More “100% pure” indexers come out of the woodwork

By Jonathan Chevreau

Here’s my latest MoneySense blog, which is a followup to Robb Engen’s article over at sister site The Hub about his conversion from stock-picking to 100% “pure” indexing.

After Robb revealed his “conversion” and I appealed for other readers with similar stories, readers started to come out of the woodwork. In one of the cases, the “confession” appeared first at MoneySense and now here and the Hub.

In addition to the two readers profiled in the MoneySense blog, I’ve already started to receive more emails from other “pure” readers. Please let me know by emailing me at jonathan@findependence.com. Hopefully, we’ll discover that there are a lot more than the half dozen I’m so far aware of.

I’ve republished the original version of the blog below and included photographs of the two readers that were not included in the MoneySense version:

Pure indexers step forward

robb-engen

Boomer & Echo’s Robb Engen

Early in January, popular blogger and fee-only financial planner Robb Engen announced on Twitter and his Boomer & Echo site that he had finally bitten the bullet – he’d liquidated his portfolio of individual dividend-paying stocks in order to become a 100% “pure” indexer.

As he subsequently revealed in a blog at the Financial Independence Hub, he “felt like a part of me died,” but nevertheless manned up and sold off his 24 stocks, $100,000 worth of them. He replaced them with just two Vanguard ETFs that happen to be MoneySense ETF All-stars: the All World ex-Canada ETF (VXC) and Canada All Cap Index ETF (VCN) and “that’s it.”

Click on the link for the full story but the rest of this blog is about two young investors who responded to my request for similar dramatic Damascene conversions. It had seemed to me that Robb’s heroic conversion was unique although the pages of MoneySense’s magazine and books have occasionally been graced by a similar tale from Millionaire Teacher Andrew Hallam.

Jason_St-Hilaire

Jason St-Hilaire

Embracing the Global Couch Potato

Jason St. Hilaire (@TcommeFinance on Twitter) is 31 and lives in Quebec City. The medical physicist started to invest seriously in December of 2011, when he put the ING Direct Balanced Fund in his TFSA and ING Growth Equity Fund in his RRSP. His early research made the case for index investing, so he put four TD e-Series funds in his TFSA (the Global Couch Potato portfolio).

“At some point I even bought some Bitcoins. You can see that I was all over the place.” Then, like Robb Engen before his dramatic turnaround, in the summer of 2012 St. Hilaire discovered the Canadian Drip Primer and the DRiP Investing Resource Center.

“I figured I could try my hand with good dividend stocks with nice yields …I built myself a 10-stock portfolio with no real investing plan whatsoever. I would buy what I would feel like buying.” By 2013, he and his partner were raising cash to buy a home, liquidated the index funds and transferred the stocks to their brokerage account. They still have three stocks: “I see the stock market going down and can’t help but tell myself to wait until my positions recover. Can you say ‘behavioral bias?’ “

Unable to stay completely out of the market, early in 2015 he restarted his Global Couch Potato portfolio in his TFSA, adding $200 every other week. “The dividend stock experiment was fun, but I don’t want to spend so much time researching companies and trying to find bargains. In my situation, going with market returns with a simple portfolio is appropriate. I just need to get over my own non-sense to finally become a pure, 100% index investor. And now that I just confessed this to someone, I might just do that.”

“Pure” since 2011

patmciver

Pat McIver

Another young investor who contacted me was Pat McIver (@mrpatmciver on Twitter.) After a brief fling picking individual stocks, he and his wife became “100% pure indexers” in 2011. They use only index-tracking ETFs for their RRSPs and TFSAs, and even for their toddlers’ RESPs.

“I had a professor at Carleton University tell me back in 2003 in his 3rd-year finance class that I shouldn’t bother trying to pick stocks, market time, or waste energy on trying to beat the market. He said the smartest thing we could ever do as investors was buy index funds (ETFs or mutual funds), and hold them.”

Despite this, after graduating, he dabbled in Nortel, RIMM, BMO, and CP but held them for only short periods and neither made or lost money. “I realized early on I was somewhat a risk-averse investor when it came to picking individual securities, and never had the confidence that I was able to identify the ‘winner’ fund or the ‘loser’ stock.”

