Beside snow – and lots will be coming – encouragement too is in the air and I want to share this with you. I devour a lot of news so I know we all need encouragement from the general gloom of viruses, storms, interest rates, politics, and war. Through it all however we find light in the ebbing days of this difficult 2022. Reviewing our client accounts we see comforting growth in October and November, even today a new high in Canada since mid-year. For 100+ years most growth has occurred from October to May or June – less in summertime. So one could say there is a seasonal advantage in our favour. Plus, it is so rare that bond & equity markets fall in the same year (6% of times, see last month’s picture), this sets a good base for next year’s growth in both domains. Current markets are rising because next year’s challenges were already priced-in; one may say it can only get better. More importantly, our portfolio teams steer away from debt burdens and bad-news controversies, instead owning assets with resilient and rising earnings, expanding markets, vital products/services, reinforced by strong management, care for environment, and overall sustainability.
In this month’s letter we start with a few items to boost your planning this year-end and the year ahead. It’s worth considering also – whether you’re retired or not – some thoughts on six key risks to retirement. These are not new to this letter but 2022 adds sharper focus so let’s review how these risks will affect people, and how our approach keeps you out of the line of fire.
PLANNING: YEAR-END INTO 2023.
I hesitate to give people a label of younger or older because each family or home is unique with personal interests, goals, and concerns. Read the following in that light, and reach us directly to further tailor your personal planning to the situation and opportunities you have at this time.
Younger clients may especially be concerned about rising rental or mortgage costs which also impact your ability to invest. It takes us back to reviewing your income and cash-flow, ongoing needs and expenses, various layers of debt you have and interest rates you’re paying, to see how we can help ease your budget. If such things have been worrying you, or if they could worry you soon – let’s talk. Meanwhile also remember, what you’ve been able to invest this year while markets were on sale, this is a very rewarding time which powers your progress and fuels your future freedom.
Retired clients who draw income from RRIF/LIF accounts will likely find year-end values at Dec. 31st lower than last year. Balancing that somewhat is the higher rate you draw next year based on age. If you have been drawing the lowest-allowed income from registered plans it may fall in January but we can adjust to keep it level (or otherwise to fit your needs). If you’re drawing a “specified” monthly income, that will continue unchanged without any action. Be sure, let me know now or soonest so we confirm your 2023 income will continue at the amount you need and choose.
TFSAs: the allowed deposit for 2023 is rising to $6500/person. Many top up and maximize deposits to TFSA each year because it is one of your best tax-shelters. If you have extra money needing a home (to park it safely for a time, or grow more aggressively) then let’s revisit how you can use your TFSA for maximum effect.
FHSA: the brand new “first home savings account” launches on January 1st for people who have not owned a home in the past five calendar years. Full details at “LINK”. Eligible contributors can invest up to $8000 in the new year (tax deductible), and with time deposit up to $40,000 toward a home purchase. Note that using FHSA restricts ability to borrow from RRSP: you may use one but not both. Fortunately, if you use an FHSA you avoid having to repay an RRSP loan. And if you never use the FHSA for a home purchase then it adds more room and more power to your RRSP.
SIX RISKS IN RETIREMENT.
1 – INFLATION is sometimes the greatest risk to retirement. With the type of inflation we had in the 1980s money could lose half its value in a decade. A story was told of a fellow who invested in cat food to gain a taste for it before that was all he could afford. Even at 3% inflation, money loses close to half its value in 20 years. Ignoring temporary spikes of 2022, our world has moved from longterm 2% assumption to a more likely 3%. Staying safe in retirement requires total return (dividend/income and capital growth over medium to long term) well above inflation. This is why we were projecting 3% inflation even when it was flat or almost negative; it’s always safer to estimate costs can rise and design our plan to keep you safe. This relates intimately to the next point too.
2 – HEALTH COSTS are a growing risk when we’re no longer young. Up to 85% of lifelong health expenses hit in the last 3-5 years of our living. Even though we live in Canada, many such costs are not paid by government. Non-formulary drugs, personal care, hospital parking, not to mention medical travel insurance, each of these can seriously attack one’s life savings. I’ve known seniors whose personal care bills were over $15,000 /month. Another paid $11,000 for six months of medical travel coverage while in Florida. As we live longer, health needs can be more complex and costly. Our financial plans keep in mind that insurance or other assets must be available to cover such bills (or refund such costs) when we outlive our health and strength.
