Tag Archives: Financial Independence

Safer investments for Retirees: How to retire with less stress

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Retirement planning is becoming more difficult for Canadians because they’re living longer and need larger retirement nest eggs. This often manifests itself in “pre-retirement financial stress syndrome.” That’s the malady that strikes when it dawns on you that you may not have enough money saved to be able to earn the retirement income stream you were banking on.

To alleviate this worry, we recommend Successful Investors base their retirement planning on a sound financial plan. Here are the four key variables that your plan should address to ensure you have sufficient retirement income:

  1. How much you expect to save prior to retirement;
  2. The return you expect on your savings;
  3. How much of that return you’ll have left after taxes;
  4. How much retirement income you’ll need once you’ve left the workforce.

Note, though, that if you’re heading into retirement and are short of money, you should move your investing in the direction of safer, more conservative investments. That’s a far better option than taking one last gamble.

Moving into “too safe” investments for retirees can sharply cut your long-term returns

This applies as well to “risk-reducing strategies,” of which there are many. One of the most common is the urge to “go into cash” (also known as “taking money off the table”) when you foresee a market downturn. Like all risk-reducing strategies, this one can seemingly work from time to time, by getting you out of the market before a drop. But it’s even more effective at ensuring that you are out of the market when prices are shooting upward.

In the stock market, downturns do come along from time to time. But they are far less common than fears of downturns, which are virtually non-stop.

Safer investments for retirees: How to use RRSPs and RRIFs to add to your long-term investing success

RRSPs (Registered Retirement Savings Plans) are a great way for Successful Investors to cut their tax bills and maximize returns of their retirement investing.

RRSPs are a form of tax-deferred savings plan. RRSP contributions are tax deductible, and the investments grow tax-free. (Note that you can currently contribute up to 18% of your earned income from the previous year. March 1 is the last day you can contribute to an RRSP and deduct your contribution from your previous year’s income.)

When you later begin withdrawing the funds from your RRSP, they are taxed as ordinary income.

If you want to pay less tax on dividends, interest and capital gains while you’re still working, investing in an RRSP is the way to go.

Converting your RRSP to a RRIF is clearly one of the best of three alternatives at age 71. That’s because RRIFs offer more flexibility and tax savings than annuities (see the pros and cons of annuities at TSI Network) or a lump-sum withdrawal (which in most cases is a poor retirement investing option, since you’ll be taxed on the entire amount in that year as ordinary income).

Like an RRSP, a RRIF can hold a range of investments. You don’t need to sell your RRSP holdings when you convert—you just transfer them to your RRIF.

Safer investments for retirees should assume conservative yield estimates to account for unforeseen setbacks

As for the return you expect from investing for retirement, it’s best to aim low. If you invest in bonds, assume you will earn the current yield; don’t assume there will be increases in the value of the bonds.

Over long periods, the total return on a well-diversified portfolio of high-quality stocks runs to as much as 10%, or around 7.5% after inflation. Aim lower in your retirement planning — 5% a year, say— to allow for unforeseeable problems and setbacks.

Above all, it’s important to remember that while finances are important, the happiest retirees are those who stay busy. You can do that with travel, golf or sailing. But volunteering, or working part-time at something you enjoy, can work just as well.

One thing we encourage all Successful Investors to do is perform a detailed study of how you spend your money now. Then, you analyze your findings to see what personal expenses you can cut or eliminate. This too can have fringe benefits, especially if it helps you break unhealthy habits. You may be surprised at how much you’re spending and how much more you could be saving for retirement.

Do you believe in safer investments? What do you consider a type of safe investment?

What kind of investments do you have in place as part of your retirement plan?

Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books. This article was last published on Sept. 18,  2018 and is republished on the Hub with permission.  

U.S. Growth stocks: You’d better be Seabiscuit

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This is Part 2 of a two-part blog series on the prospects for Growth and Value Stocks.

Read Part 1 Growth Stocks: Where’s the Beef?

By Jeff Weniger, CFA, WisdomTree Investments

Special to the Financial Independence Hub

When your starting point is a 1.4% dividend yield,1as is the case with the S&P 500 Growth Index, the group of stocks that make up the basket need to have long-term dividend growth that performs like Seabiscuit, the super horse. No tripping out of the gate or getting bumped in the stretch.

