Tag Archives: Retirement

Despite inflation, Canadians still prioritizing retirement and contributing to RRSPs and TFSAs

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While the vast majority (87%) of Canadians are worried about rising costs from Inflation, Questrade Leger’s 2023 RRSP Omni report finds that 73% of RRSP owners plan to contribute again this year, and 79% of TFSA holders plan to recontribute. That’s despite the fact 69% fret that inflation will impact their RRSP’s value and 64% worry about the impact on their TFSA’s value.

“The number of Canadians who are saving for retirement remains consistent with previous years,” the report says. “Among those who are saving for retirement, about three-in-five (58%) say they are very worried compared to Canadians who are not saving for retirement. Women are also more likely to be very worried about the costs associated with rising inflation.”

Seven in ten respondents who have RRSPs told the panel they are concerned about the rising costs associated with inflation and a possible recession: 25% indicate that they are very concerned. “A similar trend is observed among those who hold TFSAs for retirement purposes, with almost two-thirds (64%) indicating that they are concerned.”

 

Worries about inflation and recession “raise questions about the ability of Canadians to control their financial future, especially when it comes to retirement,” the report says. These concerns are most acute for those with an annual income of less than $100,000: “These Canadians are also more likely to agree that they will have to draw upon their savings or investments to cover their expenses in the coming year.”

Less than half are confident about their financial future

Less than half feel they are confident when it comes to their financial future: “Only those making over $60K have confidence in their own financial future despite the current state of the economy.”

The survey seems to imply that Canadians value TFSAs a bit more than RRSPs, based on willingness to max out contribution room of each vehicle. Of course, annual TFSA room only this year moved up to $6500 per person per year, less than a quarter of the maximum RRSP room of $30,780 in 2023, for those with maximum earned income.

Only 29% of RRSP holders plan to maximize their RRSP contribution room in 2023, compared to almost half (46%) who plan to max out their TFSAs. The most enthusiastic TFSA contributors are males and those aged 55 or older.

Given economy, most worry about rising cost of food and everyday items  

Day-to-day living expenses continue to be a concern in the face of rising inflation: 79% worry about rising food prices and 77% rising everyday items. The third major concern (for 45%) is inflation’s impact on savings/investments and fourth (at 30%) is rising mortgage costs. Depending on annual incomes, worry over inflation can centre either on investments or on debt:  those in the middle to upper income brackets ($60K or more) “are much more likely to find the impact on savings / investments and increasing mortgage concerns more worrisome than compared to those who make less than $60K.”

Ability to save impacted by inflation

Three in four (74%) agree that inflation has impacted their ability to save, at least somewhat. And half (47%) have had to draw upon their savings or investments to cover expenses due to rising costs, especially those under 55 and those who are not currently saving for retirement. Many Canadians also agree they will have to draw upon their savings/investments to cover expenses in the coming year (43%). Continue Reading…

Building the big Dividend Retirement Portfolio with defensive Canadian ETFs

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By Dale Roberts, Cutthecrapinvesting

Special to the Financial Independence Hub

There are a few reasons to play defense. A retiree or near retiree can benefit from less volatility and a lesser drawdown in a bear market. If your portfolio goes down less than market, and there is a greater underlying yield, that lessens the sequence of returns risk. You have the need to sell fewer shares to create income. For those in the accumulation stage it may be easier to stay the course and manage your portfolio if it is less volatile. You can build your portfolio around defensive Canadian ETFs.

For a defensive core, investors can build around utilities (including the modern utilities of telcos and pipelines), plus consumer staples and healthcare stocks. My research and posts have shown that defensive sectors and stocks are 35% or more “better” than market for retirement funding.

I outlined that approach in – building the retirement stock portfolio.

We can use certain types of stocks to help build the all-weather portfolio. That means we are better prepared for a change in economic conditions, as we are experiencing in 2022.

Building around high-dividend Canadian ETFs

While I am a total return guy at heart, I will also acknowledge the benefit of the Canadian high-dividend space. These big dividend payers outperform to a very large degree thanks to the wide moats and profitability. Those wide moats create that defensive stance or defensive wall to be more graphic. And of course, you’re offered very generous dividends for your risk tolerance level troubles.

