Efficient Markets

If you are like many Canadian retirement savers, a large portion of your retirement savings is held in RRSP's (Registered Retirement Savings Plans).  You may be wondering, under what circumstances does it make sense to withdraw from my RRSP's even before I retire?

On today's episode, we discuss several situation where it makes sense to withdraw funds from your RRSP, even if you're not yet retired:

1) Buying A Home Using the Home Buyers Plan

Under the plan, you can withdraw up to $35,000 from your RRSP to buy or build a home—provided that you are a first-time buyer, (defined as not having  owned a home in the four-year period preceding a home purchase).  The withdrawal comes out tax free, and it needs to be repaid to your RRSP over 15 years.  If you don't make a repayment, the prorated amount is added back to your income for that year.  If you're finding it difficult to come up with a down payment for your first home with cash, and you've been successfully saving in your RRSP, this is a very tax-efficient way to come up with the money for a down payment. 

2) Going Back to School

If you'd like to develop new job skills or even change careers completely, you can take advantage of the Lifelong Learning Plan (LLP), which allows you to withdraw funds from your RRSP to fund tuition and other education costs.  Under the plan, you can withdraw up to a cumulative total of $20,000 from your RRSP—up to $10,000 in a calendar year.  This is similar to the Home Buyers Plan in that the withdrawal comes out tax-free, and needs to be repaid over time (a period of 10 years in the case of the home buyers plan).

3) Taking a Year off Work

RRSP withdrawals are taxed as income in the year that they are made.  If you are taking a short term sabbatical from your high-paying job, you may find yourself in a lower tax bracket temporarily.  This may be a good opportunity to make an RRSP withdrawal at your (temporarily) low marginal tax rate.  If you have TFSA room available, even if you don't need the RRSP funds now for a purchase, you can consider shifting money from you taxable RRSP bucket to a tax-fee TFSA bucket for long-term tax savings.  

4) Managing your Tax Brackets as a Retiree

As you enter retirement, it may make sense to strategically withdraw money from your RRSP in order to smooth out and "average down" your income taxes throughout retirement.  There are several different situations where not taking enough income from your taxable investments can hurt you later on in retirement. 

OAS CLAWBACK

First, once you begin taking OAS (Old Age Security), if you are making over $79,845 in 2021 you get your benefits "clawed back" at a rate of $0.15 for every dollar of income that you make over that amount.  Making taxable withdrawals early in retirement can help you avoid this claw back.

CPP, PENSION WITHDRAWALS, AND RRIF MINIMUMS BUMPING YOU INTO A HIGHER BRACKET

CPP, pension, and RRIF minimum payments are fully taxable as income in retirement.  Taking RRSP withdrawals in those early years of retirement can help you "push down" those future minimum payments to keep your taxable income lower as your retirement progresses.

Even if you don't need the funds immediately, you can still use these withdrawals to your advantage through contributing to a Tax Free Savings account, making a larger donation to charity, or investing in a non-registered account and having future growth being taxed at more favorable dividend and capital gains treatment.

Have a Plan

All of these strategies are highly dependent on your unique situation.  Generally, the best "bang for your buck" with RRSP's is to invest while you are in a high tax bracket, take advantage of the tax-free compounding for several (many) years, and then withdraw the funds when you are in a lower tax bracket and/or can split that income with a spouse.  A strategy to make early withdrawals should be taken with caution.  An approach that works for one person may not work for the next person. 

I recommend sitting with a financial planner who can help you determine the best mix of strategies that will work for you.

Efficient Markets

If you refreshed your podcast player this morning, you may have noticed the change in the title of the show.  On today's episode I will walk through what's changing for the podcast and what you can expect going forward.

