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).
Since I expect robo-advisers will make great strides in 2015, it’s perhaps fitting that the first full week of the new year kicked off with an announcement that Vancouver-based WealthBar is rolling out it service across the rest of Canada.
WealthBar, which describes itself as the country’s “only full service online adviser,” issued a press release Monday advising that it has registered with each provincial regulator across Canada. The company uses low-cost ETF portfolios to deliver online personal financial planning.
Human advice alongside the “robo” advisor
And while it does use the inevitable term “robo-adviser” in the release, it hastens to clarify that the service also includes “access to a real live financial adviser for less than half the cost of most mutual funds.” This “personal financial adviser” will answer specific questions about investing and insurance and provide help with financial plans.
“We’d like to help all Canadians understand how to save money effectively and efficiently,” says Tea Nicola, CEO and co-founder of WealthBar (and daughter of well-known Vancouver financial planner John Nicola). “It’s about knowing how and when you will reach your goals as well as getting the right advice to make the best decisions whenever personal circumstances change.”
Ms. Nicola says WealthBar’s financial planning tool is free to use for everyone. Currently, anyone who signs up also gets a free planning session with a human financial advisor. “We understand that human touch is still important for good financial planning so we made the advisor a key part of the WealthBar experience right from the beginning.”
For more, see www.wealthbar.com. And for more background on roboadvisers in general enter the term here at the Hub’s search engine on the top right of the main page. (While the release spells it as “roboadvisor” we at the Hub are sticking with MoneySense’s use of the e in adviser and so robo-adviser).
… contributing as much as $5,500 to your TFSA (Tax Free Savings Account) if you’re Canadian. Launched at this time in 2009 and behaving somewhat like America’s “Roth” IRAs, it’s hard to believe this is already the seventh time you can contribute. By my calculations, that means $36,500 of collective contribution room plus any investment growth. That’s four years at $5,000 and now three years at $5,500: the maximum was boosted by $500 as an inflation adjustment for calendar 2013.
So if you’re one half of a couple, that means $73,000 in joint contribution room, even if you left it in interest-bearing investments paying almost zero. If you’ve been investing mostly in equities (either stocks or equity ETFs), it’s likely your TFSA had reached $40,000 or more by year-end, so it’s quite conceivable that some couples now have close to $100,000 invested in TFSAs between them.
Thursday, Jan. 1 was of course a holiday. While Friday, Jan. 2, 2015 is likely to be a quiet day for most, there’s no reason why you can’t contribute the next $5,500 to your TFSA that day, particularly if you use online banking and/or discount brokerages.
Good place for equity ETFs
What to invest in? In retrospect, those who invested in US investments with unhedged exposure to the US dollar would have done best up till now. Our daughter’s TFSA is more than half invested in US tech stocks and broader ETFs and the exposure to the greenback has boosted her TFSA to several thousand more than our own TFSAs with more exposure to the loonie.
Generally, I think a Couch Potato approach to investing in TFSAs makes the most sense, using broadly based ETFs from firms like Vanguard or iShares. Those closer to retirement may want a healthy exposure to Canadian dividends: foreign dividends will lose a bit of withheld tax in a TFSA and are better held in RRSPs for that reason. But for younger investors it may make sense to hold non-dividend paying US tech stocks in a TFSA for both the extra growth potential and the exposure to a strong US dollar that is showing no signs of weakening.
I still say the TFSA and Roths are the best games in an over-taxed town. While it’s true that many had hoped the 2015 limit would be more than $5,500, remember that unlike RRSPs, you can continue to contribute to TFSAs well past age 70 or 71: in fact, if you live that long you could still be contributing if you’re a hundred or more.
The key is to get the money in there as soon as you can and let it grow. And that means early January each and every year. While I think the benefit is particularly powerful for the young, they should balance the growth potential with debt repayment. There’s not much point in paying close to 20% a year in credit-card interest if you’re only earning 2% interest in a GIC or cash equivalent contained in a TFSA.
If you’re reading this Monday morning, you have roughly two-and-a-half days to do certain things to optimize wealth or minimize tax before they close the books on calendar 2014.
For convenience and one-stop shopping purposes, here it is below:
By Jonathan Chevreau
With 2014 destined for the record books at midnight Wednesday, there’s not a lot of time left to optimize your investing and tax health. As noted here a week ago, it’s already too late to benefit from tax-loss selling, which had to be executed by Christmas Eve.
Even so, if you’re reading this on Dec. 29th or even Dec. 30th or 31st, there are still a few actions you can take to maximize your wealth or at least minimize tax due in April but you’ll have to complete them well before you start singing Auld Lang Syne. Continue Reading…
The question may sound absurd but if you are a healthy Canadian in your 40s having a 40-year retirement is not just possible but very likely.
