A good majority of my clients reach out to me looking for retirement planning advice. They want to know if they have enough assets to retire comfortably, how much longer they should work, what type of investment strategy makes sense in retirement, when to take CPP and OAS, and how to set up tax efficient withdrawals from their savings and investments.
My conversation with Kornel Szrejber for the Canadian Financial Summit this year was about addressing the major gaps in your retirement plan. Below is a summary of what we discussed – but you can check out the full interview, along with the rest of the line-up, at the Canadian Financial Summit website.
Investing Is Just One Part Of The Plan
A common mistake that I see Canadians make is focusing only on what investments to buy, as opposed to seeing the investments that they choose as just one piece of financial planning and their financial wellbeing.
Can you talk about what trouble we as Canadians can get into, if we are only focusing on what investments to buy as opposed to looking at the whole picture?
It is common for Canadians to focus on their investments rather than looking at all aspects of their finances. In fact, most of the clients that come to me want to talk about investing.
Yes, investing is important. Setting up a investment strategy that matches your risk tolerance and time horizon, and more importantly one that you can stick with for the long term is crucial to your overall retirement plan.
But, when you step back and look at the bigger picture, you’ll see that financial planning is about so much more than investing.
It’s a comprehensive look at your spending. It’s about making sure you and your spouse are on the same page – understanding your values around money and aligning that with your spending habits. It’s about disaster proofing your life by having appropriate life and disability insurance, a will, and an emergency fund. It’s about mapping out both your short and long term goals so that you can prioritize your savings into the appropriate vehicle(s).
Attributes of an Early Retiree
You’ve worked with many individuals and families here in Canada. Are there any patterns that you’ve noticed between those that are struggling financially vs those that are on-track to retire early? (i.e. actionable things that people can do to be one of those that are on-track).
The people who seem to have it together tend to have a reasonably low cost of living and can max out at least their tax-sheltered accounts (RRSP/TFSA) each year.
They have clearly defined short- and long-term goals that keep them focused on saving. Many have a high income, but that is not a prerequisite to a good financial future.
They also automate many of their financial decisions, so they pay themselves first through automatic contributions, they set alerts to pay their credit card balance in full each month, and their investments automatically rebalance (through a robo-advisor or an asset allocation ETF).
Conversely, those who are struggling usually have some high interest debt and have trouble getting through the month without dipping into credit. They may or may not have a good handle on their expenses, but there’s just no wiggle room or margin for error.
That means, when something comes up, and it always does, any progress made goes out the window and they can’t seem to get ahead. They treat credit card debt like a way of life and not like the ‘hair-on-fire’ emergency that it is.
And, they typically don’t know exactly where their money is going from month to month.
Another major reason why so many people struggle financially is because their list of wants exceeds their ability to pay for them. I love the line from Paula Pant, author of the Afford Anything blog, that goes:
“You can afford anything, you just can’t afford everything.”
I think this is so true when it comes to our personal finances and all of those short-term goals and aspirations that we all have. Money is finite and we simply can’t do everything we want – at least not all at once.
So, I think the people who are on track to retire early have a good sense of where their money goes and they’re able to prioritize saving for retirement while juggling all of their other short-term needs and wants.
Not Enough Attention Paid To These Retirement Planning Decisions
Are there any important financial decisions that you find Canadians tend to oversimplify and make quick decisions about, when in reality they actually need thorough analysis and have a very significant impact?
Usually anything involving a bit of math.
One that comes to mind is when you leave a job and whether to keep your pension or take the commuted value and invest it in a LIRA. This is not a decision where you just want to take the advice of a friend or colleague. It requires some thoughtful analysis.
This is actually a decision I’ve had to make for myself when I left my day job earlier this year, and even I sought an outside expert opinion help me decide.
Another critical decision is when to take CPP. I’ve heard so many myths about CPP and that you should take it as soon as possible (i.e. at 60), but in many cases the most optimal age to take CPP is to defer it to age 70. This enhances your benefit by 42% and provides longevity insurance.
