Building Wealth

For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).

Generation X feeling the Retirement squeeze

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Generation X, and to a lesser extent the Millennials, are already starting to feel the retirement squeeze, according to a Franklin Templeton-sponsored survey released Thursday.

Details are in my column in Friday’s Financial Post, which you can retrieve by clicking on the highlighted headline here: Generation X is ‘stretched beyond their financial limits’ and struggling to save for Retirement. 

The challenges should be familiar to members of any generation (four are mentioned in the survey): it’s never easy saving money when you’re starting out in life with low wages and high expenses. But Franklin Templeton cautions against the  rationalization embraced by younger investors that they simply can  choose to keep on working if they haven’t accumulated enough assets to generate adequate income in retirement.

That may not always be an option, since ill health or corporate downsizing (to mention just two) may prevent this. You can find full details about the fifth annual edition of Franklin Templeton Investments Canada’s 2018 Retirement Income Strategies and Expectations (RISE) survey here.

Stressed GenX resigned to retiring later than hoped

More than half of Gen Xers (aged 37 to 52) are resigned to retiring later than they would want (56% in Canada, 59% in the US). While the online survey included Canadians and Americans across four generations, “this year we felt in particular that Gen X and the stress of preparing for Retirement was the predominant thing coming out of the research,” said Matthew Williams, a Franklin Templeton senior vice president, in an interview.

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How to win at tax-free investing: RRSPs, TFSAs and Dividend Stocks

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Tax-free investing can help you save money over both the long and short term if you invest using these tips.

Tax-free investing and using tax shelters are strategies employed by many successful investors.

Tax shelters are legal investment vehicles that let investors pay less tax. While some are risky and should be avoided, like flow-through limited partnerships, others, like RRSPs and TFSAs, are great ways for Canadian investors to cut their tax bills.

Here are the best ways to defer or lower the amount of tax you have to pay on your investments.

Tax-free investing with Registered Retirement Savings Plans (RRSPs)

 

RRSPs are a great way for investors to cut their tax bills and make more money from their retirement investing. RRSPs are a form of tax-deferred savings plan. RRSP contributions are tax deductible, and the investments grow tax-free.

You can put money in RRSP tax shelters each year (up to a limit based on your income) and deduct it from your taxable income. You only pay income tax on your investment, and the income it earns, when you make withdrawals from your RRSP.

In a way, investment gains in RRSP tax shelters give you a double profit. Instead of paying up to 50% of your investment gains in taxes right after you make them, you keep 100% of them working for you until you take money out. That will likely be years later in retirement, when most Canadians enter a lower tax bracket.

If you want to pay less tax on investment income while you’re still working, investing in an RRSP is the way to go.

Tax-free investing with tax-free savings accounts (TFSAs)

A tax-free savings account lets you earn investment income — including interest, dividends and capital gains — tax free. But unlike registered retirement savings plans (RRSPs), contributions to tax free savings accounts are not tax deductible. However, withdrawals from a TFSA are not taxed.

TFSAs can generally hold the same investments as an RRSP. This includes cash, ETFs, mutual funds, publicly traded stocks, GICs and bonds.

Here are three tips you can use to make sure you’re getting the most profit—and tax benefits—from your TFSA:

1.) Keep higher-risk investments out of your TFSA: Holding higher-risk stocks in your TFSA is a poor investment strategy. That’s because high-risk stocks come with a greater risk of loss. If you lose money in a TFSA, you lose both the money and the tax-deduction value of the loss.

2.) Let your current income help you decide between your tax free savings account and RRSPs:RRSPs may be the better choice in years of high income, since RRSP contributions are deductible from your taxable income. In years of low or no income—such as when you’re in school, beginning your career or between jobs—TFSAs may be the better choice.

3.) Consider holding exchange-traded funds in your TFSA: It’s difficult to build a diversified portfolio within your TFSA. Instead, look to exchange-traded funds for TFSA investing.