According to the World Health Organization, a male’s life expectancy in Canada is 80 and 84 if you are female. Let’s take the half-way point between 84 and 80 and say longevity will be age 82.
The median retirement age in 2011 was 63.2 for men and 61.4 for women. The half-way point will be age 62. It seems logical to calculate your retirement years as your life expectancy minus the age in the year in which you retire. If you retire at age 62 and expect to live to age 82 then you should save up enough money to generate income for 20 years right? Wrong!
Planning for your retirement paycheque is a lot more complicated. Life expectancy is a moving target. In Canada, we have increased life expectancy by 5 years over the past 25 years. Increased life expectancy has been consistent for decades and there’s no indication it will stop.
If we continue at this pace, we will add 10 additional years of longevity within the next 50 years. If you are in your 40s today, it’s quite reasonable to expect your life expectancy will increase from 82 to 92. But now it gets even more complicated. Life expectancy for a surviving spouse is longer than an individual’s. As long as one or both spouses survive, savings are required to support their retirement.
The headline on today’s blog so perfectly sums up the subtle difference between “Retirement” and “Financial Independence” (aka “Findependence”) that I felt compelled to devote a whole blog to the idea.
Ardrey, who is with T.E. Wealth, seems to view the topic of Financial Independence just as we do on these sites, even down to the basic principle repeated often in the book to which our sister site (FindependenceDay.com) is devoted. In Findependence Day, one of the two financial planning characters, Theo, tells his young clients more than once: “The foundation of Financial Independence is a paid-for home.”
Here’s what Ardrey tells clients just starting down the road to Financial Independence:
I’m often asked how one can get to this wonderful nirvana known as financial independence. The first step is to pay off your home. By having a debt-free residence, you have eliminated what is most people’s largest single expense. Without this hanging over your head, you have freed up significant cash-flow.
Even Ardrey mistook FI for Retirement early on
Ardrey and I have followed each other on Twitter for some time. Ardrey posts as @MattArdreyCFP. But it was only recently, in response to something on one of these sites, that Ardrey casually dropped the fact that he’s been preaching Financial Independence (as opposed to traditional Retirement) to his clients since he entered the financial planning business at the turn of the century.
He noted that the financial planning software used at the financial firm where he got his start did not have a retirement calculator. Instead it had an an analysis tool on “Financial Independence Needs.” At the time, being new to the business, Ardrey thought it was just a fancy way of referring to retirement planning but as the years progressed, “I would soon discover that financial independence was something else entirely.”
So, to return to the headline today, what exactly IS the difference? Here’s the key passage:
Retirement, by definition, is the cessation of work with the intent of not returning. Financial independence, on the other hand, is having sufficient financial assets to have the choice about whether or not you continue to work. So, one can be retired and not financially independent or vice versa.
It’s all about Freedom of Choice
This is of course pretty much what I’ve been saying, or at least the characters in the book and ebooks: “When you’re financially independent, you work because you want to, not because you have to (financially speaking).” And that’s exactly what Aubrey tell his clients:
The main differentiator is freedom of choice. If you are not financially independent, you have no choice but to continue working if you don’t want to alter other aspects of your life. Once you are financially independent, you can choose if you want to continue to work in the same capacity – or at all. This freedom to choose is empowering and it’s what I encourage all of my clients to work towards.
Some real examples
So far in this blog, I’ve reiterated Ardrey’s views. I want to close with some examples closer to home. I can think of a few friends or family members who are “retired, but not financially independent.” One couple in particular comes to mind: they do not work and live entirely on government largesse: some combination of CPP, OAS and GIS. Once upon a time they owned a home , a cottage and a car but today they rent a small apartment above a store. They have time freedom, yes, but no financial freedom. They depend entirely on the one source of income from the Government and if that dried up, I don’t know what they would do. Even with it, they are severely constrained in what they can do. So they are indeed “retired, but not financially independent.”
For the opposite situation, I need look only in the mirror. My wife and I choose to continue to work, and keep deferring future income sources that could be taken now if we chose: employer pensions, CPP, drawdowns from registered and non-registered investments, etc. Our home was paid for early in the 1990s, our cars are paid for and we have no debt. We are in fact financially independent but NOT retired, paradoxical as that may seem.
And finally …
Today is Boxing Day and I will probably CHOOSE not to do much more work on these sites, or for paying clients, until the New Year begins, apart from a few pre-arranged pieces and guest blogs. I wish all readers a very Happy New Year. See you on the other side!
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