Monday, May 4, 2015

No Fee Banking with President's Choice Financial or Tangerine

Recently, Royal Bank (RBC) made the news for finding creative new ways to charge its customers even more fees than it already does.  The additional costs include charging $2-$5 for previously free transactions such as making debit, credit card, mortgage and loan payments, and higher fees for services such as stop payment, cheque certification, and wire services.  The general consensus is that other banks will eventually follow suit, in their never-ending pursuit of greater profits.

I still remember the ultimate example of unreasonable bank fees–a news story about a mother who wanted to teach her young son the value of saving.  She helped him deposit $20 into his own bank account and returned some time later to show him how much the money had grown.  Instead, they were informed that the account balance actually had a negative balance after service charges ate away all the money.  Instead of making money, the boy now owed the bank money!  I guess the lesson this child learned was that he would do better by hiding his money under his mattress.  The negative press from this story led to the banks offering "no-fee children's bank accounts", but it illustrates the general trend for banks to try to gouge you whenever they can.

It has been over 12 years since we renounced doing business directly with any of the big five banks, in protest over their service charges.  Instead, our banking choice has been President's Choice Financial (PCF) with its offerings of  chequing and savings accounts with no minimum balance requirements and no fees for unlimited deposit, withdrawal, automatic bill payment or chequing transactions.  This is fabulous for regular day to day banking fees, as long as you do not miss the additional services that it doesn't provide.  PCF is a virtual bank that only supports online and telephone banking and does not have any branches or tellers. It also does not offer services such as certified cheques and its debit cards do not support CIRRUS or PLUS for access to cash from international bank machines. 

It should be noted that President's Choice Financial is actually owned by Canadian Imperial Bank of Commerce (CIBC) and acts as its "discount banking" brand.  Accordingly, PCF accounts can be accessed not only from PCF bank machines (which are harder to find), but also from any CIBC bank machine, at no cost.

President's Choice Financial even has comparable if not better interest rates when stacked up against the major banks with their bricks and mortar branches.  At last check of Cannex Financial's listing of deposit accounts, PCF is paying 1.05% annually on savings accounts as opposed to 0.8% paid by RBC, Bank of Montreal (BMO), Scotiabank (BNS), and CIBC, with the latter only paying this rate if you have a minimum balance of $5000. Similarly, PCF is paying 0.1% on chequing accounts as compared to no interest at all from BMO, BNS, RBC and TD Canada Trust (TD). 

Having a no-fee virtual bank alternative has been a brilliant strategy for CIBC, one that has been recently copied by Scotiabank when it bought ING and rebranded it as Tangerine.  I trust that both PCF and Tangerine are smart enough not to mess with a good thing and try to increase their bottom line by slowly introducing new fees.   If they did that, they would lose the very concept that currently gives them a competitive edge for customers who want no-fee, self-service banking.

Choosing President's Choice Financial to be our primary bank all those years ago has been a great decision for us.  We have been able to easily deposit and withdraw money from the numerous CIBC/PCF bank machines, set up regularly scheduled automatic bill payments and even connect our accounts to our Scotia iTrade discount brokerage accounts for easy transfer of dividend income.  Why worry about fees and keeping minimum balances with a major bank, when PCF offers us about 99% of what we need?

The only reason we found for keeping an extra bank account with a major bank is for access to emergency funds from an international bank machine while traveling out of the country.  For that purpose, we opened a basic chequing account with TD and keep a balance of $2000 (recently increased from $1500) in order to have the monthly service charges waived.  When we travel, we transfer extra funds into this account as contingency and if we don't end up using it, we transfer it back after.

Tuesday, April 28, 2015

New TFSA Contribution Limits and Reducing Size of RRSP/RRIF

In the Investment section of the Globe and Mail dated Saturday April 25, 2015, there was an article titled "Retirees Can Save Tax by Trimming RRIFs".  This was a theory that I explored back in 2011 prior to retiring, and which I wrote about in my book "Retired At 48 - One Couple's Journey to a Pensionless Retirement". 
 
At that time, I had created two spreadsheet models to compare the implications to the value of our portfolio and our tax burden between funding our annual retirement expenses by spending all of our non-registered funds first followed by RRSP/RRIF money versus a more balanced approach that drew some funds from all accounts at the same time.  My calculations showed that the balanced withdrawal approach would reduce all accounts at a slower rate, resulting in the total portfolio lasting longer before the money ran out.  By taking smaller amounts from multiple accounts rather than a larger sum from a single account, it allowed each account to maintain a larger balance from which to generate growth and pay dividends or otherwise generate income.  I describe this in more detail in my book.
In addition, by slowly reducing the size of our RRSPs (converted to RRIFs) starting at an earlier age, we would be able to spread out the tax burden of these withdrawals rather than being forced to withdraw huge amounts starting at age 71, due to government enforced minimums. I created a comparison of the total amount of tax paid by age 94 when withdrawing the minimum value starting at age 49 versus age 71.  In both cases, I assumed a starting balance of $300,000 and an investment rate of return of 4%.  Converting to a RRIF at the earlier age results in keeping the value of the RRIF from growing too much, which means the minimum withdrawals also remain relatively low.  Waiting until the mandatory age 71 to convert to a RRIF allows the RRSP to grow significantly in value in the intervening years.  By age 71, the minimum withdrawal percentage is also much larger, resulting in a much larger tax hit, due to our progressive tax rates which tax higher income brackets more than lower ones.  The projected cumulative tax paid on income generated from the RRIF up to age 94 is less for the scenario where the RRSP size is kept smaller (in this example, $107K vs $153K).  The difference would have been even more extreme prior to the recent lowering of RRIF withdrawal percentages at age 71 from 7.38% to 5.28%.

