Well, here I am two weeks after becoming the Editor-at-Large for MoneySense magazine. You’ll see this title used often in the media world: typically, as in the case of Financial Post Editor-at-Large Diane Francis, this is sort of a half-way house between full-time employment and a freelance career. In Diane’s case, she still pens a weekly column running in the weekend paper.
In my case, the plan currently is that I will continue to write the Financial Independence column in the print version of the magazine, plus the Financial Independence blog at MoneySense.ca, which may (or may not) be a mirror blog of the blogs you see here at FindependenceDay.com. Frequency yet to be determined. As the Globe & Mail reported on May 22, I have left the editor-in-chief job at MoneySense “but will stay with the magazine as an editor-at-large, focusing more on writing and speaking.”
One young family member I briefed on the difference between the titles was under the impression “At Large” meant some kind of criminal. Not at all! Mostly, however, “at large” means working from home and skipping the two-hour commute I used to have. The photos (above and below) show external and internal views of my new home office: this is much closer to the “Findependent” lifestyle I’d envisaged when I wrote the original edition of Findependence Day in 2008, and to which this website is dedicated.
For those curious about my work methods, I often write the first draft of something outside, then edit and do web formatting inside. For those who heard Preet Banerjee’s podcast with me about the second edition of the book, this is the view of the waterfall he was referring to: I know more than a few who heard that podcast were curious about it. You can find that podcast here or under the Reviews tab elsewhere on this site.
From wealth accumulation to decumulation
I may have telegraphed this subtle change in title in the June issue of the magazine, where in the Financial Independence column I speculate on my eventual plan to start drawing down income from various sources. During his excellent talk celebrating MoneySense’s 15th anniversary in mid May, David Chilton suggested that for baby boomers on the cusp of retirement, the next big theme for older writers like myself will be about drawing down income. This theme is well articulated in Daryl Diamond’s book, Your Retirement Income Blueprint. I’ve provided an endorsement for the new edition of that book going to press, which I was happy to do because I intend to follow much of the blueprint myself as time goes by.
Of course, as I also wrote in the retirement section of the “Best Tips Ever” package, I also believe that the longer you delay collecting pensions (like CPP), the better. I’ve also come to the realization that while I may want to have more flexibility on how I spend my time, and spend less time in transit and meetings, it’s likely I’ll continue to write, edit, speak and consult for the lion’s share of my 60s, and the more revenue coming from those sources, the less traditional retirement income sources need to be tapped.
In any case, I have a 5-year plan that includes the writing of several more books and a few twists and turns in my career that I’ll reveal in this space at the appropriate time. In the meantime, I look forward to being “at large” on various MoneySense assignments and eventually for other media outlets and possibly corporate clients.
Findependence — while you’re still young enough to enjoy it
I’d like to think this will be the best of all worlds, which is what the concept of Findependence is really all about. Remember that the subtitle of the US edition is “How to achieve financial independence …while you’re still young enough to enjoy it.” At 61, I’m no spring chicken but I believe most members of our generation will live to 90 or more, and probably work — at least part-time in “semi-retirement” — until well past 70. See for example the book, The New Retirementality. (Nice title, wish I’d thought of it first!)
When I updated my resume, I was shocked to realize I’ve now been a professional journalist and author for 35 years. Since I’ve always practiced the principles espoused in my columns and the book, I’d hope that young people can be assured that this stuff really works if you stick to the program!
You can also expect me to be updating this blog a little more often than has been the case the last two years. See you in June!
Today’s blog headline (minus the suffix I added) is also the subtitle of a free new investing booklet titled If You Can by William J. Bernstein. This is a terrific and short (16 pages) document that I wholeheartedly recommend be read and absorbed by today’s millennial generation. For that matter, it should be read by just about any investor at any age.