Tax-free investing strategies can include saving on dividend taxes

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A Canadian compromise on TFSA contribution room  

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By John De Goey

Special to the Financial Independence Hub

Canadians are notoriously nice consensus seekers.  The old joke might be that they tend to never cross the road because they consistently prefer to be in the middle.  If that’s the case, I’d like to propose a “Canadian” solution to the ongoing debate about how much should be allowed to contribute to their TFSAs annually.

You may recall that the limit is currently set at $5,500 and is likely to go up to $6,000 in a year or two (TFSA contributions are indexed to cumulative inflation and go up in $500 increments when thresholds are passed). You may also recall that for one brief year, the limit was set at $10,000 in keeping with a political promise made by a party that is no longer in power in Ottawa.  The debate, it seems has mostly revolved around the benefit of incremental tax relief for those who might not need it.

You may recall that I have argued that there is an unfair cap put on RRSP contributions because the 18% limit that applies to most people essentially penalizes the small percentage of Canadian income earners who make more than about $145,000 a year.  Similarly, some people like CIBC’s Jamie Golombek have pointed out that many Canadians are opposed to using RRSPs because they will end up paying tax down the road when making RRIF withdrawals.  The point made by Golombek* and others including yours truly is that people should be thinking about the concept of ‘tax bracket arbitrage’ when contributing to government plans. If you’re in a higher tax bracket now as compared to in retirement, contributing to your RRSP makes more sense.  If you’re in a lower bracket, the TFSA makes more sense.  If you think you’ll be in the same bracket, it makes no difference.

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Top 10 Rules for successful Retirement Income Planning

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By Doug Dahmer

Special to the Financial Independence Hub

As a Retirement Income Specialist, I have spent the past 10 years helping those transitioning from their savings years to their spending years to discover the secrets of how to optimize their future income streams, while minimizing the amount of taxes they pay. These years of experience have provided me with a great number of valuable lessons. I have reduced this learning to a list of top 10 success rules for retirement income planning.

In a world where (unless you work for a government agency – police, nurses, teachers, government employees etc.) the guarantees of a corporately sponsored retirement income stream have virtually gone the way of the dodo bird. Corporate defined benefit pension plans have been replaced with defined contribution plans and group RRSPs.

Upon retirement, the vast majority of baby boomers are now faced with the daunting challenge of determining how to convert a large lump sum of accumulated retirement savings into a recurring income stream that lasts as long as they do. These risks and responsibilities were previously carried out by disciplined and talented pension plan managers. They have now been quietly delegated to the individual – and this has occurred without providing the adequate tools to perform the tasks.

It is my hope that the following 10 rules are helpful to those who have been left to their own devices to cobble together a safe, secure retirement income.

1.) Take ownership in your future success

A plan is not a plan until, the people who have to live with the choices contained in the plan, have played an active role in crafting these choices. The level of commitment one has toward following the prescribed progression of choices contained in the plan is directly proportional to the confidence you have that these choices will lead to successful achievement of the life outcomes most important to you. By taking ownership in your own plan helps keep you focused on the aspects of your life you have control over — choices — while identifying the need to put protective mechanisms place to mitigate the potential damage of events that are beyond your control.

2.) Your Retirement Income Formula is not a static product

Retirement Income Planning is not a “One and Done” event. It is also not an exact science. Every pilot before leaving the ground files a detailed flight plan knowing full well that no flight has ever gone according to plan. The pilot must constantly monitor where they not only relative to their desired destination but also relative to their original flight plan. Retirement Income Planning, like flying, contains no roads to follow or signs to provide directions. Wondering too far off course can lead to mid-air collisions or running out of fuel. Confidence in your Retirement Income Formula comes from testing it, stressing it and constantly re-adjusting it, as life unfolds. Only by engaging in a planning process that evolves with your life, will you achieve success and security. As daunting as this may sound, like filing a flight plan, when you have access to the right tools this task can be made significantly easier.

3.) Link your life plan to your financial plan

The key to financial success in the second half of life is to directly connect your desired life plan to your investment plan. If your money managers do not have an intimate understanding of your year-by-year cash flow demands or the specific portfolios you plan to source these funds from, you are not getting the level of protection – or service – that you deserve.