One final advantage of reducing the amount of taxable RRIF income generated in the later years is the impact that income would have on the Old Age Security Pension (OAS), which starts to claw back this benefit for income over a given threshold ($71,592 in 2014).

Part of our RRIF withdrawal strategy was to use money from our RRIF withdrawals to fund our TFSA contributions, thus absorbing the tax hit slowly up front in order to have more tax-free money later on.

At the time when I came up with this concept for early RRIF withdrawal, I was not aware of anyone in the financial industry who was advocating this theory.  Instead, the typical advice from the experts was to hang on to your RRSP money and let it grow tax-free for as long as possible.  To vet my hypothesis, I submitted a question to the financial magazine MoneySense, who contacted a financial planner, Daryl Diamond, president of Winnipeg-based Diamond Retirement Planning, to validate it.  He ran the numbers and confirmed my suspicions, resulting in a MoneySense article published in October 2011.  This same financial planner is referenced in the Globe and Mail article, discussing much of what I originally surmised, but now in context of the recently increased TFSA limit of $10,000.  Lately, I have been seeing more and more analysts write about the same idea that I had years ago.  It is gratifying and reassuring to get further confirmation that I was on the right track back then, despite all the contrary conventional wisdom espoused at the time.

The two new budget items, raising the TFSA contribution limit to $10,000 and reducing the mandatory minimum RRIF withdrawal percentages at age 71, both dovetail into the strategy that my husband and I have already been following since our retirement in 2012.  The only difference is that up to now, we were able to utilize just our dividends in order to fund the RRIF withdrawals and make the TFSA contributions.  Now with the increased limit, we may actually have to sell some stock each year to cover the larger amount.  This actually helps with our goal of slowly decreasing the sizes of our RRIFs, which we accepted intellectually as the right thing to do, but still find emotionally difficult to implement.  Knowing that we are decreasing one savings pool to increase another makes this exercise easier.

Monday, January 5, 2015

After Second Full Year of Retirement - Year End Review

It's hard to believe that my husband and I are already half-way into our third year of retirement after leaving the workforce together at age 48 back in May 2012.  Now that we are both over 50, being retired feels less of an anomaly, but is just as much of a joy and blessing as when we first embarked on this adventure.  So far, each calendar year of our retirement has been marked by a major event that "defined" that year. The latter half of 2012 was spent researching, selecting, downsizing, packing and moving Rich's parents into a retirement home.  2013 was unfortunately marked by my illness when I was diagnosed and subsequently treated for breast cancer.  Luckily I fully recovered and in 2014, we finally took our dream vacation with a 7 week trip through France.  Now that 2014 is about to come to a close, I wonder what will be the highlight of 2015?  It is also time to take stock of this past year from a financial perspective and determine how we did when compared to our retirement plan.

We completed our first year-end review (found here) at the end of last year, using the various spreadsheet calculators and techniques that I describe in our book Retired At 48 - One Couple's Journey to a Pensionless Retirement.  This year, we will repeat those steps but now we have a baseline to compare against.

Retiring at such an early age without the safety net of a defined benefit pension is quite the daunting prospect, since we are almost solely reliant on our own personal savings to fund our retirement.  To reduce the chance of running out of money too soon, we created a very conservative retirement plan, selecting an extremely modest rate of return (4%) for our investment growth while using a higher than expected initial estimate for our expenses.  The thought was to allow any good stock market years to act as a buffer for the periods of poor performance that will likely occur periodically over the next 40+ years of our plan.

We start off by updating our retirement plan spreadsheet, entering the 2014 actual ending balance for our portfolio, comparing it against the estimate and then using the actual balance to recalculate the rest of the plan for the remaining years.  This recalculation gives us a more realistic estimate going forward.

For the second year in a row, our actual balance exceeded our estimates, with a net growth of 12% after withdrawing dividends for income, as opposed to the assumed 2%.  Several factors led this.  First, because of our conservative plan, we are still spending less than estimated although that gap narrowed a little in 2014 when compared to 2013.  In a later step, we will drill down and examine our expenses to explain this.  Also, the TSX had another relatively good year, with an overall upward trend for Canadian stocks in 2014 (despite several dips along the way).  As a result, many of our stocks grew in value. Finally, we benefited from the bonus of having 23 out of our 35 stocks raise their dividend payouts one or more times in 2014.  While we knew this was likely for some of our stock, we did not factor the dividend growth into our retirement plan, since we could not count on this happening.  In fact, the total amount of dividends generated by our non-registered account grew by 17% in 2014, after a 14% growth in 2013.

We then examine each of our RRIF accounts, calculating the new annual minimum RRIF withdrawal for 2015.  This amount, which grows each year, is determined by the formula (2014 closing balance * (1/90-age of younger spouse)).  We confirm that the annual dividends which we generate from the RRIF account are still sufficient to cover the minimum RRIF withdrawal.  We do have enough for 2014 and should continue to enough for multiple years still, especially if the dividend payouts continue to increase.  At some point, the minimum will become larger than we can cover with our dividends and at that point, we will need to either sell some stock or transfer out stock in-kind to make up the difference.

Next we review the performance of our individual stocks, paying closer attention to the stability and growth of their dividends than to the share price.  While many of our stocks increased their dividend, none of our stock decreased their payout, so we are in good shape. This year, we decided to add columns to our stock portfolio spreadsheet, to track the dividend history for each of our stock holdings.  We now have a better picture regarding which companies regularly increase their dividend payouts each year and which companies don't.  This helps us decide which stocks to buy more shares of, when we make our TFSA contribution each year, or when we select stock to register for the Dividend Reinvestment Program (DRIP).

