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).

ETFs to generate Retirement Income

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By Mark Seed, myownadvisor

Special to the Financial Independence Hub

Image courtesy MyOwnAdvisor/Dreamstime.com

Let’s dive in!

My retirement income plan and options

I’ve been thinking about my semi-retirement income plan for some time now.

Months ago, I captured a list of overlooked retirement income planning considerations that remain very relevant.

There are obvious ways to generate retirement income but I suspect some might not appeal to you for a few reasons!

  • Option #1 – Save more. Sigh. I doubt most people will like this option, I don’t! However, more money saved will help combat inflationary pressure, rising healthcare costs and longevity risk.
  • Option #2 – Work longer. Double sigh. If you didn’t like option #1, you might not like this one! Working longer into your 60s or potentially to your 70s might be the reality for some with a low savings rate.
  • Option #3 – Spend less. Spending less than you make seems simple but not easy!

Simple but not Easy

Meaning, the path to a well-funded retirement is usually (always?) spending less than you make, investing the difference, and growing that gap over time. This has largely been our plan – to let the power of compounding do its thing – but that does take discipline and time. Investing patience is a virtue.

Save, invest, earn

Our semi-retirement income plan has us leveraging a mix of income streams in a few years:

  1. Earn income from part-time work – to remain mentally engaged but also to fund some income needs and wants in our 50s.
  2. Spend taxable (but tax-efficient) dividend income from our basket of Canadian stocks.
  3. Make strategic Registered Retirement Savings Plans (RRSPs) withdrawals in our 50s and 60s.

We’re not quite “there” yet in terms of having 1, 2 and 3 running smoothly to meet our semi-retirement income needs yet, but we are getting there and making some lifestyle choices accordingly…

We hope to semi-retire sometime in 2024.

We have been working hard to build up our taxable dividend income stream for about 15 years now.

We continue to max out our TFSAs as our first investing priority every January (and we’re saving for that again in early 2023).

We have been maxing out contributions to our RRSPs, and we’ll continue to do so for the next couple of years.

What are my retirement income needs? 

In a nutshell, we figure once we can earn close to $30,000 per year from a few key accounts (for example, from our taxable account(s) and TFSAs x2), and then make those strategic RRSP withdrawals on top of that, we should have enough to start part-time work.

Here are some estimated very basic expenses in semi-retirement:

Key expenses Monthly Annually Semi-retirement comments ~ end of 2024??
Mortgage $2,240 $26,880 We anticipate the mortgage “dead” before the end of 2024.
Groceries/food $800 $9,600 Although can vary month-to-month!
Dining/takeout $100 $1,200
Home maintenance/expenses $700 $8,400 Represents 1% home value per year, increasing by inflation.
Home property taxes $500 $6,000 Ottawa is not cheap, increasing by inflation or more.
Home utilities + internet/TV/cell phones, subscriptions, etc. $400 $4,800
Transportation – x1 car (gas, maintenance, licensing) $150 $1,800 May or may not own a car long-term!
Insurance, including term life $250 $3,000 Term life ends in 2030, will self-insure after that without life insurance.
Totals with Mortgage $5,140 $61,680
Totals without Mortgage $2,900 $34,800 As you can see, once the debt is gone, we’ll be in a much better place for financial independence!

Add in other spending/miscellaneous spending to the tune of $1,000 per month on top of that, and our semi-retirement budget is likely at the basic-level about $4,000-$4,500 per month.

What are your retirement income needs?

Until the end of time, I suspect one of the most popular retirement planning questions will be: how can I generate retirement income?

That’s a HUGE quesiton to answer. I mean, we have rising inflation, higher interest rates, and the need to make your money last to fight any longevity risk, higher taxation and the need to cover essential healthcare costs as you age. This also makes how you can generate retirement income a VERY important question to answer.

Passionate readers of this site will know I’m a big fan of investments that generate meaningful income. Sure, you can invest in real estate, private equity, run a business into your 60s and 70s but for many people: the stock market is a common vehicle for average people/average investors to be long-term business owners.

This makes the hope of capital gains or getting paid today via dividends an interesting paradox.

As I get older, while the best total returns are always the goal, I’m more concerned about the tangible income my portfolio can (and will) generate moreso than hoping for stock market prices to work in my favour.

Full stop: I like investments that generate income. I like individual stocks as investments that pay ever growing income!