Fortuitous timing

With prescient timing, they withdrew funds from their RRSPs in August 2008 to buy their first home, and started to reestablish their RRSPs in January 2009 (also great timing!). They owned Altamira Canadian Index, TD International Equity Index Currency-Hedged and US Index and the actively managed TD Canadian Bond. They departed from this only to buy a few shares of Canadian Pacific.

In January 2011, after reading various blogs, including MoneySense, he switched his wife’s RRSP into iShares ETFs (25% XBB, 25% XIU, 10% XCS, 20% XSP, 15% XIN and 5% XEM.) Then Pat ditched the CP shares and a few mutual funds to go “all-in with index ETFs: 20% XBB, 35% XIU, 25% XSP and 20% XIN.  “This past summer, I reduced the holdings in my wife’s RRSP from six to four.”

Pat says the blended annual cost is 0.31%. “We also switched our XSP for VUN and switched XIU for XIC to broaden our diversification in the US and Canadian markets, respectively.” They rebalance once a year.

“When we started investing again in early 2009, I decided we would go with a mostly-index-based portfolio. In 2011, I decided we might as well go on in and once our allocation weightings were set, just leave it and let it ride until we retire in 2036 (the earliest date we can retire as federal government civil servants).

As a busy family man with a two-hour daily commute, Pat is happy “knowing I have a broad-based diversified portfolio that is low-cost and contains minimal funds gives me great comfort (and no sleepless nights) that I don’t have to worry about whether I am “winning” or “losing” vis-a-vis the market. I doubt I would ever go back to being an active investor ever again.”

So, counting Hallam and a handful of advisors I know, I’m aware of half a dozen truly pure indexers. Anyone else out there? Email me at jonathan@findependenceday.com.

 

 

How Ernie Zelinski retired Happy, Wild & Free

How-to-Retire-Happy-Cover-3D-2-2-AI have a lot of books about Retirement and Financial Independence in my personal library, but I seldom go through any one twice. Today’s review is an exception because of a lunch I had with a friend we’ll call Albert (not his actual name).

Albert is a former client with whom I’ve kept in touch. He’s now 70 and just begun to retire. Because of various circumstances, he was unable to engage in most of the basic practices described here or at our sister site, the Financial Independence Hub:  so no taxable or tax-sheltered savings for Albert.

Fortunately for him, he bought a house in Toronto at something like a third of what’s it’s worth now, and it’s that home equity that has allowed him to finally stop working. He has no dependents and after going over the pros and cons took out a reverse mortgage.

The Joy of Not Working

But that’s not what this blog is about. Over our lunch, Albert told me he’d been at the public library to check out books about Retirement. Two were by a Canadian writer who has achieved massive international success through self publishing: Ernie Zelinski. He’s written 15 books but the two best-known were the ones Albert got from the library: The Joy of Not Working and How to Retire Happy, Wild and Free. I told him I’d read both a long time ago and likely reviewed them when they first came out.

Retrieving Wild & Free from my office shelves, I noticed I had read it in November 2003, when I was 50 and (as it turned out), still more than a decade from my Findependence Day. I started to flip the pages and noted I had underlined many passages, some of which I reproduce below.

It holds up well. Note the subtitle of Wild & Free: “Retirement Wisdom that you won’t get from your financial advisor.”

Connoisseur of Leisure is now 65

Photo of Ernie Zelinski

Ernie Zelinski

Zelinski is an interesting character. He lives in Edmonton, Alberta and opted for semi-retirement when he was 30, despite having a net worth of minus $30,000 at the time. Born in 1949, he turned 65 last summer. Zelinksi, who is unmarried, has long described himself as a “connoisseur of leisure” who used to work just two or three hours a day.

That work was mostly writing his books, generally in various Edmonton coffee shops. He religiously adhered to a daily writing regime that clearly worked for him: as of 2015, The Joy of Not Working has sold 280,000 copies, Zelinski told me this week.

