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 -

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

Sunday, February 2, 2014

Cell Phone Plans Revisited - One Month on New Data Plan

In a previous blog entry, I wrote about how Speakout, our cell phone provider, was changing their data add-on plan from $10/month for unlimited data usage, to $10/month for 100MB with additional data charged at $0.10/MB.  Never needing to keep track of our data usage in the past, we did not know whether 100MB would be sufficient or if we should sign up for a more expensive ($35/month for 500MB + 100 talk minutes) data plan that provided more usage data.  We decided to try the 100MB for a month to see how much data we actually use.

With this new limited data plan, Speakout now provides a handy indicator of the current data usage throughout the month, as well as how many days are left in the month.  We made a point of continuing with our normal usage patterns to get an accurate estimate.  With just two days left in this first month, we have only used 65MB.  If this sample month turns out to be representative of our average usage, then the 100MB/month will be more than enough for us and the Speakout plan is still the most cost effective for our needs.

Wednesday, January 15, 2014

Surprise Year-End Bonus

Since we are trying to fund much of our retirement income from our dividend-bearing stocks, I often use the analogy that the stocks we own are like our employers and the dividends they pay represent our salary.  When a stock increases its dividend, it is equivalent to receiving a pay raise.

This year, one of our "employers" gave us an unexpected year-end bonus.  Canada Bread Company (CBY-T) currently offers an annual dividend of $2.00 per share, paid quarterly at the beginning of January, April, July, and October at $0.50/share.  Then came the amazing surprise–In mid December, Canada Bread Company announced a special dividend of $8/share to distribute extra revenue that they generated in 2013!  This one-time payout was 4x more than the sum of all the dividends that we received throughout the entire year.  We had missed this announcement when it was made and therefore were not expecting this additional allocation.  Imagine our surprise when this money showed up in our account at the beginning of 2014.  It was Christmas all over again.

Based on the current price, which is hovering around the $70 mark, the yield for CBY is around 2.9%, which is below our target dividend yield when picking stocks.  However we bought this stock at the beginning of the year when it was selling just under $50, providing an actual yield for us of around 4%.  So even before this special dividend, we were quite happy with this stock.  It not only provides a decent yield but has given us some value growth as well.  The bonus has just been the icing on the cake.  What real "employer" gives such generous bonuses these days?  Thank you, Canada Bread Company!

Tuesday, January 14, 2014

After First Full Year of Retirement - Year End Review

2013 marked our first full calendar year of retirement, which meant living entirely off our retirement savings.  While it was our first year of receiving no salary income, we were each able to make one final (abet relatively smaller) RRSP contribution for the months from January through May that we worked in 2012.

Before we retired, we created an in-depth projection in our retirement spreadsheet calculator that would estimate and track the amount that our investments would grow by versus the amount of money we would spend, year to year.  At this milestone of our first full retirement year, it is time to take stock of our actuals compared to our estimates and re-adjust our future projections as required.  This is an exercise that we will continue to execute at the end of each year, to ensure that we stay on track and will not deplete our retirement nest egg prematurely.

First we look at the big picture at a high level.  In our retirement plan, we had logged the actual amount of our investment portfolio at the beginning of 2013 (A), and used our parameters (B-G) for growth versus spending to calculate our estimated balance at the end of the year (H).  Scotia iTrade, our discount brokerage, provides an easy way to determine the actual balance of our portfolio, either by account (RRSP, TFSA, non-registered) or as a grand total. 

At the end of the year, we log the actual ending balance (I) in our spreadsheet.  This is used as the starting balance for the next year, causing the entire plan to automatically recalculate (L).  It also calculates our actual growth (K) and therefore the rate of return of our investments.  Using the tool Quicken throughout the year, we have tracked how much money we spent, what we spent it on, and how much money we withdrew from our portfolio to pay for our expenditures.  We update our spreadsheet with our actual spending (M) and then compare all our actual data against our estimates.

We would like to be spending an amount equal to or less than our estimated rate.  If we find out that we have overspent in the previous year, then we will reduce our discretionary spending (dining, entertainment, vacations) the up-coming year to get back on track.  We were very pleased to find that we came in just under our estimates and are on good footing in our plan going forward.

Next we drill down deeper to get a year by year estimate of how each of our accounts will draw down.  This will help ensure that we are receiving the expected cash flow from each of our accounts.