While I believe in (and own) low-cost, passive Exchange Traded Funds (ETFs) for total portfolio growth, a major portion of my portfolio rewards me to be a shareholder. I am attracted to investments that pay dividends or distributions. You may wish to consider the same for your meaningful retirement income needs.

Should you use ETFs to generate your retirement income needs? 

I believe so, at least a consideration if you’re not going to be an owner of some individual dividend-paying stocks!

While I invest in many Canadian and U.S. individual dividend-paying stocks for income and growing income, today’s post is about those lower-cost income-oriented ETFs you can own in certain accounts to avoid individual stock risks. Continue Reading…

Sector ETFs for Defensive Plays

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By Mirza Shakir, Associate Portfolio Manager, BMO ETFs

(Sponsor Content)

What are Sector ETFs?

Sector ETFs allow targeted exposure to sectors or industries like financials, materials, or information technology – domestic, regional, or global. The sectors are usually classified according to the Global Industry Classification Standard (GICS), but other classifications can also be used. While sector ETFs could be active funds, most track an index, offering transparency, liquidity, and low fees.

There are eleven broad GICS sectors that can be invested in with sector ETFs.

  • Energy
  • Materials
  • Industrials
  • Consumer Discretionary
  • Utilities
  • Real Estate
  • Communication Services
  • Financials
  • Health Care
  • Consumer Staples
  • Information Technology

There are two common approaches in constructing a sector portfolio: market capitalization weighted and equal weighted. As the names suggest, the former approach weights securities in the portfolio by market capitalization while the latter weights them equally.

At BMO ETFs, our suite of sector ETFs covers equal-weighted and market-weighted strategies across all sectors, locally and globally. We opt for equal-weighted strategies for sectors that have the potential to get concentrated in a few large names with the market-capitalization approach, ensuring effective diversification and mitigating individual company risk.

 

Source: BMO GAM, BMO ETF Roadmap February 2023 (Visit ETF Centre – CA EN INVESTORS (bmogam.com)

Annualized Distribution Yield: The most recent regular distribution, or expected distribution, (excluding additional year end distributions) annualized for frequency, divided by current NAV.

Risk is defined as the uncertainty of return and the potential for capital loss in your investments.

Why Invest in Sector ETFs?

Sector ETFs can offer differentiated return and risk profiles for investors, not only from broad market portfolios but also from other sectors. Additionally, investing in a sector ETF allows access to a broad range of companies that have businesses that operate in similar or related industries, which can be more diversified than investing in a single stock. The investor does not have to place individual bets on single companies, which helps limit company-specific risks.

The table shown at the top of this blog, and shown to the right in miniature, shows the performance of all sectors in the U.S. from 2011 to 2022. Notably, the best and worst performing sectors change every year, leaving an opportunity for market timing to generate high returns. However, timing the markets can be extremely difficult. A more effective strategy can be sector rotation, which involves overweighting or underweighting sectors relative to the stage of the business cycle.

Playing Defense – Sector Rotation Strategies

The business or economic cycle refers to a cycle of expansion and contraction that economies undergo, accompanied by similar upswings and downswings in economic output and employment. Continue Reading…

Best stocks for new investors seeking profits share these qualities

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Image courtesy TSInetwork.ca

Finding top stocks for new investors is easier when you know what to look for. Discover the types of stocks to invest in and some investments to avoid.

We caution investors to maintain a healthy sense of skepticism at all times. It’s especially crucial for investment newcomers to observe this rule.

Here are some recommendations on the types of stocks for new investors to focus on: and ones to avoid.

Focus on investment quality  

The best investment plans or systems use a variation of the value investing approach. That is, they revolve around choosing high-quality investments and diversifying your holdings.

Safer investing also means taking a careful and methodical approach to investing that does not jeopardize your savings or your investment goals. There will always be some inherent risk when investing, so making safer investing decisions lets you minimize that risk.

The safest way in our view for Successful Investors to invest money is to place a lot of importance on investment quality.

We do our own stock market research for our newsletters and investment services, and we apply it from a portfolio manager’s perspective. That’s why we advise sticking to mostly well-established companies; they tend to hold on to more value when things go wrong and recover faster.

Zero in on dividend-paying investments

One tip we share often is to invest in companies that have been paying a dividend for 5 or more years. Dividends are typically cash payouts that serve as a way for companies to share the wealth they’ve accumulated. These payouts are drawn from earnings and cash flow and are paid to the shareholders of the company. Typically, these dividends are paid quarterly, although they may be paid annually or even monthly. Canadian citizens who own shares in Canadian stocks that pay dividends will also benefit from a tax break.

