Over the last few years the number of low-cost investment options has exploded in Canada. There are new and easy ways to create a low-cost diversified portfolio that isn’t dragged down by high investment fees.
There were always low-cost, do it yourself options, but they required a fair amount of manual work to make contributions, invest those contributions, and rebalance periodically (and let’s not forget, the stress of keeping yourself on course during a correction or recession).
But now there are new options available. In addition to a low-cost ETF portfolio or a low-cost mutual fund portfolio, there are options like low-cost “all-in-one” ETFs and low-cost robo-advisors.
These new options provide investors with new ways to invest in a low-cost portfolio without necessarily doing all the work themselves.
This has understandably put a lot of pressure on investment advisors who have historically charged extremely high fees on the investment products they sell.
The average investment fee on a mutual fund portfolio in Canada is around 2.3%. This can cause an enormous amount of drag on an investment portfolio. A $1,000,000 investment portfolio would experience a $23,000 annual drag from investment fees! That has a direct impact on how much retirement income you can create from your investment portfolio.
But switching from a high-priced mutual fund portfolio can be hard to do.
Even with the high fees, traditional investment options continue to dominate the investing landscape in Canada, but things are starting to change. For the first time ever, ETFs have outsold mutual funds. More money is flowing into ETFs than into mutual funds (bear in mind that you can also have high-priced ETFs, and low cost mutual funds, so this isn’t necessarily the best indicator).
But… if these low-cost investment options have been around for a while, why the slow change? Why aren’t more people switching?
There are three main risks people face when making a change of this kind, financial risk, emotional risk, and social risk. These risks can be difficult to overcome. Let’s understand each one and why they make breaking up with an investment advisor hard to do…
When it comes to financial planning we often focus on the numbers, net worth, debt, rate of return etc. But half of financial planning has nothing to do with the numbers. Half of financial planning is about behavior. It’s about managing our behavior, our expectations, our emotions etc.
When it comes to personal finance, and specifically investing, we are often our own worst enemy. We make financial decisions based purely on emotion, often costing us more money down the road.
One of the most common mistakes we make is checking our investment portfolio too often. Investment portfolios are not something that should be checked daily or weekly (unless you’re day trading, which is a whole other conversation)
Checking our investment portfolios has become even easier with online brokerage accounts and financial aggregator apps like Mint.
But… just because it’s possible doesn’t mean you should.
The problem with checking your portfolio too often is that we don’t feel gains the same way we feel losses, even if they’re worth the exact same amount.
The emotional impact of a $10,000 loss is more than the emotional benefit from a $10,000 gain. It’s completely illogical, but that’s how we feel. We experience the emotional impact of losses more than gains. We remember losses more vividly, and for a longer period of time than we do for gains.
This is a problem when it comes to investing. Even though a well-diversified portfolio should gain over the long-term, it will likely experience some big swings in the short and medium-term. By checking our portfolios too often we experienced all those gains and losses, and because we feel losses more than gains, the net effect is that we can feel a bit sad.
What we need to do is check our portfolio less often, especially for medium and large portfolios. Let me explain why…
There is a new tax advantaged account in Canada, the Tax Free First Home Savings Account! Along with the TFSA and RRSP, the new Tax Free First Home Savings Account (TFFHSA) is another great way to reach your financial goals in a very tax efficient way. The account provides a significant advantage to those planning to purchase their first home and creates a new option for parents who are thinking about helping their children with a future home purchase.
The new Tax Free First Home Savings Account (TFFHSA) does add a little bit of complexity to an already complex landscape of tax planning options, however like the TFSA and RRSP, if used properly it can help accelerate progress towards financial goals like purchasing a home and planning for retirement.
When saving and investing for future goals you can now choose between TFSA, RRSP, and the new TFFHSA, and for families with small children, there is the RESP too.
The new Tax Free First Home Savings Account is very new, so in this post we’re going to explore how this account works, the eligibility criteria, the contribution and withdrawal rules, some things to possibly watch out for, and some strategic options when using it within your financial plan.
Can you retire when the stock market is at an all time high? For many soon-to-be retirees this is an important question. It can be extremely nerve-racking to “pull the plug” and leave a stable income when investment values are at their peak.
But is this really a concern? Is it bad to retire when markets are at an all time high?
For many soon-to-be retirees, their investment portfolio will make up an important part of their future retirement income. Even retirees with a pension or full CPP/OAS will often have a small investment portfolio to support additional spending in retirement.
Many retirees worry about retiring at an all time high. They worry about a large decline in investment values soon after retirement. They believe this will dramatically impact their retirement plan. But is this concern justified? Or is this one of those biases that we’re all susceptible to?
Working for a few additional years would certainly help solidify a soon-to-be retirees financial plan, but at what cost? That lost time can never be recovered and could represent some “prime retirement years”. That income may also never be needed if everything goes to plan.
As it turns out, we’re actually at an all time high quite often, and the impact of retiring at an all time high isn’t even close to what we’d assume…
For many investors adjusted cost based is something they may never need to worry about (but should still be aware of!) For most investors who are only using tax-sheltered accounts like the TFSA or RRSP, they never need to worry about adjusted cost base (or ACB for short).
This is because ACB is only required to calculate capital gains tax, and because most investors are investing inside a tax-sheltered account like a TFSA or RRSP, this is a non-issue.
But for anyone with investments outside of a tax-sheltered account, adjusted cost base is extremely important! And your ACB is something that you need to stay on top of.
Adjusted cost based is something every individual investor needs to track on their own. Yes, some mutual funds, robo-advisors, or even brokerage accounts might track adjusted cost based for you, but in the fine print they typically tell investors to track it themselves too. Why? Because they don’t want to be held accountable for a tax issue in the future.
Here’s why we need to worry about ACB and some tips on how to track it…
At some point every person with an RRSP is going to need to make a decision about converting their RRSP to a RRIF. The Registered Retirement Income Fund (RRIF) works very similarly to the RRSP with a couple notable exceptions.
One of those exceptions is that there is a minimum RRIF withdrawal each year. Retirees need to make this minimum withdrawal from their RRIF each year and this minimum will slowly increase from year-to-year. The RRIF minimum will escalate each year as a retiree gets older. By the time a retiree reaches their mid-90s they are forced to withdrawal 20% of their RRIF each year!
Because the withdrawal is a minimum, and conversion from a RRSP to a RRIF is mandatory, this often leads people to believe that keeping money in a RRIF is a good idea. After all, if they’re being forced to take money out, wouldn’t that suggest that keeping money in is a good idea?
For many people, taking out only the minimum RRIF withdrawal each year is actually a bad idea. Many people would benefit from a different RRIF withdrawal strategy. Many people would benefit from taking out more than the minimum each year. They would increase their financial flexibility, they would decrease the tax on their estate, and they could even qualify for certain benefits late in retirement.
In this post we’ll look at RRIF withdrawal rules, the minimum RRIF withdrawal percentage by age, and we’ll explore two scenarios where we show how a retiree can benefit from RRIF withdrawals that are larger than the minimum.
We’ll also explore how this strategy is even more impactful after a large stock market correction.