Personal Finance

Scale 2 Infinity

Blame the baby.  

When we realized I would have to get up to snot suck our daughter’s nose in the middle of the night, we were worried she’d take forever to get back to sleep.  Turns out, I’m the one who can’t get back to bed, which means another middle of the night post.

NBA free agency and my undying love for Vernon, BC are a few of the topics rolling around in the last few hours, in addition to the following thoughts:

1. I’m totally over the “Toronto is expensive/unaffordable conversation”. The impatience has been lingering for a while but was prompted over the weekend at a family outing to Ribfest, in Etobicoke, which btw, Billy Bones BBQ had the best ribs, in case you were wondering. While debating the other contenders, Lisa and I ran into some former downtown work colleagues, who now live a five-minute walk from the event location, Centennial Park.  They’re the same vintage as us (“older” millennials) and made the decision to trade away the prospect of seven-figure debt, for longer commute times. They’re happy, they have space for their family, and plenty of park space and recreation in the surrounding area.    

And that’s it.  Nothing fancy.

There are dozens of reasonably priced communities all over the GTA and the country, how did we get to this insane point, where we forgot about them and settled on obsessing over just two?

2. I have quite a few clients who invest with Robo-advisors, which is perhaps a bit confusing since they’re supposed to offer…. “advice”?  It’s not a blanket dig at Robos, but I genuinely think there’s an interesting question, how will fin-tech companies and their scale-to-infinity mentality, integrate non-scaleable services like advice and planning, which all result in negative economies of scale.

3. Yes, you need to consider after-tax returns when making investment decisions, but too many investors and their advisors are doing something which I’ll describe as prioritizing tax-minimization. For example, it’s fairly common to see portfolios with preferred shares (dividend income benefitting from the dividend tax credit) replacing fixed income (interest income taxed at your marginal rate).  These are usually very conservative clients and when I ask why that decision was made, the answer is that they were told preferred shares are “risk-free, like bonds but at a lower tax rate”, which is less than accurate ...

4. Hey, DIY Investors guess what? You’re all really, really scared of Trump!  Biggest piece of advice I can offer is, fairly boring - turn off the news and properly set your asset allocation.  Most portfolios have done well over the last number of years, but everyone seems to be paralyzed by those gains and what to do with their super high equity allocations.

5. Thinking about how curated social media platforms like Instagram have become, got me thinking how we don’t share anything about money either online or IRL. I wrote a post last year covering some of my past investing mis-steps,, but it certainly feels like honest financial conversations need to happen more often.

6. I get asked every now and again what I am personally invested in and unfortunately I have a boring answer.  It’s all cash at the moment, for a number of reasons. The biggest, was to have it available during the startup portion of this business, but as that progressed, my wife and I haven’t sat down to revise it.  So there you have it, at the moment, the person who does Investment Plans, is without and updated one! It’s in the works, but again, this is the baby’s fault.

Money IN

Planning your income as you approach retirement is quickly becoming one of the most important and overlooked aspect of financial advice.

The entire financial system is setup for clients to make contributions to their investments (which in turn generate commissions for financial institutions) and there really isn’t a huge incentive for them to sit down with you and develop a playbook for how you might eventually start to draw down on those assets.

So let’s do that.

For most people approaching retirement, they’ve become used to relatively steady and predictable employment income for years. I’ll just say from the get-go, transitioning away from that income stream to one that relies on a mix of investment income and government benefits is a huge challenge and again, something that is often overlooked.

For most people, their income after retirement will include at least a few of the following:

  • Canada Pension Plan (CPP) withdrawals

  • Old Age Security (OAS) payments

  • RRSP/RRIF withdrawals

  • Tax-Free Savings Account (TFSA) withdrawals

  • Company sponsored retirement plans (DC plan)

  • Life Income Fund (LIF)

  • Defined benefit pensions plans

Figuring out how much to draw and from which accounts and in which order and how that changes over time, is specific to every household but as an example, lets look at an example with a two income household with partners currently 61 years of age.  Both partners plan to retire at age 65 and have the following investments:

RRSP: $696,000

TFSA: $65,000

LIF: $95,000

Collectively, their expenses are $65,000 per year and they have a $50,000 mortgage they expect to pay down before entering retirement.

Here’s a visualization of how and when they might receive income now, through retirement and assuming they live to age 95.

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Ages 61-64: The orange bars represent their employment income, which is the sole source of income for the household as they approach retirement

Age 65-69: CPP (light blue) and OAS (black) kick in, along with withdrawals from their LIF.

Age 69: RRSP withdrawals begin

Age 71+: TFSA withdrawals stop and RRIF withdrawals become mandatory

It’s worth pointing out that even small changes to your account balances, household spending, or even life expectancy can have big changes on determining the optimal solution for your retirement income needs.  

Additionally, government benefits from the Guaranteed Income Supplement (GIS), Federal GST/HST credit, or Registered Disability Savings Plan (RDSP) may be applicable to your situation and also included in your income mix

Having this income available to you as you approach retirement needs to be part of the service your financial advisors provides.  If it isn’t, or your unsure about your financial situation, speaking with an advice-only financial planner that provides this level of detail can save you thousands of dollars and confusion when it comes time to juggle your various retirement income sources.

GIC and Chill

2019 is the year you fall in love with GIC’s.

Maybe that’s a throwback feeling, but for most people, considering GIC’s as a legit investment option is a first.

So, where did they even go?  

They’ve been around.

But beginning in the early-90’s and despite two market corrections which wiped out a lot of retirement savings, GIC’s have been been shunned from portfolios.  Equity markets are all you hear about in the media and the prevailing message from the investment world is you’re throwing away money by investing in GIC’s.

