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).

Make that last-minute RRSP contribution a conservative one

Posted By |

By John De Goey, CFP, CIM

Special to the Financial Independence Hub

Every year around this time, people like me pound their fists on the proverbial table for ordinary Canadians to make an RRSP contribution.  Spoiler alert: that’s what’s going to happen here, too.

What’s different in this post is that I’m going to go a little bit further than others in making my plea … but only a little bit.  I’m not going to recommend a specific security or product. I am, however, going to recommend a specific asset class: income.

So many people tell me that the reason they don’t contribute is that they don’t know what to invest in.  I gently point out to them that deciding about how to invest your little tax-deduction generator is not a pre-condition of contributing.  Just put the money into your RRSP based on the room available on your most recent notice of Assessment before Monday March 2, already.  Generate a refund …. or at least a reduction in the amount owing.

Many people make RRSP contributions in the second half of February and contribute nothing else throughout the remainder of the year.  For them, this is an annual tradition where they make a one-time contribution into whatever catches their fancy and pay precious little attention for the next 52 weeks or so.

Most people should be investing in Bonds this year

If this sounds like you … and if you already have a somewhat balanced portfolio that has some combination of stocks and bonds in it, then I suspect that the stock portion of your portfolio did very well in 2019 and the bond portion did relatively less well.   That simple reality is why most people should be investing in bonds this year.

Let’s say you’re a traditional balanced investor with a target of 60% in stocks and 40% in bonds.  If you started out a year ago with that asset allocation and your stocks were up 20% while your bonds were up 3% over the past year, then you could re-balance using the contribution. Continue Reading…

A million reasons young people should contribute $6,000 to their TFSAs the moment they turn 18

Posted By |

My latest Financial Post column looks at how Millennials and other young people can create a million-dollar retirement fund if they start contributing $6,000 to a Tax-free Savings Account (TFSA) the moment they turn 18. You can find the full column online by clicking on the highlighted text: The Road to the million-dollar TFSA is getting shorter for Millennials. It’s also in the print edition of Wed., Feb. 26th, under the headline “The road to saving $1 m for millennials: TFSA likely the best way to start.” (page FP3).

I’ve always been enthusiastic about the TFSA since it was first possible to contribute money to them in January 2009. My wife and I, as well as our daughter till recently have contributed the maximum to them from the get-go, always early in January to maximize the power of tax-free compounding. All three accounts have done very well. (I won’t reveal the balances but they’re consistent with heavy equity exposure through most of the bull market we appear to have been in at least until this week.)

Suffice it to say that our daughter’s TFSA has done better than ours, despite her not having contributed in the last two years because she has been working out of the country. She insisted in owning most of the FANG stocks (including Apple) and even Tesla, which was underwater until very recently but began to make headway in recent months.

It’s purely by chance that having been born in 1991, our daughter became 18 just in time for her first TFSA contribution, which naturally we funded in the early years. We viewed this as maximizing our wealth and minimizing taxes for the family as a whole.

And that’s exactly the thrust of the FP article, which cites several experts who will be familiar to most readers of the Hub: Aaron Hector of Doherty & Bryant Financial Strategies, Matthew Ardrey of TriDelta Financial, Adrian Mastracci of Lycos Asset Management. Mastracci created the chart below that appeared in the FP story:

There was also valuable input from BMO Private Wealth’s Sylvain Brisebois, who created a spreadsheet to estimate the impact of missing contributions in early years. If you can’t start until 25, a six per cent return generates $1,049,000 by age 65, $600,000 less than the $1.63 million earned with the extra $42,000 you’d have saved and compounded starting at 18. Another scenario is contributing for seven years between 18 and 25, then using it to buy a home. Assuming no more contributions the next 10 years and resuming $6,000 contributions at 36, by age 65 you’d have $829,000. Brisebois also created a scenario where you only contribute $3,000 a year, which generates $815,000.

As we experienced in our family, a long time horizon favours Millennials, who can afford to take a little more risk in return for stronger returns. That in turn translates into either a bigger nest egg 40 to 45 years from now, or it means you can get to the magic $1 million mark 5 or even 10 years ahead of schedule. Of course, if you’re even younger than a Millennial (technically they must be age 24 in 2020 to qualify) so much the better, and all these principles apply equally to Generations X, Y or Z.

