Tag Archives: Retirement

Retirement, Meet Target Date Funds: The opportunities, and how they work

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By Brian See, Evermore

Special to the Financial Independence Hub

Target date funds are a fantastic investment tool, particularly for Canadians who are saving for retirement. Despite their benefits, though, they have not been made widely available to the masses yet.

If we look at our U.S. neighbor, target date funds are already taking off. In fact, target date funds hit a record US$3.27 trillion in assets in 2021, up from $52 billion in 2020. The market value speaks for itself: target date funds are here to stay, and they’re growing in popularity.

When it comes to retirement, there are many Canadians who don’t save long-term because it seems out of reach. In fact, about 1 in 3 Canadians have never saved a dime for retirement even though the majority of Canadians have expressed concern about not having enough money in retirement. To boot, record-high inflation is leading Canadians to fear a retirement crisis, and 72% of Canadians believe saving for retirement is ‘prohibitively expensive.’

We have seen target date funds play out well in the U.S. If Canada is able to further adopt this form of investing to the market, we can close this retirement investing accessibility gap.

In order to understand the opportunities that target date funds provide for investing for retirement, it’s important to break down how they work.

How Target Date Funds work

At their core, target date funds are a one-stop-shop for long-term saving and investing. Target date funds use a systematic or rules-based asset allocation where the mix of stocks and bonds changes over time as you approach the target date. The funds are a mix of stocks and bonds that increase and decrease their risk levels according to the person’s age. This “glide path” model increases risk as you’re younger, and decreases risk as you get closer to retirement because, simply put, you’ll need that money to draw upon in retirement! Target date funds are also easy to choose. You simply pick the year you want to retire and select the target date fund with that year.

Of course, with any investment strategy, there are risks. The inherent risk here is that you are investing in the market. Stocks and bonds go up and down: they ebb and flow but in the long term, markets have increased in value. A key feature of target date funds is that they are diversified across asset classes, geographies and sectors, and that diversification helps whether there is a downturn in the market or not. Target date funds weather the storm. Continue Reading…

Longevity Insurance vs. Credits: A Primer

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This guest blog is excerpted from Moshe Milevsky’s recently published book, How to Build a Modern Tontine

By Prof. Moshe A. Milevsky, Ph.D.

Special to the Financial Independence Hub

I have been asked about the difference between a tontine – be it modern or medieval – and a conventional life annuity, purchased from a regulated life insurance company. Both might appear to perform similar tasks at first glance, but the differences are subtle and important and get to the essence of the distinction between longevity insurance versus longevity (or survivorship) credits.

One aspect of the life annuity story is the financial benefit of risk pooling, and the other is the insurance benefit and comfort from having a guaranteed income that you can’t outlive. Allow me to elaborate with a statement that some readers might find shocking. If you are 75 years old with $100,000 in your RRIF and would like to guarantee a fixed annual income for the rest of your life, there is absolutely no need to purchase a life annuity from an insurance company to achieve that goal. There are other options.

This might sound like something odd for a long-term annuity advocate to say. But the fact is that a non-insurance financial advisor can design a lovely portfolio of zero-coupon strip bonds that will do the job. That collection of bonds will generate $4,000 per year for the rest of your life, even if you reach the grand old age of 115. Ok, financial advisors need to eat too, so they may not do it for $100,000, but I’m sure that a lump sum of $1,000,000 will pique their interest and in exchange you will get $40,000 per year.

Moreover, with these strips, if you don’t make it all the way to the astonishing age of 115, they will continue to send those $4,000 (or $40K) to your spouse, children or favourite charity until the date you would have reached 115, if you had been alive. This collection of strips would be completely liquid, tradeable and fully reversable, although subject to the vagaries of bond market rates. For this I have assumed a conservative, safe and constant 2.5% discount rate across the entire yield curve, which isn’t entirely unreasonable in today’s increasing environment.

Stated technically, the present value of the $4,000 annual payments, for the 40 years between your current age 75 and your maximum age 115, is exactly equal to $100,000 when discounted at 2.5%. Yes, those numbers and ages were deliberately selected so my numerical example rhymes with the infamous 4% rule of retirement planning but has absolutely nothing to do with it.

Now, I’m sure you must now be thinking (or even yelling) “Moshe, but what if you live beyond age 115, eh? You will run out of money!”

Touché. Let’s unpack that common knee-jerk reaction to non-insurance solutions for a moment. To start with, the probability of reaching age 115 is ridiculously and unquantifiably low. If you do happen to be the one in a 100 million (or perhaps billion) that reaches age 115, I suspect you will have other things on your murky mind. Personally and post-covid, there is a very long list of hazards that worries me more than hitting 115.