In our book Retired at 48, we describe how we proved that in the long term, our total portfolio would last longer and we would pay less income tax over our lifetimes if we collapsed all of our RRSPs immediately and sourced our expenses by taking some money from each of our accounts, rather than spending all the money in the non-registered account first.  Each year, we will take out the minimum allowable amount from our RRSPs and the rest from our non-registered.  Part of our year-end review involves calculating how much the minimum withdrawal from our RRSPs will be for the next year, and ensuring that we have the cash flow to support these withdrawals at the times that they are made.  In a previous article, I discuss what could happen if this cash flow is not available.

Throughout the year, we diligently categorized our spending in Quicken so that we could get totals on our major categories such as entertainment, dining, vacations, condo fees, property tax, etc.   Now that the year is done, we can run our various Quicken reports to review our actual spending patterns compared to our budgeted estimates.  We also compare our spending for the past year with the trends from previous years to see if there are any significant changes.  Based on these reviews, we create new estimates for our mandatory spending items, adjusted for inflation, to determine how much discretionary spending we can afford for the next year.

Finally, we perform a review of our portfolio, which is mostly made up of dividend-bearing stock, to see if any reallocation needs to occur.  We calculate the sector distributions of the value of our stock to ensure that the relative percentage of our holdings have not skewed too high in any given sector.  We look at the financial results for each stock and read the updated analysis to ensure that no stock has taken a turn for the worse.  We also confirm that the dividend payout for the stock is still holding firm, since we are trying to fund our retirement from our stock dividends.  Actually these last two steps are on-going activities that we execute regularly throughout the year, since we cannot wait an entire year to find out that a stock has cut its dividend.   Throughout this past year, only one of our stocks cut its dividend by a small amount, while many of our stocks have raised their dividends.

At the end of our year-end review, we are happy with where we have ended up over all, and look forward to the next year.

Thursday, November 28, 2013

Travel Medical Insurance Analysis

To buy or not to buy medical travel insurance when traveling outside of Canada?  That is the question.  Comprehensive medical travel insurance can be pricey considering that the chance that you will actually need it while on vacation is not high.  However without it, the financial impacts could be catastrophic if you do end up getting sick enough to require medical attention, or worse yet, are injured in an accident.  According to market research reports, a hospital stay in the United States averages almost $4000 per day.

Travel insurance is offered by all the major banks, some insurance companies like Manulife Financial,  and other companies like Blue Cross and CAA.  Luckily all of these companies support an online quote for easy comparison, provided that you are under a given age limit which varies from 54 to 74 depending on the organization.  If you exceed that age limit, you may be asked to fill in an online medical questionnaire or to phone for a medical interview before you are provided with a quote.  If you answer positively to any of the medical conditions of an online questionnaire, then again you may need to phone for coverage.  It's interesting to note that if you answer negative to all the online medical questions, in some cases you may actually get a slightly lower premium.  This is because you will not be covered for any illness that is deemed related to the conditions that you denied having, so the risk of payment is much less.

We will both be 50 next spring and plan to travel to France for just under seven weeks.  Since we are well below the age limit set by any of the travel insurance providers, we were able to get a good comparison of rates and benefits.

For our criteria, the coverage benefits and exclusions were comparable and the main difference was price of the premium.  It seemed irrelevant whether our maximum overall medical coverage amount was $1 million or $5 Million for expenses that could include ambulance, paramedic care, hospitalization, private nurses, physio, chiropractors, drugs, dental and a one-way flight home if required.  Even the smaller limit seemed more than sufficient.  Different policies may put a maximum cap on certain types of expenses, such as $2000 for emergency dental work but they were all quite similar.  Each organization has a different criteria for the duration that you need to be stable from a pre-existing condition, ranging from 3 months to a year, depending on age of the applicant.

It is important to read the complete policy details to get a clear picture of what is covered, and more importantly, what is excluded.  There is a link to a sample policy on each of the websites, but often you have to really hunt for it.  Examples of areas where you need to clarify coverage for a given policy include the definitions of "stable period for a pre-existing condition" and immediate family.  In some policies, certain activities deemed as dangerous such as scuba diving may be excluded.  Each insurer may have different criteria for how soon you need to contact them prior to or after receiving your medical treatment. Not thoroughly understanding the specific terms could lead to minimizing or invalidating your coverage.

