Weekend Reading – Giveaways, why bother with bonds, why invest in international stocks and more #moneystuff

Weekend Reading – Giveaways, why bother with bonds, why invest in international stocks and more #moneystuff

Welcome to my latest Weekend Reading edition where I share some of my favourite articles from the week that was across the personal finance and investing blogosphere.

I posted these articles this week:

My review and giveaway about Stock Investing for Canadians.  Enter to win!  (Don’t go far, more giveaways to come this spring and summer.)

These are the top-3 REITs I have my eye on this year.

Great to see a few dividend raises over the last week or so:  Nutrien (NTR), Bank of Montreal (BMO), and National Bank (NA) all recently hiked their payouts in my portfolio.  Stay tuned to this channel for my May dividend income update – coming up soon.

For those that missed my April update, here is that post; we’re approaching $18,600 in dividend income per year from assets that pay dividends in some key investing accounts.

‘Til next week enjoy the weekend, thanks for being fans and I encourage you to share this site with others!

Mark

Another smart post by Andrew Hallam about why bother to own bonds when they don’t payout squat.  From Andrew:  “Consider what happens when stocks fall hard. Bond allocations can help to cushion market falls.”  He reminds about loss aversion – our hard-wired, lizard-brain behaviour we humans find very difficult to shake.

“In his book, Thinking Fast and Slow, Daniel Kahnemann, a Noble Prize winner in Behavioral Economics, says we dislike losses twice as much as we like gains. When our portfolios fall far, it increases the risk that we’ll do something silly.”

I enjoyed that book a great deal, probably one of my favourites I’ve ever read.  I highly recommend it.

A fan of this site and very well respected personal finance all-around good guy John Robertson had a thoughtful post about all-in-one ETFs and asset location – namely the costs of such funds long-term in taxable accounts.  I agree with John, investing in these all-in-one ETFs in a registered account such as RRSP, TFSA, RESP, etc. have no real tax headaches.  Non-registered investing gets a bit more complicated.  What John wrote:

Non-registered: it gets more complicated, as you might expect. When you sell a fund you’ll have to realize the gains (and thus pay tax). Turning over your entire portfolio at once might have some fairly large tax consequences. You can take an alternative approach, like buying a bond fund at some point (perhaps selling a bit of your all-in-one fund) to make a two-fund portfolio later.”

Chrissy from Eat, Sleep, Breathe FI believes any personal finance independence journey is all about the “whys”.   She makes some great points about understanding your “whys” when it comes to money goals and I would go even further to say this is extremely important for any facet of your life – including the workplace as it relates to goal setting.  The summary:  the more your “whys” are clear and understood, the better your chances of success become.  Thoughts?

The Dividend Guy is not convinced you need any international dividend stocks.  Why?  I’ll let him explain:

The problem I see with emerging markets’ businesses is that they exist and evolve in a volatile environment on all fronts: politic, economic and financial. We have been reading many articles about shadow banking, non-transparent stock markets, and political influence in many of these emerging countries.

While you can make money with some opportunities, this is not an environment that is likely to seduce the dividend growth investor in me. Instead of going deep inside a company’s financial statements, I would rather select an ETF that covers such investments.  Investing in US companies and/or ETFs seems to be easier and a more efficient way to get exposure to international markets.”

I use a couple low-cost U.S. ETFs in my portfolio – so I can see a bit about where he’s coming from.  Thoughts?

Should you protect your assets (with more fixed income or cash) as you approach retirement?  Probably a good idea but I’m not quite “there” yet in my thinking.  I’ve got a few years before semi-retirement can begin but this post did trigger some thinking – if I really need to live off dividends.

Reader question/reply of the week:

Hi Mark,

I have a question that perhaps you could turn into a blog post unless you’ve already done this. 

  • Do you need to contribute to an RRSP if you have a Defined Benefit Pension? 
  • How do you know how much to invest?
  • What if you already max out your TFSA?
  • Pros and Cons to investing in both RRSP and Defined Pension at the same time

I’m just throwing out some questions above. The reason for my questions – I want to make sure I’m not doing anything silly today that will affect the amount of tax I pay when I retire.

Thanks for your questions!  Keep them coming fans!

For what it’s worth, here’s my quick take (and I will consider putting these answers into a more detailed blogpost about RRSPs and pensions in the future):

You don’t need to contribute to an RRSP if you have a defined benefit pension plan at work, but when it comes to my financial plan, I’ve decided that all things considered a tax headache in retirement is a very good problem to have.  🙂

This means I strive to max out my RRSP (even though I contribute to a defined benefit pension at work).  I have done this for a few reasons:

1) I don’t what the future holds,

2) I want some financial flexibility in retirement – drawing down various accounts in various orders, and

3) I believe in asset diversification since I consider my pension a “big bond”; this way I can hold more equities in my personal portfolio.

