Weekend Reading: 2022 Financial Goals Edition

By Robb Engen | November 27, 2021 |
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Weekend Reading: 2022 Financial Goals Edition

Yes, I know it’s not even December yet but I’m going “that guy” – the first to share his 2022 financial goals. First, a quick trip down memory lane.

I’ll never forget attending a ceremony to be recognized for 10 years of service at the University along with dozens of other employees receiving awards for 5 to 50(!) years of service. As I sat there I remember thinking, if I’m still here in five years to receive my 15-year recognition then something has gone horribly wrong in my life plan.

Two months later we embarked on our epic 32-day trip to Scotland and Ireland. After this life changing trip I decided to put in my notice for the end of the year and pursue my entrepreneurial dreams.

It has been two years since I quit my job as a post-secondary fundraiser and turned my long-time online side hustle into a full-time business. Aside from *waves hands at everything* the transition has gone even better than I imagined. 

I work side-by-side with my wife, who handles all of the new client communication, scheduling, invoicing, and so much more so I can focus on what I do best – writing, planning, and working one-on-one with our existing clients. It’s a dream come true. Best of all, we’re there for our kids when they leave for and come home from school.

The result is a wildly successful business that does not compromise a healthy work-life balance. We’ll put that to the test next year (fingers crossed) when we can hopefully resume travelling. I may or may not have shed a tear when our youngest daughter got her first dose of vaccine yesterday.

2021 Recap:

We had five financial goals or money moves to make this year. The first was to catch up on unused contribution room in my wife’s TFSA. Our goal was to contribute $50,000 but we’ll end up short of that by about $6,000. Life is about trade-offs and we opted to spend that $6,000 on some backyard landscaping instead.

I’m current with my TFSA contributions and so we were easily able to take care of our second goal of maxing out my annual TFSA limit of $6,000.

Our third goal was to continue investing aggressively inside our corporate investing account. We already have a healthy cash float for our business, and our expenses are quite low after we pay ourselves, so we’re able to invest excess profits inside the corporation. Our goal was to invest $48,000 in 2021, but business revenue was better than anticipated and we were able to invest $70,000.

Our fourth goal was to max out our kids’ RESP contributions ($5,000) and we have done that again this year. A related goal was to rebalance this account, which is 100% invested in equities, by adding bonds. I have not done this yet. That may have been wise in hindsight but the fact is we need to dial down the risk in this account as my kids are now one year closer to needing the money for post-secondary.

The fifth goal was more of a change in philosophy. Before the pandemic I thought it would make sense to start paying down the mortgage more aggressively by 2021, but when the interest rate on our variable mortgage fell to 1.45% I decided to forego any extra mortgage contributions and focus on the other four priorities above.

2022 Financial Goals:

If you’ve been following my journey you know that we reached our $1M net worth milestone last year and now aim to reach Coast FIRE status.

What this means to me is having the flexibility to work and earn less without feeling the pressure of maintaining a high savings rate. The truth is our rich life includes more travel and active leisure, and less time spent in front of a computer working on a spreadsheet or on Zoom calls.

We don’t know yet what 2022 will bring in terms of the ability to safely travel outside of Canada as a fully vaccinated family. I am forever an optimist and have tentatively booked trips to Maui, Italy, and the U.K. (all refundable).

Financially, our 2022 goals will look a lot like this year’s goals. 

  1. Finish catching up on my wife’s unused TFSA room ($37,500)
  2. Max out my annual TFSA room ($6,000)
  3. Invest excess profits in the corporate investing account (~$48,000)
  4. Max out RESP contributions ($5,000) and rebalance for real this time
  5. Roll the extra $6,500 ($44,000 to TFSA in 2021 – $37,500 to TFSA in 2022) into our travel budget

We can achieve this by continuing to pay ourselves at our regular rate, while intentionally earning less business revenue (taking on fewer clients and fewer writing assignments). Since it can be hard to say no to new business, we’ve already blocked out our calendar for most of April and most of July (when we presume to be travelling).