Building a diversified portfolio of top stocks for new investors

Always maintain a diversified stock portfolio: and avoid the temptation of trying to pick hot stocks or sectors.

Different investors may be more comfortable holding a larger or smaller number of investments in their portfolios. Here are some tips on diversifying your stock portfolio:

When it comes to a diversified stock portfolio, stocks in the Resources, and Manufacturing & Industry sectors in general expose you to above-average share price volatility.

  • Stocks in the Utilities and Canadian Finance sectors entail below-average volatility.
  • Consumer stocks fall in the middle, between volatile Resources and Manufacturing companies, and more stable Canadian Finance and Utilities companies.

Most investors should have investments in most, if not all, of these five sectors. The proper proportions for you depend on your temperament and circumstances.

Investments that should be avoided: Cryptocurrencies & IPOs

I still can’t think of anything that would make me optimistic on bitcoin or any cryptocurrency, even after the deep slump the whole sector has gone through recently. The best thing I can say about bitcoin is that it will probably remain volatile, rather than vaporizing like the worst crypto performers. Continue Reading…

Why Healthcare could lead this market cycle

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Chief Investment Officer explains why this massive sector has the right mix of styles and innovation to show leadership as markets recover

 

Image Harvest ETFs/Shutterstock

By Paul MacDonald, CFA, Harvest ETFs

(Sponsor Content)

Market cycles are often defined by their leaders. While many sectors and areas of the market can provide returns, the tone and tempo of market narratives are often set by the companies, styles and sectors that are broadly considered the ‘leaders.’

Take the past roughly 15 years as an example. The leadership story on markets was almost completely defined by technology. Tech leaders were synonymous with growth, and that growth was synonymous with leadership during a period of mostly uninterrupted bull market runs.

The bear market we experienced in 2022 hit the reset button on leadership. Not necessarily by removing tech as the key growth sector — it still shows plenty of attractive growth traits — but by resetting some of the fundamental dynamics in the market.

The end of near-zero interest rates has changed the liquidity picture on markets. Volatility, as measured by the VIX, has been structurally higher since the onset of the pandemic, and we are likely already in a period of slow economic growth: if not a recession. Rather than the pure-growth traits investors sought for leadership, in the near to medium term we see potential for leadership in areas that balance growth prospects and innovation with stability and consistency.

That sector is healthcare.

3 tailwinds means Healthcare can lead

The US healthcare sector is, in the eyes of many investors, a sleeping giant. Looking at just the 20 leading companies held in the Harvest Healthcare Leaders Income ETF (HHL:TSX) we see a combined market capitalization of $4.86 trillion, more than 150% of the total market cap of the S&P TSX Composite. These are huge companies in a huge sector, which covers business lines as diverse as pharmaceuticals, healthcare services, med-tech, biotech, and healthcare equipment.

The healthcare sector overall benefits from three structural long-term tailwinds. The first is the aging of the developed world. As the world’s richest countries get older, they are spending more on healthcare. In the US, for example, individuals aged 19-44 spend an average of $4,856 [US$] on healthcare, according to the National Health Statistics Group. That number rises to $10,212 in the 45-64 age bracket, and rises again to $19,098 in the 65+ age bracket.

The developed world is getting older. By 2050 28.5% of North Americans and 35% of Europeans are expected to be over the age of 60, according to the UN. As those places age, their older populations will spend more on healthcare. That demand is largely expected to be stable for the simple fact that people are less likely to cut expenditures on life-saving medications than they are on something more discretionary. Healthcare is therefore seen as a superior good.

The second tailwind is the economic growth of the developing world. Taking China and India as prime examples, the WHO has found that as those countries’ GDP has grown, their healthcare expenditure has grown at a faster rate. These huge markets are already being captured by some of the large-cap US healthcare leaders held in HHL. Continue Reading…

How to Balance Spending Now & Saving for the Future

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From opening two different savings accounts to giving your money a job, here are 12 answers to the question, “Give your best tip for how to balance the need to save and invest for the future with the desire to enjoy my life and spend money on things that are important to you?” 