We also take a look at our asset allocation and sector diversification, to ensure that we are not overloaded in any one sector.  We are most heavily invested in the Financial sector (banks and insurance companies), just like many ETFs or Mutual Funds, and the TSX in general.  But the value of those shares make up less than 33% of our portfolio, which is still within a reasonable range according to the experts. We examined our exposure in the Energy/Oil & Gas sector, in light of the recent free-fall of oil prices.  While we have heard horror stories such as AGF Management cutting their dividend by 70%, luckily none of the energy companies that we invested in have cut their dividends at this point.  Even if one or more companies do reduce their dividend payout in the future, it will not severely impact us since we have ensured that no individual dividend makes up a significant proportion of our total dividend income.

Finally, we run our Quicken report on annual expenses by categories, so that we can compare with previous years and look for trends.  At a high level, our overall spending for 2014 increased by 3.2% in comparison to 2013.  This is initially concerning since our projected average rate of inflation in our retirement plan was set at only 2%.  We did have some unexpected one-time expenses this year that will not reoccur in the future, so that might account for the deviation.  We will keep our eye on this and if the trend persists, we may need to recalculate the rest of our retirement plan using a higher inflation rate.

Drilling down by category, we notice some more patterns.  In 2014 our condo fees increased by over 7%, again higher than the anticipated 2% inflation rate.  Looking back at the previous years, the increase was 1.7% in 2012 and less than .05% in 2013, so maybe this was just a catchup year.  This is another area that we will need to keep an eye on.  In terms of auto related expenses, our fuel consumption and costs decreased significantly in 2013, due to no longer driving to and from work and this trend has continued in 2014.  Our auto maintenance costs are slowly creeping up as our car gets older.  Eventually we will be hit with a large expense when we need to replace our car.

In terms of money spent on vacation, we actually did not do so badly considering we were away for 7 weeks in France followed by 1 week in Calgary (for a family wedding).  Taking part in a home swap and not requiring to pay for accommodations for a large part of our France trip really helped to cut down the costs.  We also notice that we spent less on groceries and dining out than usual, so part of our vacation costs offset the usual eating expenses that would have been spent had we been home.

So the financial review after our second full year of retirement shows us in good shape.  Steady as she goes and onwards to 2015.

Monday, October 6, 2014

Air Canada Lost Luggage - Experience and Lessons Learned

Air Canada announced recently that it would start charging $25 per flight for each checked bag.  This adds a $50 surcharge to the price of a return airplane ticket that is already heavily laden with taxes.  While the additional cost is bad enough, what adds insult to injury is that there is no guarantee that your bag will actually reach its intended destination.

This happened to us on our recent flight home from Calgary to Toronto with a layover in Ottawa.  Somehow, our suitcase was permanently lost (or stolen?) en route.  It has taken almost 3 months for us to get financial compensation, which Air Canada caps at $1500 regardless of the value of the items lost.

Upon arriving at Pearson airport, we waited in vain for our bag to come off the baggage carousel.  Once it was clear that our suitcase was not on our flight, nor the flight after, we started the lengthy process of searching for and then claiming compensation for the lost bag.  Here is what we went through and our lessons learned:

1. Before leaving the airport, we reported our lost bag at the baggage claim counter and created an incident record.  We had to present our baggage claim ticket (that is usually attached to your boarding pass-do not lose this!) and gave details about the type, size, brand and colour of our suitcase as well as sample contents inside.  We were assigned a baggage tracing file reference number and told to go home and await delivery of our bag.  If it did not show up after 5 days, then we could move to the next step.  During those 5 days, we could check on the status of the bags on Air Canada's Worldwide Baggage Tracer website.

 2. After 5 days and within 21 days, we had to download and fill in a Baggage Declaration form, which then had to be snail-mailed to the Baggage Claims Department in Quebec.  The requested information included:
  • Flight itinerary
  • Plane ticket numbers, Boarding Passes
  • Baggage Claim ticket numbers
  • Description of luggage - size, colour, style
  • Signed photo identification of the passenger (passport photo, drivers license)
  •  Itemized list and description of bags and contents
Luckily as part of planning our travel, I usually make a "packing list" of what I want to bring on the trip, to make sure I don't forget anything.  This list made it easy to fill in the itemized contents form.  Unfortunately the total value of our baggage contents exceeded Air Canada's $1500 liability limit by far, since we had been traveling for a wedding followed by vacation and had lost both our dressy and casual clothes.  We did still have the option to claim the rest with our home/property insurance (more on this later).  The form asked for receipts and details about size, colour, brand, manufacturer, where and when the items were purchased, and the original purchase price.  Who would keep all this information about their clothes after buying them?!?  We did not have all these details but filled out the form the best that we could.  We did have a photograph of our suitcase and its distinctive striped strap, so we sent that along to help with the search.


3. We mailed our form exactly 5 days after the loss of our luggage and then waited and waited.  What made it particularly frustrating was the difficulty of finding anyone to talk to who could set our expectations of what were the next steps involved and how long the process would take.  We checked the WorldTracer website regularly but there was no status update other than the original message "We are trying to locate your bag.  Please check again later".  We periodically called the 1-888 number of the Central Baggage Customer Care Centre but were connected with remote offsite call centre operators who did nothing more than look up the status, probably on the same website that we were checking, and report back that "the search continues".

About a week and a half after submitting our claim form, the status on the website changed to indicate that our claim had been received and was being processed.  Again, we had no clue how long this would take and went back to waiting.  About another 3 weeks after the change in status, we finally connected with a call centre operator who seemed to have a bit more information.  He was able to look up the date that our claim was officially "accepted" into their system, and informed us that there would be a 50 day "tracking" period starting from that date, during which they would intensify the search for our bag.  Finally, some one gave us a useful time frame to help set our expectations.  There was no point calling again until after the 50 days were up.