Latching on to the concepts in my white paper, Dividend Growth’s Drivers: Picking Apart Quality, we present figure 1, which shows the interrelationship between the percentage of earnings that are retained (as opposed to paid out as dividends) and the return on equity (ROE), which is net income as a percentage of shareholders’ equity.

This relationship is thedriver of dividend growth, and as the years go on, concepts like figure 1 have become core tenets of second-decade WisdomTree.

Figure 1: The Critical Equation

The Critical Equation

Figure 2 uses the critical equation to calculate long-term dividend growth at prevailing profitability levels.

As it stands, the S&P 500 Growth Index’s 23.2% ROE implies long-term dividend growth of 16.8%. That could happen, yes. Anything canhappen. But here’s a better idea: expect downward revisions instead.

Figure 2: Implied Dividend Growth Estimate 

Implied Dividend Growth Estimate

After all, look at the historic record in figure 3. There isn’t a single five-year period that had growth stocks’ earnings running forward at a 16.8% clip, not even in the roaring 1990s. In contrast, value stocks’ implied dividend growth is on planet Earth. 

Figure 3: Dividend Growth Rate, 5-Year Periods, 1995–Present 

Dividend Growth Rate 5Year Periods 1995Present

Does anything jump out in figure 3? Look at the dividend growth experience of growth and value from 2010 to 2015 and from 2015 to the present.

Those growth stocks start to look less like Seabiscuit and more like also-rans if recent years are any indication. Granted, value indexes are dominated by banks, and the period from 2010 to 2018 was characterized by the benefit of their reinstated dividends. Nevertheless, if growth stocks were only able to increase their dividends at a high single-digit rate during this period of irrepressible economic expansion, what happens if recession hits? Let someone else pay 22 times earnings to find out. 

Slow and Boring? Better than Growing Out of 1%

The S&P 500 Value Index has a dividend yield that is about double that of the S&P 500 Growth Index (2.7% vs. 1.4%). This kind of gap makes it nearly impossible for the latter index to ever grow out of its valuation.

If U.S. growth could not differentiate its … ahem … dividend growth relative to value from 2010 to 2018, what makes anyone think the next several years will be different? For growth stock skeptics, the WisdomTree Fund that hits value is the WisdomTree U.S. High Dividend Index ETF (HID/HID.B). 

It retains 38% of its earnings, pays out the other 62% as dividends and has an ROE of 13.5%. That ROE is satisfactory enough. Using the “critical equation,” it has long-term implied dividend growth of 5.1%, which is less than the levels of the S&P 500 Growth Index. But when the starting point is a 1.4% forward dividend yield, companies that populate indexes like the S&P 500 Growth Index would have to run up their dividends at a 15% or 20% annual pace for a long time before the math even thinks about shifting in their favour.2

For investors who do not want to commit to value because they keep getting burned, a fund like the WisdomTree U.S. Quality Dividend Growth Index ETF (DGR/DGR.B), which tracks the WisdomTree U.S. Quality Dividend Growth Index CAD, seeks to target companies that rank well on our ROE x earnings retention framework. 

Critically, its dividend weighting methodology also checks valuations at the door. That gives it a starting dividend yield of 2.7%, about 130 bps more than the S&P 500 Growth Index. It also has an explicit screen for ROE and return on assets (ROA). Its 15.8x forward earnings multiple is 3.3 multiple points below the S&P 500 Growth Index.

Over the next 5 or 10 years, we’ll take DGR.B or HID.B over S&P 500 Growth Index. This is where the rubber meets the road, when the cap-weighted U.S. large-cap growth indexes start to be priced like they’re Seabiscuit, when in reality they’re an underlay.

1Sources: WisdomTree, Bloomberg, as of 11/15/18.

2Sources: WisdomTree, Bloomberg. Unless otherwise stated, all data in this blog as of 11/15/18.    

