The 4% rule is a framework to think about how to safely draw down your retirement savings without fear of outliving your money. It was developed in 1994 by financial advisor William Bengen, who concluded that retirees could safely withdraw 4% annually from their portfolio over a 30 year period without running out of money.

Critics of the 4% rule argue that it doesn’t hold up in today’s environment because, one, bond yields are so low, and two, because it fails to account for rising expenses (inflation) and investment fees (costs matter). We’re also living longer, and there’s a movement to want to retire earlier. So shouldn’t that mean a safe withdrawal rate of much less than 4%?

Financial planning expert Michael Kitces takes the opposite view. He says there’s a highly probable chance that retirees using the 4% rule will come to the end of 30 years with even more money than they started with, and an extremely low chance they’ll spend their entire nest egg.

The problem lies in the data and testing for the absolute worst case scenarios, which in Bengen’s research included the Great Depression. Bengen looked at rolling 30-year periods to test the safe withdrawal rate and found the worst case scenario was retiring right before the Great Depression in 1929. Even with that terrible timing, a retiree could safely withdraw 4.15% of his or her portfolio.

Kitces broadened the data set and found two more ‘worst case scenarios’ which included 1907 and 1966. But what was interesting is the average safe withdrawal rate throughout every available period in the data set was 6% to 6.5%.

Even more remarkable, when starting with a $1M portfolio and using the 4 percent rule, retirees finished with the original million 96% of the time.

“Historical safe withdrawal rates aren’t based on historical averages. They’re based on historical worst case scenarios.” – Michael Kitces

If you’re interested in hearing more from Michael Kitces debunking the 4% rule then I highly recommend watching this in-depth interview Michael did on the Bigger Pockets Money podcast. It’s long (80 minutes) but well worth your time:

This Week’s Recap:

On Wednesday I offered some tips for those who are renewing your mortgage this year. 

Many thanks to Erica Alini of Global News for including that post in her latest Money123 newsletter.

On Friday I looked at tax loss harvesting both for the do-it-yourself investor and with a robo advisor.

I’ve had an incredibly frustrating experience with TD Direct Investing this week. I’ve been patiently waiting for my LIRA to be set up, and saw the funds had finally arrived on Monday. However, I could only see the funds on the EasyWeb banking side. When I clicked over to WebBroker there was no LIRA account to be found. 

I called TD Direct and got through to a representative after 90 minutes on hold. He could see the funds, but couldn’t understand why it wasn’t showing up for me in WebBroker and transferred me to technical support. More time on hold, and the technician was of no help. I requested a call back and finally received one on Friday. Again, no help. 

The good news is that while on the phone I managed to place a trade and buy $134,000 worth of VEQT. The rep was even ‘kind’ enough to waive the $43 fee for placing a trade over the phone. Yeesh.

Promo of the Week:

As most of you know, the deadline to file your 2019 taxes has been extended to June 1st, and the payment date for any taxes owing has been extended to September 1st.

I filed my taxes a few weeks ago and was happy to see a substantial refund of around $1,800. A large portion of that refund – $888 to be exact – was thanks to the new Climate Action Incentive tax credit.

With many Canadians struggling with their finances due to the COVID-19 pandemic, I’m highlighting the carbon rebate as a way for Canadians to receive a significant chunk of change back when they file their taxes.

Residents of Alberta, Saskatchewan, Manitoba, and Ontario can claim the carbon rebate when filing their 2019 tax return. If you’ve already filed your taxes, don’t worry – you can still apply retroactively. It may result in a few hundred extra dollars in your pocket.

For example, an Ontario family of 4 would receive $448 this year and $2,061 by 2022. Someone in Saskatchewan would get even more. A family of 4 receives $809 this year and $4,066 by 2022.

The climate action incentive is a tax on consumption, so the more you conserve, the more you’ll get back in rebates. To see how much you’ll get, use this handy rebate calculator.

