Tag Archives: Financial Independence

Book Review: Retirement Income for Life (3rd edition)

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ECW Press

By Michael J. Wiener

Special to Financial Independence Hub

Actuary Frederick Vettese has a third edition of his excellent book, Retirement Income for Life: Getting More Without Saving More.

He explains methods of making your retirement savings produce more income over your entire retirement.

These methods include controlling investment fees, optimizing the timing of starting CPP and OAS pensions, annuities, Vettese’s free Personal Enhanced Retirement Calculator (PERC), and using reverse mortgages as a backstop if savings run out.

This third edition adds new material about how to deal with higher inflation, CPP expansion, new investment products as potential replacements for annuities, and improvements to Vettese’s retirement calculator PERC.  Rather than repeat material from my review of the second edition, I will focus on specific areas that drew my attention.

Inflation

“We can no longer take low inflation for granted.”  “An annuity does nothing to lessen inflation risk, which should be a greater worry than it was before the pandemic.”  “We could have practically ignored inflation risk before COVID hit but certainly not now.”

It’s true that inflation is a potential concern for the future, but it’s wrong to say that it was okay to ignore inflation in the past.  Not considering the possibility of inflation rising was a mistake many people made in the past.  We were lulled by many years of low inflation into being unprepared for its rise starting in 2021, just as many years of safety in bonds left us unprepared for the battering of long-term bonds when interest rates rose sharply.

Inflation risk is always present, and financial planners who have treated it as a fixed constant were making a mistake before inflation rose, just as they would be wrong to do so now.  This underappreciation of inflation risk is what causes people to say that standard long-term bonds (with no inflation protection) are safe to hold to maturity.  In fact, they are risky because of inflation uncertainty.

People’s future spending obligations are mostly linked to real prices that rise with inflation, not fixed nominal amounts.  The uncertainty in future inflation should be respected just as we respect uncertainty in stock market returns.

Maximizing retirement income

Vettese does a good job of explaining that things like CPP, OAS, and annuities provide more income now because they offer your estate little or nothing after you die.  To make full use of this book, you need to understand this fact, and “you have to commit to the idea that your main objectives are to maximize your retirement income and ensure it lasts a lifetime.”

Spending shocks

Retirees should “set aside somewhere between 3 percent and 5 percent of their spendable income each year, specifically to deal with spending shocks.”  “This reserve might not totally cover all the shocks that people … might encounter, but it will definitely soften their impact.”

It’s easy to plug a smooth future spending pattern into a spreadsheet, but real life is much messier than this.  I’ve seen cases of retirees choosing to spend some safe percentage from their savings while also expecting to be able to dip in anytime something big and unplanned for comes up.  This is a formula for running out of retirement savings early.

Retirement income targets

In this third edition, Vettese assumes that retiree spending will rise with inflation until age 70, then rise one percentage point below inflation during one’s 70s, two percentage points below inflation from age 80 to 84, then 1.8% below at 85, 1.6% below at 86, 1.4% below at 87, 1.2% below at 88, 1% below at 89, and rising with inflation again thereafter.

This plan is based on several academic studies of how retirees spend.  I don’t doubt the results from these studies, but I do have a problem with basing my plan exclusively on the average of what other people do.  The average Canadian smokes two cigarettes a day.  Does that mean I should too?

The academic studies mix together results from retirees who spent sensibly with those who overspent early and were forced to cut back.  I don’t want to base my retirement plan partially on the actions of retirees who made poor choices.  Similarly, I prefer to base my smoking behaviour on those Canadians who don’t smoke. Continue Reading…

Market Forecasts: Potential Impacts of Trump’s Victory on U.S. Stocks, Global Markets, and Crypto

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Image by Unsplash

By Toby Patrick

(Special to Financial Independence Hub)

Donald Trump is poised once again to become the president of the United States, becoming only the second president to be reelected after leaving the White House. The last time this happened Grover Cleveland was celebrating his second stint as president from 1893 to 1897.

Two world wars, a Great Depression, and 23 presidents later, it’s safe to say the world looks very different.

