Tag Archives: Retirement

The seven money myths that stand in the way of a good financial plan

Posted By |

Financial Literacy Month is natural moment for a reality check-up

By Jennifer Cook, EPD, PFA, PFA™, QAFP™

For the Financial Independence Hub

On the path to financial security, there are natural peaks and valleys that can be navigated via the help of a good advisor.  It’s the map in the form of a personal plan that can help guide an individual toward their goals, whether it is saving for a house, planning for retirement or protecting against unforeseen events.  But more than any other hazard along the journey, is when road signs are misread or misunderstood.

Financial literacy is key to unlocking an individual’s ability to realize their dreams, and that is why Financial Literacy Month in November is so important to us at Co-operators.  It’s a moment for all of us to fill in some of the gaps in our knowledge about planning.

Many of us have developed habits or rely on inherited ideas about finances, so I look at financial literacy as an opportunity to put to rest some of the myths that can affect good financial planning.

As Canadians face year-end decisions on investments, taxes, and RRSPs, we at Co-operators have identified common gaps in financial preparedness stemming from the spread of money myths. There are many myths that can derail planning, but I’d like to talk about the top seven and offer a remedy in the form of a reality.

Myth 1: Saving is safe. Investing is risky.

Reality: As Canadians feel the impact of raising interest rates and inflation, it’s tempting to embrace the idea of “safe” or “lower-risk” investment options. But this strategy comes with a risk of considerable lost earning power. Investing in a diversified portfolio that matches individual needs with the help of a Financial Advisor can build long-term returns, while managing risk.

Myth 2: Single, young people don’t need insurance.

Reality: No one is free from the risk of loss or liability. When budgets are tight, tenant or renters’ insurance can provide critical coverage for unforeseen events like theft, fire, or water damage. Young people can also take advantage of lower insurance rates that provide continuing benefits as their lives develop and their needs grow.

Myth 3: RRSP season starts in mid-February.

Reality: Though the typical RRSP frenzy may suggest otherwise, there is no rule that says lump sum payments must be made to RRSPs before the annual March 1 deadline. Canadians can contribute to their RRSPs (up to individual contribution maximums) at any time of the year. The March 1 date is used to determine how tax benefits will apply to the previous year’s income. Depending on a person’s situation, a Financial Advisor may recommend contributing smaller amounts to an RRSP on a weekly, bi-weekly, or monthly basis.

Myth 4: Those who invest in mutual funds have sufficiently diversified portfolios.

Reality: Today’s spectrum of mutual funds is widespread. It’s not easy to gauge whether an individual investor is appropriately diversified. And that can leave some people vulnerable to losses from sectors. Leveraging the expertise of a Financial Advisor can help investors make nuanced adjustments to ensure their portfolio has the right balance of diversification aligned with their risk tolerance. Continue Reading…

Retirement Reflections during our 32nd year of Financial Independence

Posted By |
Billy and Akaisha Kaderli on Lake Atitlan, Guatemala

By Billy and Akaisha Kaderli, Retireearlylifestyle.com

Special to the Financial Independence Hub

In January, 2022 we began our 32nd year of Financial Independence. Few people can say they have 30 years of self-funded retirement by the age of 68 and have a higher net worth after spending and inflation than when they started. This is something of which we are quite proud.

As we have aged, one thing we have learned is that long term is getting shorter every day. Life is to be enjoyed now, not someday:  the older we get the more we appreciate that view. Life is continuously full of opportunities and we want to take them.

Opportunities abound

For example, a couple of years ago we were approached by a startup company which sponsored us for several months in Saigon, Vietnam in exchange for sharing our past experience in the restaurant and service industry and for exposure to our readers through our popular website and blog. That was a fabulous trip, and it got us back over to Asia again.

Then we were approached for a partnership, offering tours to Europe and South America. Can you imagine? There are always opportunities!

These are just two examples of why we say that life is full of chances to grow and learn something new if you want to take them. And neither of these recent options could have been presented to us if we were still working.