Here are some key facts about the carbon tax and rebate:

• Eight out of 10 families get more money back than they pay in tax.
• As the carbon tax rises, the amount rebated to families grows. Next year, you’ll get even more money back.
• It’s the lowest-cost way to reduce our emissions.
• Carbon pollution shouldn’t be free. A carbon tax makes polluters pay, while giving money back to families.
• It gives people the freedom to choose whether to change their behaviour.

Weekend Reading:

Our friends at Credit Card Genius share a helpful story on getting a credit card insurance refund.

Female-dominated service-sector jobs were among the first to disappear due to the COVID-19 pandemic and stay-at-home orders. One expert calls the downturn our first ever “she-session”.

I enjoyed this conversation between My Own Advisor’s Mark Seed and fee-only planner Steve Bridge about getting through financial emergencies.

Wise words from Jonathan Clements (as usual). He says it’s a scary time to own stocks, but for long-term investors who want their portfolio to clock significant gains, there’s simply no alternative.

The Financial Post’s Ted Rechtshaffen wonders why employers make pension plans such a mystery for their employees:

“The largest frustration came from employees who asked their HR department for a pension analysis that includes information about the value of their pension, and options for how to draw on the pension. In many cases, companies have changed their policy to only allow one request a year or in some cases even less than that.”

The always thoughtful Morgan Housel shares some lessons learned over the past few months, including how some of the lowest paid workers are the most essential.

What happens when distressed markets don’t give you distressed prices? Ben Carlson offers his thoughts on why Warren Buffett didn’t make a big purchase during the stock market crash.

Speaking of Buffett, downtown Josh Brown said a different version of the Oracle of Omaha delivered the annual shareholders address – a 4.5 hour live-streamed event”

“Watching a man who’s already given the world so much literally will himself through hours and hours of this at almost 90 years old was pretty tough.”

Of Dollars and Data blogger Nick Maggiulli shares a different framework for thinking about equity investing.

Michael Batnick and Josh Brown talk through whether there is any limit to how much money the Fed and Treasury can throw at the economy, and if we even have a choice:

Universal Basic Income was an idea that lived on the political margins for years. Then the pandemic changed everything. Here’s how a Universal Basic Income can save the economy.

Michael James on Money calculates his retirement glidepath, or his plan for investing and spending in retirement.

Finally, Wealthsimple made some changes to its portfolios last year to better weather a downturn. Here’s what they did and why it worked.

Have a great weekend, everyone!

Tax loss harvesting sounds like a magical strategy that is only available to the wealthy. But in reality, it’s a simple tax saving concept that involves selling a security or investment that has experienced a loss, and using that ‘capital loss’ to offset a capital gain in the past, present, or future.

Investors should know that tax loss harvesting is only relevant when it comes to investments held in their taxable or non-registered accounts. You can use a capital loss to reduce a taxable capital gain this year, in any of the three preceding years, or in any future year. That’s a powerful tool that savvy investors and investment advisors can take advantage of to reduce tax exposure.

Also, know that a capital loss is not realized until the asset (be it an investment, or a property) is sold for a price that is lower than its original purchase price. 

Tax Loss Harvesting for DIY Investors

DIY investors can create their own strategy for tax loss selling. Let’s say at the beginning of the year you purchased $100,000 worth of VCN – Vanguard’s Canada All Cap Index ETF. Today, VCN is down 12.9 percent. You sell your shares of VCN and realize a loss of $12,900.

But you’re not done yet. After selling VCN you immediately buy a comparable ETF such as iShares Core S&P/TSX Capped Composite (XIC). You’re still fully invested, but you’ve “harvested” a $12,900 capital loss to hopefully offset a capital gain at some point, and now you get your Canadian equity exposure from XIC instead of VCN.

Buying a comparable fund gets around CRA’s ‘superficial loss’ rule, which states that investors can’t repurchase the same property or security for 30 days. A lot can happen in one month, as we’ve seen recently, and so we don’t want our money sitting on the sidelines.

The other concept for investors with taxable accounts to understand is their adjusted cost base (ACB). More than just the original price you paid for an investment, adjusted cost base also factors in any new purchases, plus any reinvested dividends or capital gains distributions, minus any sells or return of capital distributions.