Canadian investors love their banks, telcos, utilities and pipelines. The ETF that does a very good job of covering that high-dividend space is Vanguard’s High Dividend ETF – VDY. The ‘problem’ with that ETF is that it is heavily concentrated in financials – banks and insurance companies.

Vanguard VDY ETF as of November 2022.

Sector Fund Benchmark +/- Weight
Financials 55.4% 55.4% 0.0%
Energy 26.3% 26.2% 0.1%
Telecommunications 9.0% 9.0% 0.0%
Utilities 6.2% 6.2% 0.0%
Consumer Discretionary 1.9% 1.9% 0.0%
Basic Materials 0.6% 0.6% 0.0%
Industrials 0.4% 0.4% 0.0%
Real Estate 0.2% 0.2% 0.0%
Total 100.0% 100.0%

VDY is light on the defensive utilities and telcos. The fund also has a sizable allocation to energy that is split between oil and gas producers and pipelines. The oil and gas producers will also be more sensitive to economic conditions and recessions.

Greater volatility can go along for the ride in VDY as it is financial-heavy. And those are largely cyclical. They do well or better in positive economic conditions. But they can struggle during time of economic softness or recessions. Hence, we build up more of a defensive wall.

Building a wall around VDY

We can add more of the defensive sectors with one click of that buy button. Investors might look to Hamilton’s Enhanced Utility ETF – HUTS. The ETF offers …

█  Pipelines 26.8%

█  Telecommunication Services 23.5%

█  Utilities 49.6%

The current yield is a generous 6.5%. Keep in mind that the ETF does use a modest amount of leverage. Here are the stocks in HUTS – aka the usual suspects in the space.

BMO also offers an equal weight utilities ETF – ZUT .

And here’s the combined asset allocation if you were to use 50% Vanguard VDY and 50% Hamilton HUTS.

  • Financials 26.7%
  • Utilities 24.9%
  • Energy 26.5%
  • Telecom 16.2%

Energy includes pipelines and oil and gas producers. And while the energy producers can certainly offer more price volatility, there is no greater source of free cashflow and hence dividend growth (in 2021 and 2022). In a recent Making Sense of the Markets for MoneySense Kyle offered … Continue Reading…

Another take on 5 Important factors to consider in deciding to Retire

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Image from myownadvisor

By Mark Seed, myownadvisor

Special to the Financial Independence Hub

As I consider some form of semi-retirement in the coming years, I’m learning there is a host of factors to consider in the decision to semi-retire or retire.

For today’s post, I’m going to take a recent quiz of sorts published on Financial Independence Hub with Fritz Gilbert, the founder and mastermind of a popular U.S. blog: The Retirement Manifesto.

After 30+ years in Corporate America, Fritz retired (as planned) in June 2018 at Age 55.

In running a respected U.S. personal finance blog, Fritz has written about pretty much everything on his site, including on retirement, and still does. A few years ago, as he was working through his own decision to retire, he admits some obsession about the transition. After doing his homework and analysis, he successfully made the leap and hasn’t looked back since.

As Fritz puts it when it comes to transitioning to retirement: some folks do well, and some don’t.

I hope to be in the former camp (!) and I hope this post (and answers to Fritz’s quiz factors) helps you too!

Here are 5 important factors to consider in your decision to retire including what Fritz wants to share about the transition process …

5 Important Factors to Consider In Your Decision to Retire

Fritz factor #1: Do you have enough money?

I hope so!?

Fritz comments in his article that having enough is “a necessary factor, but far from sufficient.”

I agree witih Fritz that retirement or even semi-retirement starts with a math problem to solve.

To understand how much you need, you need a process, a formula to outline as many unknowns as possible before you pull the trigger. One of the biggest unknowns in any retirement plan is your potential retirement spending.

You need to consider what you will spend to determine your “enough number.”

After that, you need to consider how to build your retirement paycheque per se to fund that lifestyle.

I’m intending to use a modified bucket strategy to deliver my income in semi-retirement.

Your mileage may vary. 

My Own Advisor Bucket Strategy - December 2022

Bucket 1 is cash savings. It’s simply a large emergency fund we don’t have to use but it’s there if we need it.