For that matter, as I have often written, TFSAs are equally attractive for those already in Retirement. Unlike RRSPs, you can keep contributing to your TFSA long into old age: I had a friend who proudly told me she was still contributing after she turned 100!

Mind you, after the Coronavirus fears of the past week, who can really say? Not so good for aging Baby Boomers and retirees but of course if you’re a Millennial any young person with multi-decade time horizons, it should be viewed as good news when stocks go on sale.

 

 

What you must know about Life Insurance and Coronavirus (COVID-19)

Posted By |
LSMinsurance.ca; Photo credit: hopkinsmedicine.org

By Lorne Marr, CFP

Special to the Financial Independence Hub

What is Coronavirus and why is it so scary for life insurers?

The entire insurance business is based on risks and the ability to evaluate them. At the same time, life insurance companies do not like situations where they do not have enough information and statistics about risks related to their potential customers. People who have or had Coronavirus (also called COVID-19) represent this case.

The current outbreak of Coronavirus has already infected over 70,000 worldwide resulting, so far, in over 1,800 deaths. The majority of cases are taking place in China. Nevertheless, it has already spread across more than 25 other countries and is growing. The world’s knowledge about this virus is still fairly limited, including very approximate data about its death rate and the ways it spreads. Currently there is no vaccine. The current estimations put COVID-19’s death rate at approximately 3% as per GlobalNews. Comparatively, the death rate of SARS (outbreak in 2003) was placed at 9.6% and the death rate of Ebola (also known as EVD – Ebola Virus Disease) varied from 25% to 90% with the average values at 50% as per the World Health Organization.

All this leaves life insurance companies with a lot of uncertainty on how to deal with current and past Coronavirus patients. We reached out to a number of Canadian insurers to understand how they would treat such cases.

Insurance companies are all about managing risk

Insurance companies are all about managing risks and ensuring that they collect revenue in order to run their business and pay for claims. Insurers do this through defining various levels of life insurance products associated with different levels of risk. An overview below shows key products with their key characteristics.

  • In a nutshell, standard life insurance is associated with low risks, comes with the highest coverage limits, but REQUIRES both a detailed medical exam and completion of a medical questionnaire.
  • Simplified life insurance comes WITHOUT medical exams (which makes it very attractive for some people) but WITH a short, medical questionnaire. It comes at a cost and coverage limits are lower than standard life insurance.
  • Guaranteed life insurance DOES NOT require medical exams NOR a medical questionnaire. It is a life insurance product that you can always buy, but it comes at much higher costs, with limited coverage, and extra clauses not providing any coverage if an applicant passes away in the first two years after purchasing the policy.

Two last life insurance types are also called no medical life insurance since they do not require a medical exam. They are increasingly popular among seniors and people with health conditions.

How do insurance companies treat people with Coronavirus?

Our inquiries to various insurance specialists showed that there are two groups of insurers:

  1. Those who do not have a defined approach of dealing with Coronavirus and
  2. Those who are able to share the exact conditions under which people with Coronavirus will be able to get life insurance.
    The first group of insurers would either decline your application or delay it until a clear course of action is defined or offer you only guaranteed issue life insurance.
    The second group of insurers will be able to offer you a standard life insurance policy, but only once you are within defined parameters which are:
    • 3 months have passed since full recovery OR
    • Fully healed and cleared by a physician after being diagnosed with Coronavirus
    An overview below illustrates this concept:

What exactly do the insurers say if they are not ready to provide insurance?

The first group of insurers who are not open to providing life insurance for Coronavirus patients say:

How much is enough? Retirement Calculators and Rocket Science

Posted By |

By Doug Dahmer

Special to the Financial Independence Hub

How much is enough? This is the number we all want to know as we strive to determine how much needs to be set aside to fund our aspirations for freedom of life after work. The industry’s tool of choice, to answer this question, is the retirement calculator.