Jeff Weniger, CFA serves as Asset Allocation Strategist at WisdomTree. Jeff has a background in fundamental, economic and behavioral analysis for strategic and tactical asset allocation. Prior to joining WisdomTree, he was Director, Senior Strategist with BMO from 2006 to 2017, serving on the Asset Allocation Committee and co-managing the firm’s ETF model portfolios. Jeff has a B.S. in Finance from the University of Florida and an MBA from Notre Dame. He is a CFA charter holder and an active member of the CFA Society of Chicago and the CFA Institute since 2006. He has appeared in various financial publications such as Barron’s and the Wall Street Journal and makes regular appearances on Canada’s Business News Network (BNN) and Wharton Business Radio.

Tracking your financial health in Retirement

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Sailing in Boracay, Philipplnes

By Billy and Akaisha Kaderli

Special to the Financial Independence Hub

No matter what stage of life you are in, it is important to know your financial health. This is not something you do just around income tax time but throughout the year. It’s good to check in at least monthly or, as we do, daily. The same as any successful business must know their income and liabilities, so should you.

Today there are plenty of free online tools that can help you, but we are old school and prefer to be able to check and edit our data anywhere in the world and at any time regardless of an internet connection. We have done this since we retired in 1991. Back then we used a paper notebook and pen, but today we created a spreadsheet using an Excel program that is on most computers sold today.

How it works

Throughout the day as we spend money we keep a mental note of the cost. Then, usually in the evening while winding down, we enter the data into our spreadsheet. We created categories such as housing, food, dining, transportation, donations, healthcare, and so on. Each of those entries then gets automatically added giving us a total for the day. That number is added to all of the previous entries and then divided by the day number in the year, 1 through 365, giving us a daily average.

Utilizing this system we can adjust the entries using local currencies, therefore knowing what we are spending in Mexican Pesos, Thai Baht, Vietnamese Dong, Guatemalan Quetzales or the money of any place where we are traveling. While this figure can easily be converted to dollars if we want, we prefer to think of our costs in the currency of our host country. This keeps our spending at the perspective of the natives instead of distorting it by thinking in Dollars.

This information is important

Once you know how much you are spending per day you can utilize this information to adjust spending accordingly if necessary. You are in control of your outflow at this point, and you can make changes in real time.

Net worth: What is it?

Another important tool for understanding your financial health is calculating your net worth. This number is derived by adding up all of your assets minus your liabilities. Do you own a house or rentals? Figure out what they are worth, then subtract out what you owe and this equates to the equity you have. It is important to use realistic numbers knowing that if you sold today, there would be fees and expenses involved as well as taxes to be paid. Do you have cars? Even though they are a depreciating asset, meaning they lose money over time, you still have some value there. How about retirement accounts? IRAs or RRSPs, 401(k)s or Defined Contribution pensions, regular banking and brokerage accounts, credit-card and student loan debt: all need to be factored into the equation.

This information is a powerful retirement tool

Now that you know your net worth and what you are spending per day, you can take further control of your future by figuring out what percentage of your net worth you are spending. Continue Reading…

Suze Orman and the FIRE movement

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Photo by QuinceMedia on Pixabay

By Aaron Burdick

Special to the Financial Independence Hub

In a recent interview, Suze Orman provided her opinion about the FIRE (Financially Independent, Retire Early) movement. However, in doing the social media interview, her words were probably taken out of context, and triggered a viral reaction. Everything from Orman being a “shill for the financial industry” to “she doesn’t really want people to be financially independent at all” was thrown around. No surprise, Orman had to step out quickly and put clarity into her words.

First off, Suze Orman makes a point that she’s been advising people to be financially solvent and independent for decades, so she has no outright gut opposition to the idea. Period. But she does add that there should be a balance between spending and saving as well, which is an entirely different idea. Frankly, it’s more about balancing our satisfaction interests versus what we really need to survive and live comfortably. But where the heartburn really kicks in for Orman is on the topic of retiring early. For her, it’s a bit like quitting your job early but having no idea how to pay for health insurance until you reach the age to get Medicare, avoidable and dumb.

What is the Definition of Retirement?