Cleveland’s second stint in office began with a decline in the New York stock market in what was known as the ‘Panic of 1893’. Fast forward over 130 years and the U.S. election is still closely linked to the performance of the U.S. stock market. Only this time we’re talking tariffs, tech companies, and cryptocurrencies. 

This article will explore what a Trump victory could mean for markets around the world.

What does Trump’s Victory mean for the U.S. Stock Market?

The general consensus is that Donald Trump’s victory will be good for businesses and the U.S. stock market. If the immediate reaction on the 6th of November is anything to go by, this would be true. Many U.S. shares hit record highs and the S&P surged by around 2.5% as investors bet on Trump’s pro-business policies.

At the heart of this initial boom were companies that stand to benefit from Trump’s hard-hitting tariffs that are to be imposed on international imports. Take the Elon Musk-owned Tesla for example. The world’s richest man acted as the President’s mouthpiece in the run-up to the election, and it’s easy to see why.

Not only do Trump’s policies favor high-net-worth individuals, but his threatened 60% tax on Chinese imports would essentially burden the competition to American-owned businesses. Tesla’s share price subsequently rose to a yearly high as news of Trump’s win filtered in.

On the flip side, Trump’s tariffs might not be good news for all American stocks. Large tech corporations rely heavily on Chinese imports. Increased costs could impact the share price of the “Magnificent Seven” stocks while also seeing the consumer pick up the cost through higher prices for electronic goods.     

What does the Trump Victory mean for the Global Stock Market?

Generally speaking, if a Trump victory is good for the U..S economy, it’s good for major global corporations that export to the U.S. Initial optimism across the rest of the world mirrored that in the U.S. However, unlike the U.S., the euphoria was dying out by Wednesday as investors realized the implications of the tariffs mentioned above and what they could mean for international trade.

While China has been threatened with the strictest of Trump’s tariffs, a 10% tax on all U.S. imports would impact Europe too. Take the U.K. for example. Rolls-Royce is one of the world’s biggest manufacturers of aircraft engines and heavily exports to the U.S. While companies like this may benefit from an upswing in the American economy, this could be wiped out by increasing taxes. 

This view would line up with performance too. Rolls-Royce Holdings initially rose as the news of a Trump victory filtered in before sharply declining to pre-election prices as investors possibly started to consider the future of international trade.

What does the Trump Victory mean for Cryptocurrencies?

Today, it’s becoming increasingly common for investors to look beyond traditional stock markets when it comes to investing. One of the most common alternatives, and a big talking point throughout the election campaign, is Bitcoin and other cryptocurrencies. Trump was seen as the pro-crypto option, publicly stating his positive view on crypto and even previously being involved in the promotion of NFTs. Continue Reading…

Findependence Hub turns 10 years old

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Image by Pexels

Hard to believe but Findependence Hub just turned 10 years old. We launched Financial Independence Hub on Nov. 03, 2014. Here is the very first post.

You’ll note that for a long time, we self-referred with the short-hand “The Hub.” This was of course long before another site was launched a few years back also called The Hub. So we try NOT to refer to ourselves using that short form, as it may be confusing.

However, the slogan still applies: North America’s Gateway to Financial Independence. That’s because both our readers and content providers are in Canada and the United States. Given the population differences, though, we are disproportionately Canadian.

From the start, the aim was to publish at least four blogs a week, and often five. In fact, as of this writing, we had published 2,931 blogs: just shy of 3,000. That’s roughly 300 blogs a year.

As we explained a few weeks ago, generally we don’t schedule Wednesday blogs far in advance, in order to leave that slot open for any late-breaking developments. It also allows us to shuffle the schedule when necessary.

The future

So what of the future? Well, my personal financial life is more or less an open book, between what I write here and what I write every month in my Retired Money column at MoneySense.ca.

As I disclosed earlier this year, I am now 71 and therefore enter the magic land of RRIFs as of the end of this year and into January 2025. At some point, I may retrench blog frequency down to three blogs a week instead of four or five: aiming for Monday/Wednesday/Friday. Happy to hear reader and sponsor feedback on that though. I’m also open to partnering suggestions.