“I bought a 5-year GIC and slept well” ~ said no one in the last 25 years.

A historical look at GIC rates (courtesy of helps frame some of the context around what happened to the perception around GIC’s.

In the decades leading up to the early 90’s, both equity market returns and interest rates (upon which GIC rates are based) were solidly positive and into the double-digits.  The path for someone saving for retirement usually had them save and invest ‘till they turned 55 (retirement age once upon a time) and then buy an annuity or GIC to fund 10-15 years of retirement expenses.

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By the early-90’s, interest rates accelerated their long downward trek, which wasn’t a terrible problem if you already owned government or corporate bonds and benefitted from the subsequent price appreciation (interest rates and bond prices move in opposite directions), but the incessant decline in rates to nothingburger levels has resulted in problems for those now nearing retirement.

Firstly, the amount of income you can drive from the fixed income side of your portfolio has collapsed. (In 1990, as a retiree, you could lend $100,000 to the Government of Canada and they’d pay you almost $11,000 per year.  Today, that same investment gets you a whopping $1,750 per year)

Secondly, bond prices would come under pressure IF interest rates rise. The resulting loss in value would offset whatever stable interest income you’re actually generating for yourself.

Here’s the iShares 1-5 laddered corporate bond ETF as an example, where the modest 2% cash yield it generates each year has been almost fully offset by the decline in value of the bonds held in the ETF.

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GIC’s are a bit different from bonds.

There is no price risk with them.  Meaning, if you buy a GIC for a $1000, the amount the GIC is worth is not impacted if interest rates rise. You’ll get $1000 plus your interest payments back, guaranteed. Most (not all) GIC’s have the additional benefit of being insured through the Canadian Deposit Insurance Corporation (CDIC) up to $100,000 per account.

With non-redeemable GIC’s available for in the mid 3% range, I’d happily take those returns and chill as opposed to worrying about price, duration and credit risk with bond holdings.

Never been better

You’re looking for financial advice.  There’s something about your money that you’re not quite sure about and figure it’s probably time to speak to a human about it.  Whether you get a recommendation from a family member or friend, the experience continues to be pretty consistent. The advisor will sit you down,  talk personal finances, possibly offer you a new line of credit or travel rewards card and before you know it, the glossy pamphlets are on the loose with a clear pitch; invest with us, your money will only go up in value, you’ll be on the path to riches, sign here.

It all sounds like it makes sense, but in reality it's a lot of information and understanding what your money is invested in is difficult.  Most people have no idea how to assess their investment performance, both return and risk, or how much you’re paying every year in fees or commissions.  But that travel rewards card means you get access to the swanky lounge, so that’s a thing, right?

We put way too much trust in financial institutions and it’s perfectly clear, why.  They went all in on calling their mutual fund sales pitch, “advice” and not providing much, if any, actual advice or planning.

Even with the proliferation of Robo-advisors, exchange traded funds (ETF’s) and low-cost (D-series) mutual funds, the majority of the financial world seems stuck in 1994, pushing nothing other than high-priced mutual funds when so many alternatives are available. It sorta feels like, if HMV still existed today and was trying to convince you that buying a $16 CD was the only way to listen to music.

But it’s 2018 and it’s never been better for regular people to invest their savings into a globally diversified portfolio at a significantly lower cost than high-priced mutual funds (these are usually the A series funds that have an embedded fee over 2.5%, which, yes, is a lot!).

For starters, there are D-series mutual funds, which are identical to their higher priced A-series siblings.  The D-series are half the cost to own (1.25% compared to 2.5% on average for the A-series varieties) and only available through your bank’s online brokerage.  Because you can only invest in D-series funds online, you lose access to the financial advisor, which, may not be a bad thing since you’re tired of sales pitches, right?  Hiring an independent financial planner who will really walk you through your budget and how to reach your financial goals is an effective combination that I highly recommend.

Then, there’s the new kid on the block, Robo-advisors, which in many ways are similar to a mutual fund in that, both monitor and rebalance a portfolio of investments for you and charge a fee for doing so, usually, less than 0.75%.  While some Robo-advisors offer basic financial planning, it’s far more accurate to think of Robo-advisors, as Robo-Investment Managers. They’ll manage your investments, but are generally a bit light on providing detailed financial advice. That’s probably ok if you’re single, in your 20’s and only have you to worry about but in more complex situations like family planning, caring for a parent or considering a career switch, you may be looking for more detail and dialogue about what to do. Again, hiring a fee-based financial planner who will walk you through your budget and how to reach your financial goals is an effective solution that has become increasingly popular as the number of independent financial planners increases.

Finally, while not for everyone, managing your own portfolio of low-fee ETF’s is an option.  Yes, there’s an ETF for just about everything these days from marijuana to electric vehicles, which can lead people to feel like choosing the right combination of ETF’s is an impossible task. Fortunately, Vanguard has simplified that task by creating three new, asset-allocation ETF’s which do the work for you and are based on your risk level:

  • Growth (80% equities)

  • Balanced (60% equities)

  • Conservative (40% equities)

(In case you’re wondering, I’m not affiliated with Vanguard in any way.  Their new ETFs are the only all-in-one ETF solution, which, in my opinion is one of the best financial products to come out in years along with Robo-Advisors)

Access to cheaper investment products is only half of the ongoing disruption in the financial services industry, the other half is the growing army of independent financial planners and money coaches who don’t sell products and provide truly unbiased financial advice.  Most people go to an advisor because they’re feeling unsure about their finances and are just trying to feel better about their money. With investment fees on the decline and access to people who you can have real money talks with, its never been better to find a financial solution that works for you.