4. We phoned again at the end of the 50 day search period, and explained that the time was up. After some pressure on our part, the operator agreed to forward our file to the Claims department for settlement.  Again there was no indication of how long this would take and no way to contact the Claims department directly other than mailing them a written letter or sending a fax.  Our attempts to get a contact email or phone number for the Claims department were rebuffed.

5. Without any further guidance, we settled in for another long wait.  Imagine our surprise when a mere two weeks later, we received our $1500 claim settlement cheque in the mail, along with a letter indicating that they were unable to locate our bag (which we had realized months ago).  In total, it took 81 days for Air Canada to resolve our issue and compensate us for our loss.

6. Our next step was to file a "Theft, Burglary or Robbery - Off Premises" claim for the balance of our loss against our home/property insurance with Aviva.  We were expecting to have a $1000 deductible but were pleasantly surprised to learn that our policy had a disappearing deductible of 20% per claim-free year.  Since we had been claim-free for over 5 years, we now had a zero deductible.  We were required to fill out another itemization of the contents of our suitcase but were able to cut and paste from the Air Canada list for the most part. 

In comparison to the Air Canada experience, the one with Aviva was extremely smooth, quick and stress free.  After submitting our claim, it took merely a week for it to be processed.  We had the choice of taking the settlement as "replacement value", meaning we would replace all the items and send Aviva the receipts which they would reimburse, or take a lesser cash settlement that reduced the value of each item by a depreciation percentage ranging from 10 up to 70%!  The total cash value came to about 60% of the replacement value.  When it became obvious that I was leaning towards the cash settlement, which would give us a quicker resolution with much less hassle, the adjuster voluntarily offered to raise the amount so that we would receive 70% of our replacement value.  We happily accepted and this cheque is now in the mail.  Our property insurance disappearing deductible has been reset to $1000, but with any luck, we will not need to make another claim again until it has reverted to zero.

While we always knew that our luggage could be delayed, it never fully registered with us that it could be totally and irretrievably lost.  Being financially reimbursed cannot completely make up for the loss of some beloved items that have sentimental value and which were purchased long enough ago that they could no longer be replaced.  This has been quite the traumatic experience and I've learned some valuable lessons for the future.

Traditionally I have been a chronic "over-packer", since I like to be ready for all eventualities and I want to have my favourite clothes and accessories with me while on vacation.  This ordeal has cured me of this.  In the future, I plan to pack sparsely and only with items that I would not be devastated to lose or which I can easily replace.  Some pricey items that I mindlessly checked but that I will make sure that I carry-on in the future include my custom-made dental night guard and my electric toothbrush.  In fact, as much as I can, I will try to avoid checked luggage.  I will strategically pack as much as I can in my carry-on baggage, although the new $25 check-in fee has resulted in a crackdown on carry-on bag size and weight limitations. 

With our settlement money, we decided not to buy another full-sized replacement suitcase.  Instead, we researched the purchase of a pair of better carry-on cases that meet most airlines' size and weight restrictions, while maximizing storage capability and minimizing weight of the actual bag.  What we settled on was the Bric's X-Bag 21-Inch Carry-On Spinner Trolley which is made of sturdy but flexible, light-weight material that is 21"x15"x9" and weighs under 3kg.  It was recommended to us while we were browsing in the high-end Taschen! luggage store in Yorkville (162 Cumberland Ave.)  Thinking that we could get a better price elsewhere, we did a quick online price comparison and were surprised to learn that Taschen!'s price ($209) was better than other stores including Bed, Bath and Beyond ($229).

Most likely, our bag was lost during the layover in Ottawa, possibly because it did not properly check through to Toronto, as intended.  I have visions of it sitting on the baggage carousel in Ottawa until someone finally decided to take it.  We had this awkward flight because we used Areoplan points to book our flight.  In the future, we will think twice before agreeing to a layover and would rather pay more for a direct flight.  It's actually concerning how little security there is around baggage claim areas and how easy it could be for someone to walk off with your luggage before it gets to you on the carousel.  There is no security check to ensure that the luggage you leave with actually belongs to you.  At least at Toronto Pearson, the baggage area is restricted and only valid passengers can access it.  When we landed in Calgary, the baggage area was out in the open and anyone off the streets could walk up to take the suitcases.

We now have a CIBC Visa Infinite credit card that provides additional travel insurance coverage including delayed or lost/stolen baggage.  Too bad we did not get this card until after we had paid for the Calgary flight.  We were lamenting this unfortunate timing, but after reading the policy details on this credit card coverage, it turns out that we did not miss out on that much after all.  The coverage is only for a maximum of $500 per person (not sure if that actually means per bag, since we had two people's clothing in one bag) and is only in "excess to all other insurance or indemnity available to the insured."  Possibly if we didn't have a zero deductible, then the card coverage could have paid for that. I hope we never go through this again and don't ever have the need to find out whether this assumption is true or not.

I wish there was a way to inform Air Canada that despite such adverse circumstances, customer satisfaction would be much improved  if only they would set better expectations up front as to how long things would take.  But since the chance of finding anyone in the position to listen and take action is about nil, its just not worth the effort.  The uncertainty and lack of an escalation path to seek clarity was the second source of our frustrations.

Coming back to the issue of charging $25 for each checked bag–Air Canada, I would gladly pay this fee if you can guarantee that you never lose my luggage again.

Thursday, October 2, 2014

Buying Online with Promotional Codes

You can find some good deals when buying online, whether through eBay or Amazon or directly from different online stores.  These days, just about all retail outlets have an online presence.  There are risks to purchasing online, since you are buying products sight unseen.  I try to limit the value of my purchases to $50 or less and don't buy anything like clothing or shoes that depend on size and fit.  Even if returns are allowed, it is so much trouble to ship back an unsuitable item that I don't want to go through that hassle.  If possible, I prefer to pay for my online purchases using PayPal, since this shields my credit card number and offers me an extra layer of protection.

