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).
I’ve been doing lots of reading lately about a new stage of life between MidLife and traditional Retirement. You can read the details in Marc Freedman’s The Big Shift, which confirmed what I’ve been slowly piecing together since my career change this time last year.
The Financial Independence Hub organizes blogs in six categories that are quite similar to the Ages & Stages that MoneySense has long espoused, both in its articles and in its Special Interest Publication, Guide to Retiring Wealthy. You can find these six blog categories in the horizontal grey band that appears below the horizontal blue band at the top of the Hub’s home page.
Ages & Stages: The Life Cycle approach to Investing
When I heard the announcement that the Conservative government is considering allowing Canadians to make additional voluntary contributions to the Canada Pension Plan, my first reaction was that maybe that’s not a bad idea.
After all, the CPP Fund reported last week a return of 18.3% for its latest financial year, its best showing ever. I don’t know about you, but I’d be happy if CPP was managing and investing more of my retirement savings.
But the fact is that I already have retirement savings. I have a pension, my RRSPs and TFSAs are maxed out and our house is paid off. However, for Canadians who do not have a workforce pension and are living from paycheque to paycheque, another opportunity to save voluntarily is not going to make a difference.
In fact, if voluntary CPP contributions are locked in until retirement, even when middle or low earners finally bite the bullet and set up a payroll savings plan, chances are they will opt for an RRSP or TFSA so they can get at the money in an emergency. Because employers probably won’t have to match contributions, there is little incentive for employees to contribute more money to CPP.
Details are still sketchy but both major daily newspapers are reporting a plan by the Conservative Government that would let Canadians boost their payouts from the Canada Pension Plan by letting them voluntarily contribute more.
Whether this constitutes enough federal action to get the much-criticized Ontario government proposal for an Ontario Retirement Pension Plan (ORPP) overhauled or aborted remains to be seen. All along, it seems, Ontario went out on a limb with ORPP out of frustration that the federal government seemed disinclined to expand the CPP. Certainly an involuntary expansion that would have forced businesses to take on higher payroll expenses would not have been an easy sell but a voluntary scheme is quite a different matter.
Consultations will be held in the summer to flesh out the details, Finance Minister Joe Oliver said in the House of Commons Tuesday. The Globe observes that labor groups and seniors advocates like CARP do not believe that voluntary savings vehicles work and that therefore a mandatory expansion of the CPP is needed to make sure Canadians save enough for retirement.
Oliver sees the voluntary expansion working in concert with the new improved TFSAs as well as Ottawa’s PRPPs (Pooled Registered Pension Plans).
Voluntary CPP expansion makes sense, especially for those who lack true DB pensionsContinue Reading…
Liberal deputy leader Ralph Goodale (National Post.com)
The Financial Post ran an op-ed written by me today (A10), titled simply How to Max Out your TFSA. We’ve written on this topic before of course, but it specifically addresses an oft-repeated Liberal comment that few middle-class Canadians have “$10,000 lying around” for a TFSA contribution.
On the contrary, I argue, many middle-aged middle-class Canadians have hundreds of thousands of dollars in non-registered or “open” investment accounts, money that is subjected to annual rounds of tax on interest and dividends, and often capital gains, and which would love to find a tax-free home in a Tax Free Savings Account.
Similarly, many seniors already in retirement have large RRSPs or RRIFs that can also be a source of funds for a TFSA, once withdrawals are made and a one-time tax hit is sustained.
In fact, this weekend, I spent time with a 98 year old friend (a woman), who proudly informed me she recently put $10,000 into her TFSA and is saving up from her part-time job to put in another $5,000. Why? She felt she needed a bit of cushion in case some medical problem arises.
As the end of the FP piece notes, there are plenty of other potential sources too, including sale of a principal residence (perhaps in a downsizing situation), severance payments, life insurance proceeds, sale of a business, lottery wins and — this one’s for you, Justin — inheritance.
In the original piece, Cestnick floated a colourful parable that suggested the rich are more than paying their share, to the benefit of those less fortunate. But if those with the highest incomes are pushed too far beyond the 50% rate, they may be inclined to leave, making the circumstances of those further down the pyramid that much worse.
With 650 comments and counting, it’s no hyperbole in this case to say there’s a true debate that’s raging here. And with an election coming up this fall, it’s safe to say this topic won’t be going away any time soon. The new higher TFSA limits are certainly a major element of this debate. No surprise that we at the Hub favour the new higher limits and I’d be surprised if Tim Cestnick or any of his well-heeled clients feels any differently.
The Bond dilemma
Meanwhile, rich or not and highly taxed or not, it continues to be a struggle finding yield at today’s paltry levels of interest rates, which of course are fully taxed outside registered accounts. This was one of several themes I picked up at a recent ETF and mutual fund conference in Chicago. Here’s my column in Motley Fool Canada on this topic, titled Caution Ahead: Why Bonds May Soon Become Much Harder to Manage.
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By Jonathan Chevreau
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