So, it comes down to definitions first. If we are talking about true retirement, for Orman that means stopping working for income altogether. There is no odd job, or a part-time job, or a different job operating a lathe machine; it’s just not working at all for any profit. Second, retirement under the FIRE definition could be 55, but it could be as early as 30 or 40 as well. For the financial planner that Suze is, mathematically, that was pretty much impossible unless one was a millionaire or won the lottery. Mainly, the problem has to do with the fact that people are living really long, and that translates to tens of thousands of dollars needed annually to survive on. Quitting work at 40 or even 50 is just ludicrous.

FIRE’s Definition of Retirement

As it turns out, however, FIRE’s definition of retirement isn’t a complete cessation of retirement. Instead, it involves switching from what you have to do for a paycheck to what you want to do and still earn an income doing it. No surprise, without that clarification, Orman’s original response was not just “no,” but “hell no!” And that caused a kerfuffle on the Internet. In fact, the revised definition is entirely inline with Suze Orman’s general advice direction, pushing people to find what they love doing, but still, earn an income doing it. Some call it FIRE, and Orman calls it Living on Your Own Terms.

So there is commonality with the clarified version of FIRE and Orman’s advice categories. The detail then comes into the “how,” the method used to get from what you have to do for a paycheck to what you want to do. FIRE doesn’t necessarily detail these steps; that’s left up to the user to figure out. This is where Orman finds a gap in the philosophy.

Orman’s Take on Retirement

For Orman, retirement and individual financial independence aren’t about making enough money to quit a job. It’s about keeping stable while finding a life direction more in line with your interests, goals, wants, and happiness. Just getting to retire early with a lump of money isn’t going to translate to happiness per se. And, going back to her financial math, it’s a high risk for even more problems and unhappiness. So, Orman’s not against FIRE per se; but she has an issue with its lack of detail and in that respect, being misleading.


Aaron Burdick is a blogger and personal finance enthusiast with slight “addiction” of planning and organizing whether it’s budget, business or just life in general. Finances, real estate, budgeting and new technological solutions are not the only talking points, that he has his heart set on. Passionate about life. he studies and writes about environmental changes, human rights and quality of life. He is also the proud owner of a Golden Retriever. When he’s not writing articles he’s with his best friend playing fetch or cycling around the streets of Louisville. 

Planning an epic Boomer adventure? Don’t forget these 5 pre-travel tips

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By Neil Henderson

Special to the Financial Independence Hub

It’s no secret that many Canadians think about escaping the cold winter months for some place warmer. While some may like to spend their vacation days relaxing beside the beach or pool, boomers are increasingly seeking out unforgettable travel experiences.

While embracing bucket list travel might mean trying new things off the beaten path, like driving a Ferrari in Italy, hiking the Inca Trail or helping build clean water wells in Africa, there’s always a risk that adventure could turn into misadventure. A recent TD Insurance survey revealed more than a third of Canadian boomers who travel annually say they or someone they’ve travelled with has had a travel emergency, such as an injury that required a trip to the doctor.

The survey also revealed many boomer travellers report they don’t purchase travel insurance because they’re already covered under their work benefits or credit card. Although existing travel insurance plans may cover certain travel emergencies, it’s important to take the time to review them for any gaps in coverage, especially if you’re planning activities you haven’t tried before, and purchase supplementary coverage if needed.

For Boomer travellers setting out to check off their travel bucket list items, here are a few more pre-travel tips, so your epic adventure can be exactly that:

1.) Follow your interests

What’s on your travel bucket list is very personal and will vary widely depending on your interests. Do you want to test your physical limits by hiking along the Great Wall of China? Do you dream of seeing the annual migration on the Serengeti Plains? Bucket list travel are trips of a lifetime, so take the time to not only decide what you want to see or do, but also properly prepare in advance of your travels.

2.) Pre-departure prep

Proper preparation is key to making your bucket list trip terrific. Prepay or set up autopayments for bills that will be due while you are away. Verify whether you need any vaccinations for where you’re travelling to. Ensure you have enough prescriptions to last the trip. There’s lots to be done ahead of time so that your bucket travel is as dreamy as imagined. Check out TD Insurance’s Travel Checklist for more tips. Continue Reading…