The biggest issue for me when buying online is related to shipping.  Often the shipping charges are so high that they eliminate any price advantage or cause the total cost of purchase to become prohibitive.  Even more annoying are the companies that don't ship to Canada, where I live.  American online stores have much better product selection and prices, but many do not ship outside of the USA.  Some sites don't let you make a purchase unless you have an American credit card that matches the proper State of an American address.  So even if I found someone in the USA that I could ship to and have them bring it to me when they come visit, I am not able to make the purchase with my Canadian credit card.  This is all very annoying!

When I purchase items online, I often see the field for a promotional discount code and have wondered where to get these codes.  Recently I tried searching the internet for these codes and have actually found ones that worked and resulted in a reduction in my cost of my purchases.  There are websites like http://www.retailmenot.ca/ that specialize in accumulating promotional codes, but it is just as easy to search specifically for what you need.  For example, I was buying a Dr. Ho Electrode Tens machine from the online store mywellcare.ca and found a code for $10 off.  Then I bought a necklace from Nygard and found a code for 35% off my purchase.  And just today, I wanted to watch a play at the CanStage theatre and actually found a code that took 50% off the ticket price.  This is amazing and from now on, I will be checking for promotional codes whenever I buy online.

Sunday, August 24, 2014

Staying Vigilant on Minimizing Expenses

When we first retired in May 2012, we did our due diligence in terms of reviewing all of our expenses in an attempt to minimize them.  As described in our book Retired at 48 - One Couple's Journey to a Pensionless Retirement, we sought out the best rates that we could get at the time for services like cable, home telephone, internet and mobility access for our cell phones and tablets. By bundling our phone/internet/cable under one provider, reviewing our service levels and features to reduce them to the minimum required and then negotiating a "loyalty" discount by agreeing not to transfer our services to a different provider for at least 2 years, we ended up with a fairly good rate.

Unfortunately the 2 years are now up and our bundle rate has increased by over 50%!  So it was back to the drawing board with comparison shopping between providers.  We took another look at our services and decided that we did not want to reduce them any further.  We are already down to basic cable, have one of the lower priced internet data package options, and are not ready to give up our land line and rely on our cell phones, like many of our younger relatives and friends have done.  

After long discussions with the various providers, we determined that with the current promotional offerings from the competitor, we would not save enough to make it worth switching providers at this point.  We were told by our current provider that we would not qualify for another discount for at least two months, but that we could try for one again after that.  So we will continue to monitor the situation and wait to see which provider comes up with a better promotion before deciding if we should switch some time down the road.

During the discussion with our current provider, we did find out that we were on an old "grandfathered" internet package.  In the new set of options, there was one at a marginally lower price that offered faster upload and download speeds but slightly lower data limit.  Since we have never come close to reaching even this lower data limit, it seemed like a good choice for us.  The cost reduction was minor, but we would get faster service.

While we were doing this further research on our expenses, we took another look at whether our IPAD mobility package was optimal for our usage patterns.  We had signed up several years ago for a flex step plan where you paid $5 per month for up to 10MB usage, $15 for up to 250MB and $30 for up to 1Gig.  While we tried to stay within the 250MB limit, we found that we were often pushing this boundary prior to the end of the usage period, or would accidentally exceed it slightly, taking the $15 hit for being bumped into the next step.  We decided to search for a better/cheaper plan that would allow us a higher data limit.  To our surprise, just like the case with our internet provider, our current IPAD mobility data provider had also restructured their plans.  In their new plan (which confusingly was called by the same name as our old plan), the steps were $5 for 10MB, $20 for 1GIG and $40 for up to 5GIG.  This was the perfect plan for us, but we were stuck on the old grandfathered plan until we called to ask for it to be switched over.

It is so annoying that in each case, the provider never bothered to inform us that they had new offerings that might be a better fit for us and at a lower cost.  What these two experiences have taught us is that we must remain vigilante in monitoring our expenses and constantly review our usage fees against the latest offerings.  With technology changing so rapidly in the TelComm industry and competition being so stiff between the major players (which is ironic since the big three of Rogers, Bell and Telus hold a virtual monopoly), there are always opportunities to get a better deal.  But we are on our own if we want to find them. 

Wednesday, July 30, 2014

Death + Taxes



My 90 year-old father passed away recently and it has been a struggle to wade through the 
bureaucracy required to ensure that my mother receives her survivor's share of his CPP and government work pension.  It may take months before everything is sorted out and she finally starts receiving the full amount of payments to which she is entitled.

This led my husband and I to take a closer look into what would happen to our retirement portfolio when one of us dies.  This portfolio is made up of RRIFs, TFSAs, a joint non-registered investment account and joint bank accounts. We want to ensure that we are structured in such a way to allow the surviving spouse to minimize probate and deemed disposition taxes, as well as reduce administrative delays that would temporarily limit access to our money.

Probate is the process of obtaining court certification of the validity of your will and the legal authority of your executor to represent your estate.  The fee or tax of probating a will could be as high as 1.5% of the estate.  Two recommended ways of avoiding probate taxes include making your non-registered accounts joint, and ensuring that your registered accounts have designated beneficiaries. 

These were steps that we had already taken when we first set up all of our investment accounts with our discount broker Scotia iTrade.  Our non-registered account is set up as "joint tenants with right of survivorship", meaning that assets are automatically passed on to the surviving joint owner and are not subject to probate tax.  We named each other as beneficiary when setting up our RRSPs, RRIFs and TFSAs, so that the value of these accounts will be excluded from the estate for probate purposes, and will be paid directly to the beneficiary.