Bucket 2 is earning income from dividend-paying stocks. Income will be earned inside some key accounts (such as our non-registered account(s), TFSA(s), and RRSPs) to pay for living expenses.

Bucket 3 is earning income from equity ETFs. This income will come from mainly our RRSPs, as we intend to “live off dividends and distributions” and withdraw capital from our RRSPs/RRIFs over time as we work part-time.

The purpose of having buckets is simple but effective: this retirement bucket strategy is an investment approach that segregates your sources of cash or income into three buckets. Each of these buckets has a defined purpose based on what or when the money is for: now, (short-term), intermediate (near-term) or long-term (multi-year or decade).

My bucket approach, while maybe not perfect, helps for a few reasons:

  • It can help ensure I stay within a reasonable withdrawal plan, starting off retirement or semi-retirement with a low withdrawal rate of 3% or 4%.
  • It can help avoid sequence of returns risk (especially in the early years of retirement)* *Review these graphs below from BlackRock for an example.
  • It can help “smooth out taxation” over time by liquidating accounts, slowly and methodically.
  • It can help offset longevity risk, thanks to preserving capital early in retirement and letting assets compound away.

This is our more detailed bucket approach to earning retirement income. 

*On sequence of returns risk

Exhibit A – pre-retirement:

BlackRock - Sequence-of-returns-one-pager-va-us - December 2022 Page 1.pdf

BlackRock - Sequence-of-returns-one-pager-va-us - December 2022 Page 2.pdf

Fritz factor #2: Are you mentally prepared for retirement?

Yes, getting there, but it’s more semi-retirement for me/us.

As Fritz puts it in his post on Jon’s site:

“Almost everyone thinks about money when they’re making the decision to retire, but far too few consider the non-financial factors.  If I were to choose one point to make from all the things I’ve learned in the 7 years of writing this blog, it’s that the non-financial factors are the most important for putting yourself on track for a great retirement. Important enough that I wrote an entire book on the topic.”

Instead of just focusing on the financial-side of things, I’m really ramping up my mental-game.

I’ve given quite a bit of thought about what semi-retirement might look like, including answering many of these Frtiz-factor questions and more:

How much do you want to travel? (A bit, not all the time.)

Where do you want to live? (In Ottawa, as a home base.)

Are you going to downsize? (Already done!)

Are you going to do more entertainment with that increased free time? (Yes, but also more volunteer work.)

So, to Fritz’s points and recommendations: we dream a bit, we talk a lot, and we keep our mind open to new opportunites. I think everyone should consider the same.

Fritz factor #3: Have you made a realistic spending estimate?

You bet!

As we enter semi-retirement, we essentially intend to “live off dividends.”

Meaning, we will live off dividends from our non-registered accounts as we make some slow, methodical withdrawals from our RRSPs, while working part-time. We won’t touch TFSA assets at all and we’ll be far too young to tap any government benefits.

In a few years, we will be at this Crossover Point [also shown at the top of this version of the blog]:

Including some cash buffer, we figure that’s a good starting point for semi-retirement to begin. Continue Reading…

The 5 most important factors In your Decision to Retire

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By Fritz Gilbert, TheRetirementManifesto

Special to the Financial Independence Hub

A few years ago, I was working through my decision to retire. I was pretty obsessive about it and documented the many factors I was evaluating on this blog (stored in chronological order for your convenience).  After doing my homework, I decided to make the jump in June 2018.

In the four years since I’ve never regretted my decision.

The decision to retire is complicated and there are many factors to consider.  Consider them you must, however, so I’m listing the factors I consider most important and one which I consider essentially irrelevant.  To make your best decision on when to retire, it’s important to recognize all of the things that matter, as well as those that don’t.  Under each factor, I’ve included links to relevant posts for those of you who’d like to dig deeper.

The Most Important Factors

1.) Do you have Enough Money?

The first thing most people think about when they’re making the decision to retire is whether they have enough money to last for the rest of their lifetime.  Fair enough, and I’ll concede it’s way up on the list.  I’d warn, however, that having enough money is a necessary factor, but far from sufficient.

I’ve written many articles on evaluating whether you have enough money to retire.  Below are four that I’d recommend:

2.) Are you Mentally Prepared for Retirement?