Zelinski self-published Joy between 1991 and 1997, at which point he handed it to Ten Speed Press, later acquired by Random House. While it has slightly outsold Wild & Free, he makes more from the latter because it’s self published. He says it was rejected by 35 British and American publishers and sent me three rejection letters to confirm it. One New York giant publishing house told him in 2003 that “the retirement shelf” is quite crowded but “we hope you prove us wrong.”

I’d say he did: He has since negotiated 111 book deals with publishers in 29 countries. The two big titles continue to sell, so much so he says he can’t qualify for Old Age Security. “I’m making the best money ever in my life. Only 1% get it clawed back … I guess I’m a 1 percenter among 65-year olds.” He now works about half an hour a day. How he spends the other 23-and-half hours you can divine from his books.

Do we focus too much on the financial side of retirement?

As I perused the pages of Wild & Free once again, I was struck by how little the book dealt with the usual financial matters that the personal finance press tends to focus on. Here’s one passage I had underlined 12 years ago:

“… the biggest mistake you can make with your retirement planning is to concentrate only on the financial aspects.”

Some of the points in the chapter summaries include “You are never too young to retire,” “Retiring too late means you don’t get another chance to do it right”, “Life is short — and so is money,” and “It’s better to live rich than die rich.”

The book nicely touches on the dilemma debated just last week in a MoneySense blog I wrote that was repurposed here at our sister site (aka “The Hub”) under the headline, “Retirement Planning would be so much easier if we knew (exactly) when we were going to die.”

I have to admit that once I re-read the passages I had underlined in 2003, and much more that I hadn’t the first time around, I thought to myself: “Why am I working so hard when I really don’t have to?”

It’s not about loafing but about staying active

Zelinski’s list of things you can do in Retirement takes multiple pages to list and it got me thinking about my own oft-postponed semi-retirement. When I put the book down for the second time, I was even inspired to go back to a hobby that had obsessed me between 2004 and 2011 or so: Internet bridge. Over those years, I had encountered many cyber personalities from around the world and was pleased to reencounter several of them once I did.

While Zelinski doesn’t use the term Findependence, his vision of Semi-Retirement is certainly consistent with this website’s insistence that our last few decades need to have purpose:

“This I can assure you: You won’t find genuine joy and satisfaction by spending all your time sleeping, relaxing, loafing, and watching TV, hoping to live up to the ideal of a true idler … To retire happy, wild, and free, you must stay active.”

As I have noted in other blogs about Extreme Early Retirement, Zelinski is certainly no loafer: he was smart enough to get out of the corporate jungle early in life so he could become an entrepreneur: in addition to his publishing empire he still speaks a bit. Sounds corny but it’s another case of “do what you love and the money will follow.”

I could go on at length but if you want more, go ahead and buy the book, or for $2.99 you could buy this summary e-book by Bob Matthews. It certainly made me think and I’d love to hear from Zelinski fans who have implemented his ideas over the years.

Just drop me a line at jonathan@findependenceday.com. In fact, Ernie himself supplied me with a few letters from readers who achieved an even more happy, wild and free retirement than the author himself.

We’ll revisit them in a few weeks.

An ominous trend in Millennials’ growing use of credit cards

Here’s my latest MoneySense blog, which looks at what I perceive to be a developing problem in the abuse of credit cards by a few Millennials with whom I am acquainted. I name no names but the guilty know who they are! More’s the pity, because the book Findependence Day starts with an opening scene built around a young couple’s similar credit-card problem!

For one-stop shopping purposes and convenience, here’s the original version:

Young Woman on a Shopping SpreeBy Jonathan Chevreau

With some reluctance, I feel compelled to return to the age-old topic of excessive credit-card debt. I do so because lately I’ve had chats with some of my nephews and nieces, all in the age range of 23 to 24. These kids have now all graduated from university or community college, have made a first stab at being in the workforce, and have already racked up what I consider to be excessive credit-card debt.

In one case, this is combined with a hefty student loan. The (single) parent in question may not be loaded but I was nevertheless surprised by the extent of the debt. Same with the young person on the other side of the family, where the parents are doing quite well financially. When I learned he had this debt and was paying only the minimum monthly amount, you can imagine the discussion that ensued.

