Never work again?

neverworkagainIn researching the post-Findependence lifestyle, I’ve come across a lot of books that invoke the phrase  “Never Work Again” in the title, or variants that suggest much the same thing. There is, for example, a free e-book with that precise title (shown on the left) but you soon discover that these kinds of books equate the word “Work” with the corporate 9 to 5 routine.

Most of them, like the Tim Ferriss book we looked at earlier this summer, involve leveraging the Internet to create a mobile lifestyle that can earn money anywhere in the world. Other examples are The Laptop Millionaire and Click Millionaires. In the case of Erland Bakke, author of the book shown at the top, if you follow your passion and the money eventually follows, this is no longer defined as “work,” even though for all intents and purposes it is.

These books propose business ownership and the pursuit of multiple clients and at some point leverage their personal time to either employ one or more assistants, or to outsource various pieces of “work” that one either lacks the skills for (like web-site development) or lacks the inclination to focus on.

Better to sell products than time

laptopmillionaireThe fundamental decision is whether to continue to sell one’s time – this is what salaried employees do, as do “one-man band” freelancers – or to pursue the sale of products. The latter route, whether of tangible products or web-based information products, contains the seeds of potentially greater wealth, but of course requires a lot of upfront-time, energy and often capital in order to establish the infrastructure that will later deliver a sort of “freedom.”

I’d still call this work, even if it’s the supposedly glamorous field of “internet marketing.” Certainly, the covers of these books and e-books suggest the hybrid nature of this lifestyle. Typical are the two covers I’ve used to illustrate this blog:  you see someone lounging on a beach somewhere – we’ve probably run versions of this idyllic scene in various “Retirement” covers in MoneySense – but instead of the lounger languidly sipping a pina colada and reading a trashy paperback, we see instead a laptop computer perched on their stomach. They are in fact “working,” however idyllic the environment, not unlike the photo I ran of myself “lazing” in the back yard in this blog earlier in the summer.

Working and Living become intertwined

Far from “stop working, start living,” (to borrow from the title of Dianne Nahirny’s book on early retirement), the philosophy of these books is to combine living with working, taking advantage of the global infrastructure of the World Wide Web to engage in money-making activities anywhere in the world.

Personally, I envisage such activity as a supplement to the traditional sources of “retirement” income we write about regularly in MoneySense. My faith in the stock market was shaken sufficiently by the events of 2008 that I’d be reluctant to count exclusively on dividend income, however diversified the portfolio. And we all know that the phenomenon of “financial repression” practiced by the world’s central banks has conspired to keep interest rates low for the foreseeable future, which makes counting on highly taxed interest income from fixed-income investments equally dodgy. If I were a real estate tycoon, which I am not, I’d want to add rental income. As I am not, I envisage some combination of selling my editorial services and creating new web-based products. These blogs will continue to report on this adventure as time goes on.

 

 

New year, new TFSA room & giant step to Findependence

A belated Happy New Year to all readers and a reminder that every adult Canadian can take a big step this week towards their ultimate financial independence. I refer of course to the fact we can all contribute another $5,500 to our Tax Free Savings Accounts (TFSAs), bringing the total cumulative room to $25,500 (going back to the program’s launch in 2009). For the benefit of any American readers, Canada’s TFSA is the equivalent of the U.S. Roth plans, albeit with different rules.

In other words, if you acted at this time each year, you’d have contributed $5,000 in each of 2009, 2010, 2011 and 2012. Now that it’s 2013, the annual limit has been raised to $5,500, the first time the limit has been adjusted to accommodate inflation.

Of course, assuming you invested wisely in each of those years, your balance should by now be well north of $25,500, and in some cases may have grown past $30,000.

TFSAs a particular boon for young people

I truly believe that maximizing the TFSA is the single biggest step Canadians can take in their quest for financial freedom. As we noted in Julie Cazzin’s “Make Your Child a Millionaire” feature in the current issue of MoneySense, the TFSA is especially a boon to young people because they have such a long investment time horizon ahead of them.

Unlike RRSPs, which require earned income the prior year, an 18 year old can qualify for the full TFSA $5,500 limit this year (they may need parental assistance to come up with the money, but that’s permitted by the rules. Think of it as a tax-effective early inheritance!). Not only that, but they can contribute to TFSAs well into old age, unlike RRSPs, which end after age 71. You better believe that half a century of maximizing TFSAs and investing wisely will mean multi-millions down the road.

Do this right from the get-go and you may not even have to worry about RRSP contributions, although those in higher tax brackets should probably do both.

But how to invest wisely? For the young in particular, but also older people seeking income, I think equities are the only way to go in TFSAs, especially with interest rates being so low as they are now.

I’m all for international investing but if you already have lots of RRSP contribution room, I’d use the RRSP for US dividend-paying stocks, since the tax treaty shelters Canadians from the 15% foreign withholding tax.

Despite the “tax-free” moniker, TFSAs won’t stop you from being dinged by that tax on foreign securities. For this reason, I like TFSAs for Canadian dividend-paying stocks. Yes, I realize the dividend tax credit makes Canadian dividends a good choice for non-registered (taxable) accounts, since the tax is roughly half what it is on interest income. However, Canadian dividends also result in the annoying “gross-up” calculation come tax-time, and such phantom dividend income can ultimately hurt you on the OAS clawback. And to me, zero tax is preferable to even a “low” rate of tax, especially if you plan to reinvest those dividends.

Canadian Dividend ETFs are my choice

For all these reasons, my personal choice for TFSAs this year are Canadian dividend-paying ETFs. A year ago, when it was part of the Claymore family, I publicly stated that the iShares S&P/TSX Canadian Dividend Aristocrats Index Fund (CDZ/TSX) was a tempting choice, at least for those who already have plenty of exposure to the big Canadian banks.  To be included in that index a stock has to be a common stock or income trust listed on the TSE and have increased dividends for at least five consecutive years.

This year, there is a valid new alternative from Vanguard Canada: the Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY/TSX). The management fee on VDY is just 0.30%, half the 0.60% of CDZ. (MER is 0.67%, we don’t yet know what VDY’s MER will be). But keep in mind that VDY amounts to a big bet on the major banks: a whopping 59% of the ETF is in Canadian financials and in fact the top four holdings are all the big banks.  CDZ has much less exposure to financials (just 21%) and minimal exposure to the big six banks in particular.

Half and half is one compromise

One way to go might be to split your contribution between both ETFs: say $2,750 in each. Remember, though, this assumes you have plenty of US and foreign stock exposure in your RRSP. Younger people for whom the TFSA comprises the lion’s share of their wealth should strive for plenty of US and foreign stock exposure through similar types of ETFs. We’ll be looking in depth at these in the next issue of MoneySense, currently in production.