Finally, there’s the question of whether to contribute to an RRSP or TFSA. If you’re below a certain tax bracket it probably makes more sense to invest in your TFSA rather than an RRSP, and vice versa.
Impactful Financial Decisions
What would you say are some of the most impactful financial decisions that we can make to set ourselves up for success? And which ones can we do ourselves vs having to seek out the help of a fee-only financial planner like yourself?
Starting to invest at a young age and, more importantly, setting up a system to make the contributions automatic. You can start with as little as $25 or $50 a month. It’s not about the starting amount, but about building the habit of saving over time.
Be a savvy financial consumer and understand where incentives may be misaligned, or when the seller may not have your best interests at heart. That’s the essence of financial literacy.
Spend less than you earn, obviously, and try to avoid debt where possible.
Don’t buy more house than you can afford, and if you do buy make sure you stay there for 10 years.
For those seeking advice, I’d say the biggest decision is about retirement readiness. Do you have enough to retire and live a comfortable lifestyle?
The answers require a lot of math and careful analysis about your spending, rates of return, and determining how your various income streams all fit together at different ages in retirement.
That’s why William Sharpe calls retirement income the nastiest hardest problem in finance.
In reality, any major life event such as marriage, having children, buying a house, changing careers – anything that’s going to require a major shift in your own personal finances could benefit from some expert advice, or at least a sober second thought.
Reviewing Your Investment Portfolio
For anybody new to this, what are investment portfolio reviews, and what are the different things that you like to look for when analyzing if someone has any critical flaws in their investment portfolio?
I’ll typically look at a client’s investment statements to determine their asset mix and whether it’s appropriate for their age and stage. I’ll look at their holdings and see if there’s anything missing, or in many cases if there’s a lot of overlapping funds with similar holdings. There’s some odd stuff out there.
If it’s a managed portfolio, I’ll look at the fees and ask questions about what other value-added services (if any) they get from their advisor like tax planning, estate planning, goal prioritization, or if they’re just getting an email once a year at RRSP season.
One client recently asked for a second opinion on his managed portfolio and I determined that his low(ish) cost, well managed portfolio was well worth the fee and that he should stay put.
I’ll always share low-cost solutions like bank index mutual funds, a robo-advisor, or a self-directed ETF portfolio. More importantly, I’ll share the time, effort, and complexity required to manage each of those solutions to determine the best fit for my client.
The goal is not simply to go with the lowest fee but to find a solution that the client can implement and then stick to for the long term. That means meeting my clients where they are. For example, if someone has a bank managed portfolio of mutual funds I can point to the same bank’s suite of index funds at half the cost and suggest they talk to their advisor about them.
Investing for Early Retirement
For those that are working towards an early retirement or are already there, is there a particular portfolio structure that you like.
I’m a big fan of simplicity and would suggest either opening a self-directed online brokerage account (I use Wealthsimple Trade) and buying an asset allocation fund like the ones offered by Vanguard and iShares. Alternatively, if they’d prefer not to manage their own money, to open a robo advisor account and invest through a digital platform.
The simpler, the better. So, if you have multiple account types like an RRSP, TFSA, maybe a LIRA from an old job, plus a taxable account, I’d suggest just using the same asset mix in each account rather than tinkering with different ETF combinations in each account.
I don’t see the point of investing for income in the asset accumulation stage, but certainly once you’ve reached retirement age, depending on your level of assets, you could switch to an income or dividend strategy if your goal is to preserve your capital.
I’m likely to recommend a bucket strategy that includes 1-2 years’ worth of spending in cash savings, another 3-5 years of GICs in a ladder of rolling maturity, and then long-term investments in low cost, globally diversified ETFs. Use the GICs to replace the cash you spent, and then sell off some investments to replace the GIC(s) that matured.
It’s a common mistake to focus solely on your investments while ignoring other potentially more important aspects of your finances – the major gaps in your retirement plan.