You can see where this is going. If we’re successful next year then 2023 will shape up to be our first Coast FIRE year where we are only contributing $6,000 each to our TFSAs, plus $5,000 to the kids’ RESP. 

I’ve done the math to know that we can just let the rest of our investments ride without ever adding to them again. We’d have the option to spend that extra $31,500, or reduce the amount we pay ourselves, or some combination of the two.

More likely, our business will still continue to do well and so we can keep adding excess profits to our corporate investing account.

That’s the plan, anyway.

This Week’s Recap:

I recapped our trip to Boston in the last edition of Weekend Reading.

Is free trading really free? I explore the issue of trading fees in my latest MoneySense column.

On Young & Thrifty I look at whether stocks are more risky than real estate.

Promo of the Week:

If you’re a business owner then you need to take advantage of the American Express Business Platinum Card and all of the perks that come with it.

New cardmembers can earn 80,000 Membership Rewards points when they spend $6,000 in the first three months. If you keep the card past the 14 month mark and make one purchase then you’ll earn an additional 25,000 Membership Rewards points.

I transfer Membership Rewards 1 to 1 to Aeroplan where I value Aeroplan miles at 2 cents per mile*. That means your initial 80,000 welcome bonus points can be worth up to $1,600.

*Note that I recently redeemed Aeroplan miles for four business class tickets from Calgary to Rome. The tickets would have cost a whopping $33,000 in cash, which means I got an incredible 10.5 cents per mile value out of those Aeroplan miles.

You’ll also get hotel perks and airport lounge access.

The $499 annual fee may be tax deductible as a business expense.

Weekend Reading:

Costco ended its credit card relationship with Capital One and is forging ahead with CIBC. Our friends at Credit Card Genius breakdown the new details on what the CIBC Costco MasterCard is going to offer

Another plug for Dan Bortolotti’s excellent new book – Andrew Hallam shares how to reboot your portfolio with Canada’s ETF guru. Read my review of Reboot Your Portfolio here.

Has the pandemic ended the dream of retiring abroad? Jon Chevreau says it can still be done.

The odds of you picking a single stock and it becoming one of the big winners of the future are not in your favour. Read why this is the stock picker’s bear market.

With assets everywhere seemingly overvalued Nick Maggiulli (Of Dollars and Data) shares why this will not last.

PWL Capital’s Justin Bender explains the key concepts of asset location:

My own view is that most DIY investors should ignore asset location and intentionally hold the same asset mix across all accounts for simplicity.

Millionaire Teacher Andrew Hallam tells investors: Don’t worry, be happy.

“Take comfort knowing this:  most wealthy retirees didn’t earn their fortune with a single home run.  Sure, stories of fast fortunes grab our attention.  But they aren’t the norm.  Instead, most people grow wealthy because they spend far less than they earn, they invest responsibly…and they’re patient.”

An enjoyable read from Wealthsimple Magazine on the five simple rules to be the absolute worst stock picker.

Steadyhand’s Tom Bradley says investors should be wary of the next big thing in ETFs.

Finally, why millions of Canadians are planning to choose self-employment, and how to make that transition.

Have a great weekend, everyone!

3 Reasons To Take CPP At Age 70

By Robb Engen | November 26, 2021 |
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3 Reasons To Take CPP At Age 70

It might seem counterintuitive to spend down your own retirement savings while at the same time deferring government benefits such as CPP and OAS past age 65. But that’s precisely the type of strategy that can increase your income, save on taxes, and protect against outliving your money.

Why Take CPP at age 70?

Here are three reasons to take CPP at age 70:

1. Enhanced Benefit – Take CPP at 70 and get up to 42 percent more!

The standard age to take your CPP benefits is at 65, but you can take your retirement pension as early as 60 or as late as age 70. It might sound like a good idea to take CPP as soon as you’re eligible but you should know that by doing so you’ll forfeit 7.2 percent each year you receive it before age 65.