Portfolio getting stronger

Since the 2008 financial meltdown the markets certainly have performed well, thereby increasing our portfolio. And for a longer term view the S&P 500 closed at 312.49 when we retired in 1991, producing a better than 8% annual ride plus dividends. So, our advice is to get invested now and in a couple of decades looking back you will have wished you had invested more. Probably a lot more.

We suggest people track their spending now, then multiply that number by 25 to get a rough estimate of the portfolio amount they need to retire. Once you know that amount, in simple terms, assuming the same 8% growth in the future and you withdraw 4% for living expenses, this leaves you 4% to cover inflation and growth so you are all set.

The 4% rule is a guide not set in stone and ours bounces around depending on the markets and our expenses, but on average we have been able to maintain it easily below 4%. Our data over 30 years gives us security knowing that if one year it is higher we can make adjustments the following year to correct it. Then again, the markets could move higher helping us out as well, which is usually the case. Plus, we now are receiving Social Security, so payments and dividends cover our expenses. You can read our reasoning behind this decision here.

Practical considerations

Another note is that because we have a good percentage of assets in retirement accounts, when we turned 56 years old we used IRS rule 72T to withdrawal an annual amount close to our estimated Social Security payments, thus creating a bridge until we actually qualified. Now that we are receiving benefits we have turned off that spigot and are letting the IRAs grow once again.

The age of 72 is now coming into our sight and RMD, required minimum distributions, are the next issue to deal with, but we still have time and no one knows what the tax laws will be then.

With that stated, we still maintain a core holding of buy and hold (DVY, SPY, VTI) which sends us a steady stream of dividends in our taxable accounts as well as tracking the market. But in our IRAs, where we have no tax issues regarding trading, we have been more active using market seasonality with the idea of side-stepping larger declines. Some years have been better than others but we have been taking about half of the market risk than being all in all the time and that is comforting.

Where to retire, cost of living and healthcare

We are not alone anymore, with Boomers retiring at 10,000 a day, we see more retirees everywhere! But in terms of the foreign locations that we visit, the retirement community of Chapala, Mexico is growing at a fast pace. The Colonial town of Antigua, Guatemala has also attracted its share of Expats, and there is a solid and active retirement community in Chiang Mai, Thailand and Panama.

We would recommend Mexico, Panama and Guatemala for their proximity to the US and Canada as well as being on similar time zones as family and financial markets in the States. We would say that Thailand is attractive for its excellent medical care, warmer weather and uniqueness. All of these locations offer excellent lifestyle for cost of living. Continue Reading…

Retirement Options for Small Business Owners

Posted By |

By John Shrewsbury, RICP

Special to Financial Independence Hub

As a small business owner who is emotionally, physically, mentally, and financially engaged in a growing startup, you may feel consumed in the now. So many small business owners put everything back into their company without setting aside their profits in a tax-efficient way. If you run your business without an eye to the future, you will never reach the point where work becomes optional. Your business is your vehicle to financial independence, but it won’t happen without years of careful preparation.  

The independence and freedom of your entrepreneurial path comes with an array of responsibilities. As the business owner, the weight of preparing for your retirement and the retirement of your employees falls entirely on your shoulders. After all, if you don’t plan for your retirement, who will? Start building retirement savings into your company budget and making it a part of your compensation for running the company.

Business owners in the U.S. have retirement options for many situations

As a small business owner, you have a retirement option for almost every situation. When choosing a plan, your most significant consideration is the cost of contributing. If you can only afford to set aside a small amount of money each year, an individual retirement account (IRA) will serve you well. 

A Simplified Employee Pension plan (SEP) is the equivalent of a jumbo IRA. This plan works best for self-employed entrepreneurs with few or no employees. You can contribute up to 25% of your compensation to a SEP, with a maximum of $61,000 per year allowable in 2022. Keep in mind that if you have eligible employees, an SEP requires you to contribute an equal percentage of their salaries to the percentage you contribute from your own revenue. For example, a business owner with an employee making $100,000 per year would have to contribute 25% of the employee’s salary if they want to maximize their own contribution at 25%. If you have a number of employees, a SEP will most likely be your most expensive option.  Continue Reading…

Planning for Longevity: How to avoid Retirement Hell

Posted By |

I never thought that I would fail at retirement and end up in Retirement Hell. But I did.