Retirement planning requires careful analysis to put everything together, from your investments to your government benefits, workplace pensions (if any), housing situation, and legacy & estate planning.
There are enough low cost and diversified investment solutions out there to consider investing to be solved. Find the investing solution that works for you, automate it, and get the hell out of the way so you can focus on the other areas of financial and retirement planning that deserve your attention.
This post is sponsored by RE Royalties. All opinions are my own.
The federal government’s recent throne speech put climate change and sustainability at the forefront, making it abundantly clear that the future of economic and job growth will be led by investments in green technology.
This shift towards more sustainable investing is not only happening at the government level, but large institutions and asset managers are also going green and striving to make more sustainable investment choices.
The Canada Pension Plan, managed by CPP Investments, more than doubled its investments in global renewable energy companies in 2020.
Blackrock, the world’s largest asset manager, announced a number of initiatives that put sustainability at the centre of its investment approach – including exiting investments that have high sustainability-related risk:
“Because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.” – BlackRock CEO Larry Fink.
Robo-advisor Wealthsimple revamped their SRI portfolios, creating its own low-cost ETFs – ones that don’t just include the best of the worst companies and industries.
At the individual level we can make an impact by reducing our climate footprint and also by investing our money towards a greener and cleaner future. I’ve written before about Green Bonds and how investors can marry investment returns with their environmental interests.
Since then, the demand for Green Bonds has continued to surge around the world. Despite a global pandemic, Moody’s forecasts total Green Bond issuance of up to $225 billion for 2020.
Investors in Green Bonds are typically large institutions or governments, but retail investors like you and me can also take advantage of this growing sector while helping to make a measurable impact on the environment.
Vancouver-based RE Royalties recently announced a successful closing of its first Green Bond issuance – raising $5.5 million. Each $1,000 Green Bond bears an interest rate of 6% per year, paid quarterly, for five years.
Even if the notion of investing in renewable and sustainable energy projects doesn’t get you excited, a 6% annual return is sure to get your attention.
Fixed income returns are going to be challenged for the foreseeable future. 5-year Canadian bond yields are still hovering around record lows (0.37%), while the best five-year GICs are still paying less than 2% interest.
Indeed, Green Bonds paying 6% annual interest can be good for your investment portfolio and good for the planet.
Let’s be clear: I’m not arguing that Green Bonds should replace the government bonds and GICs in your portfolio, but a relatively small investment could boost your fixed income returns while also making a positive impact in the fight against climate change.
About RE Royalties
RE Royalties is a public company with shares listed on the TSXV under the symbol ‘RE’. It acquires revenue-based royalties from renewable energy generation facilities in Canada, the U.S., and Europe.
RE Royalties pledges that its Green Bonds will:
- Provide investors with a strong fixed income, secured against investments made in renewable and sustainable energy projects.
- Only be invested in sustainable and renewable energy projects that will reduce greenhouse gases and mitigate the impacts of climate change.
- Be aligned and compliant with the ICMA Green Bond Principles (2018).
The current portfolio lists royalties from 69 solar, 14 wind, and 3 hydro projects.
How does the royalty structure work?
RE Royalties provides renewable energy operators and developers with the financial flexibility to grow without resorting to dilution, asset sales or restrictive debt covenants. Let’s look at an example of one of these arrangements:
Aeolis Wind Power Corporation was an original developer of the 102 MW Bear Mountain Wind Project located in north-eastern BC. Aeolis sold its equity in the project to AltaGas, who ultimately built the project. As part of the sale, Aeolis received a gross revenue royalty on the project.
Aeolis had other clean energy development opportunities and needed the capital to pursue them. Royalty payments from the Bear Mountain Wind Project were not enough to provide this funding.
RE Royalties provided Aeolis with an upfront payment of $1.24 million in exchange for a portion of their existing royalty for the remainder of the agreement. By monetizing a portion of Aeolis’ royalty, it allowed them to pursue further development opportunities while retaining a larger ownership position.