Indeed, you’ll get up to 36 percent less CPP if you take it immediately at age 60 rather than waiting until age 65. That alone should give you pause before deciding to take CPP early. What about taking it later?

There’s a strong incentive for deferring your CPP benefits past age 65. You’ll receive 8.4 percent more each year that you delay taking CPP (up to a maximum of 42 percent more if you take CPP at age 70). Note there is no incentive to delay taking CPP after age 70.

Let’s show a quick example. The maximum monthly CPP payment one could receive at age 65 (in 2021) is $1,203.75. Most people don’t receive the CPP maximum, however, so we’ll use the average amount for new beneficiaries, which is $714.21 per month. Now let’s convert that to an annual amount for this example = $8,570.

Suppose our retiree decides to take her CPP benefits at the earliest possible time (age 60). That annual amount will get reduced by 36 percent, from $8,570 to $5,485 – a loss of $3,085 per year.

Now suppose she waits until age 70 to take her CPP benefits. Her annual benefits will increase by 42 percent, giving her a total of $12,169. That’s an increase of $3,599 per year for her lifetime (indexed to inflation).

2. Save on taxes from mandatory RRSP withdrawals and OAS clawbacks

Mandatory minimum withdrawal schedules are a big bone of contention for retirees when they convert their RRSP to an RRIF. For larger RRIFs, the mandatory withdrawals can trigger OAS clawbacks and give the retiree more income than he or she needs in a given year.

The gradual increase in the percentage withdrawn also does not jive with our belief in the 4 percent rule that will help our money last a lifetime.

You can withdraw from an RRSP at anytime, however, and doing so may come in handy for those who retire early (say between age 55-64). That’s because you can begin modest drawdowns of your retirement savings to augment a workplace pension or other savings to tide you over until age 65 or older.

Tax problems and OAS clawbacks occur when all of your retirement income streams collide simultaneously. But with a delayed CPP approach your RRSP will be much smaller by the time you’re forced to convert it to a RRIF and make minimum mandatory withdrawals.

With careful planning (and appropriate savings) your retirement income streams by age 70 could consist of CPP and OAS benefits, small RRIF withdrawals, plus – the holy grail – TFSA withdrawals, which do not count as income and won’t affect means-tested benefits like OAS.

3. Take CPP at age 70 to protect against longevity risk

Here’s where the counter-intuitiveness comes into play. Most default retirement projections will have you taking CPP at age 65 (or earlier) while delaying withdrawals from your RRSP and/or LIRA until age 71.

As I suggested above, the idea is to spend down some of your RRSP before age 70 to fill the gap left by deferring your CPP benefits. Good luck getting your commission-paid advisor to buy into this approach. I doubt many advisors would like the idea of spending down your savings early in order to maximize retirement benefits from CPP.

“Spend your risky dollars first because they may not be there for you in your 80s, depending on how your investments do. A bigger CPP cheque, however, will definitely be there for you.” – Fred Vettese

Spending down your RRSP in your 60s while deferring CPP until age 70 is like converting your risky assets (personal savings in the stock market) into a guaranteed income stream for life.

Related: 5 ways to save your retirement

Think about it. Will you still have the required mental faculties at age 80 or 90 to continue managing your own retirement assets? Or would you prefer to enjoy spending those assets in your 60s and 70s, knowing you still have an enhanced (and guaranteed) income stream to last a lifetime?

If your biggest fear in retirement is outliving your money then why not design your retirement income streams to protect against that very fear? Instead, most retirees take their CPP benefits the first chance they get – leaving additional money on the table and giving up a portion of that longevity risk protection.

Let’s hear it: Retirees, when did you take CPP? Soon-to-be retirees, have I given you a compelling argument to take CPP at age 70?

3 Reasons To Take CPP At Age 60

By Robb Engen | November 25, 2021 |
Posted in

3 Reasons To Take CPP At Age 60

It’s generally not wise to voluntarily take up to a 36 percent reduction in income, especially if that income is paid for life. But that’s exactly what happens to retirees who elect to take CPP at age 60.