By doing deeper research on this topic, we learned that for spouses (including common-law), it is even better to designate each other as the successor holder (for TFSAs) or successor annuitant (for RRIFs only, not RRSPs), rather than beneficiary.  Upon death of the owner, all rights to the registered account transfer to the successor, with the account and all its tax-sheltering benefits remaining intact. 

In the beneficiary scenario, the account would have to be closed with the investments inside liquidated and transferred as a lump-sum to the beneficiary.  This involves a time-consuming process of filling out forms and could result in an interruption in the flow of income from the account until the administrative details are sorted out.  There would also be costs involved in disposing and reacquiring investments, as well as worrying about adverse market conditions at the time of the purchase or sale.  There might be a possibility to transfer shares "in-kind", but that would probably involve even more paperwork.

In the case of the TFSA, the beneficiary could make a one-time "exempt" contribution of the funds to his own TFSA, but would need to worry about timing of the contribution, not exceeding his and the deceased person's contribution room for the year, and other rules and potential tax implications. 

In the RRIF beneficiary scenario, the originally specified RRIF payment rules would terminate and need to be recalculated for the surviving spouse, using his age to determine the minimum payment.  If the survivor is the older spouse, he loses the advantage of using the age of the younger spouse to set the minimum payment.  There could possibly be an interruption in RRIF payments while this is being sorted out.

By contrast, the successor route requires a simple name change on the existing account.  The payments for a RRIF would continue uninterrupted, based on the terms originally set up for the account.  After taking over ownership of the deceased's TFSA account, the successor holder is still subject to his own personal contribution limitations, but could contribute either his own or the TFSA of the deceased.  He can also choose to merge the funds into his own TFSA account.  

Now that we know about this differentiation, the successor option is clearly preferable since from a logistics perspective, the successor option seems much simpler than the beneficiary one.  It is concerning that we had never even heard of these terms prior to our recent investigation.  It makes me wonder what other useful tax conditions or situations are we unaware of. Once we thought to look, there is plentiful information on the internet on this topic, but how do you know to look for something that you have never heard of?

For our RRIFs and TFSA accounts that were already set up with beneficiaries, we visited the Scotia iTrade office to fill out the request forms for changing this to successor annuitant and successor holder respectively.   For our remaining locked in RRSPs (LIRA) which we cannot collapse until at least age 55, we will now know to select the right option when converting them to locked-in income funds (LIF).

While in the iTrade office, we confirmed that our non-registered joint account was indeed set up as "joint tenant with right of survivorship" and then asked what would happen when one joint owner died?  We were told that the joint account would be closed and a new account opened with the single remaining owner.  It would take between 5-7 business days to create the new account, but we were assured that the surviving joint owner would still have access to the original account during this period.  Despite this assurance, we made note that it might be wise to withdraw some spending money prior to reporting the death, just in case. To start the process of turning the joint account into a single account, the survivor would need to provide the death certificate plus a letter of direction.

Finally we looked into how deemed disposition rules for the final income tax filing of the deceased would affect our joint non-registered account.  Usually upon death, an account owner is deemed to have disposed of his investment assets at fair market value and would be subject to capital gains tax if applicable.  In our case, having a joint account plus the rules for transfer of assets to spouse will help defer capital gain taxes until the death of the second spouse.  When the joint account is turned into a single account for the remaining spouse, the assets can be transferred at book value (the price at which each asset was originally purchased) which results in no capital gains or losses.  For those who have more losses than gains in their investment account, you can alternately request for the transfer at market value in order to trigger capital losses to apply against future capital gains.  Hopefully we won't be in this situation.

At some point, we need to take the final step of creating a will that determines what happens to our estate if both of us die together.  Having a will also makes it easier to apply for death benefits from Service Canada, as there is much more administration involved to recoup funeral expenses if there is no estate.  For now, we seem to have set ourselves up to ease the transition for the surviving spouse, if and when one of us dies.

Saturday, May 10, 2014

Travelling in Early Retirement

In our book Retired at 48, I write about how it is almost as important to plan socially for your retirement as it is financially.  Those who don't have social activities, interests or hobbies outside of work will find it difficult to adjust to retired life.  Those like me (or am I unique?) who were born to be retired and have practised enjoying it since the first day on the job, will relish the new-found freedom of time and opportunity.

So many people have asked us how we could possibly fill our days if we retired at such a young age.  I then proceed to bore them for multiple minutes as I rattle off our seemingly endless list of hobbies and interests which include tennis, cycling, walking around the city, theatre, movies, arts, photography, knitting, crocheting, writing, blogging, cooking, dining out, hanging out with friends and family, learning new skills such as speaking French or playing the ukelele, ... see what I mean?

 But the biggest itch that we have been able to scratch with our early retirement is our love of travel. While we were working, our ability to travel was severely restricted by the demands of our jobs.  Being in sales, Rich could not be away more than 6 business days at a time, had to avoid the last and first weeks of each month due to month-end processing, and the entire months of March and September, which were the "year-ends".  This really limited which destinations we could travel to, since there are some locations that just were not worth going to for a mere 7-9 days.

Now we can travel whenever and wherever we choose, as long as we have the funds to support the trip. This is something else we considered when planning for our retirement.  We made sure we set aside a healthy travel allocation in our annual budget that we track closely against.  There may be some years where we will travel more modestly and locally to offset larger trips abroad in other years.  Both will be fun, so that is no big sacrifice.

One major way that we keep travel costs down is by home-swapping. Staying in someone else's home for free while they stay in yours is a great way to not only to reduce expenses, but also gives you the opportunity to live like locals.  We are about to embark on a 7-week trip to France that will include a 6 week home swap in a little town called Bargemon.  I will be blogging about our trip in my travel blog, so check out the link below if you want to follow our adventures.