In fact, I dug into the personal archives to confess that when I was their age (well, late 20s), I too was that close to insolvency. Unlike the situation today, when I was freelance in the 1980s I was single, rented an apartment and had no financial assets to speak of. My debts were minimal but I did tend to run a credit-card balance of $500 or $1,000 and until I woke from my stupor, did as my nephew is now doing and paid just the monthly minimum.

My own credit-card epiphany

As I related to my young relative, part of the reason for my indebtedness back then was that I was in the habit of buying Compact Discs, which then ran at about $20 each. My credit-card epiphany was when I realized that in a typical month, I was paying $40 in interest payments. One day I thought to myself, “My goodness. I could be buying two CDs every month with that money!” So I stopped buying them for awhile (I may even have done what I do today, and frequented a library) and whittled the balance down to zero. At that point, I reasoned, I was free to pay $40 a month in cash to buy two CDs.

And I think that’s the way young people should approach this problem. Think of a good or service you value, then imagine it going down the drain to the credit-card company just because of your poor spending and debt repayment discipline. For example, my nephew is a big hockey fan: perhaps visualizing the purchase price of a junior hockey game going up in smoke each month might be enough to get him to change his ways.

One way around the problem

On his Boomer & Echo blog, fee-only financial planner Robb Engen once described his personal strategy for getting out from under the burden of credit-card debt. He was tackling the question of whether to pay off the balance in full the moment each expense is incurred, or waiting until the end of the 21-30 day grace period that amounts to an interest-free loan. As he relates, the risk of maximizing the grace period is that sometimes you miscalculate and end up paying out interest you hadn’t reckoned on paying.

But the point remains. The credit-card companies love it if you leave balances unpaid and choose to do what my nephew did and pay just the minimum monthly amount. With interest rates still near 20%, that way lies madness: most card statements should say somewhere just how long it will take to pay off a debt if all you do is pay the minimum. It’s several years in most cases, and you’d be shocked to find out just how much interest you’re shelling out with this strategy (and I use that term loosely!).

Far better to be on the receiving end of interest, either by collecting interest on GICs or fixed-income investments like bonds, or better yet, by owning the shares of big U.S. credit-card giants like Visa or Mastercharge. Early buyers of either stock have made out like bandits, which is exactly what they are: bandits!

Don’t let them hold you up!

The Crash of 2016?

crash2016As a rule, I avoid reading too many financial books based either on Greed or Fear. Still, when you have a good chunk of your net worth invested in the stock market, it’s hard not to have a twinge of doubt when you encounter books like Thom Hartmann’s The Crash of 2016.

I paid no attention to this book when it was published late in 2013 but now it’s 2015, well, 2016 isn’t so far away now, is it?

Why am I writing about it now? I wasn’t responding to a belated PR campaign by the publisher (Hachette Book Group) but stumbled on it while searching for other books on Kindle. The Kindle sample on offer didn’t enlighten me much about the author’s thesis (that should have been a clue!) so I ordered it from the local library, not feeling any urgency to get my hands on it.

Indeed, the last time I read such a book was Harry Dent Jr’s The Great Crash Ahead and of course so far that prediction has yet to manifest. Read my 2011 review of the book, at which time Dent predicted the Dow might fall as low as 3,000. So far,  no cigar: to the contrary, the market spent much of 2014 besting itself, racking up all-time-high after all-time-high. As I write the Dow is still hanging in above 17,000.

Still, as the saying goes, even a stopped clock is right twice a day. See also Barron’s piece at the time titled “Harry’s Dented Prophecies.

No doubt, Hartmann – a prolific author with New York Times bestseller status – would view the current level of the market as the proverbial selling opportunity. For those unfamiliar with the former DJ turned entrepreneur and political commentator, here is his Wikipedia entry.

Hartmann’s focus is US economy, not stocks

Actually, somewhat strangely, Hartmann’s book is not chiefly about the stock market. It’s more about a general breakdown in the American economy and social safety net, and the reader is left to infer that part of that will involve some (or a lot) of air escaping from the still-elevated stock market. His theory is that these things go in cycles and every 80 years or so, civilization is doomed to repeat the last economic debacle once the previous generation passes away. This he calls “the great forgetting.”