Based purely on price, the cheapest policies for our 48 day trip would be to go with TD Bank ($265) or Manulife ($279).  Manulife had the extra option of specifying a deductible in order to further reduce the price.  Adding a $500 deductible per person reduced our premium to $235.  This seemed worth the risk since the $500 would not bankrupt us, and the chance of our needing to use it was not high.

Our next consideration was regarding Trip Interruption Insurance.  We currently have four elderly parents, all closing in on age 90.  If one of them passed away during our 7 weeks abroad, it would be quite expensive to get an emergency flight home for the funeral and then back again to resume our trip.  However trip interruption insurance is extremely expensive and often doubles the premium.  And upon reading the fine print of what trip interruption insurance covers, it only flies you home but will not pay for you to resume your trip.

Manulife and Bank of Nova Scotia (which seems to use Manulife under the covers) offer something called "Bounce Back" protection.  On the surface, this option provided exactly what we were looking for–it would pay for you to fly home in case of death of an immediate family member, and then pay for you to return to resume your trip.  It was not even that expensive, at an extra $55 per person, compared against the thousands we would pay in airfare on our own.  However, the extensive exclusions in the policy rendered this option ineffectual for us.  It excluded any family member that was in poor health prior to trip departure or resided in a long term care facility, which included retirement homes.  This basically excluded most of our parents.

At the same time that we were doing all this research, we were also considering upgrading our CIBC Dividend Visa card to the CIBC Dividend Infinite Visa.  Our original card gave us up to 1% cash back, while the additional card gave up to 2% on a tiered spending level.  We had calculated that based on our regularly spending pattern, we would get more cash back with the Infinite card, even after deducting the $109 fees.  But this particular card also provided a slew of travel benefits including travel medical insurance for trips up to 15 days, flight delay and baggage loss, car rental collision, and trip interruption!

With this card, we will may not get a full bounce back, but at least we get trip interruption (one way fare home) for free.  Since it provides 15 days of medical insurance per card holder, we would only have to buy extra medical for the remaining 33 days (or 34 days to provide a safe overlap, just in case).  This would bring the travel insurance medical coverage for our 48 day trip down to $166.  So finally, we have settled on the best solution for our needs. 

Sunday, November 17, 2013

Cell Phone Plans - Revisited

It was too good of a deal to last forever.  In our book Retired at 48, we described our cell phone usage pattern as data heavy-voice "lite".  We rarely use the phone to make or receive phone calls or texts, but we do use the email and internet features daily.  The pay-as-you-go plan with data add-on option from 7-Eleven SpeakOut Wireless was perfect for our needs.  After buying a $10 SIM card, you can add air time (spent at $0.25/minute talk and $0.10/text) to your unlocked cell phone in denominations of $25-$100 and the additional minutes last for 365 days as opposed to the standard 30-60 days.

But even better was the data add-on of $10 per month for unlimited usage.  This is the part that was too good to last forever, and it hasn't.  SpeakOut has changed its pay-as-you-go data add-on to $10 per month for 100MB with additional usage charged at $0.10/MB.  There is no option to buy a larger add-on for more data with the pay-as-you-go plan.

An alternative is to abandon the pay-as-you-go plan and buy a SpeakOut Value Plan instead.   The cheapest value plan costs $20 for 100 talk minutes per month (way more than we ever use) and allows you to choose data add-ons of 500MB for $15 or 1GB for $25.  So our monthly cell phone fees would go up from about $12 to around $35-45 depending on our data usage.

Our first instinct was to repeat the price comparison analysis which we described in the book, to determine if we should change providers.  For our new analysis, we used 10 minutes talk time, 500MB data and the voicemail feature as our monthly requirements.

What we quickly realized is that for our usage pattern, Speakout is still the most inexpensive option for us.  Most of the other providers forced you to buy a pricier plan in order to get 500MB of data.  Wind Mobile came close with its $30 plan that offers unlimited data.  But Wind charges $8/month for voicemail and is not an official Apple Supplier, which is no good for us since we own an iPhone.  We are also concerned about the breadth of Wind's coverage area.