But a warning: if you’re in the financial services industry, you’re not going to like the content. The author is a neurosurgeon who learned the hard way how to invest his own money, and has written a few books along the way. If you’re not in the financial services industry, you may be merely amused by his depiction of most full-service stock brokerages and mutual fund salespeople as the equivalent of “hardened criminals” or “self-deluded monsters.”
At the outset, Bernstein promises to lay out an investment strategy that any 7 year-old could understand and will take just 15 minutes of work per year. Yet he promises it will beat 90% of finance professionals in the long run, but still make you a millionaire over time. The formula will be no surprise to MoneySense readers familiar with the Couch Potato approach to investing in index funds or ETFs. Simply, Bernstein advocates saving 15% of one’s salary starting no later than age 25 into tax-sheltered savings plans (IRA or 401(k) in the U.S., RRSPs or Registered Pension Plans in Canada), and divvying up the money into just three mutual funds: a U.S. total stock market index fund, an international stock market index fund and a U.S. total bond market index fund.
Bernstein a big fan of Vanguard and John Bogle
In Bernstein’s view, the index funds should be supplied by the only financial services company he seems to trust: the Vanguard Group (which sells both index mutual funds and ETFs).
Bernstein is addressing young Americans just embarking on their working careers but the basic idea would apply to Canadian millennials too. Judging by recent Portfolio Makeovers we’ve run showing ETF-based Couch Potato portfolios, the equivalent mix would be 20% each of Canadian, U.S. and international equity index funds or ETFs, and 40% of a bond ETF. And as I’ve written before, don’t even wait till age 25: if you can get your parents to match your savings starting at age 18, the TFSA is the place to put in place these bedrock principals of investing.
And the 15 minutes of work? That would be an annual rebalancing exercise to get the proportions of the three or four funds back to their starting levels.
Millennials can’t count on employer pension plans
Despite this, Bernstein warns younger people that they’ll have a hard go of it because the traditional defined benefit employer pensions of previous generations probably won’t be around much longer. This is pretty much what I wrote in the Editor’s Note for the April issue of MoneySense: that we’re all forced to be our own pension managers these days.
Bernstein says the operative word in his booklet’s title is “If,” because following his simple recipe for wealth (I’d call it financial independence of course) involves a very big “if.” He lays out five hurdles. Number one is excessive spending, second is understanding the basic principles of finance and investing, third is learning and applying market history, fourth is overcoming yourself: the biggest enemy being your face in the mirror; and hurdle five is the conflicted financial industry that is supposedly there to help you with your financial goals. He goes so far as to declare, “The financial services industry wants to make you poor and stupid.” Fighting words, indeed! I might not go that far but it’s certainly a way of looking at the world.
Bernstein’s homework assignments
Bernstein assigns some “homework” to his young readers. They have to read his document twice and read a few books, starting with Thomas Stanley and William Danko’s The Millionaire Next Door and John Bogle’s Common Sense on Mutual Funds. He’s too shrewd to plug his own books but I’ll name one on his behalf that I’ve reviewed positively in the past: The Four Pillars of Investing.
The fact that Bernstein has gone out of his way to give away the booklet should tell you a lot. You can find the link for a PDF here. If you act quickly (today, May 5) you may also be able to get the Kindle version free rather than the 99 cents Amazon.com normally would charge.
To parents of millennials, I’d urge you to download and print this document and hand it over to your kids, perhaps after highlighting the passages you feel to be most relevant. You could give them the link but you know how distracted they tend to be with all the social media noise that abounds these days. Sure, they may say they want to get rich some day but to paraphrase the old saying, “We all want to go to heaven, but no one wants to die first to get there.” For millennials, saving 15% of salary is the financial equivalent of dying, which is why Bernstein titles his document “IF you can.”
Just saw a review by Money Coaches Canada of the (Canadian) edition of Findependence Day. You can find Leslie Gardner’s review here.