“We are standing today at the edge of the Fourth Great Crash and war in American history. The previous three — each about eighty years apart — were gut-wrenching in their horror and bloodshed, but they ultimately transformed America in ways that made this a greater and more egalatarian nation.”

Hartmann’s “crash” consists of a combination of economic meltdown, war, environmental crisis, radical social transformation and the “gridlock of dysfunctional government.” He adds that “for some Americans, the crash is already well under way.” (Presumably he is talking about the unemployed or failed businesses).

Since there’s very little about the stock market in the book, there is likewise little or nothing about how one would go about protecting against a crash were one convinced that such a catastrophe truly was around the corner. Nothing on put options or reverse ETFs or ETNs, nothing on asset allocation, hedge funds, real estate, commodities and gold or alternative assets.

How Tax Cuts for the rich hurt the middle class

Hartmann’s beef is chiefly with what he terms the rich “Economic Royalists,” and particularly billionaires, who he believes should have all their wealth taxed away after their first billion. In practice, he’s referring to the Republican party and its allies, such as Fox News, and their joint success in watering down Obama’s agenda. Since Ronald Reagan, the “Royalists” have succeeded in rolling back the system of graduated income tax, with the result that the middle class is being squeezed. Hartmann has mined this terrain before, with books like Rebooting the American Dream and Screwed: The Undeclared War Against the Middle Class.

When the wealthy bore fairly high taxes in the years before Reagan, Hartmann theorizes that business owners chose mostly to reinvest in their businesses, plant and workers, so as to avoid taking income out of the business and being taxed at high rates personally. But with the Reagan tax cuts and those under subsequent administrations, rich business owners have been more inclined to pull more money out of their enterprises to be enjoyed personally.

Why late 2016?

So why the timing of 2016? Again, it’s about politics. As Hartmann explains, by late 2016 Barack Obama’s second term in office will be winding down, and politicians always do what they can to keep things rosy until they step down, don’t they?

“The Obama administration will do the same thing the Bush administration did when confronted with the forces of the ongoing of the oncoming Great Crash in 2007-2008. It will tinker around the edges, inflate as many bubbles as possible, and try desperately to hold things off until the November 2016 elections are safely in the bag. If it doesn’t all come apart before then, that will be the time of maximum vulnerability.”

So what to do about all this? If you agree with most financial advisers that timing the market is futile, then you should do little or nothing. On the other hand, if you agree with Hartmann’s thesis you might want to closely monitor things a year from now, perhaps lightening up by the summer of 2016. Of course, with the oil-related volatility we’ve been seeing of late, the wheels could come off long before 2016.

Ironically, back when he was writing the book in 2013, Hartmann was describing the perils not of falling oil prices, but of rising ones.

This book and the November 2016 elections may turn out to be so much noise; then again, remember the quip about forecasting pundits and stopped clocks. Once in a blue moon — or even twice a day — they are correct.

Is “Extreme Working” as unbalanced as Extreme Early Retirement?

My latest MoneySense blog is on the pros and cons of Extreme Early Retirement, or its opposite, which one reader dubbed “Extreme Working.”  It was in response to my recent column in the magazine about extended longevity, a theme we regularly explore here at the Financial Independence Hub’s “Longevity & Aging” section.

David Headshot small2
David Davidson

As mentioned in the MoneySense version of the blog, one of the readers highlighted — Oakville-based David Davidson — also sent along a photograph of himself, which we’re running here (on the left).

For continuity and archiving purposes, here’s the original version of the blog:

By Jonathan Chevreau

My recent column on planning for longevity attracted some good counterpoints from readers. In it, I suggested that with life expectancy rates steadily on the rise, people shouldn’t get too hung up with early retirement.

However, I recognize that my own preference to “just keep working” (at least for the time-being) is not necessarily shared by everyone.