Nobody really “runs out of money” in this century

Second and more importantly, nobody really “runs out of money” in retirement in the 21st century. That is plain utter fear-mongering nonsense. With CPP, OAS/GIS, the elderly will continue to receive some income for as long as they live even if they have completely emptied every piggy bank on their personal balance sheet. In fact, with tax-based means-testing you might get more benefits if you actually do empty your bank accounts.

Ok, so back to my prior claim and the supporting numbers, if you want a guaranteed (liquid, reversable, bequeathable) income for the rest of your life, you can exchange your $100,000 for a bunch of strip bonds and voila, you have created a sort of pension plan. My point here is that the primary objective isn’t a guaranteed lifetime of income: which anyone can create with a simple discount brokerage account and a DIY instruction manual. Continue Reading…

5 factors for millennials considering their retirement

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By David Kitai, Harvest ETFs

(Sponsor Content)

Millennials — the generation born between 1981 and 1997 — are beginning to enter their 40s. With the passing of that milestone comes a new consideration: retirement.

Canadians are living longer and longer, retirement at or around age 65 may need to last 30+ years. Millennials in their 30s and early 40s are ideally placed to plan for their eventual retirement. In those typically peak working years, millennials can take major strides towards a stable financial future and the achievement of their retirement goals. Preparing for retirement, though, is more than just putting a magic number away in a bank account. There are myriad factors a millennial should consider as they begin to plan for retirement. Below are five of those factors.

 1.) Understanding RRSPs and RRIFs

Registered Retirement Savings Plan (RRSP) accounts are a key tool Canadians can use to save for retirement. Their mechanism is simple: contributions to these accounts within the annual limit are tax-deductible. Income earned by investments held in the RRSP is also tax exempt, provided that income stays in the account. RRSPs give you an annual tax incentive to save for your retirement.

When RRSP holders turn 71, however, those RRSPs turn into Registered Retirement Income Funds (RRIFs). These accounts are subject to a government-mandated minimum withdrawal, on which some of the deferred tax from these contributions is paid. You can learn more about the problems with RRIF withdrawals, and how to navigate them here.

Millennials considering their retirement should look at how RRSPs can give them a tax benefit for saving now, while also planning for how the eventual transition to RRIFs will change their financial realities.

 2.) How the Canada Pension Plan factors into retirement

Canadians between the ages of 60 and 70 who worked in Canada and contributed to the Canada Pension Plan (CPP) can elect to activate their CPP benefits. Those benefits will be paid as monthly income based on how much you earned and contributed during your working years, as well as the age you chose to begin receiving benefits.

The longer you wait before turning 70, the higher your CPP benefits will be, though that appreciation doesn’t go beyond age 70. Millennials planning for retirement at any age could consider how they’ll finance their lifestyles while maximizing their CPP benefits at age 70. It’s notable that even the highest levels of CPP benefits pay less than $2,000 per month in 2022. That won’t be enough for many Canadians to live on, and millennials considering retirement may want to think about other sources of income.

3.) Equity Income ETFs

One of the issues that retirees have struggled with over the past decade has been the extremely low yields of traditional fixed income products like bonds. In 2022 those rates rose somewhat, but only following record inflation eating away at the ‘real yields’ of an income investment.

Many equity income ETFs pay annualized yields higher than most fixed income and higher than the rate of inflation. These ETFs hold portfolios of equities — stocks — but pay distributions generated through a combination of dividends and other strategies. Harvest equity income ETFs use an active and flexible covered call option writing strategy to help generate their monthly cash distributions.

These ETFs still participate in some of the market growth opportunity a portfolio of stocks would, while also delivering consistent monthly cash flow for unitholders. The income they pay can help retirees finance their lifestyle goals and help millennials as they prepare themselves to retire.

4.) Tax efficiency of retirement income

Tax is a crucial consideration for any younger person thinking about retirement. Aside from the tax issues surrounding RRSPs and RRIFs, any income-paying investments held in non-registered accounts, or any income withdrawn from a registered account, will be subject to tax. Dividend payments and interest payments from fixed-income investments are taxed as income. Continue Reading…

4 ways Life Insurance can fund Retirement

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Image by unsplash: James Hose jr

By Lucas Siegel

Special to the Financial Independence Hub

The infamous retirement crisis that’s been talked about for years just became real, with inflation and interest rates reaching record highs in the past few months. Consumer prices skyrocketed by 9.1% as of June 2022, the largest increase we’ve seen in 40 years. Couple that with a growing senior population living off a fixed income, many of which retired early during the pandemic, and you have yourself a massive problem.

Most senior Americans are unaware that their life insurance policy could be one of their most valuable liquid assets. Contrary to popular belief, life insurance isn’t just a way to care for loved ones after you die through the death benefit. In fact, permanent life insurance policies can also be used to access funds for retirement planning and healthcare when you need it most. Life settlements are legal throughout the US and regulated in all except six states, as well as the provinces of Quebec and Saskatchewan in Canada.

