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).

Fed Pivot turned into a Divot

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

It was a more than interesting week. Not much mattered until Jerome Powell (the U.S. Federal Reserve Chair) delivered comments on Friday. He came clean. Or at least he helped to reverse the delusion created by stock market enthusiasts that the Fed would ‘pivot’ and reverse course on the market-unfriendly series of rate hikes. Rates are going higher and they will stay higher. There will be some pain for consumers and business. Inflation must be crushed. They will do what it takes. The Fed pivot turned into a divot. The markets were not happy with the reality check.

In a Seeking Alpha article published just days before the Powell presser, Michael J Kramer of Cott Capital Management offered …

The futures, bond, and currency markets are already telling the world that there is no dovish pivot, and quite frankly, there probably never was a dovish pivot. The only market out there that hasn’t gotten the message appears to be the equity market.

If Powell can deliver a message that even a golden retriever (I own two goldens) can understand, then the equity markets’ day of reckoning will arrive in short order.

Also from Michael …

The futures knew it, bonds knew it, and the dollar knew it. Once again, the only market living on an alternate planet was equities …

Powell finally delivered a direct message

In his Jackson Hole speech, in the opening paragraph, he made it clear that his remarks would be shorter and the message would be more direct. That it was.

Very simply, rates still have further to rise, and once there, they will stay there for some time. In the following paragraphs, I have borrowed from Michael and others, I will avoid quotes for readability. My own commentary is in the mix.

Powell offered that reaching an estimate of the longer-run neutral rate is not a place to pause or stop. He said the June FOMC projections suggest rates would rise to just below 4% through the end of 2023 and that history warned against loosening policy too soon.

It’s evident that the Fed is aware of the mistakes made in the 1970s and 1980s with the stop-and-go monetary policy approach that led to even higher rates, and the Fed appears determined not to repeat those mistakes. There can be no 70’s show rerun.

Fed Chair Jay Powell said:

Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.

Powell noted that fighting inflation will take a sustained period of below-trend growth and a softening labor market, which could bring pain to households, and are the costs of reducing inflation. In the third paragraph of his speech, it’s right there. The Fed is willing to sacrifice growth and face rising unemployment to bring inflation down. He is telling the market there will be no “pivot” anytime soon.

Inflation is driving the bus

The Fed chair said central banks need to move quickly, warning historical episodes of inflation have shown that delayed reactions from central banks tend to come with steeper job losses.

“Our aim is to avoid that outcome by acting with resolve now,” Powell said.

The following image is not a live video, but an example of the headlines that ‘spooked’ the markets.

Federal Reserve Chairman Jerome Powell on Friday said the central bank’s job on lowering inflation is not done, suggesting that the Fed will continue to aggressively raise interest rates to cool the economy.

Get the inflation-killing job done

“We will keep at it until we are confident the job is done,” Powell said in remarks delivered at the Fed’s annual conference in Jackson Hole, Wyoming.

“While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down,” Powell said Friday.

The central bank has delivered four consecutive interest rate hikes over the last six months, moving in June and July to raise rates by 0.75%, the Fed’s largest moves since 1994. By raising borrowing costs, the Fed hopes to dampen demand by making home buying, business loans, and other types of credit more expensive. Continue Reading…

Infrastructure as an Alternative Investment

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BMOETFs.ca

By Sa’ad Rana, Senior Associate – ETF Online Distribution, BMO ETFs

(Sponsor Blog)

At a time when market volatility, rising rates and high inflation are a common denominator, investors are looking for alternative solutions that can boost returns, while diversifying their asset mix away from traditional assets and fixed income.

In 1991, an investor with a portfolio of only Canadian bonds could have earned an annualized return of ~11% over 5 years. [1] Investors have increasingly had to look to alternative assets to add diversification, for growth and income generation, and enhanced returns with more challenging market environments

Alternative investments include non-traditional assets, like real estate and infrastructure. Investors can access these types of investment through ETFs that invest in public securities to give exposure to alternative investments offering greater diversification to a portfolio.

Infrastructure defined

When focusing on infrastructure as an alternative investment, it is important to first define what infrastructure actually is. One way to think of it is that infrastructure is the essential underpinning of modern industrial societies: all the core physical structures that allow us to function and enjoy modern life. Examples of such modern physical structures are transportation (roads, bridges, railroads etc.), energy infrastructure (energy transmission lines and pipelines), telecom infrastructure (cell phone towers) etc.: the things that allow all commerce to occur across the globe.