3 – WITHDRAWAL RISK: retirement usually means drawing income from your investments. When young we invested more each month – effectively dollar-cost-averaging. Retiring is the opposite picture: taking money out even if values are sliding. Bonds usually fix that, but 2022 was a rare year when bonds and equity both fell. Fortunately 2023, especially second-half, looks highly rewarding. As every decade hosts two to three down years (like 2020 & 2022) we have strong reason to be confident for the years ahead. People cannot always choose their retirement date: one doesn’t plan things like personal/family illness or premature job loss. Whatever happens, we adjust your plan to include sensible projections to keep you safe. If investments have been strong we lower our future estimates; if market values have fallen we increase future estimates. With a core foundation of Life Income Mandates (LIM) and equity growth we can surf or survive safely, regardless of anything world markets will ever throw our way.
4 – LONGEVITY RISK is portrayed by Trudy in the early 1990s who sadly told me at her age of 83, “we never knew we were going to live this long!” or John soon after who announced to me that he and his wife had 33 months to live as he had calculated their money would be gone then. I began my career with those two stories in my heart, vowing to help people sustain their wealth to protect their life, indeed the life they choose. Over 40% of boomers/seniors are likely to outlive their wealth, and many more are hiding from the day it may happen to them. Whitney and I have vowed that will never happen to our clients, and the only magic or assurance we can offer is by having a plan and working your plan to continue protecting you when life continues longer than you might have expected.
5 – ASSET ALLOCATION is what you own: home, insurances, business and employee benefits, and especially your investment accounts. Some have smaller accounts and a valuable house but that’s not liquid and doesn’t tend to pay you back without its own risks and fees. Some insurances also strengthen and supplement retirement income. We regularly review your investment accounts (RRSP, RRIF, TFSA, OPEN, etc.) to ensure: (i) growing income from dividends, real estate, infrastructure, (ii) stable income from govt/corporate bonds, (iii) capital growth from blue-chip and mid-sized equities selected to reduce risks, advance growth, and put a lot more money into your pocket 3, 5, 10+ years from now. Anything less than this would risk the disaster faced by Trudy or John mentioned above, ie. the risk of outliving one’s money. Our focus (LIM) will always help you recover, replenish, rebuild, recreate and relax.
6 – ANXIETY is the ultimate risk to both wealth and health. We diminish this risk through proactive persistent focus on your Lifestyle and Wealth. Worry was never a plan, and indeed can wreck a plan if it pushes one to invest in what pays the least and expires soonest. With a prudent financial plan you Free Yourself to explore and enjoy life as you choose, and trust the plan. It works. I often add your picture on the front of your plan, showing you or your family having a good time, or your past/future retirement destinations. Most simply, a financial plan is just two things: how you will live, and how money will serve that. Our service to you, then, and all our conversations together, bring these two points together season after season as all the years proceed. The value of your financial plan is confidence to ignore any hype or fear of a given year’s news, and just continue enjoying life on your own terms.
Any questions you have or may be hearing among friends, let me know. Any needs you expect as the new year opens, let me know that too please. To friends in the U.S. we wish happy thanksgiving: we made sure to get our turkeys first and we’re nearly ready for Christmas. Updating Privacy Authorizations for your accounts: I will email you in January (reply then with e-signature or mail). Santa’s Rally customary in the weeks ahead won’t recover every loss of 2022 but things are mending well this quarter and half-year. There is much to welcome in 2023 as covid/economic/political troubles born in 2020-2022 fade in the rearview.
Yours always in Financial Security for LIFE.
Brian Weatherdon, MA, CFP, CLU, CPCA. 905-637-3500
627 Guelph Line, Burlington, Ont. L7R 3M7. 1-877-937-3500
Certified Financial Planner, Certified Retirement Coach
** This monthly letter touches on key strategies in Canadian and global investing and financial planning. This letter is not an offer to sell any kind of security, insurance, or program. Historical returns and risk measures are not a valid guide to future performance. Returns are from publicly available sources and research from a variety of firms including but not limited to Canada Life, CIBC, Dynamic, Mackenzie Financial, RBC / PH&N, and more. Opinions in this letter belong solely to the author and no other body is responsible for the content expressed here. We value opportunity to coordinate with your legal and accounting advisers to further your financial goals in home and business. We are grateful always to receive your comments and questions.