In terms of how much I could invest, inside my RRSP by having a defined benefit pension plan, every year I look at my CRA Notice of Assessment (NoA) to know how much RRSP contribution room I have left.  I use my NoA as my guide since contributions to my pension reduce any available RRSP contribution room for the upcoming tax year.

What about the TFSA?  What about it?! – it’s a killer investment account!  There are great things you can do with your TFSA every year – and I max out this account every year without exception.

Lastly, of course, there are pros and cons to having assets inside an RRSP and with a workplace pension plan but I think regardless if you have a workplace pension plan, or not, and most people don’t, striving to save and invest inside a TFSA and RRSP during your peak earning years will provide you with tremendous financial flexibility later in life. A desirable place to be I would think!

Got a question for me?  Fire away.  Visit my Bio & Contact page and drop me a line.

Save, invest, and prosper this spring!

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BMO InvestorLine - January 2019

Mark

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, we're inching closer to our ultimate goal - owning a 7-figure investment portfolio for semi-retirement. We're almost there! Subscribe and join the journey. Learn how I'm getting there and how you can get there too!

21 Responses to "Weekend Reading – Giveaways, why bother with bonds, why invest in international stocks and more #moneystuff"

  1. Fir the reader that is worried about having too much pension payout when he retires. Much better to have too much than to have too little and worry about having to make lifestyle choices – will that be a hamburger or a steak.
    If you have a DB pension then you max out your TFSA first and then max out your RRSP to the amount allowable – percentage of earned income. Not everyone earns enough to do both of those and still pay their life obligations and wishes – taxes, food, car(s), etc and yes, also entertainment and vacations.
    To each his own but that is my nickels worth (inflation got to the penny and now a minimum is five cents).

    RICARDO

    Reply
    1. Depending how good his DB pension, one might consider going with Low Yield/High Growth DG stocks in a non-registered than an RRSP. Capital gains will be taxed much lower than the registered withdrawals. TFSA, and RESP first, then decide about RRSP or non-registered or a bit of both.

      Reply
      1. I’m a huge fan of maxing out/contributing to TFSA first, then RRSP or RESP for kids; then taxable investing. I think taxable investing based on my own personal experiences should come last.

        Reply
        1. If you know your kids are going to post secondary then I move the RESP to number 1. Take advantage of the grant and let that money compound! It’s like a TFSA with a 20% government boost, as the taxable portion of the withdrawal goes to the student who usually will not pay any actual tax.

          Reply
    2. Fully agree: “…if you have a DB pension then you max out your TFSA first and then max out your RRSP to the amount allowable – percentage of earned income.”

      I can appreciate not everyone has the income to do that, and has other priorities, but I think it’s the right call to have financial options to the extent possible. That’s just me.

      Great comment.
      Mark

      Reply
  2. When it comes to DBs and RRSPs I’m going to again say “it depends”. My pension plan had a provision where I could retire at age 50 with 30 years of service. At 50, I had the option to take the pension and incur a 5%/year under 55 (25%) reduction on the pension for life, OR, I could defer the accumulated pension to age 60 and suffer no penalty. An RRSP (TFSAs were not invented back then) would be an ideal self-funded bridge to allow me to retire at 50, and defer the pension to 60. This was my plan although it wasn’t really all that clear in my 20 year old mind. It was more of a *possibility* or *option* if things worked out.

    So in summary, one sort of has to know how their pension works, what they might want it to do in the big picture, and how one can use the RRSP tool to help with that picture. It may turn out one has no intention to leave the workforce and they intend to go to the end, or they might want to take a few years off (if their employer allows for such things). There are dozens of possibilities but one has to know what is possible before one can make a determination.

    Or, one can save the max and keep all their options open and possibly have to deal with paying a bit more in taxes at some point.

    Reply
    1. That’s my favourite answer too Lloyd!

      I think it’s important for the reader to figure out how their pension (income) might fit into their broader retirement income plan. Certainly there is a case to be made for contributing to the RRSP and the pension, at the same time, for at least a couple of decease if possible (to increase future financial flexibility) but that doesn’t mean one must.

      A tax problem (i.e., being over-taxed) is a great problem to have in retirement comparatively speaking 🙂

      Appreciate your comments.
      Mark

      Reply
      1. I also agree with Lloyd that it depends, like most financial matters.

        We recently extensively looked at our situation initially thinking we might have too much RRSP. Our first incline was to think non-registered could be better, especially to avoid OAS clawback in retirement and a major tax bill at death.

        It turned out that we will probably use non-registered only as a last resort. For instance, capital gains would only be a better option than RRSPs if you know your taxable income (or to be more precise, your marginal tax rate) will be much higher in retirement. The advantage of RRSPs also widens with time and expected return.