There’s more to life than working

Click to the comments section of the story, and you can see one reader was concerned “the author can’t think of anything they would rather do with their time then work.” He or she cites such non-paid activities as volunteering, cultural activities, and visiting friends and family:

“Those activities would be mentally and socially stimulating, and wouldn’t require that I have to be somewhere at any given moment. I would be in charge of when and how often I participated.”

Well sure, but I’d argue much of that can be accomplished on nights and weekends. I don’t see paid work and other rewarding activities as being mutually exclusive. I certainly can see plenty of things I’d love to do that don’t result in attaching an invoice. One reason for my focus on “Findependence” has been my wish to pursue longer-term creative projects.

I’ve also argued that as the Boomers shift gradually into semi-retirement, they can find a more comfortable balance of paid work and those rewarding alternative activities. Several years ago, my wife went down to a four-day work week, precisely so she could visit her aging parents in the country, usually on Fridays. Both have since passed away and she has returned to a five-day week but the point remains. Those who are really well to do and who have an extensive network of friends and family can go to a three-day week if necessary, or do what one self-employed colleague of mine does: she works from home from 8 am to 2 pm, then takes the rest of the day off for all these other activities.

45 years of working is enough

While it wasn’t posted as an online comment, I also received an email from an Oakville reader happy to be identified by his real name (and supplied the above photo): David Davidson is 62 (as I will be in a few months) and has been working full-time since he was 17.

“After 45 years I think I’ll stop working and enjoy the fruits of my labour before it’s too late … I do get exasperated by all the ‘keep working and never spend your money’ retirement articles I see these days”

While Davidson agrees with my skepticism about “extreme early retirement” he draws the line at planning to work into advanced old age and having to save enough money to last beyond 100 years of age:

“That seems like ‘extreme working’ to me and a way to ensure the financial management business hangs on to my money as long as possible.”

Davidson says he has “scrimped and saved all my life to pay off the house, and put my children through university debt free, all while maxing out both my and my wife’s RRSPs and TFSAs.  This was not easy and involved a lot of long hours and sacrifice from everyone.”

Now that they are totally debt-free and the children launched, the couple have more than $1 million in combined registered savings “and we intend to spend it.” (She has a small indexed pension; he does not.)

Delaying CPP until age 70

As a hedge against extended longevity, they won’t take CPP until age 70, but it has “long been my plan to have all the savings spent by our mid-80s.  After that, if we need money, we’ll have the house to sell (it’ll probably be too much for us to look after by then anyway) and we can rent an apartment or whatever.”

Davidson says his parents and grandparents had minimal expenses once they passed age 80:

“My father and his wife are both 89, in good health until recently, and don’t spend all their CPP & OAS (neither has a pension); my mother and my wife’s mother were the same.  My wife’s father died at 68 so there is a downside to planning to live a long time – you might not make it.”

Well, yes, we all realize that. As a friend of mine says, “Live every day as if it were your last, because one day it will be.”

Enjoy the good early years of Retirement

Davidson sensibly counsels enjoying the “really good early years of retirement, before infirmities and just plain exhaustion set in.” He describes my hail-and-hearty 98-year-old friend Meta who still works part-time as “an outlier: the reality is most of us aren’t like that.  My father rode his motorcycle until he was 88 so he’s been as healthy and active as anyone could wish for.  This year at 89 he has inoperable cancer and most would say he’s had a good long life.”

10 reasons to quit your job in 2015 … and a few not to

Quit job markVia Linked In comes this insightful article listing ten reasons to quit your job in 2015.

Click above link for the full article. I’ve reproduced the ten headings below, after which I make a few additional observations, based on my own transition in 2014 from employment (21 consecutive years of it.)

The bottom line is this is what Findependence (Financial Independence) is all about, and the raison d’être of this website. In fact, the cover of the US edition of the book to which this website is focused is very similar to the illustration to the left, except that the calendar date circled is Findependence Day.

As I note below, there may also be good reasons NOT to quit your job in 2015 but instead in 2016 or later. I wrote the original Findependence Day in 2008 but the day didn’t actually arrive until 2014, so you could say it was six years in the making. Sometimes, big life events need to be planned out that far ahead.

In any case, here are the ten reasons for quitting sooner than later.