I’m a big proponent of delaying CPP up to age 70 to help protect against longevity risk and enhance your monthly pension benefit in retirement. Only a small percentage of retirees do so, however, as many prefer to take CPP as soon as they’re eligible.

Why Take CPP at Age 60?

Taking CPP early may not be the most optimal financial decision but there are a few cases where it can make sense. Here are three reasons to take CPP at age 60:

1). You Need to Eat and Pay the Bills

Maybe you were laid off in the latter stages of your career and struggled to return to the workforce, or you had to retire early due to poor physical health. Whatever the case, you’re about to turn 60 and need to build an income stream.

Simply put, without sufficient income or personal savings to carry you through your 60s you may have no choice but to take CPP as early as possible.

The earliest you can take your CPP benefits is one month after your 60th birthday. Doing so means a 36 percent permanent reduction in your monthly benefit, but that’s still money in your pocket today.

The maximum payment amount for taking CPP at age 65 is $14,455 per year (2021). That amount would be reduced to $9,244.80 per year if you elect to take CPP at 60.

Taking that extra $9,200 at age 60 could mean the difference between meeting your retirement income goals or not, and that needs to be weighed against having to wait five years for an extra $5,000 (or so) a year.

Finally, if you’re sure that you will be eligible for the Guaranteed Income Supplement (GIS) once you reach 65, it’s generally a good idea to take CPP at age 60.

2). You Have a Reduced Life Expectancy

The biggest mystery in retirement planning is that we don’t know how long our money needs to last because we don’t know when we’ll die.

By age 60 you may have some idea. Whether it’s genetics, poor health, or the results from your 23andMe test, if you have any reason to suspect a shortened life expectancy then taking CPP at 60 can make good financial sense.

Understand your breakeven point for taking CPP early. For instance, you’ll be ahead financially if you take CPP at age 60 and don’t live past age 69. If you make it to 85, then the optimal age to take CPP is 69.

For context, a 60-year-old Canadian, on average, can expect to live another 25 years. So if you’re playing the averages then it’s best to delay CPP.

Lastly, if you’re thinking about taking CPP early because of poor health, you should apply for a CPP disability pension instead. If approved, the CPP disability amount will always be higher than a retirement pension and it will convert to a full retirement pension at 65.

3.) You Have No Contributions from age 55 to 60

Did you retire at age 55? Or maybe leave your career as a salaried employee to start a business in your fifties? Business owners can choose to pay themselves dividends rather than a salary, and therefore would not have to make CPP contributions. How do those years of zero contributions affect your CPP retirement benefit?

When you take CPP at 60, your benefits are based on your best 35 years of earnings, rather than your best 39 years of earnings if you were to take it at 65. Depending on your earnings from age 18 to 54, your CPP payments might still be close to the maximum if you take it at age 60, but it will definitely be reduced if you wait until age 65.

Two reasons not to take CPP at age 60

Forget the notion of taking CPP early and investing. This idea, likely brought to you by your friendly neighbourhood financial sales person advisor, sounds compelling in theory but can be a disaster in practice.

Remember, the CPP is taxable income so you won’t be able to invest the full amount unless it’s in an RRSP. Then take investment fees into account and consider how much will you need to earn to beat the guaranteed 7.2 percent return that comes with delaying CPP by a year?

No, it’s better to defer and receive a larger pension that’s guaranteed and inflation protected for life.

Finally, if you’re concerned about whether CPP will be around when it’s time to collect, or whether the government of the day will raid the fund to pay its debts, let’s put that idea to rest.

The Canada Pension Plan Investment Board (CPPIB) is independent of the CPP and run at arms length of federal and provincial governments. The fund has been audited by an independent actuary and found to be sustainable for at least the next 75 years (using conservative projections).

CPP will be there for you in retirement. The question is when do you plan to collect your benefits?

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