Regardless of age or financial standing, understanding the true value of your assets is essential to living out the retirement you deserve. Check out the following four ways you can use your life insurance policy to help fund retirement:

1.)   Sell your life insurance policy through a life settlement

For millions of Americans who own a life insurance policy, selling it through a life settlement can be a great way to access cash when it’s most needed. A life settlement involves selling a life insurance policy for lump-sum cash payment that is more than the cash surrender value, but less than the death benefit. Despite decades of industry innovation and growth, some 200 billion dollars[US$] in life insurance is lapsed each year that could have been sold as a life settlement.

While the life settlement process once took two to four months, AI technology has expedited the process, making it easier than ever the get a life settlement valuation. Policyholders can now use a free life settlement calculator to instantly see how much their policy is worth based on a few simple questions. Just as you track the value of your house on Zillow or your car on Autotrader, understanding the value of your life insurance policy is critical to make the best financial decisions for you and your family.

2.)   Obtain the cash value from a permanent policy

When you pay your premium on a permanent life policy, only a portion goes toward covering the cost of your life insurance. The remainder of these payments goes into an investment account where cash value can grow on a tax-deferred basis. As you age, you’ll also eventually be able to tap into the interest earnings from this investment account to help keep your policy active, thus bringing down your out of pocket premium payments. Essentially, the money in this account can be treated as emergency savings with tax advantages.

3.)   Borrow from your policy through a loan

Americans with whole life insurance that have accrued enough cash value to cover the debt can also use their policy as collateral through a whole life loan program. One major benefit is the interest rate will be much lower than what you’d see with credit card debt or an unsecured personal loan. This allows the policyholder to get a one-time, tax-free distribution that can be paid off with interest in life, or be withdrawn from your life insurance policy’s death benefit. Retirees might be able to go through their insurance carrier if whole life loans are offered, or utilize a third-party whole life loan program instead. Continue Reading…

The “mostly stocks” Retirement Portfolio

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

It was a long time in the making, but I recently finished and posted the stock portfolio for retirees, on Seeking Alpha. It uses an all-weather portfolio approach but only puts stocks to work. Stocks are arranged by sector to perform in certain economic environments. Stocks and REITs will have to step up to do the work of bonds, gold, cash and commodities. We’re building the retirement stock portfolio on the Sunday Reads.

Here’s the post – Stocks for the retirement portfolio. That is a U.S. version. I will also post the Canadian stock portfolio (ideas for consideration)  on Cut The Crap Investing.

Defense wins ball games

The key is a core defensive stance: for market corrections, recessions and deflation. For those who are not able to access Seeking Alpha, here’s the portfolio.

As always, this is not advice. This is an idea and strategy for consideration.

Defensives @ 60%

Utilities – 10%

NextEra Energy, Duke Energy Corp, The Southern Co, Dominion Energy, Alliant Energy, Oneok, WEC Energy.

Pipelines – 10%

Enbridge, TC Energy, Enterprise Partners, Energy Transfer, Oneok.

Telecom – 10%

AT&T, Verizon, Comcast, T-Mobile, Bell Canada, Telus.

Telco REITs – American Tower, Crown Castle.

Consumer Staples – 10%

Colgate-Palmolive, Procter & Gamble, Walmart, Pepsi, Kraft Heinz, Tyson Foods, Kellogg, Kroger, Hormel Foods, Albertsons Companies.

Healthcare – 10%

Johnson & Johnson, Abbott Labs, Medtronic, Stryker, CVS Health, McKesson Corporation, United Health, Merck, Becton Dickinson, Cigna Corp.

Canadian banks – 10%

RBC, TD Bank, Scotiabank, Bank of Montreal.

Growth assets – 20%

Consumer discretionary, retailers, technology, healthcare, financials, industrials and energy stocks.

Apple, Microsoft, Qualcomm, Texas Instruments, Nike, BlackRock, Alphabet, Lowe’s, Amazon, TJX Companies, McDonald’s, Tesla, Visa, Mastercard, Raytheon, Waste Management, Berkshire Hathaway, Broadcom.

Inflation protection – 20%

REITs 10%

Agree Realty Corporation, Realty Income, Essential Properties, Regency Centres Corporation, Stag Industrial, Medical Properties Trust, Store Capital Corporation, Global Self Storage and EPR Properties.

Oil and gas / commodities stocks 10%

Canadian Natural Resources, Imperial Oil, ConocoPhillips, Exxon Mobil, Chevron, EOG Resources, Occidental Petroleum, Devon Energy.

Agricultural

Nutrien, The Mosaic Company.

Precious and other metals

Tech Resources, BHP Group, Rio Tinto

All said, I am still a fan of some cash and commodities and bonds. This was offered in the post …

The hybrid approach might then include:

  • 5% cash
  • 5% bonds
  • 5% commodities
  • 85% retirement stocks

More Sunday Reads Continue Reading…