You see, I spent my entire career – almost forty years- in the banking industry. While there, I learned a lot about money and investing and, over the years, I helped thousands of clients save for their own retirement. Furthermore, my wife is a financial advisor. And yet despite all that knowledge and expertise, I still managed to fail miserably at retirement.

Looking back, I now realize that many of my beliefs about retirement were wrong because they were all linked to the financial aspects of retirement. What I know for sure now is you just don’t fall into a happy retirement because you have a lot of money. You need financial security, of course. But designing a satisfying life takes thought, time and planning on many more levels. You need to know your needs and values, and what makes you happy, and then you have to find ways to satisfy these aspirations on a regular basis. Thinking that you will figure things out when you get there doesn’t work.

Traditional retirement planning has programmed us to think it’s all about the money, but it’s not. In conventional planning, the focus is always on the number: how much money you are going to need to retire. Few financial advisors/planners talk about the other important stuff: how you are going to replace your work identity, how you are going to stay relevant and connected, and how you are going to keep mentally sharp and physically fit, among other things.

Believe it or not most retirements fail for non-financial reasons rather than financial ones. I don’t want that to happen to you so for the past year and a half I along with five of my friends have been working on a new book — Longevity Lifestyle By Design — to help people design a life they would be happy to wake up too.

Retiring from work is simple. Figuring out what you are going to do with the rest of your life is the hard part.

Our mission is to help improve the transition to retirement and help retirees to design a life that they look forward to living everyday.

We know that many people are going to struggle with the non financial challenges that can often accompany retirement. It happened to me, my colleagues and through my discussions with other retirees discovered that it also happened to many of them as well. Continue Reading…

Earning income from dividends: reality or fantasy?

Posted By |

By Anita Bruinsma, CFA

Clarity Personal Finance

Special to the Financial Independence Hub

Getting an income from dividends is a concept that is often mentioned in the personal finance world. It can seem like an elusive concept – a unicorn – or perhaps something for the super-rich or those with investment gurus at their disposal. In reality, though, anyone with some savings can earn dividends and it doesn’t require much expertise.

A dividend is a cash payment made by a company to its shareholders. Shareholders are simply people who own stock (or shares) in their company. If I own shares of TD Bank, I get $3.56 per year for every share I own. It might not sound like much, but if I invest $3,000 in TD Bank today, I’d be in line to get $132 over a year. It adds up!

Let’s get something straight though: living entirely off dividends requires a lot of money available to invest. It’s not a reality for most people.

Here are a few numbers to give you context. In order to earn $40,000 a year (before tax) from dividends, you’ll need a portfolio of about a million dollars to invest in stocks.* You’ll then have to pay tax on these dividends (except for those that are earned within your TFSA). As you can see, living off dividends isn’t a strategy available to most people.

If you are looking to supplement your income to maybe pay for your annual vacation, you can earn $5,000 a year (all figures are before tax) with $125,000 to invest. For $10,000 a year, you’ll need about $250,000.

Dividends have more benefits that just giving you cash flow – they also give you a reasonably reliable investment return and can protect against inflation. A company that has a long history of paying a dividend and consistently growing it over time provides a quasi-guaranteed return on a stock. (No dividend is guaranteed but it can be consistent and dependable.) Even though the stock prices goes up and down (unreliable), you’ll get the dividend (reliable). Even better, many companies increase their dividend year after year, sometimes at a rate higher than inflation, so dividends can help protect you from the ravages of inflation too.  You can read more about dividends in a prior blog post.

DRIPs

For those who don’t need the additional cash flow, another way of benefitting from dividends is to reinvest them. There are two ways to receive a dividend: it can be paid in cash into your account or it can be paid to you in shares. This is called a Dividend Reinvestment Plan, or DRIP. If you sign up for a DRIP, you’ll receive additional shares of the company you are invested in. For example, if you own BCE (Bell), and you own 100 shares, you’ll be entitled to a dividend payment of $368 every year. You could get that in cash, or you could get 6 more shares of BCE. This is great because then next year you’ll get a dividend on 106 shares – and the snowball keeps rolling.

