Hub Blogs

Hub Blogs contains fresh contributions written by Financial Independence Hub staff or contributors that have not appeared elsewhere first, or have been modified or customized for the Hub by the original blogger. In contrast, Top Blogs shows links to the best external financial blogs around the world.

Financial planning should be a Parallel, not Serial, process

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By Darren Coleman

Special to the Financial Independence Hub

In a serial circuit when one light bulb goes out, all the lights go out. Each light is wired to the next and all of them have to work for each one to work. In a parallel circuit all the lights are wired together but independently from each other, so when one light goes out, the other lights still stay on.

This concept is important and comes into play in my book ‘RECALCULATING – Find Financial Success and Never Feel Lost Again’. The book applies the analogy of driving to investing and financial planning. (See earlier Hub blog on the book).

I have spent almost a quarter of a century counseling clients about their money and assets, and often see people who believe their financial planning should look like a serial circuit. They think they must achieve one goal before moving on to the next. They have constructed an order or sequence that must be strictly followed for them to feel comfortable about achieving their plan.

This is the view Marvin and Jesse had when I met them. A successful, professional couple, they had young children and a list of goals. No. 1 on the list was that they wanted to be mortgage-free by age 45. They also wanted their kids to go to a private school, and vacations every year with the family. In addition, they wanted a comfortable retirement by their late fifties. They had great jobs, were disciplined savers, and figured they should be able to achieve all these goals. But they didn’t know how to put all the pieces together and make it happen.

I reviewed the situation to gain an understanding of their current state, and discovered that almost all their uncommitted cash flow went to pay down the mortgage. There were only token amounts being saved for their children’s education, family vacations, and retirement plans.

A couple that used serial financial planning

When I asked about this, they said paying down the mortgage as quickly as possible was the central assumption – the core pillar – of their financial planning. In short, this couple looked at all their desired destinations as if they were part of a serial circuit. Once they had paid off the mortgage, they would move on to the other plans.

I told them they could do this, but achieving that milestone of being mortgage-free by age 45 meant they could not put their children in private school, take annual holidays with the family, or make tax-advantaged contributions to their retirement plans. So, while they could be mortgage-free at an early age, they would not accomplish their other goals. And, of course, they couldn’t get the time back.

None of us can.

Shift to financial planning in parallel

I showed them that changing the picture from a serial circuit to a parallel circuit might be the answer. Continue Reading…

Large taxable foreign portfolio? Watch $100K and $250K thresholds for CRA’s T1135 form

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If you’re a Canadian investor with a large taxable foreign portfolio, you need to be aware of your cost base, since exceeding $100,000 of so-called Specified Foreign Property (SFP) has to be reported to the Canada Revenue Agency.

This is examined in my (monthly) High-Net Worth column for the Globe & Mail Report on Business which was published online on Friday and was in the physical paper Wednesday, Nov. 15. You may be able to retrieve it by clicking on the highlighted headline: Pay Close Attention to Your Foreign Assets to Avoid Tax Troubles. (Depending on how often you access the site, access may be restricted to subscribers. I’ve summarized the main points below.)

If you file your own taxes, you may have noticed an innocuous looking “box” you may or may not tick each year that ask whether you own “Specified Foreign Property.” If you have a cost base of more than $100,000 of SPF you have to tick that box and fill out a CRA form called the T1135. For most Canadian investors the relevant investments will probably consist primarily of individual US stocks, ADRs and/or foreign equity ETFs trading on US and other foreign stock exchanges.

There is also a higher threshold of $250,000 you also should be aware of because this entails even more detailed reporting and paperwork, and the article suggests you may wish to avoid reaching that higher threshold. The $100,000 and $200,000 thresholds are per individual, not household, and again, it’s based on cost base not current market value.

Failure to comply can entail serious penalties.

How to stay below the threshold and still have foreign content

If you would rather not deal with more CRA paperwork and capital gains hassles, I’d argue you should try to stay below the $100,000 threshold, in which case you don’t have to tick the box on your tax return. Continue Reading…

How Group Annuities can help employers protect Defined Benefit pensions

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Source: Mercer Pension Health Index published October 2, 2017

By Brent Simmons, Sun Life Financial

Special to the Financial Independence Hub

Recently, employees and retirees of Sears were stunned to learn they may not receive all of their defined benefit (DB) pension when it declared bankruptcy. They learned their pension plan was underfunded and the company had requested that it be allowed to stop making the contributions required by Ontario laws. The plight of Sears employees and retirees has left many Canadians wondering if their DB pension plan is healthy and if their DB pension is safe.

The pension challenge

With a DB pension plan, a company promises their employees a pension for life and is responsible for paying the pension: whatever the cost ends up being. The problem is that low interest rates and choppy equity markets have made the funding level of many pension plans look like a roller roaster ride. This can be seen in the chart at the top of this blog.