Simply put, it’s a pain for self-directed investors to keep tabs on their adjusted cost base, plus come up with their own approach to tax loss selling that’s timely, profitable, and onside with CRA.

So, what’s an investor to do if he or she wants to take advantage of tax loss harvesting without the pain of managing it on their own?

Tax Loss Harvesting with Wealthsimple

The remainder of this article will look at how the robo advisor Wealthsimple handles tax loss harvesting for its clients. It’s a feature that’s widely promoted as a benefit to investors, but as you’ll see it only makes sense in a few circumstances.

Related: Using a robo-advisor in retirement

I spoke with Michael Tempelmeyer, a senior investment and retirement specialist at Wealthsimple, to better understand how the robo advisor uses tax loss harvesting for its clients.

He says tax loss harvesting is available to clients who qualify for the Wealthsimple Black or Wealthsimple Generation premium service levels by having net deposits of $100,000+ and $500,000+ in their Wealthsimple account, respectively.

Tax loss harvesting can be activated for these clients and applies to personal investment accounts and corporate investment accounts, both of which are taxable account types.

“Our approach to tax loss harvesting is simple. Any time one of the eligible ETF positions in a client account falls 7 percent below the amount that was paid for it, we will sell the position to realize the capital loss for tax purposes,” said Tempelmeyer.

They take the proceeds of this sale and invest the money in another similar, but not identical ETF, so the client maintains their desired market exposure.

For the majority of the individual ETF positions used in Wealthsimple’s 11 standard risk level portfolios there is a backup ETF on standby for this purpose.

However, there are a few ETF positions used in their standard portfolios that don’t have a viable backup position. In these cases, as well as in their Socially Responsible Investment (SRI) portfolios and their Halal portfolios, they are not able to do any tax loss harvest selling.

Tax Loss Selling in Action

Tempelmeyer said that during the recent decline in markets, as a result of the COVID-19 pandemic, there were a number of tax loss sales in client accounts where XEF (BlackRock iShares Core MSCI EAFE IMI Index ETF) was sold.

“We use VIU (Vanguard FTSE Developed All Cap ex North America Index ETF) as a backup position in this case. VIU tracks a different index but has very similar geographic exposure to XEF,” said Tempelmeyer.

There were two particular cases where this decline in the unit price of XEF created a good tax loss harvesting opportunity for two different clients in very different situations.

1) Linda who is a 35-year-old technology company employee has $1.5 million in a personal investment account with us. The account is invested in our risk level 10 portfolio which has 90 percent exposure to stock markets and 10 percent exposure to bond markets. The tax loss sale of XEF realized a total capital loss for her of approximately $30,000.

2) Ray who is a 47-year-old business owner has $2.9 million in a corporate investment account with us. The account is invested in our risk level 6 portfolio which has 65 percent exposure to stock markets and 35 percent exposure to bond markets. His business realized a capital loss of approximately $40,000 as a result of the sale.

What this means is that the next $30,000 of capital gains realized personally for Linda and the next $40,000 of capital gains realized by Ray’s business will be tax-free. If there are no capital gains this year or in the three prior years to be offset, then the capital losses that were realized can be carried forward to be used against capital gains in any future year.

“The benefits of tax loss harvesting make sense for the vast majority of people with taxable accounts and I generally recommend taking advantage of this strategy, but it is always a good idea to talk through the specifics of an individual situation with a financial planner who understands the potential implications,” said Tempelmeyer.

Changing Your Asset Mix

A market downturn can also provide an opportunity for investors to make a shift in how their portfolio is structured at a reduced tax cost.

Many investors can feel trapped in a particular strategy due to the unrealized capital gains that they would be taxed on when selling.

Related: Changing investment strategies after a market crash

While Mr. Tempelmeyer thinks it makes sense to move away from a high cost or inappropriate asset mix portfolio essentially any time, a downturn provides the opportunity to do this more efficiently from a tax cost perspective.

Investors who should review their options include those who hold high cost mutual funds or other costly advised portfolios as well as investors who continue to hold concentrated positions in individual stocks for the sole purpose of avoiding the tax hit associated with selling.