How To Invest In RE Royalties Green Bonds
The minimum investment is $5,000, purchased in increments of $1,000. RE Royalties Green Bonds earn 6% simple interest annually, paid quarterly into your brokerage account. For example, on a $5,000 investment, you will receive $300 annually, or $75 quarterly, for the next five years after your investment. After five years, you will receive the full $5,000 back.
They are available to investors in non-registered or registered (RRSP, TFSA, RRIF, LIRA, RESP and RDSP) accounts across Canada.
RE Royalties Green Bonds are senior secured against the underlying assets of the company, unlike most competing Green Bond options. This ensures that its investments are ranked in priority to other debts.
Note that you cannot sell RE Royalties Green Bonds. They are private investments for a 5-year term, and they are not traded on public exchanges like stocks.
It’s not often we talk about socially responsible investing and higher returns in the same breath. But times are changing.
Governments and large institutions are putting more emphasis on sustainable investing and green technology. Investment firms are coming out with more and more SRI and ESG investment products and portfolios to meet the growing demand for sustainable investing.
This ‘green’ shift is not just happening to create headlines and good will. There’s money to be made from investing in green technology and renewable energy projects.
Green Bonds can play a role by investing in sustainable projects, and also by delivering strong returns.
Click here to learn more about RE Royalties Green Bonds.
Many investors tend to be nervous about their portfolio and the direction of the stock market during an election year. You may even think it’s wise to hold off on investing a lump sum of cash until after the election is over. This behaviour comes from the belief that markets are more volatile leading up to and immediately following a U.S. election.
An election brings with it the potential for a new presidential party and new ideas for growing the economy. Markets hate uncertainty*, so it’s intuitive to want to wait until after the election to see how the market prices in these new (or old) ideas.
But is there any evidence to suggest that markets are actually more volatile during an election year? And, furthermore, is there any relationship between the stock market and which presidential party is in power?
PWL Capital’s Ben Felix looked at the 12 month returns in November of election years and non-election years from 1926 to 2019. In election years, returns were 10.6% for the average 12 month period, versus 11.9% for all 12 month periods in which there was no election.
So, even though the returns were slightly lower in election years, there was no meaningful relationship between stock market returns and election years. Seven of the 23 election year 12 month periods had negative returns. Those numbers align with historical data that shows market returns tend to be up two-thirds of the time.
Does it matter whether the election is won by a Democrat or a Republican? Again, intuitively, we’d expect more favourable stock market returns from the business friendly Republican party. But the data shows a different result.
Dimensional Funds examined market and economic data for nearly 100 years of U.S. presidential terms and showed a consistent upward march for U.S. equities regardless of the administration in place.
More surprisingly, stock returns (on average) were much higher when Democrats were in power. The excess return of the U.S. stock market over three-month T-bills (equity risk premium) was on average 9% per year higher under Democrats than it was under Republicans.
What should you do with this information? Nothing, assuming you already have a globally diversified, risk appropriate portfolio. Keep doing what you’re doing. But, if you’ve been sitting on cash waiting until after the U.S. election results, I’d suggest you follow the research on how to invest a lump sum of money. The evidence shows that it’s more favourable to invest a lump sum immediately rather than dollar cost averaging over time or waiting until markets “settle down”.
If you’re nervous about investing before the U.S. election it may be wiser to reconsider your risk profile and adjust your asset mix to include more bonds.
*Finally, let’s look at the idea of market uncertainty and waiting to invest until markets “settle down”. Markets price in future expected returns based on the best available information. But the future is unknowable. Stock prices are constantly adjusting as investors price-in new information.
That means markets can never be “certain” about the future. The best we can do as investors is to build a globally diversified and risk appropriate portfolio and stay invested for the long-term. Ignore events (like the U.S. election) that seem like they’d have an impact on stock returns but in reality show no clear relationship.
This Week’s Recap:
In my latest edition of the Money Bag I looked at Couch Potato returns, first investment ideas, early CPP, and more.
Earlier this week I shared some ideas on how to think about retirement planning.