Here are some of the main points Leslie gleaned from the book:
- Financial Education is paramount
- Financial Planning is a life long journey
- Life does not always goes as planned, but planning makes it go smoother
- If it sounds too good to be true….. it may be (Big Hat No Cattle)
- That life isn’t always about retiring, it’s more about living with financial freedom
Also just out is the new June issue of MoneySense, which includes a semi-regular column by me on Financial Independence.
Part 2 of the question-and-answer session with Money on Trees has been posted, here.
Part 1 went up last week, here.
In both cases, the focus is heavily on young people getting started in the working world and how they can establish early the habits that will lead to ultimate “findependence.”
Here’s a Q&A about Financial Independence conducted with Money on Trees. The first part of the interview was posted Thursday morning here, with the second part scheduled for next Tuesday.
Note that I’ll be giving a similar talk about Findependence, real estate and personal finance tonight in Brampton (Pearson Convention Center) for the Real Estate Investment Network (REIN). REIN members attending will receive an e-book version of the MoneySense Beginner’s Guide to Personal Finance, plus the just-published April issue of the magazine, and possibly a copy of Findependence Day.
Here’s a 20-minute audio interview conducted Friday with Dale Pinkert of FXStreet’s Live Analysis Room.
The chat touches on findependence, global currencies, central bank money printing and gold, currency hedging by investors in various countries, the loonie vs the US dollar, the need for portfolio rebalancing, MoneySense magazine, the aging of the baby boomers, the views of Harry Dent Jr. and Currency Wars author James Rickard, and more:
Click here to listen.
While taxes don’t have to be filed until April 30th, I always like to do a preliminary runthrough with TurboTax (formerly QuickTax) before the end of February. When I did this a few days ago, I was glad I did because I discovered I had a bit more RRSP contribution room than I’d guestimated, and I still had time to act before Monday’s March 3rd RRSP deadline.
In my case, I contribute regularly through a group RRSP at work, so I don’t normally regard the looming RRSP deadline with any trepidation. But if you’re in employer sponsored pensions, Pension Adjustments may vary up and down. You really don’t know the precise RRSP room until you get your Notice of Assessment after filing the prior year’s taxes.
Don’t file until second week of April
By now, you should have received your T-4 slips and most RRSP receipts, which is sufficient for the purpose of a preliminary runthrough. I like to use the online edition of TurboTax, which makes it easy to carry forward your information from the prior year, including RRSP contributions and unused room from prior years. If you also use an online discount broker, you can make an RRSP contribution easily online, just by transferring funds into your RRSP account: that should generate the needed RRSP receipt that you will use to back up your claim: you still have two months for that receipt to arrive and to finish inputting other data into your return — T5s,T3s and the like can be expected to dribble in until the end of March and first week of April, which is why I always hold off actually filing (NetFiling) until the second week of April. If you have significant non-registered (taxable) investments, you may as well wait till then as well: filing adjustments after the fact would just be an unnecessary hassle.
But do the preliminary work this weekend, just in case you miscalculated RRSP room and while you still have time to rectify the situation. I’m glad I did, because there was $1,400 of unexpected extra room. Remember too that there’s $2,000 worth of overcontribution leeway just because people do make these kinds of miscalculations or errors. I don’t deliberately overcontribute that much but if you’re in the opposite situation as I was — making too high rather than too low contributions — it’s nice to have a little flexibility.
One of the first acts of the new year for our family was topping up our Tax Free Savings Accounts or TFSAs. You’ll see a number of TFSA stories running this week on the MoneySense.ca web site, some of them from the most recent edition of MoneySense magazine, which I edit. Julie Cazzin’s feature story on the Great TFSA Race should whet your appetite on the potential of this vehicle, with the winner racking up an incredible $300,000 in his TFSA, and runnerups at $72,212 and $61,700.