While these calculators provide a rough guideline for those early on in their accumulation years; once the count down for retirement begins (around ten, nine, eight years before retirement lift-off), you need to shift your attention from the rough guestimates of retirement calculators to a more disciplined planning process. Failure to do so robs people of the retirement they dream of and keeps them from achieving the security they deserve.

Reality Oversimplified

I recently re-watched the movie Apollo 11: a film that focuses on the spaceflight that first landed humans on the moon.

While Commander Neil Armstrong and pilots Buzz Aldrin and Michael Collins garnered most of the headlines, as I watched the mission unfold, it occurred to me that the unsung heroes of this mission were really the 100+ engineers back in Cape Canaveral. These were the people tasked with planning and then monitoring every single detail of the flight.

Complex? Unquestionably. Yet, this mission did have a pre-planned duration (8 days), a known destination (the lunar surface), a highly-researched flight plan and the ability to pre-determine fuel consumption: prior to lift-off.

Those approaching or currently living in retirement should be envious of the simplicity of this type of mission. Why? Because baby boomers face a much more daunting mission. A journey of unknown duration (often 11,000+ days), to an (all too often) poorly defined destination, along an uncharted course (Baby Boomers are redefining retirement), while constantly worrying and wondering if they will run out of fuel (money) before their journey’s end.

Unfortunately, the guidance system offered by the financial services industry is based upon the simple math of retirement calculators. Google “Retirement Calculator” – you will find every financial planning institution has an on-line version readily available. Continue Reading…

Define “Bubble”

Posted By |

By John De Goey, CFP, CIM

Special to the Financial Independence Hub

The word “bubble” is bandied about often to explain quick and often unwarranted run-ups in securities prices.  If you use the word in that context in a general conversation about economics, most people will have a quick, intuitive understanding of what you’re talking about.

Interestingly, two of the most prominent financial economists have radically different definitions of the term.  In fact, one of them goes so far as to suggest that the word “bubble” is itself a misnomer that is all but meaningless.

A half dozen years ago, Professors Robert Shiller of Yale and Eugene Fama of the University of Chicago shared the Nobel for their contributions to the understanding of asset pricing.  Many people have since speculated that the people in Stockholm who award the prize chose to give it to the two men concurrently in order to avoid implicitly “taking a side” in the debate about what constitutes bubbles.  While I respect and admire both men immensely, you need to understand that they are rivals of sorts.  The Nobel people likely wanted to recognize both without getting involved in a political and sometimes dogmatic battle of wits.

For about a generation now, I’ve been using products based on Fama’s research as the primary set of core holdings for my clients.  Based on a recent conversation with one of that company’s representatives, that’s about to change.  Basically, the company threatened to stop working with me simply because I told them I was inclined to subscribe to Shiller’s definition of a bubble.

Irrational exuberance

I’m currently reading the third edition (2014) of Shiller’s groundbreaking book “Irrational Exuberance.”  He gets straight to the point.  In the preface, he writes:

Maybe the word bubble is used too carelessly.  Eugene Fama certainly thinks so.  Fama, the most important proponent of the “efficient markets hypothesis,” denies that speculative bubbles exist.   In his 2014 Nobel lecture, Fama states that the word bubble refers to “an irrational strong price increase that implies a predictable strong decline.”  If that is what bubble means, and if predictable means that we can specify the date when a bubble bursts, then I agree with him that there may be little solid evidence that bubbles exist.  But that is not my definition of a bubble, for speculative markets are just not so predictable.

Obviously, it’s all fine and well for Shiller to say what a bubble isn’t, but it should be obvious that it behooves him to go on to offer what his own definition might be.  He provides a concise explanation (definition?) in chapter 1:

Irrational exuberance is the psychological basis of a speculative bubble.  I define a speculative bubble as a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, and, in the process, amplifies stories that might justify the price increase and brings in a larger and larger class of investors, who, despite doubts about the real value of the investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement.

Basically, I agree with Shiller on both counts … that Fama’s point is fair if one’s definition implies predictability, but that Shiller’s point (and definition) is more practical.  I certainly do believe that bubbles exist and I make absolutely no claim to be able to predict anything about when, how or why they will burst. Continue Reading…