It’s here, it’s not going away anytime soon, and every time you open a business news article, the word leaps out at you: “inflation.”
And, according to a recent Leger survey commissioned by Questrade of 1,547 Canadians, it’s not only very much top of mind for us, but it’s keeping many of us awake at night: not just about the short-term scenario, but also when we contemplate our retirement future.
According to the survey, four in five (84%) Canadians say they are worried about inflation, with almost two in five (39%) saying they are very worried.
For the short term, most of the Canadians surveyed are concerned about the everyday costs associated with rising inflation. More than eight in ten (86%) who are apprehensive about rising inflation say what worries them most is the increasing cost of food, while nearly as many (82%) are concerned about the increasing cost of everyday items. And not far from mind is the impact of inflation on savings and investments: 45% of those surveyed expressed concern about how inflation would affect their savings and investments, with 51% of those who are investing for their retirement saying this.
Investors are less worried about inflation than non investors
However, while many Canadians are experiencing inflation angst to varying degrees, those taking steps to invest for their retirement appear to be in a better overall frame of mind than those who aren’t. In the Questrade survey, of the 39% who say they are very worried about inflation-related costs, the worry is less with those investing for retirement (36%), compared to those not investing (49%). In particular, those holding an investment vehicle such as a mutual fund, RRSP, or TFSA appear to be consistently less worried about rising inflation than those not holding these products.
For those who are concerned about the longer-term impact of inflation on their investments and retirement, 39% are worried about the cost of living when they retire, followed closely by 38% who are concerned about lower purchasing power.
What’s interesting is that, despite their inflation anxieties, only one quarter of Canadians (23%) have made a change to their investments to safeguard themselves from possible inflationary effects. The remaining 77% either don’t know or haven’t made any change.
Of those who are making changes to their investments due to inflation, 24% are planning on contributing less while 22% are going to contribute more this year. The survey revealed that among those with an RRSP, 39% say they plan on contributing more to it this year, especially those aged 18–34 (57% vs. 36% for those aged 35+), with an average of about $5,409 extra. The reasons for contributing more to their RRSP vary, but for nearly half, it’s because retirement is a priority for them. Continue Reading…
A good portion of my financial planning clients are in what I’d call the retirement readiness zone, meaning they are 1-5 years away from retirement. They want a check-up on their financial situation and answers to big burning questions like, when can I retire, how much money can I spend, how long will my money last, and how to withdraw from my savings and investments to create the retirement income I need.
Here is a checklist of things to consider when you find yourself in the retirement readiness zone:
How much do I spend?
I get that many people are turned off by budgeting and tracking expenses, but it’s important to understand what it costs to live your life.
Instead of relying on rules of thumb, like you’ll spend 70% of your final salary in retirement, I find that most of my clients want to maintain their current standard of living, if not enhance it with additional spending on travel and hobbies.
Determine your true after-tax spending, including items like property taxes and home & auto insurance that will be with you for life. Add in your desired annual spending on travel and hobbies, and build in a buffer for small unplanned expenses such as replacing an appliance or doing modest home improvements or repairs.
This spending amount is what will drive the decisions around how much to withdraw from your investments, when to take CPP & OAS, and how long your money will last at that spending rate.
Plan your one-time expenses
Besides your regular after-tax spending, you should also factor one-time expenses into your plan. In my experience, the majority of these expenses will include vehicle replacement, travel beyond the ordinary (ex. bucket list trip to Europe), home renovations, and monetary gifts to adult children or grandchildren.
It’s not practical to assume your spending will stay static every single year. Build these one-time expenses into your plan over the next 10-20 years so you have a better and more realistic understanding of what you can afford and how to access these funds.
What you’ll find is that instead of static spending of, say, $65,000 per year, you’ll have several years of spending $75,000 to $85,000 (or more) to cover these one-time costs.
Estate planning
Make sure to update your will and estate planning documents, including the beneficiaries on your insurance and investment accounts.
Consider giving with a warm hand (otherwise known as give while you live) to your children or favourite charity. What I mean is rather than leaving hundreds of thousands, or even millions, in your estate at 90 years old, consider making smaller gifts to your beneficiaries throughout your lifetime.
Some examples include a gift towards a downpayment, help funding the grandkids’ RESPs, and footing the bill for a family vacation with adult kids and grandkids.
In case I die file
It’s common for one spouse to take the lead on financial matters for the household. But this can be problematic if something happens to the chief financial officer of the house – if they predecease their spouse or become cognitively impaired and can no longer manage the finances or investments. Continue Reading…
It is a common question from readers. How do I create reliable retirement income with ETFs? It is a simple answer if we consider the last 40 years. A simple mix of Canadian, U.S. and International stocks has provided the necessary growth component. Core bond funds have offered the required risk management. Stocks for offense. Bonds for defense. A typical balanced or balanced growth couch potato portfolio did the trick. Today, we’ll look at the 2021 returns for retirement ETF portfolios.