Of course, such returns can come only from capital gains on shrewdly picked stocks, and probably concentrated positions in relatively risky smaller stocks. If you make the mistake of parking your TFSA in GICs or some version of cash, your growth will be negligible. Assuming you put in $5,000 in January 2009 and maxed out every year thereafter, with $5,500 a year ago and $5,500 early in 2014, you would now have $31,000 cumulative contribution room: six years worth. Of course, if you’re one half of a couple, then your spouse also has $31,000 room for a combined $62,000. That’s what I would call significant money: enough to buy a luxury new car or to put a down payment on a first home.
TFSAs are too good to use on spending
However, the tax allure of TFSAs is such that it seems a terrible shame to have to actually spend the money, when its potential to grow into a huge nest egg is such an enticing alternative. Fortunately, the bitter pill of breaking into capital is sweetened somewhat by the fact you can replenish the TFSA, so you’re not actually losing contribution room. Because you can’t repay until the following year, however, you’ll keep more tax-free growth by cashing out towards the end of a calendar year, rather than early in the new year.
Note that in the case of the big winners of the TFSA Race, the bigger the TFSA when you cash out, the more contribution room you’ll eventually have when you recontribute. So in the case of Jim Nykyforuk, if he were to take his entire $300,000 out this year, in 2015 he’d be able to recontribute the same $300,000, plus of course the new $5,500 room he and everyone will qualify for by January 2015.
Those are big numbers but as I wrote in the editor’s note for the current issue (Dec/Jan 2014), it’s unlikely that most TFSAs will have grown anywhere near that much, even if they are in stocks. The risk-takers who won the contest had plenty of other money in other vehicles and they were willing to risk the TFSA capital for a big win, fully understanding it’s as easy to strike out as hit a grand-slam home run.
Diversified equities more prudent
I wouldn’t even recommend that most people emulate those aggressive strategies. From my correspondence with the kind of readers who gravitate to a “Couch Potato” portfolio so often seen in the pages of MoneySense, a typical all-equity TFSA would have grown from the original $25,500 contribution room to somewhere in the low $30,000 range at the end of 2013. In our family, for example, our TFSAs ranged from $32,000 to $34,000 and as of the January 2014 top-up would be just shy of $40,000 each. (This includes our daughter, whose aggressive investing strategy was unveiled in MoneySense in an earlier feature by Julie: How TFSAs can make your child a millionaire; Dec/Jan 2013)
The temptation to dip into such growing nest eggs must be considerable for younger people but when you consider the power of tax-free compounding, I’d still urge most to keep their hands off their TFSA for 30 or 40 years. Yes, those who have maxed out to this point now have enough to buy a brand new car, but I’d urge them to instead go with a used vehicle or take advantage of zero financing or ultra low interest rate deals on new cars. The other big temptation would be to dip into TFSAs for a down payment on a home but here again, I’d look first at the Home Buyer’s Plan provision of RRSPs first, or perhaps hit parents up for a down payment.
TFSAs should be priority for those with modest incomes
I’d think most MoneySense readers are in a position to do BOTH an RRSP AND a TFSA contribution but for those who aren’t, the TFSA should probably get the nod. If you can’t do both, odds are your income is relatively modest, in which case you may be in a lower tax bracket, which in turn makes the RRSP argument less compelling. By the same token, if your salary is relatively low and you want to maximize future sources of government retirement income like Old Age Security and/or the Guaranteed Income Supplement, then again the TFSA is compelling: all withdrawals will be totally tax free and not trigger dreaded “clawbacks” of OAS or GIS. Say you’re currently 47 years old and have $10,000 saved in a TFSA. In 20 years, you could contribute $5,500 20 times, for another $110,000 (and probably more if the government keeps adjusting the limit to inflation.) Even if growth was negligible because it’s invested in laddered 5-year GICs or a bond ETF equivalent, let’s assume you can get 2.5% interest (a figure that will likely be much higher 20 years from now.)
Even with no employer pension or other sources of income, someone living on some combination of CPP, OAS and GIS taken at age 67 would be able to generate some $3,250 a year of safe interest income from a nest egg that (conservatively) might have grown to $130,000 over that time. That’s almost $300 a month, guaranteed and tax free.