These core assets to modern life are staples for society and you don’t see demand vary much with the economic cycle. This lends to a few key attractive characteristics that makes infrastructure good to look at from an investment perspective.

So why Infrastructure?

One of the aspects that makes Infrastructure a good hedge or offset to the cost of inflation is the nature of the underlying business. These businesses are often supported by long-term contracts with governments, municipalities, or cities. This could lead to relatively steady cash flow with a potential yield component. Another important aspect to consider is that the high barrier to entry in the marketplace which does not encourage competition to emerge easily (mostly monopolistic businesses).

In a lot of the cases, contracts are linked to inflation or the operators have the ability to pass on the inflation to the end consumers. Because of the nature of the services being provided, people aren’t going stop paying the costs associated with services and products. You can rely on income being generated. So essentially, there is baked-in inflation protection.

Continue Reading…

Retired Money: All about the OAS boost at age 75 and implications of deferring OAS and CPP benefits

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My latest MoneySense Retired Money column looks at a rare 10% boost of Old Age Security (OAS benefits) Ottawa recently confirmed for seniors aged 75. As you’ll see there are plenty of implications and points to consider for those who are younger and contemplating deferring OAS to 70, or indeed CPP.

You can find the full column by clicking on the highlighted headline here: Delaying CPP and OAS — Is it worth the Wait?

The National Institute for Aging (NIA) confirmed OAS payments for Canadians aged 75 or older will be hiked 10%: the first permanent increase in almost 50 years. The NIA’s Director of Financial Security Research, Bonnie-Jeanne MacDonald, and Associate Fellow Doug Chandler said in the release the best way for retirees to maximize this boost is to defer OAS benefits for as long as possible, either by working longer or by using their savings to fund the delay.

By now, most retirees are aware they can boost Canada Pension Plan (CPP) benefits by 42% by delaying the onset of benefits from age 65 to 70, or 0.7% for each month of deferral after 65.  What’s less well known is that a similar mechanism works for OAS. Unlike CPP, OAS is never available before age 65, but by delaying OAS benefits for 5 years to age 70, you can boost final payments by 36%, or 0.6% more for each month you delay benefits after 65, according to the NIA. Before the August increase at age 75, the NIA said average Canadians would “leave on the table” $10,000; but after factoring in the new increase, they would now lose out on $13,000 by taking OAS at 65.

MacDonald and Chandler noted there are three other reasons to postpone OAS benefits: Reduced clawbacks of the Guaranteed Income Supplement (GIS) after age 70; Better OAS benefits despite clawbacks for those with more retirement income: and Increasing residency requirements. On point one, it says lower-income seniors wishing to avoid GIS income-tested clawbacks could draw down on RRSP savings to defer and boost OAS benefits, thereby preserving GIS payments after 70. On point 2, those subject to OAS clawbacks may find the age 75 boost in combination with delaying benefits may increase benefits but not the clawback. And on point 3, waiting may mean more years of residency for those who have not lived their entire years in Canada: to qualify for OAS you need to have been a Canadian resident for at least 10 years after age 18, so the five extra years of waiting for benefits could add to the payout.

However, on the first point retired actuary and retirement expert Malcolm Hamilton says it’s true deferring OAS until 70 and drawing more from your RRIF to compensate, means your RRIF income after 70 will be smaller and OAS pension larger. “However, by not drawing OAS until 70, low-income seniors will forfeit the full GIS benefit before 70. This doesn’t look like a good plan to me.” Continue Reading…

Post Ethereum Merge, will Crypto survive or thrive?

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By Jacky Goh

Special to the Financial Independence Hub

According to a recent report from CNBC, Ethereum has just completed its “final dress rehearsal” for the so-called Merge, which will shift the second-largest cryptocurrency by market value from a “proof of work” validation protocol to “proof of stake.” As CNBC notes, this upgrade has been years in the making and is considered “one of the most important events in the history of crypto.”

The reason is simple: efficiency. Moving to “proof of stake” will reduce Ethereum’s carbon footprint over 99.5% per its internal estimates, and also significantly lower its “gas” prices, i.e. the cost of transactions. Carbon emissions and the cost of converting crypto to fiat currencies (or other crypto currencies) are the two major criticisms of Ethereum, in particular, and crypto, in general.