In early 2019 I posted the simple 7-ETF portfolio for retirees. Please have a read of that post for background on the ETFs, risk, and the retirement scenario.
Seek retirement and investment advice
You can self-direct your investments if you have the knowledge and you understand your risk tolerance level. But I’d suggest that you contact an experienced fee-for-service financial planner who has expertise in the retirement arena. With a fee-for-service advisor you will pay as you go. You can pay by the hour, or perhaps pay a flat fee for the evaluation and plan. You might then set off on your own to build the portfolio with all the right pieces in the right place.
Your retirement ETF will be one piece of the retirement funding plan. The following represents a model for consideration and evaluation.
The 7-ETF Portfolio for Canadian retirees
You may choose to go more aggressive or more conservative in your approach. And keep in mind the above is not advice, but ideas for consideration. That said, I do see it as a sensible conservative mix. You may decide to add more inflation protection by way of energy stocks or commodities.
And let’s cut to the retirement funding chase. Here’s the returns for the 7-ETF portfolio for retirees for 2021. Charts and tables are courtesy of portfoliovisualizer.com
Yup, that simple mix delivered a return of 13.8% in 2021. That is a very good return for a conservative mix that has a 45% bond allocation.
Here’s the returns of the individual assets for 2021.
With inflation fears dominating the back half of 2021 the inflation-sensitive assets of the Canadian High Dividend VDY and REITs performed very well. Keep in mind that two of the assets are in U.S. Dollars. You can substitute and use Canadian Dollar holdings. See the original 7-ETF post.
At Questrade you will hold dual currency (U.S. and Canadian dollar) accounts. You can buy ETFs for free.
Vanguard VRIF ETF for retirement
Recently I also looked at Vanguard’s VRIF Retirement ETF. That retirement funding ETF delivered a very nice income increase for 2022.
Here’s the VRIF distribution scorecard
Distributions per share.
2020 0.83
2021 0.87 (4.5% increase)
2022 0.94 (7.6% increase)
The portfolio income
Portfolio visualizer offers that the starting yield (2021) in the 7-ETF portfolio would be in the area of 2.8%. You will sell assets to create additional income.
Creating that retirement income
You may choose to ‘fund as you go’. While you will have portfolio income (from bonds and dividends) that is accumulating, you will likely have to sell assets to create the desired portfolio income. The basic idea of asset harvesting would be to keep the portfolio close to the original asset weighting. You do not have to be exact in this regard.
You may choose to sell assets monthly, quarterly, or you may even move the assets to a cash (ETF) at the beginning of the year to ensure that you have your retirement income for the year safely stored in cash. Of course, consider fees and taxes.
Retirement spend rate
Here’s an example of a 4.8% spend rate. That is to say, each year you would spend 4.8% of the initial total portfolio value. Each $100,000 would create $4,800 of income, before taxes, each year. A $1,000,000 portfolio would deliver $48,000 of annual income, before taxes.
The chart runs from January of 2015 to end of 2021. This is for demonstration purposes. I have not adjusted for inflation.
So the good news for this simple mix of ETFs is that you would have enjoyed a decent spend rate and the portfolio value would have increased by 17.4%. Of course it is favorable to have a buffer to weather the storms such as the great financial crisis that began in 2008, or the dot-com crash of the early 2000’s. An increasing portfolio value will offer that much-welcomed cushion.
The bonds and cash help in that regard as well – to protect against severe market corrections.
And keep in mind that we enter the retirement risk zone about 10 years previous to our retirement start date. We need to de-risk and prepare the portfolio well in advance.
And here is an interesting approach. You can remove sequence of returns risk (entirely) by going very conservative as you begin retirement. You would then increase your stock allocation (and growth potential) in retirement. That is called a retirement equity glidepath.
A portfolio spend rate example
Here’s an example with the 4.8% spend rate from the year 2000. That is a very unfortunate start date as 2000 is the first year of the dot-com crash. U.S. markets were down three years in a row. Canadian markets suffered as well.
We see that the Balanced Portfolio is still chugging along in 2021, while the all-equity global portfolio went to zero in 2017. We have to protect against an unfortunate start date.
Keep in mind that there are many periods when the most optimal option is an all-equity or equity-heavy portfolio that would provide greater retirement income. But with an aggressive portfolio you run the risk of retiring and running head first into a severe market correction. You don’t want to gamble and hope that you get lucky. Most retirement specialists would recommend a Balanced or Balanced Growth model. Continue Reading…
A “perfect storm” of challenges faces Canadian investors this RRSP season, according to a a national online study conducted on the Angus Reid Forum Panel for Co-operators, released Tuesday. Jan. 25.
After surveying financial professionals across the banking and wealth management sectors, the panel believes this “perfect storm” can be attributed to the uncertainty of this past year and to DIY [Do It Yourself] investing strategies.