If you put it into Canadian blue chip stocks, you’d have a much bigger nest egg but either way, it’s nice to have an emergency fund and a source of regular income that’s independent of what government authorities provide — my idea of a modicum of financial independence even for those with modest means. Yes, I realize it’s tough for some to put aside even $5,500: if that’s the case, then at least shoot for $2,000 or $3,000 a year, even if it means going without expendable luxuries like alcohol, tobacco, fine dining, lottery tickets or even the much maligned daily latte habit at your local coffee shop. Find just $50 a week for your future and you’ll be on your way!
As for dual-income couples making good money, to me it’s a no-brainer that the TFSA should be maximized each and every year, and managed for maximum (or balanced) growth. The moment you make your January contribution, you should start accruing for the next year’s installment, even if it means parking in short-term cash vehicles and paying a little tax for the balance of the calendar year.
Conventionally, the American dream refers to a well-paid job, a family of two or three children and a new home along with a sturdy retirement nest egg. However, the impact of the economic meltdown as well as over trillion dollar student loan debt has left many to reconsider that dream. They are now introspecting a lot about the reasons for their own financial plight. Moreover, they are looking for ways to resolve the issues that plague their financial independence or “findependence.”
A new survey by Credit.com and GfK Custom Research found 25% of respondents defined their version of the American dream as being able to lead a debt-free life. Such a response comes second only to the definition of becoming financially stable by the time one reaches the age of 65.
This answer came mostly from the group who belong to the retirement age of 65 or above. In addition, 18% of the survey participants have responded that they dream to buy a house of their own, while 7% want to opt for higher studies and pay off their education loans.
Despite the continuous grim economic outlook, people are positive regarding their ability to fulfill their customized American dream. Another survey by Credit.com has revealed that 54% have a belief they are about to fulfill their dream, while another 24% declared they have already attained it. This summed up to a total of 78% who were affirmative about their retirement prospects.
The advantages of being findependent
Post the the Great Recession of 2008, Americans have chosen a path that is not wrought with underwater-mortgages, overwhelming credit card balances, tedious car loans and multiple lines of student loans.
Instead, their new road leads them to a life that is debt-free – where they’re no longer burdened with an exhausting budget, a dreadful mailbox and life that’s controlled by the debt collectors and spiralling interest rates.
There are numerous benefits to living debt-free that would entice anyone living on the edge of bankruptcy to start following a debt management strategy to get rid of his or her financial woes. Some are as follows:
Reduced interest charges – CreditCards.com has said that, on an average, rate of interest on credit cards is 14.95%. The average credit card debt for the consumer carrying a balance is almost $5,000. So, a lot of interest is paid by people that is also weighing down their monthly budgets. However, these are just the averages. For people with bad credit histories, the rate of interest could be several notches higher. Hence, being debt-free allows you to steer clear of wasting your hard-earned money on interests that would leave little tangible benefit for you to use at a later stage.
Increased retirement fund – According to a combined statistical data compiled by the Federal Reserve, the U.S Census Bureau and the Internal Revenue Service (IRS) of 2012, 25% of American households do not have any savings whatsoever. What’s more surprising is the average retirement fund is only $35,000. Indeed, avoiding sky-high interest debts could leave these people with more disposable income. It isn’t difficult to understand there are numerous ways to dodge long-term debt.
More, they could even find out the ways to direct their income as well as increase their savings at the end of it all. The bottom line is the absence of monthly bills with exorbitant interest lets you save all the more aggressively for retirement, home purchase, college and even build up an emergency fund.
Finally, that one benefit sought by everyone is complete solace and peace of mind. Hence, being debt free and attaining financial independence would translate into a life with less worries. These are a few of the advantages of findependence that you cannot support with a survey report or reflect through statistics.
This blog was written by Zindaida Grace, a financial writer and researcher associated with the Oak View Law Group.