Certainly I would like to thank the registered users who have hung in this far, as well as our advertisers who make it possible to provide this content at no charge to readers. Continue Reading…

What Fritz Gilbert learned writing 400 blogs on Retirement

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TheRetirementManifesto.com

 

By Fritz Gilbert, TheRetirementManifesto

Special to Financial Independence Hub 

On April 12, 2015, I published my first post.

In the nine years since I’ve kept writing… and writing…and writing.

I’ve published 428 articles about retirement (see my Archives page).  If you do the math * …

…I’ve written the equivalent of 11 books over the past 9 years. *

(* The Math: 1,500 words per post x 428 posts = 642,000 words.  The average 200-page book is 60,000 words, so that’s ~ 10 books.  Add in the actual book I wrote, and it’s equivalent to 11 books in 9 years.)

And yet, with all of the writing, I’ve missed something.

I’ve never taken the opportunity to step back and think about what I’ve learned from all of my writing.

During our recent RV trip to the Ozarks, I took some time to reflect, and today I’m sharing the most important things I’ve learned through my years of writing articles about retirement.

I suspect the most important lesson may surprise you.  But I’m getting ahead of myself…

I’ve written the equivalent of 11 books in the past 9 years, all on retirement. What’s the most important thing I’ve learned in the process? Share on X

What I’ve Learned Writing 400 articles about Retirement

Reflecting on the past 9 years of writing has been an interesting trip down memory lane.

  • The first 3 years, as I was preparing for retirement.
  • The middle 3 years, as I was making the transition.
  • The final 3 years, as I figured it out.

It’s all there.

The 428 articles are like pebbles I’ve sprinkled on the trail, helping those in my footsteps find their way.  I’m thankful I decided to experiment with blogging.  It’s turned into something I love.

But what have I learned?

Image created by Fritz Gilbert on Pinterest

What I’ve Learned about Retirement

  • Retirement is Complex:  Any topic that can fill 11 books has more layers than an onion. Don’t underestimate how complex retirement is.  Yes, we all expect the financial complexity (Bucket Strategies, Roth Conversions, Safe Withdrawal Rates, Estimated Quarterly taxes, Asset Allocation, etc.).  What’s been more surprising to me is the complexity behind the non-financial aspects of retirement.  Working through your experiments to determine how to replace all those non-financial aspects you once received from work (Sense of Identity, Purpose, Structure, Relationships).  As complex as the financial issues are, I would argue the non-financial aspects are more so. Be prepared for ebbs and flows as you go through your retirement transition, you’re entering a maze that’s more complex than most people realize.
  • Retirement can be Difficult:  I’ve gotten hundreds of emails from readers telling me their stories, and I’ve read every one.  Many are stories of the difficulties you’re having adjusting to retirement.  Your stories led me to research the Four Phases of Retirement and realize how blessed I was to be in the 10-15% of retirees who skip the dreaded Phase II.  As you’ll read in the next bullet, I’m convinced there’s a proven way to make retirement less difficult, and I’m fortunate that I chose the right path.
  • There are Proven Ways to Make it Easier:  I was 3 years from retirement when I started this blog.  I’d seen some of my friends struggle with the retirement transition, and I was obsessed with learning why some people have great retirements, whereas others struggle. I was motivated to find the path that led to success and was fortunate to discover it. I’m convinced it wasn’t merely luck, but rather a result of the extensive planning my wife and I did in my final few years of work.  If there’s one trick I’ve learned to make retirement less difficult, it’s the importance of putting in the work to prepare for the transition before you cross The Starting Line. Focus on the non-financial aspects as much (or more) as you do the financial ones.  To understand how I approached the challenge, check out The Ultimate Retirement Planning Guide, which lays out all the steps starting 5 years before you retire.
  • Retirement Changes with Time:  I’ve often said that retirement is like marriage – you never really know what it’s like until you do it.  As I thought about what I’ve learned from writing so many articles about retirement, I realized there’s another parallel between marriage and retirement.  Just as your marriage will evolve over the years, so too will your retirement.   The honeymoon is great, but it doesn’t last forever.  Working through the challenges that surface is one of the fun parts of both marriage and retirement.  No retirement (or marriage) is perfect, but there’s a lot you can do to make it the best experience possible.  Learn to experiment, learn to follow your curiosity, and learn to maintain a positive attitude.  If there’s one piece of advice I’d give to help you deal with the changes that occur throughout your retirement, it is to embrace, nurture, listen to, and follow your curiosity wherever it leads.
  • Retirement can be the Best Phase of your Life:  We all want great retirements, right?  I’m grateful that retirement is the best phase of my life.  Many of you can say the same.  But …. there is a large percentage of folks who can’t.  If you’re struggling, I encourage you to study those in the first camp.  Listen to what they talk about, and observe what they do.  Chances are good you won’t hear much talk about money.  As I wrote in The 90/10 Rule of Retirement, if you’ve done your planning correctly you won’t worry much about money after you retire.  By studying the 72% of happy retirees,  you’ll find the common themes of Curiosity, Purpose, Relationships, Fitness, and Planning.   Focus on doing those things well, and you’ll find, like many others, that retirement can be the best years of your life. It’s interesting to realize how many of those commonalities relate to the non-financial aspects of retirement.  In my experience, it’s in those areas where you’ll find true joy. Continue Reading…