Network will be more secure and less prone to manipulation

The Merge is not only important to the investing public, however; it’s a critical upgrade for the crypto community. The Ethereum network will now be more secure and less prone to manipulation. For example, anyone who wants to take over 51% of the network will now need to hold half of the total staked amount in ETH, rather than 51% of the mining hash power, as was the case previously. What this means is that the platform is guaranteed to be controlled by those who have a long-term interest in its success, ergo the term “proof of stake.”

But it’s the lower “gas fees” that will probably attract the most attention: and have the most profound effect on adoption. As the cost to process any transaction on the Ethereum blockchain goes down, more adoption will occur, meaning more people will be more open to participate in Ethereum blockchain projects. Think of how stock trading took off in the 1980s after US markets were deregulated and the world’s first discount stockbroker, Charles Schwab, opened for business. More recently, Robinhood spurred another surge in trading by reducing the cost of stock transactions to zero. This is commonly referred to as the “democratization” of investing. With the Merge, a similar revolution is coming to crypto. Continue Reading…

Can you retire with a $500,000 RRSP?

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Image Courtesy of Cashflows & Portfolios

By Mark and Joe

Special to the Financial Independence Hub

Many people feel you need to save a bundle for retirement, and that can be true, depending how much you intend to spend. So, can you retire with a $500,000 RRSP? Can you retire without any company pension plan?

Read on to learn more, including how in our latest case study we tell you it’s absolutely possible to retire with no company pension while relying on your personal savings.

Financial independence facts to remember

You may recall from previous case studies on our site while achieving financial independence (FI) is desired by many it may not be possible for most to achieve.

Realizing FI takes a plan, some multi-year discipline, and ideally one or both of the following:

  1. For every additional dollar you save, you can invest that money so it can grow your wealth faster, and/or,
  2. You can realize financial independence by consuming less.

Here at Cashflows & Portfolios, we suggest you optimize both options above: if you can.

Check out these previous, detailed case studies, to see if you fall into any of these retirement dreams:

Check out how Michelle, a 20-something software engineer, plans to retire by age 40, including how much she’ll need to save to accomplish that goal.

This couple plans to retire by age 50 by using their appreciated home equity.

Here is how much you need to save to retire at age 60 rather comfortably.

There are different roads to any retirement

Members of our site have already learned the powerful math behind any retirement plan:

The more you save, the faster you are likely to achieve your goal.

However, life is not a straight line. Everyone has a unique path to retirement. Twists and turns abound. Depending on the path you took in life, including what decisions you made, your retirement planning work could be vastly different than anyone else’s.

Can you retire with a $500,000 RRSP?

Not every person has a high savings rate. In fact, most don’t.

Not every person has a company pension plan to rely on either. In fact, increasingly, many don’t!

Our case study participant today was unable to have a high, sustained savings rate and he didn’t have any company pension plan to buy into either. Is he doomed for retirement? Will $500,000 saved inside his RRSPs in his 60s be enough (in addition to $100,000 in his TFSA)?

Let’s look at his case study.

In our profile today, is Tom.

Tom is aged 63 and wonders if he can retire with $500,000 invested inside his RRSP and $100,000 in his TFSA. Here are some snippets from his email to us:

Hi there,

I was hoping you can help since I know you perform some financial projections for clients … I was just wondering if you have any articles or would you know the answer to this question. I’m a single guy with a simple life. Let’s say I have only my RRSP (for the most part) to rely on for retirement beyond government benefits. I have almost $500,000 invested there. I have no non-registered account although my TFSA is maxed and now worth $100,0000. (I don’t want to use my TFSA for retirement spending right now, I consider it a big safety net as I get older so maybe you can help me run some math?) Anyhow, I am wondering if I could start taking money from my RRSP, and retire soon. Any money I don’t need for retirement, I would move in-kind into my TFSA. (I know from reading your site I cannot make a direct transfer from my RRSP to TFSA – thanks guys but I will take any excess cash I don’t spend and likely move it there. We’ll see.) I have very modest spending needs. I have no debt. I own my home in rural, small town Ontario.

What do you think?

I make decent money now, definitely not $100,000 per year but “enough” to meet my needs and to continue to invest inside my RRSP and TFSA for the next couple of years. 

Do I have enough to retire and spend about $3,000 per month well into my 80s and 90s?

Thanks very much!

Thank you Tom!

 

To help Tom out in the future, we shared some low-cost investment ideas for his TFSA and RRSP:

  1. Everything You Need to Know about TFSAs.
  2. Everything You Need to Know about RRSPs.

Here are the cash flow and investing assumptions for Tom beyond what he told us above. Continue Reading…