Another challenge facing pension plans is that Canadians are living longer, meaning that pensions need to be paid for a longer time. A common rule of thumb is that one year of additional life expectancy at age 65 can increase the cost of the pension plan by 3% to 4%.

In a tough economy, the need to contribute to a pension plan can often come at a time when a company’s core business is also facing financial difficulties. If a company becomes bankrupt, then the company likely won’t be able to pay the contributions owed to the pension plan and employees may indeed face a shortfall in its pensions.

How Group Annuities protect their employees’ pensions 

The good news is that a growing number of Canadian companies are taking steps to protect their employees’ pensions. They are buying group annuities to transfer the financial risk of their pension plans to insurance companies, which are subject to strict regulations and must have funds on hand at all times to pay promised pensions. With a group annuity, an insurer assumes responsibility for providing the pensions to a company’s retirees in exchange for a fee, and the retirees continue to receive their promised pension.

Continue Reading…

How Millennials’ financial priorities differ from previous generations

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By Gabby Revel

Special to the Financial Independence Hub

There is some truth and some fiction to the idea that millennials are not responsible with their finances. On the one hand, today’s youth is particularly adept at saving money and meeting their financial responsibilities on a monthly basis. However, millennials appear to have less foresight, as they’re not as interested in planning for their financial future as Generation Xers and Baby Boomers were.

Financial freedom

The most important element of a paycheck for millennials is the financial freedom it offers them. A study by Bank of America and Merrill Edge discovered that this generation is better at saving money compared to other generations, but what they choose to spend this money on differs greatly from older workers.

This same study discovered that 63% of millennials value financial freedom above all, meaning they set aside a certain amount of money to continue living their lifestyle of choice. This means planning for social trips or vacations, eating out at fancy brunch restaurants on Sundays and using Uber as one of their primary forms of transportation.

A survey by BMO Wealth Management found that 26% of millennials  —  ages 18 to 34 — believe “saving more” is their most important priority with finances. A further 25% value reducing and eliminating debt at the top of their list, while 20% want to invest effectively, 17% focus on budgeting and 5% believe in spending on personal needs or goals above all. All in all, millennials are reinventing the wheel in regards to where their finances should go, but they might pay the price moving forward.

Disregard for retirement

 A chunk of today’s youth has yet to begin planning for retirement, as they’re not thinking about what their needs will be in the future. Some believe Social Security (or in Canada CPP/OAS) will get them through their golden years, which only nets the average retiree about $1,300 per month nowadays. Others buy into the carpe diem or YOLO mentality that’s been instilled within millennials.

Continue Reading…

Sun has set on the Golden Days of DB pensions: How to survive the New Retirement

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My latest Financial Post column can be found online, by clicking on the highlighted headline: Sun has set on the Golden Days: How to survive the ‘New’ Retirement. It can also be found on page B8 of the Friday paper under the headline Senior Investing Gets Critical.

The piece is based on a half-day conference held in Toronto on Wednesday sponsored by Franklin Templeton Investments. The third annual Retirement Innovation Summit was an equal mix of sessions on Retirement readiness and updates by Franklin Templeton executives on the current state of the markets.

The big theme was the well-established (two decades now) shift from the guaranteed-for-life Defined Benefit pensions earlier generations enjoyed, to market-variable alternatives like Defined Contribution pensions. As a result, longevity risk and market risk has been gradually shifting from the shoulders of employers to those of their workers/employees. And that in turn has meant that would-be retirees have to devote a lot more attention to the markets and investing than older generations that enjoyed what seems in retrospect to be a “golden age” of retirement income security.

Retirement is a gradual process, not a cliff

As for Retirement Readiness, one speaker described how Retirement itself has become more tentative. Instead of moving abruptly from 100% work mode to 100% leisure the moment you reach the traditional retirement age of 65, workers are experimenting with retirement and more often than not returning to the workforce, only to rinse and repeat.

Since the US financial crisis, the numbers of people aged 65 or more who are still working full-time has been on the rise. Of those still working after 65, only one in five did so because they felt they had to because of shaky personal finances. For the other four in five, it’s “because they want to or truth to tell, their spouse wants them out of the house,” the speaker said.

Furthermore, among both full- and part-time workers in that age category, 40% reported they had retired twice already: they had quit the working world, returned a few months or years later, then quit again and then returned to work again.”

Taking a Retirement Victory Lap

So much for the so-called “Retirement Cliff.” This of course is a major theme of the book I co-authored with Mike Drak: Victory Lap Retirement. We basically argue that retirement is a long process that involves slowly moving into. After all, you never see an airplane land by suddenly putting on the brakes in mid-air and dropping vertically: there is a gradual “glide path” to a smooth landing.

So it is with Retirement in our view: call it Semi-Retirement or an encore career or a legacy career but in essence it’s about moving gradually over five or ten years from 100% full-time work to perhaps 80%, 50%, 30% and so on, so that by the time you’re fully retired (perhaps in your 70s), the shock to your system is much less severe.