great time for new client acquisition. The reason is simple: there were so many new clients to be had – in the form of first-time investors. As interest rates plummeted from their all-time highs in the early 1980s, the fulcrum began to shift. Specifically, as the risk-free rate (anything that could be attained on a guaranteed basis) dropped, people became increasingly willing to absorb risk.
Starting around 1982, the long-term macro trend that continues to this day began. That year marked the cyclical high in long-term interest rates (in the mid to high teens!) along with a multi-generation low in price/earnings ratios (well into the single digit range!). For nearly 40 years, interest rates have been seeing a secular decline, while market valuations the world over have been creeping up. The correlation is predictable. As rates drop, people are prepared to take on increasingly large amounts of risk in their quest for financial reward. Totally understandable.
Rates are essentially at Zero
Now that rates are essentially at zero throughout the developed world, the trend has become acute. The question that people might now be asking themselves is: will people stay out of traditional income investments for the foreseeable future? Continue Reading…
It’s the new year and you may have a couple of questions on how to use your TFSA account. The Tax Free Savings Account is one of the greatest additions to your investor tool kit. It is true to its name in that the monies grow completely tax free. When you take the monies out for spending there are no tax implications. We need only keep track of our contribution limits.
Out of the gate it’s important to know the contribution allowances. The program was launched in 2009 (the brainchild of then federal Finance Minister Jim Flaherty). The initial contribution limit was $5,000. There is also an inflation adjustment mechanism and that is why you will see the TFSA limits increase over time.
TFFA Limits History
The annual TFSA dollar limit for the years 2009 to 2012 was $5,000.
The annual TFSA dollar limit for the years 2013 and 2014 was $5,500.
The annual TFSA dollar limit for the year 2015 was $10,000.
The annual TFSA dollar limit for the year 2016 and 2018 was $5,500.
The annual TFSA dollar limit for the year 2019 was $6,000.
The annual TFSA dollar limit for the year 2020 was $6,000.
The annual TFSA dollar limit for the year 2021 is $6,000.
The total contribution allowance to date is $75,500 for 2021. You can carry forward any unused contribution space. Keep in mind that the eligibility for TFSA is based on age of majority. You would have had to have been 18 years of age or older in 2009 to qualify for that full amount. You would also have to be in possession of a Social Insurance card/number.
If you reached age of majority in 2018, that would be your first year of eligibility. To date your contribution limit would be …
Starting the TFSA in 2018
2018 – $5,500, 2019 – $6000, 2020 – $6,000, 2021 – $6,000 for a total of $23,500.
Of course we have to wait for January 1 or later to use that $6,000 for 2021.
Remember if you go over, you will be penalized by 1% per month, for the amount that you have overcontributed. Check with CRA for your contribution eligibility.
Reader question on over contribution
“Ooops, I over contributed in December of 2020.” If you recently jumped the gun and overcontributed by $6000 you would be charged 1% per month, meaning a $60 penalty. Thing is you earned another $6,000 in contribution space on January 1, 2021. You would only face one month of over contribution. You might as well sit tight. You would not be able to have that contribution reversed, even if you quickly move that money out of the TFSA account. If you move the monies in and out there will be no benefit, but you could created fees if it is stocks or ETFs.
If you ever make a more costly (but honest) mistake on over contribution, you can take that up with CRA and your financial institution. It’s possible that you might get some help from your institution or from the CRA. Good luck.
Calculating your TFSA after removing amounts
The formula or rule is quite simple. If you remove $12,000 in one year, you would add that full amount to next year’s contribution allowance. And of course that contribution allowance would also include that calendar year’s new room. For example if you took out $12,000 in calendar year 2020, you would add that $12,000 to the $6,000 allowance for 2021. Your 2021 contribution allowance would be $18,000.
Yes, you get to keep any contribution room gains you made in your TFSA if you sell. You lock in that space. Those investment gains can boost your total TFSA contribution room above the calendar year totals.
This event may be considered if you were looking to use or gift some monies next year. You might sell now and lock in that TFSA space. Obviously, if you’ve been investing those monies, your account is likely or should be at an all-time high.