Final Thoughts

Individual investors can use tax loss harvesting or selling to save taxes on past, present, or future capital gains. In fact, the recent market crash due to the coronavirus pandemic likely highlights a terrific opportunity to take advantage of tax loss selling.

But beware.

Managing your own non-registered portfolio and creating your own tax loss selling strategy means diligent and tedious tracking of your adjusted cost base, ensuring your selling and re-purchasing is onside with CRA’s superficial loss rules, avoiding market timing, and identifying the appropriate time to crystallize a loss that best benefits your tax situation. Whew.

This is where a robo-advisor can come in handy. At Wealthsimple, once you’ve turned on the tax loss harvesting feature then it is happening automatically behind the scenes whenever one of a client’s ETF positions falls 7 percent below its original purchase price.

Related: How to transfer your RRSP to Wealthsimple

It can also work for clients with specific tax loss harvesting opportunities, like when they’ve transferred over a non-registered portfolio in-kind from another institution and need to carefully and methodically sell off the portfolio over time. 

Did you know Boomer & Echo readers get a $50 cash bonus when they open up a new Wealthsimple account and fund it with $500 within 45 days? Transfer your account to Wealthsimple and they will cover the transfer fee.

Readers: Are you looking at tax loss harvesting opportunities due to the recent market downturn? How comfortable do you feel managing it on your own versus using a robo advisor?

It’s an interesting time to be shopping for mortgage rates. On the one hand, the Bank of Canada’s emergency rate cuts have slashed its key lending rate to 0.25 percent. The big banks followed suit, dropping their prime lending rates by 1.5 percent. On the other hand, bond yields have dropped to historic lows, which should send fixed mortgage rates down – but that hasn’t been the case.

Here’s what you need to know when renewing your mortgage this year.

Variable rates vs. Fixed rates

A quick explanation of variable versus fixed rate mortgages.

Variable rates are tied to the Bank of Canada’s key interest rate and typically move in lockstep when the central bank raises or lowers its interest rate. That affects the interest rate on a variable rate mortgage, or on a home equity line of credit.

Fixed rate mortgages are influenced more by the bond market – in particular five-year government of Canada bonds.

In both cases the bank borrows money at rates slightly higher than the government rate, and profits from the spread between their borrowing and lending rate.

With that out of the way, how should homeowners facing a mortgage renewal this year tackle their decision? Mortgage renewals typically come down to timing. No one is going to successfully select and carry the lowest possible mortgage rate throughout their entire term.

That’s why I adopt a mortgage renewal approach that looks for the lowest of either the five-year variable rate mortgage, or a 1-2-year fixed rate mortgage.

My thought process is that if a large variable rate discount (prime minus 0.8 percent or better) isn’t available, then I’ll take a short-term fixed rate and hope for better variable terms in another year or two.

This process has served me well over the life of my current mortgage. I started with a five-year variable rate of prime minus 0.8 percent, which gave me a rate of 2.15 percent in 2011. One rate cut took that down to 1.90 percent for some time.

Variable rate discounts had all but dried-up when it came time to renew in 2016. Our bank was offering a measly prime minus 0.10 percent (2.6 percent at the time). So, I opted for a 2-year fixed rate mortgage at 2.19 percent.

Fast forward to 2018 and those sweet variable rate discounts came roaring back. I once again chose a five-year variable mortgage rate – this one at prime minus 1.15 percent. With the recent Bank of Canada cuts my mortgage rate is now an incredibly low 1.45 percent.

How does this help you?

If you’re renewing your mortgage, start with the basic premise that borrowers who choose a variable rate mortgage typically save more money (nine times out of 10) than fixed rate borrowers over the life of their mortgage. Then add the idea that negotiating your rate often is a good thing.

Finally, understand that in some years the variable rate discount is largely non-existent, and so it’s not a bad idea to go with a short-term fixed rate so you have the opportunity to hunt for bargains again in the near future.

Renewing Your Mortgage This Year?

I reached out to Rob McLister, mortgage expert and founder of RateSpy.com, to ask specifically what else homeowners should be looking for when it comes to renewing your mortgage this year.