Our 500MB data requirement was just an estimate.  We really don't know how much data we use monthly on our cell phone, because up to now, our data was unlimited so we didn't keep track.  Since we mainly use our phone to check emails, it is possible that our usage will fall within the 100-350MB limit.  If this is the case, then we could stay on the pay as you go plan with the $10/100MB add-on and pay the $0.10/MB for up to an extra 250MB before we reach the $35 cost of the value plan.  We will try this pay-as-you-go with 100MB data add-on option for a couple of months in order to gauge what our real usage is.  We can then decide whether or not to switch to a value plan.

One consideration that influenced our decision was our desire to upgrade our iPhone 3GS to a newer iPhone model. An unlocked iPhone 4S is selling for $450 at the Apple Store while the 5S is $719.  Our plan had been to buy the 4S and stay with the SpeakOut, but since we were reevaluating cell phone plans anyways, we considered selecting a locked in plan for 2 years in order to get a 5S for $229.  There was a Bell Lite plan at $55 month that provided 500MB of data and 1000 talk minutes.  The $20 difference in monthly cell phone fees for two years would be offset by the $490 discount on the newer phone.  But when we called to confirm, we found out that the discount was only for the Bell Plus plan which was $80/mth!  The discount on the 5S for the Bell Lite plan was a mere $50.  Who would willingly lock into a plan for 2 years to save $50?!?   Then we considered buying the 5S anyways while staying with SpeakOut.  This was also not possible because currently SpeakOut does not support the new nano SIM card that the 5S requires.

So finally our decision was made.  We would buy an unlocked iphone 4GS, stay with our current pay-as-you-go plan and add the $10 for 100MB feature.  After a few months, if we find we are regularly using more than 350MB per month, we will switch to the appropriate SpeakOut value plan.

Thursday, September 12, 2013

Retired at 48 Featured at Toronto Word on the Street book festival

Annie and Rich English (A.R.English), the authors of the book Retired at 48 - One Couple's Journey to a Pensionless Retirement, will be speaking at the Toronto Word on the Street Festival held Sunday September 22, 2013 at Queen's Park Circle.

We will be at the Nothing But the Truth Tent from 3:00-3:45pm, talking briefly about our book and then joining a panel discussion about retirement.  We will also participate in the "Friend an Author" event.  Come join us!

Saturday, August 10, 2013

Preparing for Post-Retirement Medical Expenses

My husband and I have now been retired for over a year and have both turned 49 in the process.  The year went by in a flash.  We moved from one fun-filled adventure to the next, both in town and abroad.  We also took on the onerous and stressful task of helping one set of parents downsize their home and move into a retirement facility.

Unfortunately, we missed celebrating the one-year milestone because our dream retirement has been hit by an unexpected medical setback.  This March, I was diagnosed with Stage 2 breast cancer and required surgery, followed by chemotherapy, radiation and hormone therapy as the prescribed courses of treatment.  The surgery successfully removed all of the tumor and the follow-up treatments are almost complete. 

Luckily we live in a country where most medical expenses including surgery and hospital stays are covered.  What our health care system does not include are costs related to dental care, vision and drugs.  While we were working, these costs were paid for by our company health plans.  When preparing for our retirement, we realized that stopping work at such early ages meant that we would be on our own for these types of expenses until age of 65, when programs such as the Ontario Drug Benefit Program kick in to help out with some of these costs.

As described in our book Retired At 48, we researched various private health insurance offerings, comparing our known health costs against the premiums.
Invariably, the premiums were close to or even exceeded our expenses.  There were also set maximums to the amounts that you could claim against the policy for covered benefits such as drugs, vision, dental, physiotherapy and other services.

This was not the type of insurance we were looking for.  We could afford to pay for our current health costs.  What we were looking for was coverage against future, unexpected and potentially exorbitant expenses from some serious illness.  We settled on Manulife's Catastrophic insurance which has an annual $4500 deductible, after which further drugs claimed in that year are covered at 100% with no maximum.  The premiums were relatively low at about $240 per year as opposed to typical health insurance plans which often cost more than tenfold.

Our foresight and good planning in terms of acquiring health insurance paid off when I fell ill.  Although OHIP took care of the chemotheraphy drugs, it did not cover any of the medicines prescribed to ward off or minimize the many potential side effects of chemo.  This included four injections of Neulasta at around $2800 per shot, used to increase white blood cells and help fight infections.  After we covered the $4500 deductible for the "effective" year, the insurance policy paid for any additional drug costs incurred within this same time period.  So far this has amounted to almost $7000.