4.) Create forward knowledge of how much you need and when

Better financial decisions will always be made when you have advance knowledge of the what, the when, and the how much of your desired lifestyle. People who blindly chase the unknown savings target of “more” are the people who make the most financial errors.

5.) Don’t trust your future to outdated ‘rules of thumb’

Conventional wisdom that served past generations well, is no longer applicable. Baby Boomers are in the process of redefining retirement. Governments are having to respond to the financial implications of a rapidly aging society. Within this state of flux, tremendous new opportunities exist for those who find them. Devastating risks await those who fail to recognize the new reality. Probably the largest mistake baby boomers are currently making is the date they choose to start their Canada Pension Plan. A poor start date choice can frequently cost the average couple well over $100,000 over the balance of their lives.

6.) Embrace variables, not averages Continue Reading…

4 investment strategies every stock investor should consider

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By Sia Hasan

Special to the Financial Independence Hub

Portfolio managers and analysts believe that no one investment strategy outweighs the rest. Instead, every game plan has its unique strengths and weaknesses. As such, it’s up to investors to choose the tactic that best works for them. It’s worth taking time to learn to develop strategies if you are considering investing in bonds or stocks. Some of the stock and bond investment strategies include quantitative, algorithmic trading, value investing, growth strategy, GARP investing, and collar options strategy.

Quantitative, Algorithmic Trading

Quantitative, algorithmic Trading involves selection of an investment based on mathematical analysis. In fact, investors don’t need to consider other factors such as how a business operates. All they need is to analyze different variables that correlate with each other to create an algorithm that can help predict how stock or bond prices will change over time. Quantitative, algorithmic trading is one of the newest investment strategies that have become popular in the past few years. It allows investors to engage in different investment styles and come up with a thesis, variables and set of data that they can use to identify and exploit market inefficiencies. It’s up to the investors to develop a model, test it with historical data, and implement it to see if it works. Algorithmic trading is ideal for investors with some mathematical and computer programming background.

Value Investing

Value investing is a strategy where an investor buys stocks that are grossly undervalued. Buying stocks that trade for less value than their net assets and cash profits allows the investor to limit the amount of money he or she could lose on an investment. The strategy is ideal for investors who believe that the market overreacts to emerging trends, resulting in a price decline that doesn’t correspond with an investor’s long-term fundamentals. The stock price could decline beyond its fair value when a market overreacts to bad news. As such, an investor can take advantage and buy stock, and wait for its value to return to its optimal level.

Growth Investing

Growth investing is a more aggressive investment strategy that focuses on capital appreciation. It involves investment in stocks or bonds that exhibit signs of growth even if their current share price seems high. Investors are anticipating that stocks and bonds will grow in value and offset the premium they will pay for the investment. However, this is an aggressive investment approach that investors regard as both highly rewarding and highly risky. Investors have to be confident about the growth and competitive strength of a company to justify that its share value will grow in the future. Growth investing strategy is ideal for futurists who are confident that stocks or bonds will increase in value over time.

Growth at Reasonable Price Investing (GARP)

GARP (Growth at a Reasonable Price) is a hybrid of growth and value investing strategies. However, analysts have often stated that value and growth-based investment strategies are joined at the hip. In fact, there is little difference between growth and value-based investment strategies. The growth of a company will always impact its fair value. It is far better to buy highly valued shares at a fair price than to buy undervalued shares at a lower price. GARP strategies enable investors to identify stocks and bonds that are priced reasonably. As such, they can benefit from the stock’s growth potential as well as enjoy protection against price deviation.

It’s important to note there is no one investment strategy that is best for everyone. What matters is whether the investment tactic is a good fit for your company or not. However, nothing is worse than being inconsistent with each of your investment strategies. You can hardly find the source of error that could be increasing your costs if you invest in different philosophy each time. However, it is vital to minimize your trading costs irrespective of the investment strategy you adopt.

Sia Hasan is a tech entrepreneur by day, and a freelance writer by night. Her passion lies in business technology, efficient and sleek programming, and customer relationship management. When she doesn’t have her nose pressed against her computer screen, you can find her spending time with the loves of her life, her two dogs, Pixel and Vector.