There is important roadblock to this strategy for a lot of people: if you want to earn dividends, you have to invest the cash in dividend-paying stocks or funds. This means that if all of your savings amounts to $125,000, and you want to earn $5,000 in dividends, you will need to invest all of it and you will not be well-diversified nor will you have any money in less volatile investments like bonds or GICs. You also need to ensure you have enough money that isn’t invested in the market to use in emergencies or for near-term uses.

Dividend ETFs

If you’ve decided that you want income from dividends and you’re comfortable with having your savings invested in the market, you might asking “Now what?” How do you get these dividends flowing? Well, you’ll need to find investments that pay dividends, preferably reliable, consistent, high, and growing ones. Unless you have a large portfolio, the most efficient and the simplest way to invest for dividends it to put your money in a high dividend-paying exchange traded fund. This kind of ETF will invest in companies that pay high dividends and as an investor, this money will flow through to you via fund distributions, which you can choose to take as cash or re-invest in more units of the fund (like a DRIP).

To find an appropriate ETF, do a Google search for “high dividend yielding ETFs” and drill down into a few. There are three things to look at when choosing which to invest in:

  1. What is the yield? Higher is better.
  2. Does it invest in a broad swath of the stock market? Avoid ones that invest in a specific sector.
  3. What is the MER, or annual fee? The fees on these ETFs are higher than broad market ETFs but you can find a high yielding ETF for less than 0.20% per year.

Yield is the most relevant number to look at with dividend investing. It’s simply a measure of how much income you will get as a percent of the amount you invest. It’s like an interest rate on a GIC: if a GIC pays 4% interest, you get $40 for every $1,000 you invest. If a stock has a dividend yield of 4% you’ll get $40 of dividends for every $1,000 you invest. (Dividends don’t happen in nice round numbers like that, though.) If an ETF has a 4% yield, you’ll get $40 in distributions from the fund.

Although I am not usually a proponent of stock picking, this is one situation where I feel that owning individual, high-dividend paying stocks can be okay. If you have enough money to own a number of stocks, you could put together a portfolio of high-quality dividend stocks that have a long track record of paying and growing their dividends. In Canada, this list would probably include Canadian banks, telecom companies and utilities, among others. For example, a portfolio consisting of TD Bank, Royal Bank, Manulife, BCE, Telus, Enbridge, Fortis and Algonquin Power yields more than 5% right now.

Are you still with me? If that last paragraph made you want to stop reading, please don’t! If you’re not into investing in individual stocks, keep it simple and go the ETF route. Here are a few Canadian ones to look at:

iShares S&P/TSX Composite High Dividend ETF (XEI)

Vanguard FTSE Canadian High Dividend Yield Index (VDY)

BMO Canadian Dividend ETF (ZDV)

(Note: You can also buy U.S. and international dividend ETFs.)

The yields on these ETFs and on dividend-paying stocks are quite high right now. This is because the stock market has fallen. As the price of a stock falls, the dividend yield increases because you need to spend less per share to get the same dividend. To demonstrate, let’s look at BCE (Bell). BCE pays a dividend of $3.68 per year. If the stock is trading at $63 (as it was a year ago) you pay $63 to get a $3.68 dividend, which is a 5.8% yield ($3.68/$63). Today, BCE is trading at $57 which means it has a yield of 6.5% ($3.68/$57). (If you are ticked off at the amount of your internet, cable and cell phone bill with Bell, offset it with some sweet dividends!)

Living off dividends? Probably a pipe dream. Adding some cash flow, getting a good return on your investment, and fighting inflation? Not a unicorn – it’s totally doable!

*Assumes a 4% dividend yield.

Anita Bruinsma, CFA, has 25 years of experience in the financial industry. As a long-time investor, Anita is passionate about demystifying investing to make is accessible to more people. After a long and satisfying career in the world of banking and wealth management, including 15 years managing mutual funds with a Canadian bank, Anita started Clarity Personal Finance, and now helps people learn to better manage their finances, including how to invest for themselves.