This catastrophic insurance has worked out as planned, but we had an unexpected windfall as well.   When it became known that we did not have full drug coverage and were facing such a high financial outlay for our insurance deductible, the hospital social worker helped me apply for the Victory Patient Assistance Program of Ontario.  This organization provides "financial assistance and other value-added services when you've been prescribed an oncology-related drug...".  Victory got in touch with the drug manufacturer of Neulasta and negotiated for them to pay for the entire deductible.  Victory also called Manulife for me and confirmed that Neulasta would indeed be covered by my insurance plan, once the deductible was covered.  So in the end, we ended up being reimbursed for the entire Neulasta fee of over $11,000 as well as the costs of other prescribed drugs.

There are a few considerations to take note regarding Manulife's Catastrophic Insurance offering.  First, you need to be relatively healthy and in good shape to qualify and they will not cover any "pre-existing conditions", or medicines that you were already taking prior to acquiring the insurance.

The deductible applies to every "effective year", which spans 12 months from the day your coverage begins.  My current effective year ran out on August 1 and hopefully, this will be the only year where I will require enough drugs to surpass my $4500 deductible.  So I tried to have as many of my prescriptions for drugs filled before this date as possible.  This included a hormone drug that I need to take for the next few years.  I was not due to start taking these pills until after August 1, but I asked the doctor to write me the prescription in advance so that I could have it filled before my year expired.  I also asked for a larger than usual amount to be filled at once, to maximize the expense covered.

Finally, when I had my claim processed, I found out that the processing fees charged by the drug stores were not covered, although it was not the total $10.99 fee which I saw charged on each prescription.  I received a bit less than I expected on my claim, but most of the expenses that I submitted were reimbursed.

While it is regretful that I had to go through this ailment, our forethought in planning for such a possibility really helped to ease any additional stress from facing significant financial burden on top of the medical concerns.  Being retired, it was also nice that neither my husband nor I had to worry about work-related pressures in addition to everything else.  Having my loving and supportive husband available to be by my side through every doctor's appointment and treatment procedure has been more comfort than I can express.

So all things considered, I have not had it so bad.  I am now coming to the end of my treatments and am recovering nicely.  I've tried to stay as positive and active as possible through it and I now look forward to a full recovery so that I can resume my dream retirement plans.  France, I had to put you on hold, but I hear you beckoning... see you next year!

Thursday, June 13, 2013

Unlocking Your Locked-In Life Income Fund

While I was still working, I was enrolled in a locked-in Defined Contribution pension plan.  On an annual basis, my employer contributed a preset percentage of my salary to a Locked-In Retirement Account (LIRA), which is basically a locked-in RRSP.  This amount reduced my RRSP contribution room for the year.  Once I retired, I transferred the accumulated money into a self-directed LIRA account at Scotia iTRADE, where we were managing the rest of our investments.  These funds were then used to buy more dividend-paying stocks, in line with the income generating strategy described in our book Retired at 48 - One Couple's Journey to a Pensionless Retirement.  However, at age 48, we would not be able to access this money for a while.

A LIRA has many more restrictions than a regular RRSP.  The earliest that a LIRA can be collapsed is age 55, and it must be converted into a locked-in income generating product such as a Life Income Fund (LIF).  The latest date to collapse the LIRA is the same as the RRSP–by the end of your 71st year.

The LIF not only mandates an annual minimum withdrawal, but also imposes an annual maximum withdrawal limitation.  This is to ensure that your pension lasts throughout your retirement years, rather than being squandered prematurely.  In my opinion, this is a "Big Brother" approach that feels unreasonably restrictive. I want to free up as much of the LIF money as soon as possible so that I can be in control of my own funds and make my own decisions.  Luckily there have been some recently added LIF rules that could help.

If your LIF is subject to Ontario laws, then rules have been introduced over the past few years which allow you to free up some of these locked-in funds.  However you need to be aware of them and take action promptly at the appropriate times in order to take advantage of them.   The two most relevant rules that apply to the most people are:

1. You can free up to 50% of the value of your LIF by submitting a request form to the financial institution managing the LIF.  The catch is that you must make this request within 60 days of creating the LIF.  You can request to either withdraw the money from the LIF or to transfer it into an unlocked RRSP or RRIF.  Choosing the withdrawal option could trigger a huge tax burden for the year, whereas transferring to the RRSP or RRIF would be tax-free since you are provided an contribution deduction slip which offsets the taxable income.  Unless you need all the money immediately, the latter seems to be the better strategy.   