Rob’s on the ground dealing with mortgage applications and he understands both the interest rate and lending environment we’re facing right now.

Should I shop early and take advantage of rate holds?

Mortgages are taking longer to close in some cases due to COVID-related inefficiencies. Make sure you apply to renew your mortgage at least 35-40 days before renewal.

It typically pays to lock-in a rate sooner than later in case rates shoot up. But, in a recession where the government is adding massive amounts of liquidity to the system, there’s less chance of rate spikes.

There’s a greater probability in the near-term that interest rates just drift sideways or move lower as bond investors price-in falling growth and deflation risk, and as investor demand for mortgages improves in the mortgage funding market.

Should I go with a fixed or variable rate?

Well-qualified borrowers can pick up five-year fixed rates as low as 2.14 percent, and variable rates as low as 1.95 percent.

Uninsured borrowers (applies to purchases of $1M or more, rental properties, or amortizations longer than 25 years) are finding as low as 2.44 percent fixed and 2.25 percent variable.

The upfront edge of a variable rate has faded significantly in the last month or so. To put it another way, you’re now paying a lot less for fixed-rate “insurance.”

Typically that happens when the market expects rates to stay low for a few years or more. But humans, being risk averse creatures, tend to weight risk management more heavily than historical rate patterns. As a result, we could see a shift towards fixed rates until that spread between fixed and variable rates — or long-term and short-term rates — widens out more.

At this point, someone going variable would have to be very comfortable with the potential of a 75-100 basis point rate increase in a few years. In fact, if we get more than one rate hike anytime in the next three years, a 5-year fixed rate mortgage would outperform based on interest costs alone.

But the conversation doesn’t end with interest cost. You’ve also got to factor in prepayment penalties, which can be two to four times worse with some five-year fixed rate mortgages, especially at the top 10 banks. Penalties factor in if you move or refinance and can’t get good rates from your existing lender, or if you sell and don’t re-buy soon after.

My existing rate is extremely low. Should I still consider locking-in a rate now?

Variable-rate discounts have slowly improved after almost disappearing in March. At the time, investors were panicked over a potential surge in credit risk. Today, the government is buying mortgage and fixed-income assets by the billions and risk premiums have subsided. That’s pushed down lending costs and banks are starting to pass the savings back to borrowers.

We’re not out of the woods yet, however. Credit risk and rate premiums could always flare back up, but the probability is now greater that variable rates will improve by September.

If I had decided to go variable, then I’d wait as long as I could to set my rate, and ask a mortgage broker to inform me immediately if rate discounts start to shrink again.

If a five-year fixed were more suitable, I’d keep an eye on bond yields. If Canada’s 5-year government bond yield closed above 0.60 percent then I’d apply immediately to lock-in a rate hold.

What’s the rate and lending environment today, compared to five years ago?

Five years ago (May 2015) the average 5-year fixed rate was 2.64 percent at the major banks. Today it’s exactly the same at 2.64 percent. There is virtually no renewal risk for qualified borrowers closing on a fixed rate mortgage in the next few months.

For variable-rate borrowers, they’re seeing about a 20 basis point reduction in rates versus five years ago.

Unfortunately, not everyone is a well-qualified borrower, especially with COVID impacting people’s employment. For anyone renewing near-term who’s seen income interruption or has other credit challenges, you may be better off just renewing with your existing lender.

But talk with a mortgage broker to make sure there’s not a better option given your circumstances.

Final Thoughts

There’s a lot more that goes into a mortgage decision than simply getting the lowest interest rate. There’s variable rates versus fixed rates, short terms versus long terms, not to mention other mortgage features such as pre-payment and double-up privileges, and pre-payment penalties to consider as well.

Not to mention your own personal financial situation. How stable is your income? Has anything changed since your last term, such as marriage, children, divorce, or a career change that may impact your finances today?

Whether you’re renewing your mortgage with a fixed or variable rate term, know that interest rates are still at historic lows and well under 3 percent. As long as your finances remain in good shape, you can renew your mortgage with confidence without agonizing over 10 or 20 basis points.