  • Open Two Different Savings Accounts
  • Consider Your Housing Costs
  • Focus on The Three Aspects of Great Personal Finances
  • Use Financial Aggregators to Monitor Spending
  • Spend Money On Your Passions; Avoid Pointless Purchases
  • Invest in Things That Will Last
  • Understand Your Cash Flow
  • Consider the 50-50 Rule
  • Create and Follow a Budget
  • Use Fixed Percentages for Saving /Investing
  • Schedule a ‘Spending Period’ in Your Life
  • Give Your Money a Job So It Has a Purpose

Open two different Savings Accounts

Most people have a checking account and a savings account. If you want to save for the future, open up a second savings account and put your long-term savings in that pot. Find the best interest opportunities you can find for that account and leave that money alone to the best of your ability.

For the money that you want to use in the shorter term (shopping, traveling, buying gifts), manage that money in a separate savings account. Your checking account should cover all of your expenses while your primary savings account should be your “fun-spending” money.

The third account should be your long-term savings and that should be the money that you take to your financial advisor for the best long-term investment opportunities. Let that build up for a while and then try to make smart investments with it. — Brittany Dolin, Co-founder, Pocketbook Agency

Consider your Housing Costs

If you’re struggling to save and invest for the future while also enjoying life, consider your housing costs. Housing is one of the biggest monthly expenses, so if you’re living in a home that’s too big for you, or you’re paying more than you can afford for it, you may want to consider downsizing.

Consider your needs and wants when choosing a home. Do you really need a five-bedroom home if you’re a family of two? Can you live somewhere with fewer amenities if it means you can save money on your monthly housing costs? Homeownership is an investment in yourself and your future, so it’s important to find a balance between spending on your housing and investing in the future. — Matthew Ramirez, CEO, Rephrasely

Focus on the three Aspects of Great Personal Finances

I’ve learned from my mentors that great personal finances can be broken down into three areas: Budgeting Expenses, Creating Income, and Developing Cashflow-Producing Assets.

With any money-related goal, identifying which area(s) to focus on is key. For example, getting out of debt requires stricter budgeting and increasing income. Meanwhile, retirement has to do with areas 1 and 3. This also makes it simple: budget a percentage of your income to save and invest based on your long-term goals.

Then determine your priorities. Perhaps you need to be strict with some other living expenses to be able to spend money on what’s important to you and set savings and investment goals for larger purchases while you also work to increase your income. — Eric Chow, Chief Consultant, Mashman Ventures

Use Financial Aggregators to Monitor Spending

The balance between saving and investing for the future, while also enjoying life and spending money on what matters to you, is a difficult one to achieve.

One uncommon way to reach this balance is by using financial aggregators. Financial aggregators are tools that allow you to connect all your accounts, such as investments and bank accounts, into one place in order to get a better look at where your hard-earned money is going. This makes it easier for you to budget wisely and allocate money towards satisfying both savings goals, as well as needs or wants for immediate enjoyment.

With this knowledge in hand, you’ll be more aware of how much flexibility you can have with your monthly expenses since both needs are being fulfilled simultaneously. — Carly Hill, Operations Manager, VirtualHolidayParty.com

Spend Money on your Passions; Avoid Pointless Purchases

The best way to save money and enjoy life is to spend money on your passions and cut back on everything else. For example, you might grab a Starbucks drink before work every day. But does this really add value to your life? You can make the exact same coffee at home for a fraction of the price. This is just one example, but most people are spending thousands of dollars a year on unimportant things.

Once you’ve cut expenses out of your life that don’t provide value, spend this extra money on your passions. Let’s say you’re a big fan of motorbiking. You can use this money to buy a sport bike and go to your local racetrack every weekend. Or, if you love hiking, buy quality hiking gear and hike with friends and family. This strategy allows you to cut back on unimportant expenses, save money, and spend more on things that bring happiness. — Scott Lieberman, Owner, Touchdown Money

Invest in Things that will Last

A great way to balance the need to save and invest for your future while still enjoying life is mindful spending. This means considering each purchase you make, big or small, and evaluating if it will add long-term value and benefit you; an uncommon example of this would be investing in a massage package.

Instead of splurging on something that won’t provide sustainable value, such as multiple nights out with friends, consider treating yourself to regular professional massages — which have medical benefits from managing pain to reducing stress — that promote mental health and well-being. Practicing mindful spending ensures money is not wasted frivolously but also allows for some indulgences now that can later prove beneficial. — Grace He, People and Culture Director, teambuilding.com

Understand your Cash Flow

Understanding your household cash flow is among the most important aspects of securing your financial future. In order to have more money to spend or save now, you must be acutely aware of your spending habits. Continue Reading…