If you hold stock within your LIF, you can provide instructions to transfer shares "in-kind" into the RRSP or RRIF.  This will save transaction fees of selling stock in the LIF and repurchasing it in the RRSP or RRIF.  It also will not disrupt any Dividend Reinvestment Plans (DRIP) that you may be registered in.

2. The small account rule indicates that once the combined value of all of your locked-in accounts is less than $20,440, you can submit another form requesting to unlock the rest of the money. 

The two steps can be executed sequentially.  If withdrawing/transferring 50% in step 1 brings the value of your LIF(s) down below the small account minimum, then step 2 can be executed to unlock the rest.  This means that LIFs in the range of around $41,000 or less can be totally unlocked within the first year.  If the value is more than that, then you need to set up the LIF to withdraw the maximum each year and wait for it to fall below the value of the small account rule.

Wednesday, May 29, 2013

Diversification the Key to Our Dividend Investment Strategy

Our main strategy for generating post-retirement income is to attempt to live off the dividends from our stock holdings. In our book "Retired at 48 - One Couple's Journey to a Pensionless Retirement", we describe in detail how we try to reduce risk through diversification.  For example, we buy many different stocks in various sectors and set limits for the amounts we would hold in each stock depending on market capitalization, setting lower limits for smaller, riskier companies and higher limits for larger, blue chip companies which are presumably safer and have a history of raising their dividends. 

The book also describes how we use the Globe and Mail Watchlist tool to check on the performance of our stocks.  In particular, we regularly monitor the dividend amount for each of our stocks, prepared to take action if necessary if one of them declares plans to significantly cut their payout.  Since we started with our dividend strategy many years ago, a majority of our stocks have raised their dividends, some of them multiple times on a regular basis.

Recently we did have one of our stocks take a relatively large dividend cut.  We purchased a small-cap stock in the health industry called CML Healthcare (CLC-T) in an attempt to diversify into different sector from the financial, telecommunications, energy, utilities and REITs that we are mainly concentrated in.  Based on our strategy of limiting exposure to smaller companies, the shares we acquired accounted for only about 1% of our portfolio.  At the time of purchase, it was paying a relatively generous yield of over 7%.  For various reasons, the company's earnings declined to the point that the dividend payout was no longer be sustainable.  This resulted in the share price plummeting by over 25% and the yield rising to an unreasonable level of over 11%.  The writing was on the wall that there would be a cut in the dividend, so we evaluated our options. 

We realized that even after the proposed 30% dividend cut from $0.75/share to $0.53/share, the yield would still be higher than most of our other stocks.  Because we owned so little of this stock, the net loss in dividends did not noticeably impact our annual dividend income.  Selling these shares would generate a capital loss that was significantly larger than the minor loss in dividends, and there was no clear replacement stock that could do better.

So in this case we decided to continue to hold the stock.  Our dividend strategy is designed so that no dividend cut in any single stock should create a major blow to our portfolio.  So far, this has worked out well.

We also encountered two scares that turned out to be false alarms.  The first was when it appeared that Telus (T-T) had cut their dividend by 50%!  Further investigation showed that Telus had actually executed a stock split.  So although their dividend payout was now 50% less, we also owned double the number of shares, each worth half the price.  The net result was the same... phew!

The second scare came from a data error from the Globe and Mail Watchlist.  For one solid week, both the Watchlist and the Saturday Globe and Mail business page showed that Cineplex Inc. (CGX.T) had dropped its annual dividend from $1.35 to $0.48, changing the yield from 4.2% to 1.39%.  This didn't make sense, since there was no news announcement or drop in share price (which usually accompanies a significant dividend decrease).  Checking both Cineplex's corporate website and other websites such as Reuters indicated that the Watchlist data was not correct.  In fact, rather than dropping their dividend, Cineplex has announced they would raise their dividend to $1.44.  We contacted Globe and Mail's globe investor support and advised them of their data error, which has since been corrected.  Another bullet dodged!

All in all, our buy-and-hold dividend strategy for generating retirement income continues to work well for us and we are insulated from the impacts of rollercoast stock prices as long as we continue to concentrate only on the stability of the dividends. 

Our recent experiences also accentuate the importance of paying close attention to your portfolio and being prepared to take action to re-balance when necessary.