Credit reporting has turned into a multi-billion-dollar business but getting your credit report doesn’t have to be expensive, in fact, you can get a free credit report mailed to you once per year and all it takes is just 5-minutes.
A credit report represents all your recent credit history, mortgages, credit cards, vehicle loans, lines of credit, and even some bill payments. It’s often referred to as a “consumer disclosure” or “credit file disclosure” but most people call it a credit report.
Every piece of debt you’ve recently owned (even if paid off or closed) should be represented on your credit report. It will also capture your current and past addresses, phone numbers, even employers.
In today’s world your credit report is very important. It directly impacts your ability to qualify for new debt. Plus, it often gets pull as part of a thorough background check. It can also help identify fraud and identity theft early on, limiting the damage.
Your credit report is so important that it’s a good idea to check and review it on a regular basis.
When leaving an employer, or when transitioning into retirement, those with a defined benefit pension will have a difficult decision to make… take a lifetime pension? Or take a commuted value?
A commuted value is essentially the current value of those lifetime pension payments in one large lump sum. The commuted value is an amount that is determined to be equal to the lifetime of payments that a pension would provide. It’s calculated by the pension actuaries and can easily be several $100,000 or even $1,000,000+
With interest rates at historical lows, the commuted value of a pension can easily be $1,000,000+ for those at retirement age. Low interest rates will push up the size of a commuted value, which is partially driven by an assumed rate of return, and right now interest rates are at historical lows.
This creates a very large psychological problem; how do you invest all that cash?
In particular, when do you invest it? Do you invest it all at once as a large lump sum? Or do you invest it in smaller increments over a period of time?
If invested all at once, that commuted value could drop dramatically if markets experience a correction in the near future.
If invested later, that commuted value could miss out on a large increase in value during a period of growth.
The indecision around how to invest a large amount of cash can cost tens of thousands of missed investment gains, or it can cost hours of lost sleep and feelings of stress. It’s not something to be taken lightly.
Investing a large lump sum is a daunting experience even for the most seasoned investor.
Technically compounding begins with the first dollar, but when does compounding exactly take hold, when do we really start to FEEL the effect of compounding?
Compounding is almost like magic. It turns even the smallest amount of money into millions if given enough time.
Ben Franklin bequeathed $2,000 to the cities of Boston and Philadelphia in his will BUT with the stipulation that they could not draw on the investments for 200-years. The original amount has compounded over 200-years from $2,000 to $6.5 million!
But do you have to wait for 200-years to feel the effect of compounding? Definitely not.
The effect of compounding can be SEEN almost immediately but to really FEEL the effect of compounding takes at least a few years, plus, as well see below, it also depends on the rate of investment return.
As of January 1st, everyone in Canada over the age of 18 has the chance to add another $6,000 to their TFSA. If you were 18 or older in 2009 your total original contribution room would be $75,500.
But that’s just contribution room, what about investment growth?
With investment growth where would a TFSA be? How much would it be worth? And how would that compare to other historical periods?
Let me preface this post by saying I don’t like to compare personal finances. Everyone’s path is different and it’s impossible to compare apples to apples. Even in the same financial situation everyone values money differently and therefore two people with the exact same income, assets, debts etc will have very different financial plans, part of the reason why financial planning is so important, and also so interesting.
That being said, in this post we’re going to compare hypothetical TFSA balances of today with those of the past. We’ve had a great “bull run” over the last 10+ years but what would it look like if we had different set of returns? What if we looked at the best periods and the worst periods in recent history to compare how the last 10+ years stacked up?
The TFSA has been around since 2009. Each year, once you reach age 18, you accumulate TFSA contribution room. In 2021, someone who was 18 or older in 2009 would have $75,500 in original contribution room. But with investment growth where would the actual balance be?
What do you think the top 5 and bottom 5 historical periods would be? And how do you think they’d compare with the last 10+ years?
This is the time of year when everyone starts talking about investment returns. It’s been a wild ride and just months ago it would have been difficult to imagine reaching positive investment growth year over year. With the incredible ups and downs of this year, investment returns are bound to be in the headlines over the next few months.
For some people, investment growth is an important metric. They care about time weighted returns, money weighted returns, and breaking down their year over year growth by geography, sector, and even individual investments.
We, however, don’t care about investment returns.
In fact, I couldn’t tell you what our year over year returns have been this year or in past years. The only way we’d know is because our discount broker likely tracks that for us. Otherwise it’s just not a personal finance metric we put much value in.
Of course, we do care about long-term returns, but we don’t care about year over year returns, and here’s why you shouldn’t either…
Retirement is full of risk. There is longevity risk, spending risk, health risk etc. But two of the largest risks in retirement are investment risk and inflation rate risk.
What if you could transfer some (or all) of that risk to someone else? That would make retirement that much more enjoyable, less to worry about and less to stress over. There would be more time to enjoy retirement itself rather than worry about retirement finances.
The problem with risk is that it’s hard to understand and hard to quantify. We’re pretty bad at assessing risk and probability. We might look back at the accumulation phase and think that we can manage the emotional impact of investment risk and inflation risk. After all, we’ve been managing those risks for 30-40+ years before retirement, why would that change in retirement?
The difference during the decumulation phase is that those risks are exacerbated by annual investment withdrawals. In retirement, these withdrawals, necessary to support retirement spending, multiply the effect of fluctuations in investment returns and inflation rates.
During the accumulation phase, investment contributions help reduce the impact of fluctuations (dollar cost averaging is a big benefit during accumulation). During the decumulation phase however, investment withdrawals multiply the impact of fluctuations.
As you’ll see below. The based on historical standards, the variation during the accumulation phase is nothing compared with the variation that’s possible during the decumulation phase.
So, transferring retirement risk to someone can become quite appealing when transitioning into retirement. It can help reduce that variation. Transferring even a small amount of retirement risk to someone can significantly improve peace of mind. Plus, it can help create a “floor” of retirement income that is virtually guaranteed.