Reasons for the change:

• Client shift
  1. many of my clients are approaching retirement, but many aren't
  2. lots of great financial planning questions that I answer that I'd like to spend more time on here
• Format shift
  1. I got feedback from friends and family, and to a person they encouraged me to shorten the episodes, and make them simpler
  2. So going forward, expect episodes more frequently, at least once a week but likely twice a week – on Tuesdays and Fridays, starting next week.
• Reflection of my day to day
  1. On a daily basis, I field a lot more investment questions than any other type of question, so I think my podcast should be a reflection of that
  2. The financial advice I give is non-controversial, BUT, still only a very small percentage of Canadians invest the way I recommend they invest – in an evidence-based way. I think I need to tell that story more.
• The name?
  1. Efficient Markets was a video series I did a few months back
  2. It describes the bedrock of my investing approach, which is the belief that markets are mostly efficient and we should act accordingly
  3. Efficient is also the way I would like to make these podcasts going forward – shorter, more frequent, and to the point

What's not changing:

• It's still me, talking to you – just more frequently but for shorter periods
• There will still be discussion about financial planning and retirement topics, just a little bit less of those and more questions and answers about investing
• The music – I told my wife Sarah that I was changing the name of the show, and she said I had to keep the music, it's like my trademark – so I hope you enjoy the music!

Thanks for tuning into today's episode and I will speak with you next time.

Mark

Hello and welcome to Retire Me Episode 50!

On today's episode, we discuss:

1) 3 main takeaways from the Annual Berkshire Hathaway Meeting

2) Reporting foreign property on your tax returns

3) Expected returns of stocks and bonds going forward

Detailed notes and resources from this episode will be posted on my website later this week at www.walhoutfinancial.ca/podcast

Timeline:

0.00 - Happy Belated Mothers Day!

2:02 - I discuss my 3 favorite takeaways from the Berkshire Hathaway General Meeting

9:16 - I discuss reporting Foreign Property on your Income Tax Returns, what qualifies, what doesn't, and the penalties for missing this requirement on your tax returns.

13:27 - I discusses the assumptions I use for future stock and bond returns, and the rationale behind preparing for lower future returns after recent returns  have been quite high

Thanks for listening!

Mark

Welcome to Episode 49 of Retire Me.

Today we talk about:

1) Cottage Co-Ownership Agreement - a friend of mine had a cottage passed down to him and his brother.  A cottage agreement can help outline your intentions, guidelines, and a gameplan in case something happens to you.  I talk about what could go into your cottage agreement and how to get started

2) Bitcoin - I provide an overview of what Bitcoin is, the reasons to own it, the reasons not to own it, whether I own it, and a reasonable way to approach bitcoin in a portfolio

TIMELINE:

00:20 - Mark talks about the pool opening

02:09 - The benefits of co-owing a cottage

03:00 - Possible pitfalls of co-ownership of a cottage

03:55 - Introducing the Cottage Agreement

04:24 - The main sections of a Cottage Agreement

05:41 - How to get started on a Cottage Agreement

06:55 - What is Bitcoin?

07:58 - The reasons to own Bitcoin

10:20 - Reasons not to own Bitoin

14:34 - Mark's take on Cryptocurrencies and disclaimer 

Detailed show notes and links will be on my blog this week at www.walhoutfinancial.ca/podcast

Thanks for listening!

Mark

Welcome to Episode 48 of Retire Me.

The federal budget released its first budget in over 2 years this past Monday.  The budget was full of announcements and spending programs for a wide range of initiatives, individuals, and businesses.

On today's show, I focus on what I believe are the top 5 most meaningful announcements for people who are saving for retirement or are already retired.  They are:

1) Enhancement to OAS

2) Green Retrofit Loan Program

3) Expansion of the Disability Tax Credit criteria

4) Introduction of a Foreign Owner Vacancy Tax

5) What *wasn't* in the 2021 Budget

Detailed show notes and links to resources will be available on my blog this week at www.walhoutfinancial.ca/podcast.

Thanks for listening!

Mark

Welcome to Episode 47 of Retire Me.

We wrap up our discussion this week with a discussion on how a factor portfolio is implemented.

We cover:

1) Review of the Factors

2) How to implement a factor portfolio using "tilts"

3) The challenges with holding a factor portfolio for the long run

4) Who should and who shouldn't own a factor portfolio

Detailed show notes and charts will be on my blog this week at www.walhoutfinancial.ca/podcast.

Thanks for listening!

Mark

Welcome to Episode 46 of Retire Me!

On today's episode I discuss factors in fixed income (bonds).

I begin the episode with an overview of the role of fixed income in a portfolio.  From there, we move into an overview of where returns come from in a fixed income portfolio.  Then, I do my best to explain the role of a yield curve and how it contains information that can be helpful when trying to anticipate future returns in fixed income.