Please note that if it is a stock or bond or ETF or mutual fund, the trade has to settle within the calendar year. Check with your discount brokerage or advisor on timing and settlement details.
Saving or Investing for your TFSA?
I am a big fan of using your TFSA for investing. There’s the potential or likelihood of much greater gains and hence much greater tax savings when you invest your TFSA dollars.
Also consider that interest rates are sooooo low you might have very modest ‘gains’ with any savings account. The benefit of the TFSA for savings is more muted in a low interest rate environment.
But of course, 2020 proved to many the importance of that emergency fund. You might hold an emergency fund that is 6 months of total spending needs as a starting point. Here’s my personal finance book, OK it’s a blog post …
And it can make sense to hold some cash as a portfolio asset. After all it’s an obvious hedge for any deflationary environment. The spending power of cash will increase in any deflationary period.
On that cash front you might consider EQ Bank where you can earn 1.5% in a savings account and 2.3% in registered account such as that TFSA. You may choose to hold some TFSA amounts in savings and some in higher growth investments.
On the mutual fund front you might have a read of this post from Jonathan Chevreau on the top mutual funds in Canada. I am a big fan of those funds from Mawer.
Beneficiary form – successor holder
Ensure that you fill out a beneficiary form for all of your registered accounts. For taxable accounts you might consider joint accounts. Continue Reading…
Happy New Year! However, this first business week of the new year promises to snap investors rudely out of their holiday moods, given political events south of the border.
As of last Friday, January 1st, Canadians could add another $6,000 to their TFSAs, taking their total cumulative lifetime contributions to $75,500. As I outlined in my latest MoneySense Retired Money column, it’s generally a good idea to do this early in January just to maximize the time value of money.
However, I’d hold off committing to particular equity investments until the dust settles, given that this morning’s headlines no doubt focus on the incredible political drama taking place in Georgia on Tuesday, Jan. 5th and then in Washington on Wednesday, Jan 6th.
After this weekend’s dramatic capturing on tape of soon-to-be-ex President Trump’s attempt to persuade the State of Georgia to “find” (aka steal) almost 12,000 votes, both the Georgia runoffs and Wednesday’s supposedly ceremonial formal certification of the state electors votes confirming Joe Biden’s victory promise to be full of fireworks.
Fireworks almost inevitable in Washington this Wednesday
Things were simmering even before Sunday’s saturation TV coverage of what seemed yet another impeachable offence from Trump. Violence from far right-groups fomented by Trump’s fanning the flames in anticipation of Wednesday’s ceremony in Washington already seemed to be in the cards even before this weekend. That can be hardly good for stock markets although pre-market Monday futures were strongly up in the three major US indices.
Add in the ongoing stress of the still-raging pandemic and recent euphoria over vaccines, and the fact US and many global stocks have been hovering near record highs: not to mention cryptocurrencies and Bitcoin, which this weekend smashed through US$30,000 for the first time.
So it hardly seems like there’s a need to rush to invest new TFSA money when all these portents mean prices could be cheaper later this week. Whether this creates yet another proverbial buying opportunity remains to be seen.
Some ideas for how to invest new TFSA money
Those in doubt who would rather invest sooner than later on any anticipated market downturns Monday could always hedge their bets with value-oriented balanced mutual funds or the Asset Allocation ETFs often mentioned on this site, from BlackRock iShares, BMO ETFs, Horizons ETFs or Vanguard Canada. Hard to believe it was just three years ago that the Hub published this blog about these “game-changers” and they seem to me to make a lot of sense for the large “core” of most portfolios. Continue Reading…
Many of us dream of financial independence. Chris Mamula, Brad Barrett, and Jonathan Mendonsa offer many practical ideas for achieving financial independence (FI) and enjoying the journey along the way in their book Choose FI: Your Blueprint to Financial Independence. They avoid many of the problems we see in the FIRE (Financial Independence Retire Early) book category.