Annie and Rich's Travel Adventures - http://arenglishtravels.blogspot.ca

Thursday, May 8, 2014

Falling Discount Broker Costs and the Use of DRIPs Can Jumpstart Small Accounts

 Back in the early 2000s when we first started managing our own stock trades using a discount broker, we selected the little company eTRADE, since it was offering the best rate by far at $9.99 per trade compared to $29.99+ for the large banks.  A few years later, Scotiabank purchased eTRADE, keeping the low trade fee for accounts worth at least 50K and rebranded it as iTRADE.  Soon, the other banks lowered their fees to remain competitive and for a while, the fees for the discount brokerage arms of all the major banks were pretty close.  Non-bank brokerages such as Questrade have even lower fees, but for the purpose of this article, let's stick with the big banks. 

This year, in another salvo to win new business, RBC Direct Investing removed the minimum account balance restriction and is now offering $9.95 a trade (note the trivial but symbolic $0.04 competitive difference to iTRADE) for all accounts regardless of size.  BMO InvestorLine and TD Waterhouse quickly followed suit.  It is only a matter of time before Scotiabank and CIBC Investor's Edge will need to fall in line if they don't want to start losing customers, let alone attracting new ones.

This is great news for new investors who are starting to build up their portfolios. Now, you could buy stocks or bonds for as little as $1000 and pay only 1% on the trade.  Of course the more money you can save to make a single purchase, the lower the cost per share will be.

The use of the Dividend Reinvestment Program (DRIP) makes it even easier for small accounts to grow with minimal transaction fees.  If you buy a stock that supports a DRIP, you can enroll to have the dividends from that stock be automatically reinvested into buying more shares, without incurring any trade costs. Some companies even offer a discount on the shares bought within a DRIP in order to reward shareholder loyalty.  Having your dividends reinvested in a DRIP immediately puts to work small sums of cash that otherwise would sit idly in your account–not worth enough to warrant the trade fee, but also not earning any interest or dividends. The DRIP works its compound magic since the more shares you own, the more dividends you generate, so that eventually your DRIP can buy even more shares.  Of course, you want to select a company that you feel comfortable owning more and more shares of.  Luckily, DRIPs are supported by most of the large-cap blue chip companies.  An excellent list of Canadian companies that support the DRIP can be found here.

I just found out today that to qualify for the DRIP purchase, you must receive enough dividends per payout period to cover the cost of at least one share.  I thought that my dividends would be put aside and accumulated until I had saved enough to cover the cost of the share purchase.  This turns out not to be the case.  If I don't have enough dividends to buy a share, the dividends just remain as cash in my account. So for one of my stocks, I hold 160 shares that pay out around $15 per month.  The share price is around $24.8 so I need to purchase an extra 114 shares ($2840 including fees) before I will generate enough dividends per payout period to actually qualify for the DRIP.  This stock is in an RRSP where I can no longer make further contributions, so I will just have to wait until I accumulate enough dividends from the other stock in that account to make my purchase.

Just note that it could take up to one dividend payout period before the request to DRIP or unDRIP a stock to take effect.  So if you decide at some point that you need the dividends as cash again, leave enough time for the unDRIP request to be processed.

Friday, April 25, 2014

Our Investment Strategy Featured in the Globe and Mail Me And My Money Column

Our investment strategy was featured in the column called Me and My Money in the Business section of the Globe and Mail. You can read the article here:

Globe and Mail Me and My Money Article

This strategy is described in greater detail in our book "Retired at 48 - One Couple's Journey to a Pensionless Retirement" and is serving us well in retirement.  Because our non-registered income is all in the form of Canadian eligible stock dividends, the tax burden of this income is significantly less than other forms of income such as bonds, GICs, foreign stock, registered income from our RRSPs, or employment income when we were still working.  We really noticed this with our 2013 tax returns, which marked the first full year where we had no employment income.

Using a Tax Estimator that is also described in the book, you can see the difference in tax resulting from the same amount of dividend income versus the other forms of income described above.  The dividend income is grossed up to produce a higher taxable income, but then the amounts of federal and provincial tax owed are each reduced by a generous dividend tax credit that more than offsets the increase.  Note that the tax advantages of dividend income start to decrease as the amount of dividend income increases.  This is because the gross-up eventually pushes you into a higher tax bracket so that there is more tax that needs to be offset, while the percentage of the dividend tax credit remains the same regardless of income level.

Friday, April 4, 2014

StudioTax 2013 Integrates NetFile to CRA

Last year I wrote about how I used the free online tax software StudioTax to prepare my income tax return.  My previous blog article describing how to use StudioTax can be found here.  Since it was my first time, I also prepared my tax return manually (as I did in all the previous years) just to compare the results with the software.  The two returns came out identically.  So this year, with total confidence, I relied solely on StudioTax 2013 to create my tax return, which saved me so much time. 

The 2013 version has been enhanced to integrate the step of net-filing to the Canada Revenue Agency (CRA) within the software.  After completing data entry on the tax return and pressing the "Netfile" button to generate the .TAX file, you previously had to go to the CRA website to manually submit this file.  Now you are given an option to use StudioTax to submit to CRA.  Note that if you owe money, you are expected to make a payment within the next five days.

After successfully generating the .TAX file, you are asked to click on the link to read the NETFILE Terms and Conditions and Privacy Notice.  I did not realize initially that unless you click on this link and select the check-box, the Next button is not enabled and you cannot proceed.  On the last screen, you press the Transmit button and your tax return is automatically submitted and you are returned a confirmation number.  This seamless integration of tax return generation and submission made this task so convenient.

