My column in this weekend’s Financial Post looks at the collision course between Tax Free Savings Accounts (TFSAs) and the Guaranteed Income Supplement (GIS) to Old Age Security.
This is a followup to a curious strategy unveiled by Mornell Shapeau senior actuary Fred Vettese a few weeks ago in the Post. I also touched on it in a subsequent MoneySense blog. (Note the comments there).
Vettese showed how even relatively rich couples can contort their finances so they too can collect GIS for three years: generating over $60,000 of tax-free income between age 67 and 70. The furor over this gambit suggests either GIS or TFSA rules may eventually have to be tweaked as a result.
The strategy consists of postponing receipt of employer pensions, CPP benefits and RRSP income until age 70. Addressing younger people now 40, Vettese envisaged taking OAS and GIS at age 67 while drawing on joint TFSAs worth $320,000.
Normally, the wealthy don’t even consider the possibility of collecting GIS because of the low clawback threshold. In fact, the truly rich are resigned not only to not qualifying for GIS but realize even their OAS may get clawed back, in whole or in part.
Hypothetical scenario still far away?
Asked about this, the Department of Finance said it was a hypothetical scenario still far away, but that “the tax system is continuously under review to ensure it is as fair and as current as possible.”
Advocates for low-income seniors quoted in the article say they should avoid RRSPs and invest in TFSAs instead, since they will result in neither tax nor OAS or GIS clawbacks. And they suggest some simple rule changes to the TFSA or GIS that would nip this “end-run for the wealthy” in the bud.
Those who are wealthy may not wish to go to the trouble Vettese describes to get three years of GIS payments (GIS is however tax-free!). But it may be wise to keep maxing out TFSA contributions while you still can, including for your children 18 or over.
Savers almost everywhere have nearly been beaten into submission by seemingly perpetual Zero Interest Rate Policies (ZIRP) imposed by central banks around the world.
The simple connection is that when interest rates are low, there is no incentive to save money. The flip side is that low interest rates make borrowing cheap, so people raise their debt load. So, is it still worthwhile to save when interest rates are low?
I recently connected with Jon Chevreau, who invited me to contribute with a guest blog here on the “Financial Independence Hub”. I am honoured to participate and hope that sharing my financial independence experience will be of value to you.
At the relatively young age of 43, my wife and I were able to leave the full-time workforce. We were fortunate to have achieved this by establishing a financial plan in our early 20s and then selecting investment strategies that could get us to our goals as quickly as possible.
As fresh university graduates, we had very little in the way of assets. We both started in engineering careers in Toronto. We had your typical expenses with a mortgage, two cars and raising two daughters. How did we save enough in 21 working years to be able to have the choice to not work now? The short answer is that we looked for opportunities to ensure that our savings were as high as comfortably possible and then we focused on ensuring those savings were growing well.
Term Financial Independence was less common 7 years ago
When I left full-time employment, over seven years ago, I told people I was “retiring.” The term financial independence wasn’t as common back then. Unfortunately, there is a negative connotation associated with the term retiring. People seem to picture rocking chairs, watching TV and boredom. I pictured free time, skiing, mountain biking, travelling and all the other things you could do in the world if you weren’t working for 40+ hours per week. I had a great job as an Engineering Manager but really enjoyed my activities in my personal time more than work. I think this is common for most of us.
Last year, my youngest daughter started her first full-time job. I realized that if she could learn from our financial journey, it would be a great benefit to her. By passing on many fundamentals learned on our path to early financial independence, she would have a great jump-start in obtaining her financial goals. I decided to write a step-by-step book, in a series of letters, so our daughters would have a good financial education base to start with. During my writing process, I realized that publishing my letters in an e-book that I titled, Destination: Early Financial Independence, could benefit others. The e-book is for both for people starting to invest and for those who have been managing their portfolios for some time. My wife often reminds me she is so grateful that I have documented this for her learning too. I share our personal roadmap from our first jobs to where we are today, managing our own portfolio in retirement with minimal time requirements, yet achieving above-average results.