The authors avoid the biggest problem with most FIRE books. It’s annoying to tell the story of a high-income earner deciding to live like a student his whole life and retire in his 30s, and then say “you can too!” Although I point out the bad parts of books, I can forgive a lot if my mind is opened to a good idea. For this reason, I’ve enjoyed FIRE books even if they have some bad parts. This book manages to avoid the worst parts of other FIRE books.
The authors don’t bother much with retirement. FI gives us choices so we can “scrap the idea of retirement completely and focus on building lives we don’t want to retire from.” The life you build can involve paid work, leisure, or any other pursuit you want.
Rather than focus on just one story, the authors draw from the experience of many people who have sought FI. A common theme is the importance of enjoying the journey. If you see your pursuit of FI as suffering for several years until you hit your magic number, you’re not doing it the right way.
FI’s benefits start even before you reach the target
You benefit from pursuing FI even before you reach your target. “If you have a mortgage, a couple car payments, a family to feed, and nothing in the bank, what choice do you have when your boss asks you to do something stupid?” I was able to push back somewhat with my boss in the late part of my career, and this got me more money and autonomy.
If reaching FI seems like an unattainable goal, it may help to break it down into milestones. The authors suggest “getting to zero” for those in debt, “fully funded emergency fund,” “hitting six figures” in your portfolio, “half FI,” “getting close,” “FI,” and “FI with cushion.” This last stage is defined as having a portfolio equal to 33 times your annual spending needs. This is a sensible target for a young person with a long remaining life who doesn’t really know how spending needs will change with age. Continue Reading…
2020 was a difficult year in markets and the economy. There remains a high level of uncertainty heading into the new year. Below we’re going to walk you through some time-tested practical steps on how to prepare for the coming year, in order to make sure you’re financially set for whatever may unfold.
1.) Assess your personal balance sheet
When planning your finances for the new year it is critically important to know and understand the strength of your current financial position. You can do this by running through the exercises below.
• Understand your financial obligations relative to your income:
Are you carrying high levels of debt relative to income? What is the composition of this debt: is it mostly in high-interest credit cards or a low fixed-rate mortgage? The 36% Rule states that your debt to income (DTI) should never surpass 36%. When your DTI rises above 36%, your personal balance sheet is fragile and you become more exposed to financial risk. In these difficult times of uncertainty, it’s important to keep your DTI low so as to maintain financial flexibility.
• Upcoming big-ticket expenses:
Do you plan to make any big purchases or financial outlays in the coming year? Perhaps you’re planning to buy a home and purchase a new car or pay the tuition for your child to attend their first year of college … These are big expenses that can stress the strongest of personal balance sheets if one doesn’t plan properly. That’s why it’s important to note these at the start of the year so you can start preparing for the expense.
Nonessential spending:
Frequent dinners out and vacations at the beach are fun but if they come at the cost of putting a strain on your financial security, they can cause more stress than they’re worth. A good exercise for planning for the coming year is to look back at your expenses from the year before and see where you’re maybe spending a little more money than you’d like. Those $6 lattes every morning add up!
2.) Set your personal financial goals
To cite the oft-quoted baseball sage, Yogi Berra “If you don’t know where you’re going, you’ll end up someplace else.” Financial planning and goal setting are critically important to protecting your resources and securing the future you want. From a practical standpoint, this means doing a number of key things at the start of each year.
Set a target retirement savings amount:
Retirement might be a ways off for you, or not. Regardless, it’s never too early or too late to start planning for it. The rule of thumb is that you should aim to stash 10%-15% of your pretax income into a retirement savings account each year. The earlier you can start doing this the better because that puts the power of compounding in your favor.
Invest, invest, invest:
The best way to grow your wealth over time is to start investing early and often. This means putting a percentage of your income into low-cost stock and bond indices, on a consistent and regular basis.
Take control of your debts:
Turning back to keeping your DTI below the key 36%, debt is a financial burden that has to be dealt with before it grows out of hand. This takes time and planning. Just like how the power of compounding works in your favor in investing, it works against you when you carry large amounts of debt if you’re just paying the minimum. Continue Reading…
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