Almost everyone thinks about money when they’re making the decision to retire, but far too few consider the non-financial factors.  If I were to choose one point to make from all the things I’ve learned in the 7 years of writing this blog, it’s that the non-financial factors are the most important for putting yourself on track for a great retirement. Important enough that I wrote an entire book on the topic.

If you’re thinking about retirement, the best advice I can give you is to spend time thinking about what you want your life to be in retirement.  Think about it at least as much as you think about the “money stuff.”  Once you’ve retired, I suspect you’ll realize #2 is actually the more critical factor.

If you’re married, have you and your spouse talked about your mutual expectations for your life in retirement?  How are you addressing any misalignments?  Trust me, you have some.  Take the time to find them now, and discuss how you’re going to work together to live the best years for both of you in retirement.

What Purpose is going to fill your days when you no longer have a boss telling you what to do?  Where are you going to live?  What are you going to do?  Important stuff, all, and a topic on which I’ve dedicated thousands of words.  If you’re still working, do yourself a favor and take a “mini-retirement” to think about the things that really matter before you take the plunge.

3.) Have you made a Realistic Spending Estimate?

In its rawest form, the decision to retire is a simple math problem.  Multiply your assets times a safe withdrawal rate, add any expected income, and see if the total covers your expected level of spending.  Given the importance of getting the correct answer to that formula, it’s critical that you spend some time developing a realistic spending estimate for your retirement years.  Since you’ve thought about what you’re going to be doing in retirement (#2), it’s a necessary exercise to track your pre-retirement spending for as long as feasible (I did 11 months), then make any adjustments for how you think it will change post-retirement.  Too many people “take a swag” on this one, but I strongly encourage you to resist that temptation and give it a lot of focus as you’re making your decision to retire.

Retirement Case Study: Marcus and Lee

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Photo by SHVETS production

by Patricia Campbell, Cascades Financial Solutions

(Sponsor Content)

Ages: 60 & 55

Province: Ontario
Professions: Capital and Facilities Planning Director & Senior Data Analysist

Primary Goal: Determine annual retirement income, save taxes, and plan for travel.

Marcus and Lee were on track for retirement in 5 years, but an early retirement offer from Marcus’ company prompted them to consider retirement earlier than originally planned. We investigate their concerns in this retirement planning case study using Cascades Financial Solutions.

The Issues

Unexpectedly, Marcus was forced into retirement by his company due to a severe downturn in business. The couple thought they had at least five more years before they would need to make a decision regarding retirement.

Over their careers, Marcus and Lee prioritized saving money each year in their Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA). In addition, they both had a joint savings account, and Marcus had a defined benefit pan but, was it enough?

Their Concerns

How much retirement income will they have? Did they have enough money for Marcus to retire early? Lee will continue working until she is 60 but was depending on Marcus to have 5 more years of income and savings. 

How could they minimize the taxes on their retirement? The couple would like to explore tax efficient strategies and are unsure how to approach this.

Will they be able to travel? By retiring early Marcus is concerned about their future travel plans.

The Plan

Marcus and Lee realized that this was a critical time and needed help from someone with extensive experience in retirement income planning.

Marcus and Nicole decided to seek financial planning advice. The financial planner they found uses Cascades Financial Solutions.

The Cascades financial planning process included the below steps:

Gather fact find data. This included the details of each RRSP, TFSAs, defined benefit plan and any joint savings, their investments large purchases they plan on making in the future.

Consider ages for CPP and OAS options. The next step was to run a few retirement income scenarios which included adjusting the start age to receive CPP and OAS.

Choose a winning strategy. After running a few scenarios which included receiving CPP at 60 vs. receiving at 70 they were able to determine a sustainable withdrawal plan and maximize taxes savings over the course of their retirement.

Execute the plan. Finally, it was time to start putting the new retirement income strategy in place. Seeing the plan on paper, gave the couple the confidence and financial security they needed to be at ease.

The Results

Marcus was delighted retiring early knowing their hard work and saving for a rainy day paid off. While Lee wasn’t quite ready to retire, she was happy Marcus can enjoy a few years of retirement before she did. When they are both retired, they plan to take two international trips each year and spend plenty of time with family.

The financial planning process helped Marcus and Lee in several ways: Continue Reading…