Our steps can be replicated by others
I always believed the steps we took and the investment process we followed were all quite simple and the outcome could be replicated by others, if they only knew it could be done. When we “retired,” I knew a lot of friends and family thought we were crazy. They were all polite about it, but I could tell from their questions that they didn’t expect us to really stay retired. We would either run out of money or just get bored.
My prior work colleagues started a betting pool as to when I would go back to work. I am happy to report that no one ever won the pool. I wish when I started our financial planning, I had a book I could have referenced that said, “No Ross, you aren’t crazy. Your calculations are correct and you are on the right track. You have actually used conservative estimates and don’t need to worry about running out of money. It’s a beautiful Monday morning, go cycling!”
Fortunately, in the last couple of years, I have come across a number of firsthand accounts of people who have left the work force early, so I am now more confident it is a goal that can also be achieved by others. By documenting and sharing our story, including strategies and processes, I hope you will find many tips that will be helpful towards your Financial Independence!
Below, I have attached the details of how to obtain my e-book, if you are interested.
The book can be read with free e-reader software if you do not have a Kindle or Kobo device. Links to the free e-reader software is at the bottom of this blog.
Ross is a contributing writer for Canadian MoneySaver. Ross and Shal were featured in a Globe and Mail article, “Freedom 55? Couple couldn’t wait that long for retirement,” Oct 22, 2009.
Wohlner (@rwohlner on Twitter) cites a recent survey that found 52% of those approaching retirement said they wish they started saving for the future sooner. 47% wished they had saved more of their pay check and 34% regretted not saving more aggressively. As a result of all this, more than two thirds (68%) of those nearing retirement said they’re not prepared for what’s to come. Therefore, 42% of those between 55 and 64 plan to keep working, at least in a part-time job.
Here are the 7 tips. Click on the link above for full detail on each tip.
Earlier this fall, I gave a short interview to robo-adviser/light advice firm NestWealth.com about financial independence, ETFs and the term I often use in Findependence Day: guerrilla frugality. You can find it here.
I first used the term “guerrilla frugality” in a personal finance column in the Financial Post. The idea was that early retirement (or findependence) requires a sort of super-frugality.
Guerrilla warfare and guerrilla marketing are both phrases already in the public lexicon. I reasoned that as consumers, we’re constantly besieged by the “guerrilla marketing” efforts of well-heeled advertisers and stealth marketers. So in order to spend less than you earn consistently, in order to save and invest the difference, you need to become super-frugal and practice “guerrilla frugality.” (Note, it’s not “gorilla,” which some readers have mistakenly used in their correspondence with me. Gorilla is the ape!)
In the book, we talk (in war terms) of donning the battle fatigues of the “Frugality Guerrilla,” which we shortened to “Frooger.”
I’ve used the photo of a brown-bag lunch to illustrate this blog, since the character in the novel starts to brown bag it once he decides he wants to be “findependent” by age 50. In his guest post here at the Hub last week, millennial Sean Cooper also describes how he “brown bagged” it (among many other frugal endeavours) to accelerate his mortgage pay down campaign.
Formal definitions in the Glossary of the new ebooks
In the glossary to two new e-books published earlier this month, we offer these two definitions:
Guerrilla Frugality: A term invented by the author to describe the “warlike” mentality of being super-frugal in order to resist the strong consumption messages of America’s markets and advertisers.
Frooger (Frugality Guerrilla): An invented term in this book describing anyone highly committed to being frugal and saving money.
US fee-only financial planner Sheryl Garrett used the term “frooger” in both her foreword to the US edition of Findependence Day, published in 2013, as well as the new US ebook. Because it appears near the front, you can read Sheryl’s foreword free by clicking on the “Look Inside” feature on either the full book or the abbreviated e-book edition.
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