        On top of it all, tax considerations are also much simpler with RRSPs. For instance, using RRSPs, we won’t have to bother with the 15% withholding tax on US dividends or the more complex tax filing that comes with capital gains.

        One major point that repetitively came out of our enquiries was to ALWAYS MAX OUT YOUR TFSAs FIRST. TFSAs are more flexible and remain much simpler while still being very tax efficient.

        Hence, we will concentrate on maxing out our TFSAs. We will even consider RRSP withdrawals to achieve so. Especially, on lower income years during my gradual retirement. In that context, one key fiscal strategy for us will be to maintain my taxable income just in the lower tax bracket, making sure not to exceed its upper threshold ($46605 in 2018). The objective will not be to lean towards non-registered but rather to keep our TFSAs maximized considering new contribution room available with each new year.

        In the end, as you both implied, RRSPs give you options and having too much is a good problem to have!

        JD

        Reply
        1. Good to hear from you JD.

          For sure…tax considerations are simple with the RRSP. Tax-deferred growth today and taxed assets upon withdrawal.

          As someone that has a TFSA, RRSP and a small DB pension at work, I will be very happy with the financial options in the years ahead thanks to contributing to all three accounts.

          I’ve read about that a few times ~ $45,000 or so is the “sweet spot” for each retiree in retirement to stay in the lower tax bracket but upper end of that bracket to maximize income with minimal taxation.

          Reply
          1. By the way Mark,
            Have you started your golf season yet?

            Golf is not really fun around Montreal with the not-so-warm weather.

            It sad to think we played and enjoyed it in early March a few years back. It’s now June and it doesn’t even feel like the same sport. So much for global warming!

            Luckily, I may have a chance to catch some better days in the fall as I will still have some time on my hands.

            Please hit a couple far ones for me (as it doesn’t seem possible up here for now)!

            JD

          2. I’ve played one round. Sore shoulder now, not sure what is going on. Been to physio x3 in the last month. My only round I shot 39-43. A terrible back nine for me. I used to be a rather good golfer. Now, with age, bad habits creeping in and no practice time, my game is suffering.

            If I gain more flexibility and strength back in my shoulder(s), I should be able to shoot 75-78 rather consistently. I would be happy with that given the volume of practice time I put in (very little).

            It’s not how far, it’s how far and how straight that’s important 🙂

            I hope you get out as well JD.

            Cheers,
            Mark

  3. “It depends.” Also one of my favourite answers. Maybe because it is so often right as it is in Lloyd’s comment.

    Good articles from Dale Roberts and Andrew Hallam. No surprise to most regulars in here that I’m on side with those 2 perspectives. Re Dividend Guys comments I’d say maybe but I note the reference is to international stocks but the concern raised and what he wrote was on emerging markets, a small portion of international.
    I also note the phrase volatile in all fronts, politic, economic, financial for EM. It was ironic to me the 2008 crisis was partly created by poor regulation (MBS’s) in the favoured US. Right now there is a leader creating great uncertainty in US & global markets with loose fingers on his twitter feed, questionable trade practices and relationships, and rather unusually working to influence the fed on interest rates. Perhaps I am wrong but it seems not all is well or right in highly developed countries either.

    Reply
    1. Oh I don’t think this just applies to EM. The U.S. has a HUGE wealthy disparity and it’s only getting worse. Tens of millions of people are basically living in poverty.

      Reply
  4. Although I’m contributing to a DB pension plan, we chose to contribute first to a Spousal RRSP, and then (if we had funds available) to the TFSAs. The amount contributed to the Spousal RRSP was the amount that would have otherwise been taxed at my highest marginal rate of 43.4%. With income splitting, our tax rate will be around 27% in retirement, and under the current rules, there will be no OAS clawback.

    Reply
  5. Gruff403 (Semi retired at 56) · Edit

    Having a DB pension did not leave a lot of RRSP contribution room so I let it build for a few years and contributed to TFSA. My last year of full time work I borrowed to max out RRSP contribution and paid the loan off within a year. It takes some work to get your money out of RRSP/RRIF but the TFSA can be tapped with just a few clicks making the money easy to access. For me that is a bit dangerous. It’s fun watching money go into your account when you don’t have a full time job. Right now we have one RRIF that will generate income for the rest of our lives and the other RRIF we plan to wind down within 6-8 years until OAS and CPP become available.

    Reply
    1. Nothing wrong with borrowing for your RRSP, as long as you can pay back the loan quickly.

      Gruff, you’re in a great place: “Right now we have one RRIF that will generate income for the rest of our lives and the other RRIF we plan to wind down within 6-8 years until OAS and CPP become available.”

      That is ideal – to have enough income from your portfolio such that you can draw it down without needing any CPP or OAS. Having CPP and/or OAS is “gravy” is great for any unexpected expenses.

      Reply

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