1.) Work from Anywhere

2.) Do What You Love

3.) Make More Money

4.) Crush Boredom

5.) Express Yourself

6.) Gain Confidence

7.) Get Excited about Going to Work

8.) Explore Limitless Possibilities

9.) Be More Flexible

10.) Travel

Lots of food for thought there. I’d also add to point 3 about making more money that the odds are you can keep more of the money you do earn, since self-employment has tax advantages that don’t generally accrue to salaried employees. Similarly, there should be lower out-of-pocket costs, such as commuting and parking, snacks and lunches etc.

As I noted when I blogged from Turkey in October, the Internet and mobile devices certainly facilitate “working from anywhere,” all of which relates to points 1 and 7 to 10 above.

“My boss is a slave driver”

The article doesn’t single out avoiding having a particular boss but that’s certainly a fringe benefit. When you’re your own boss, you can quip “My boss is a slave driver,” assuming you push yourself as hard or harder than any external boss would.

Of course, as many entrepreneurs have noted, business owners actually have multiple bosses: every client is in effect a boss and it can seem at times that so are suppliers, bankers and anyone else you depend on. Still, the freedom to decline assignments is a luxury few full-time employees enjoy.

But does this all add up to quitting your job in 2015? I’d have to say “Not necessarily.” If you’re in debt and have extensive financial obligations, just up and quitting may have severe consequences. If you’re debt-free and “findependent,” leaving a full-time job is a lot easier, particularly if it’s accompanied by severance or Employment Insurance. (Note that you may not qualify for EI if you abruptly quit: much better if you can engineer being laid off!).

Don’t forget that there are many good things about traditional employment. This is the second time I’ve been self-employed (the first was between 1984 and 1989) and both times I soon observed that the first thing you miss are paid vacations and sick days. Consider too the many benefits like health and dental plans and group insurance, and employer contributions on CPP or Social Security.

Think long and hard before acting, and plan in advance

As for the softer concepts like passion, confidence, creativity and the like, I suppose it’s all true but you don’t have to quit a job to enjoy those. Focused time spent on nights and weekends to creative projects, night school, and weekly events like Toastmasters, can all provide those things without having to quit your job.

As with anything, you need to plan well in advance. If you enjoy your work, have a congenial boss and compensation, by all means investigate entrepreneurship but check with your spouse and family and your financial adviser to see whether quitting in 2015 is realistic or even advisable. It could be that 2016 or 2017 might be better in your circumstances.

If on the other hand, you hate every moment at work, your boss is the proverbial jerk, you’ve not had a raise in years, and you are generally unappreciated, clearly you have little to lose and much to gain by taking the plunge sooner than later.

If you need help to motivate yourself to quit there are various blogs and podcasts on the subject. One is this from Freakanomics on the upside of quitting. Or try this one or just Google “quit blogs” or “quit podcasts.”

Your first investment act of 2015 is …

Canadian Tax-Free Savings Account concept word cloud… 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.

Last-minute wealth and tax tips for 2015

office binder taxes house family dollar symbolIf 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 more, see my latest MoneySense blog just posted here.

One can be retired and not financially independent or vice versa

MattArdrey

Matthew Ardrey, T. E. Wealth

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.

It was used in a guest post earlier this week by certified financial planner Matthew Ardrey on our sister site, the Financial Independence Hub, and you can find the whole post here.

Foundation is a paid-for home

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 this site (FindependenceDay.com) is devoted. In the book, 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!

 

 

 

Tax-loss selling deadline fast approaching

Christmas Eve and New Years at midnightNot to put any pressure on anyone trying to finish their Christmas Shopping, but Wednesday, Dec. 24 is also the last day Canadians can sell stocks for tax-loss harvesting purposes.

You need three days to settle trades so next week just before New Year’s will be too late. Christmas on Thursday is obviously a holiday and Canadian markets are closed Friday for Boxing Day.

Americans have a little bit longer since US markets will be open part of the day Friday.

More details in my current MoneySense blog.

Oh, and if you’re still scrambling to buy Christmas gifts, there are some ideas at our sister site here.

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