The ability to pay my income tax bill from my computer as the final step made the hassle-free experience complete.  This was accomplished by going to my online banking interface, entering for "CRA" as the search criteria, selecting the option for "2013 Tax Owing" (the wording may differ slightly depending on the bank) and entering my social insurance number as the "account number" of the bill.  After adding this CRA payee as a new bill, I was able to pay my tax bill on the spot.

Since we retired in May 2012, 2013 was the first full year that my husband Rich and I earned no employment income and relied completely on our retirement income.  Without the complicated tax elements that came from his commission-based job, this year we were able to use StudioTax for his return as well. StudioTax makes it very easy to create joint spousal tax returns.   On the T3 (income trust) and T5 (investments income) forms, there is a field to indicate the split of the income between spouses and a button to copy the information from one spouse's return to the other's.  You only need to enter the information in the form for one spouse and StudioTax will automatically distribute the values between the two returns at the specified percentage split.  For us, we are simulating income splitting by sharing all income equally, and so we enter 50% for each of us.  StudioTax even has an Optimizer option that makes sure that income and deductions are properly allocated between the spouses to minimize the joint tax burden of the couple.

StudioTax also makes it easy to play around with different scenarios since it quickly recalculates the entire tax form when you change a value in any field.  To take advantage of this, we played around our RRSP contributions (we each had room for one final contribution from our 2012 income) and donations to see if we needed to claim the entire values to minimize our tax, or if we could carry any of it over to the following year(s).  In my case, I needed all of my RRSP contribution plus all of the donations that we each made in order to reduce my taxable income. But we were able to carry forward some of Rich's RRSP deduction to next year since applying all of it did not further reduce his tax burden. It was a matter of repeatedly running the "Wizard" option, fiddling with the RRSP deduction number and then checking the recalculated tax owed until we could not bring down the tax owed any further.

StudioTax is a great tool that is free to everyone regardless of income and relies on donations to keep going.  You can make a donation here in order to help fund future versions of the program.  They accept credit cards, pay pal or cheque.  We will definitely make a contribution to thank them for making our lives so much easier.

Monday, March 31, 2014

Interview on Global TV's The Morning Show

 

If you think fifteen minutes of fame goes by fast, then try six!  That's how many minutes we were allotted for our interview on Global TV's The Morning Show to talk about our book "Retired at 48 - One Couple's Journey to a Pensionless Retirement".  There was so much to talk about, and so little time!

I'm not sure if we were able to convey that the purpose of our book is not to teach people how they can retire at 48, but to help them create their own retirement plan so they can figure out at what age they can retire and with what type of lifestyle.

We never got around to talking about some of our strategies for generating a tax-efficient income flow, including taking advantage of favourable tax rates for Canadian eligible dividend stock, and simulating income splitting by making all of our non-registered accounts joint and each claiming half the income.

We didn't get to explain why we felt confident that we would not run out of money too soon as long as we stuck to our retirement plan. If we ever find ourselves spending more than planned in any year, we will reduce our discretionary spending in the next year to get back on track.

We didn't have time to share our tips for reducing expenses in car insurance, health insurance, cell phones, cable, entertainment and more.

Hopefully what we did talk about generated enough interest so that people will want to check out our book.  This was a great experience and provided excellent exposure for Retired at 48.  We would like to thank Global TV for giving us this opportunity!

Click on this link to see our interview.

Monday, March 24, 2014

Toronto Star Book Review and the Purpose of the Book

Our book Retired at 48 has been reviewed by Toronto Star Business reporter, Ellen Roseman.  The Toronto Star article can be found here at this link.

Based on the book's title, you would be justified in assuming that we are claiming that we can teach you how you can retire early as well.  That was never our intention.  Our retirement plan is based on our own personal circumstances, which most likely won't apply to most other people.  In particular, we had two reasonably well paying jobs, no kids and no debt when we started to seriously save for retirement.  All these factors contributed to our early retirement at age 48, more than any strategies or planning steps that we could implement.  So it would be unrealistic to think that anyone else who has a different personal situation could expect the same results.  This is just what happened to work out for us.

Having said that, the steps we took to create our retirement plan in order to calculate at what age we could afford to retire, should be applicable to most people.  These steps include analyzing and tracking our spending habits, creating a budget and sticking to it, generating a savings plan that predicted  how large a retirement nest egg we needed to accumulate and how long it would take to get there, and a spending plan which we now follow closely in our retirement years, to ensure we don't deplete that nest egg prematurely.  Our strategies to structure our post-retirement income to minimize income tax burden, and to generate a regular income flow to pay our bills, should also be applicable. 

If you are looking for the magic bullet of how you can retire at 48, then please don't read our book.  We won't be telling you this.  But if you want to learn how to generate a plan to determine at what age you could retire and with what type of lifestyle, then our experiences may help you.

Friday, February 21, 2014

Author's Book Talk at Deer Park Library

Rich and Annie English, the authors of the book "Retired at 48 - One Couple's Journey to a Pensionless Retirement" will be giving a talk at the Deer Park Public Library.

Date: Thursday March 6, 2014 - 2pm-3:30pm
Location: 40 St. Clair Ave. East, Toronto, 2nd Floor

We will be talking about how we saved and planned for our retirement, answering the following questions:

1. How much did we want to spend in retirement?
2. How much do we need to save to support this spending, while having our nest egg last our expected life-times?
3. How would we invest our savings to grow this nest egg?
4. Once we saved enough, how could we structure our portfolio to:
      a) Generate a regular income flow sufficient to pay our monthly bills
      b) Minimize income tax owed

We will then talk about how we are currently finding economical ways to enjoy our early retirement including looking for ways to save money on:
  • Travel
  • Live Theatre
  • Museums
  • Interest courses