Next week I’ll let you know about an opportunity to invest in the green economy and earn a fixed return. I’ll also share which credit card I’ve been using for the past seven months to maximize the rewards on my spending.
Fred Vettese has completely revamped his excellent book, Retirement Income For Life. I have two copies of this second edition – one to review, and one to give away on the blog. Stay tuned for that in a future post.
Promo Of The Week:
A reminder that the Canadian Financial Summit goes live next week from October 14 – 17.
I’m joining speakers such as Kevin McCarthy (creator of the TFSA), Rob Carrick, Ellen Roseman, Kristy Shen & Bryce Leung (the dynamic early retirement duo) and more.
[see the full speaker list to look for your favourites]
You can catch me on October 16th speaking about how to identify major gaps in your financial plan. In addition to my session, you can watch these great sessions throughout the week on:
- How to retire early and on your own terms
- How to invest better, easier, and more efficiently
- How to earn more money by creatively advertising innovative side gigs
- How to see through financial jargon meant to confuse you
- How to check your “retirement readiness”
- How to avoid crippling fees and terrible advice
- How to legally avoid Canadian taxation when you move for work or retirement
- How to use Financial Technology (FinTech) to save major cash
- How to drawdown your nest egg in retirement & what a safe withdrawal rate is
The Summit will kick off with a live webinar on October 14th and is absolutely free to view for that weekend.
If you want to check out the videos after their free window has passed (and get access to a whole smorgasbord of bonus resources and video sessions) then you’ll want to sign-up for the All Access Pass. Don’t miss out on the Early Bird Pricing, as the price jumps as the Summit begins.
How do you sign up?
Just click here to claim your free tickets and browse this year’s fantastic speaker line-up.
I hope to see you there!
Our friends at Credit Card Genius share the best credit card offers, sign-up bonuses, and deals for the month of October.
Dale from Cut The Crap Investing presents a 7-ETF portfolio for retirees.
Speaking of suitable ETFs for retirement, Dan Bortolotti continues his excellent series on Vanguard’s VRIF with a look at whether its 4% distribution is sustainable. The post also contains a great quote about unsustainable payouts:
“Monthly income funds with such unsustainable payouts are a rarer these days, but they still exist. Perhaps the most egregious example is the Canoe EIT Income Fund (EIT.UN), which pays a monthly distribution of $0.10. That’s a pornographic yield of over 13%, which explains how it has attracted $1.1 billion in assets.”
John Stapleton is an expert on planning for retirement on a low income. He has a workshop scheduled on this topic that takes place live and online on October 21.
Blogger Nick Maggiulli digs into the data to explain why today’s stock market is not a repeat of the dot-com bubble.
Sequence risk refers to the possibility of running out of money in retirement because of the order in which the markets’ best and worst years occur. One researcher concludes that retirees should be informed, but not obsess, about sequence risk.
The latest video from PWL Capital’s Justin Bender explores the subject of investing in gold. Is it a safe haven, portfolio diversifier, return enhancer, and inflation hedge?
My Own Advisor Mark Seed takes an extremely thorough look at the pros and cons of taking the commuted value of a pension. I did a similar calculation when it came to my own pension decision and ended up taking the commuted value.
The Irrelevant Investor Michael Batnick answers a podcast listener question about when to use a financial advisor. The answer is a must-read, and includes this gem:
“Above everything else, an advisor can answer the only question that really matters: Am I going to be okay?”
Why Humble Dollar blogger Jonathan Clements wants to pay it forward as he thinks about his remaining years in retirement.
Thinking of selling your home? Global’s Erica Alini explains how you can save thousands with the right type of mortgage.
RV sales increased sharply during the pandemic as locked-down travellers sought more domestic trips. Andrew Hallam looks at the best time to buy an RV.
Finally, freelancer Max Fawcett explores the controversial modern monetary theory (MMT) and explains why Canada won’t go broke.
Have a great Thanksgiving weekend, everyone!