Then we discuss the main factors in fixed income which are:

• Term Premium – longer term bonds have higher expected returns than shorter term bonds
• Credit Premium – riskier bonds (ie. corporate bonds) have higher expected returns than less risky bonds (ie. government bonds)

I take us through our regular criteria for factors, remember, a factor needs to be:

• Additive
• Persistent
• Pervasive
• Robust
• Investible
• Intuitive/Sensible

I finish the discussion with a debate on whether credit premiums should be pursued in a portfolio.  Larry Swedroe advocates for opting away from credit factors in fixed income.  DFA pursues these factors in a dynamic and systematic way in their portfolios.  We discuss some research from DFA to help us here.

My show notes and links will be on my blog this week at www.walhoutfinancial.ca/podcast

Thanks for listening!

Mark

Hello and welcome to Episode 45 of Retire Me!

This week we continue our deep dive into factor investing.  Last week we started with Market Beta and Small Cap Premiums.  This week, we will go into the Value Premium and the Profitability Premium.

As a quick refresher, a factor is a unique source of risk in a portfolio.  We want to pursue risk to generate higher returns, and we want to diversify our sources of risk so that we lower our volatility (smooth out our ride), because not all factors work all of the time.  In fact, they frequently go through periods where they don't work.

Before we dive into this week's factors, a quick reminder about what makes for a good factor, and the lens that we will use to go through the factors today:

• Has to deliver positive returns
• Has to be persistent across different periods of time and economic regimes
• Has to be pervasive – holds across countries and regions
• Has to be robust – holds up to various different measurements and definitions
• Has to be investible
• Has to be sensible – has a risk-based and behaviour based definition. the aunt who wins the NCAA pool by picking all teams with red uniforms, or for an animal

So this week, we will discuss the value premium and the profitability premium.  Next week we will go through the premiums in fixed income (bonds).  The week after that, we will go through portfolio construction and wrap up with my thoughts about who should and who shouldn't invest in a factor portfolio. 

Show notes and links will be on my blog this week at www.walhoutfinancial.ca/podcast.

Send your questions to [email protected]

Thanks for listening!

Mark 

Welcome to Episode 44 of Retire Me!

In the world of enterprise technology, businesses want proof that the solutions they are buying will perform as expected.  They look for research, they test solutions to make sure they are compatible with their environment, and they build business cases based on their findings.  These steps help businesses make good decisions.

When I discovered factor investing in 2017, it made sense that investment decisions should be carried out the same way as big business decisions.  Asking questions like:

1. What is the evidence that supports our decision making?
2. The data robust and reliable?
3. Can we implement it in a way that fits my life and my goals?
4. Can I expect a relatively better ROI on this approach over decades, versus other alternatives?

Over the next 4 weeks, we will:

1. Introduce factor investing more in depth
2. Explain the main factors that drive investment returns
3. Explain how factors can be implemented
4. Offer some pros and cons and reasons why you may want to either pursue or avoid a factor investment strategy

Most of the content for these episodes is inspired and heavily sourced from Larry Swedroe and Andrew Berkin's book:

"Your Complete Guide to Factor Based Investing" Your Complete Guide to Factor-Based Investing: The Way Smart Money Invests Today: Berkin, Andrew L, Swedroe, Larry E: 9780692783658: Books - Amazon.ca

The design point of these episodes is to explain factors in "Plain English".  Some of the research is a little wonky, so I have done my best to condense and simplify wherever possible.

If you have questions or clarifications, please message me or send an email to [email protected]

Show notes will be up on my blog at www.walhoutfinancial.ca/podcast

Enjoy!

Welcome to Episode 43 of Retire Me.

Today we talk about the 8 great behavioral investment mistakes.  If you can avoid these, you can sort of "back into" success as an investor.

The great mistakes we discuss are:

1) Overdiversification

2) Underdiversification

3) Euphoria

4) Panic

5) Leverage

6) Speculating when you think you're investing

7) Investing for yield instead of total return

8) Letting your cost basis dictate your investment decisions

Show note, references, and links can be found on by blog at www.walhoutfinancial.ca/podcast

Send your questions to [email protected]

Thanks for listening!

Mark