What I call the “Findependence Day Model” dervived from the book is simply the combination of three things.
All three deal with cutting investment costs or brokerage costs. The first is using a discount brokerage to make your own trades, typically at $10 per transaction. The second is to take advantage of broadly diversified, tax-efficient and low-cost exchange-traded funds (ETFs), which can also be purchased at a discount brokerage.
And the third is to use a fee-for-service financial planner, that is, a planner whose services are billed either by time (usually by the hour) or by the project (as in a one-time financial plan) but NOT via annual fees levied as a percentage of client assets under management. The problem with the latter is it gets prohibitively expensive as wealth grows, unless the fees are tapered down accordingly. I recently heard from a reader complaining that a 1% fee on a $4 million portfolio cost $40,000 a year — an amount many people could live on. Clearly in such case, you should negotiate a lower fee: say 0.5% for starters, or look for another firm that will negotiate, or go the DIY route described in this blog and find a true fee-for-service planner.
What the heck does “fee-only” really mean?
Note there is much confusion over the term “fee-only.” As Preet Banerjee writes in the current issue of MoneySense — here — the term fee-only does not necessarily mean fee-for-service. All that fee-only means is that it is NOT old-time commission-based, levying commissions per transaction. In fact, commission-based is not that bad a deal, particularly if you’re a buy-and-hold investor.
Sadly, many journalists and even advisers themselves have used the term “fee-only” when they really were referring to fee-for-service. As a result of the definition used in the US NAPFA, an asset-based financial planner (like the one charging our reader 1% of a $4 million portfolio) is well within their rights to refer to themselves as “fee-only.” Fee-only can mean EITHER fee-for-service OR asset-based financial planning, rendering it almost meaningless. And mea culpa, even in the two editions of Findependence Day, I use the term fee-only when I should have used “fee-for-service.” Future editions will fix that and editions of MoneySense magazine will going forward make this distinction clear.
MoneySense’s new Fee-for-Service online directory
Because of this, we at MoneySense have revamped the previous online directory of “fee-only” planners. Click here for the new directory, or rather TWO directories: one for true fee-for-service (i.e. by hourly or project billing) and one for financial planners who are primarily asset-based (at least 60% of revenues) but who do offer clients the option of time-based or fee-for-service billing.
I might add that other aspects of the Findependence Day model have also been rolled out in MoneySense throughout the year 2013. Our Feb/March issue on RRSPs introduced the ETF All-.Stars, which will be revisited in the Feb/March 2014 issue. And our June 2013 issue introduced MoneySense’s first survey of Canada’s best discount brokerages, a second version of which will run next summer. Both features were written by MoneySense editor at large Dan Bortolotti, more about which can be found below.
For those who missed those two issues of the magazine, here’s a tip. It costs only $20 a year to subscribe to MoneySense magazine (7 issues), which also gets you free access to the web site at MoneySense.ca PLUS the iPad edition. We recently went behind a paywall (or technically a pay fence) but the iPad edition also gives you the back issues, including the ones mentioned above and in fact all the issues since I became editor starting with the June 2012 issue.
Upcoming iShares educational event in partnership with MoneySense
Finally, those in the greater Toronto area may find an event coming Saturday, November 16th of interest. Dan, mentioned above and pictured on the left, will be talking about ETFs and portfolio construction along with “Ask MoneySense” columnist and broadcaster Bruce Sellery, and various iShares ETF experts from BlackRock Canada . Dan will be taking readers through some of the concepts I’ve described above, as outlined in the book he authored for the magazine: the MoneySense Guide to the Perfect Portfolio, copies of which will be given away at the event, along with the current issue of the magazine, parking and breakfast. (more than recouping the $25 charge).
I might add that Dan is in the process of becoming a financial planner himself. He is already working with PWL Capital, whose firm is listed in the new directory as primarily asset-based. Dan himself is in the fee-for-service camp.
Details for the iShares/MoneySense event can be found here.