Real Life Investment Strategies #4: Business Owners should Leverage their Corporation for Retirement Savings

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Lowrie Financial/Canva Custom Creation

By Steve Lowrie, CFA

Special to Financial Independence Hub

When you’re immersed in running a business, thoughts of saving for retirement often take a back seat; Employees in the corporate world may rely on employer pensions, but as a business owner, the responsibility for your retirement falls squarely on your shoulders.

Starting your retirement planning early and consistently contributing allows you to benefit from compounding returns to steadily build your nest egg over time. Investing in your retirement can ensure you have the financial means to enjoy life post-retirement, whether it’s traveling, pursuing new passions, passing along a little financial freedom to family members, and more.

This blog explores how business owners can utilize their corporation (Canadian-controlled private corporations or CCPCs) to retain business income that exceeds operational and personal lifestyle needs.

Changes to Income Tax Rules (Capital Gains Inclusion Rate) can throw Business Owners’ Retirement Savings Plans into Chaos

The 2024 Federal Budget is a perfect example of how income tax rules can change, sometimes less smoothly and with less notice than what is reasonable.

Specifically, the 2024 budget included an increase in capital gains inclusion rate that affects:

  • Individuals with over $250,000 of capital gains in a tax year (only on the amount in excess of $250,000)
  • Corporations
  • Trusts

To make matters worse, the timeframe for any pro-active tax planning was very short and with few specific details before the tax changes became effective on June 25, 2024.

Many have also speculated that capital gain tax increase was a last-minute addition to a budget that was politically motivated and not based on sound economic policy.  Among the critics was none other than, Bill Morneau, the former Trudeau-Liberal finance minister.

There is also a high probability that there will be a change in Federal Government in 2025, which may bring a complete taxation review and reform.  Among the taxation reforms might be to roll back this tax increase.

Given this context and uncertainty, what should an individual with corporate investment assets do?

The best advice I can give you is to step back and view these tax changes versus your long-term financial goals, and to avoid making hasty decisions.  If there is major tax reform in the next few years, many individuals might find their hasty planning decisions to be very costly.

Even with higher capital gains inclusion rates, investing in your corporation still has many advantages.

Using Your Corporation for Retirement Savings still Provides you with Numerous Advantages

Retirees increasingly rely on their savings to sustain their lifestyle after leaving the workforce, presenting unique challenges (and opportunities) for business owners pre- and post-retirement. Over time, these corporations can accumulate investment assets and simply selling the business for retirement funds isn’t always the best option. The corporation can reliably serve as a source of dividends for the owner-manager in retirement. When a corporation is involved, it opens up another retirement savings and withdrawal option which, although advantageous, can be complex. We’ll walk though how saving within your corporation can be a great choice for business owners, but it is quite important to work with a competent independent financial advisor, accountant, and other professionals to determine the best retirement saving planning for each specific situation.