2022 is poised to be a unique RRSP season because of multiple unique market conditions, the study finds: 58 per cent agree that in the face of rising consumer debt, natural disasters (climate change), Omicron, and looming hikes in interest rates, we are approaching a “perfect storm” of challenges, a figure that jumps to 65 per cent in Quebec.
Key findings
80 per cent percent of respondents say that when people experience financial mishaps or losses, many feel overcome with doubt, which leads to indecision and in-action.
76 per cent hypothesize that for many Canadians living in urban centres, home ownership is increasingly feeling out of reach, and because of this, many are looking for DIY investment strategies.
93 per cent say the majority of Canadians have unleveraged opportunities in that they haven’t maximized their RRSP planning and TFSAs.
“By initiating a much-needed national conversation around financial literacy, the hope is that more Canadians will feel empowered to seek counsel from a financial advisor and develop a strategic financial plan to help achieve their goals,” Co-operators said in a press release.
Conducted in January 2021, “Canadian Attitudes on RRSPs” was designed to examine the state of RRSPs, TFSAs and retirement planning strategies that Canadians are using to secure their financial futures – all from the perspective of industry professionals with their ears to the ground across the country.
Consumer confusion appears to be rampant when it comes to understanding the different roles of RRSPs and TFSAs. 90 per cent of financial professionals believe most Canadians” have a lot of confusion” about those two key retirement savings vehicles.
This is reflected in similar confusion about Saving versus Investing: 70 per cent say they see Canadians declining in their ability to differentiate between saving and investing.
The study also sees what it calls “unleveraged opportunities”: 93 per cent think the majority of Canadians haven’t yet maximized their opportunities with RRSP planning, TFSAs, and other programs.
A majority (85%) of industry pros attribute the influence of today’s “culture of now” as hindering people from seeing retirement planning as a priority.
The venerable Registered Retirement Savings Plan (RRSP) also seems to be suffering from the challenge of an “old school image”: 57 per cent say too many Canadians today see RRSPs as “an investing tool of the past” that is no longer as attractive today.
Adding to the angst is the continuing decline of availability of Defined Pension [DB] plans offered by employers: 85 per cent think defined benefit pension plans are going extinct. They too are viewed as a thing of the past: something Canadians don’t expect to have when they retire.
No surprise then that Early Retirement is largely regarded as a myth: 92 per cent of advisors believe that because most Canadians aren’t saving enough for retirement, concepts like “early retirement” are becoming more elusive.
What’s holding Canadians back
When it comes to identifying the causes for Canadians holding back on retirement saving, the survey found financial losses generally contribute to indecision: 80 per cent of advisors say when Canadians experience financial mishaps or losses, many become overcome with doubt, which then leads to indecision and in-action. In addition, 73 per cent see a stigma of shame among many Canadians around financial mishaps or losses.
Just the fact they feel they are not saving added to their stress: 80 per cent see many Canadians feeling paralyzed from the stress of not having enough savings to meet their long-term needs. And many also feel pressure to be perceived as “financially in-the-know.” 65 per cent think there is social pressure among Canadians to appear “financially savvy.” Continue Reading…
Investing is a vital part of a person’s financial life. Whether you’re trying to aggressively grow your assets or prepare for retirement, investing is crucial for reaching your goals. There are several different types of investments that you can make throughout your lifetime, depending on your financial situation and what age demographic you’re in. Investment strategy can and should change as you get older, as your focus begins to shift from your career, to retirement, and beyond. Let’s take a look at three different age demographics and some investment tips for each.
20s –30s: Career Focused
At this age, you may be fresh out of college with a heavy amount of loans to pay off while starting at an entry level position with low income. In this situation, your first thought may not be to start investing your money and saving for retirement. This is understandable, but it’s also a mistake. Investing at a young age will better set you up for the future. Start to put some of your money into a retirement account like a Roth IRA. The IRS allows you to put up to $6,000 a year into your Roth IRA. If your company has a 401(k) plan, that’s another easy way to start saving for retirement especially if they’ll match a certain percentage of your paycheck.
Another popular way of investing is in real estate. Unlike stocks, you can assess its value and what profit it will bring you prior to investing. Especially at this young age you can begin to work on improving your credit score so that you’re able to buy homes and earn passive income. If you get lucky enough to find a home or apartment for a low selling price, you can resell or rent it out to make a large profit. Looking for investments that are low risk and high reward may be best for this age, especially when you don’t have a high amount of income.
40s –50s: Retirement Focused
You’re heading toward retirement age, most likely deep into your career, and have a significant increase in your income. Investing in more stocks and bonds is a great way to earn extra cash to prepare for your coming retirement. Along with that, your Roth IRA and/or 401(k) account most likely have a hefty amount accumulated. It’s suggested that you prioritize saving over spending at this age as it can benefit you immensely once you retire. Continue Reading…
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