4 Reasons you should be Using your Corporation to Save for Retirement

  1. Tax Deferral

By retaining excess funds within the company, the initial tax benefit is that the income is taxed at a lower corporate rate vs. your personal tax rate – the extent of the advantage can vary depending on whether your corporation qualifies for the small business tax rate, which would be even more advantageous. Hand-in-hand, the tax benefit is also gained by the postponement of personal taxation. When funds are distributed to the business owner later as dividends, even with consideration of tax integration, the investment returns of the funds held within the company can generally more than compensate.

  1. Tax Deferral means more Money to Invest Today

By taking advantage of the tax deferral due to the reduced corporate tax rate, you have access to more investable capital today. This increased liquidity opens up the possibility of generating higher returns on your investments within the corporation, amplifying the potential growth of your wealth over time.

  1. Build Up Long-Term Value of the Corporation

If you plan to sell your corporation down the road, you can also take advantage of the Lifetime Capital Gains Exemption (LCGE), which Budget 2024 is proposing to increase to $1,250,000 (for dispositions after June 25, 2024) when you sell shares in the business.  Let’s say you sell a business for $2 million; the exemption amount means you wouldn’t pay tax on 62.5% of that profit. This translates to hundreds of thousands of dollars in tax savings.

In addition, the LCGE is a lifetime limit – so you can also choose to apply the exemption multiple times until you reach the limit. So, you have the option to sell shares over time and use the LCGE for multiple years until you’ve capped out. Figuring out how best to apply the LCGE can be challenging but worth the effort.

Lastly, with proactive planning, leveraging the lifetime exemptions of multiple family members can potentially mitigate or even eliminate the capital gains tax liability on higher-value businesses. A reliable professional financial planner and accountant can help you determine the best way to allocate and dispose of corporation shares to realize the optimal financial result.

  1. More Options for Savings & Withdrawal Streams = Flexibility

The most important advantage of saving for retirement within your corporation is that it gives you more options for both your retirement savings and investment options and your retirement withdrawal pools. Essentially, it gives you another tool in your toolbox. Most people are limited to three investment streams: RRSP, Tax-Free Savings Account, and Non-Registered Investments.

The corporation gives you a 4th pool of funds to work with – for both saving and withdrawal.  This allows for the flexibility to optimally select the best pool of funds for savings and withdrawal over time. For example, in any given year, your lifestyle needs may drastically change, so saving within the corporation gives you one more place to pull money in a way that best works for you. The following year, you have the flexibility to change it up in a way that works better. You don’t need to be limited to only 3 pools of your savings.

Another option that saving within your corporation opens up is the way you withdraw your money – during your prime working years, as you ramp down, and into retirement. Business owners can take money out of the corporation via dividends or salary.

Dividends are not tax deductible for the corporation. But with dividends, there are also no payroll taxes. Dividends also allow for more flexibility around how much you withdraw from the corporation and when. This is a great advantage for changing needs dictated by your personal lifestyle needs.

Withdrawing from your corporation via salary is advantageous due to the tax deduction for the corporation. In addition, salary withdrawal creates personal RRSP investment room. However, you would need to pay CPP at both the personal and corporate level. In addition, other payroll taxes would be required to be paid by the corporation.

Considerations when Saving for Retirement in your Corporation

With so many advantages to saving within a corporation, it may seem like a no-brainer. However, I need to point out some things you should consider as you use your corporation as a retirement savings pool.

Firstly, there is some extra complexity that comes with managing that extra stream of savings, which makes your reliance on a trusted accountant and financial advisor even more important.

Obviously, there are extra costs that come with owning an incorporated business, but if you are reading this blog, you are already paying these expenses. But, due to the extra complexity of managing more, there might be slightly more costs associated for your accountant. Although more cost, it is likely minimal and wouldn’t offset the advantages.

Another consideration about saving in your corporation is how you plan to retire: selling your business, winding down, succession, downsize, family takeover, etc. Thinking about the right path for the specific situation results in questions (and answers) about the best way to proceed. Continue Reading…