Thursday, August 27, 2015

Portfolio up almost a percent from value before correction

The market stumble the other day was a test. Did you panic, did you cheer, did you hold or did your buy? I bought. I increased my exposure to U.S. equities by buying a little more of a TD e-Fund (TD US Index: TDB902).

Today my retirement portfolio is up almost a full percent from where I sat about eight days ago or just before the correction.

If this grandfather hadn't been babysitting on the day of the huge and oh-so-sudden correction, I'd have bought a lot. Damn. I've been moving into cash for some time and waiting for the moment. The correction came and went so quickly. One had to move fast. There are still stocks going at reduced prices but the fire sale is over.

Oh well. Corrections, even sudden major corrections, are a part of investing in equities. Keep your powder dry. There will be another equity sale in the future. Be patient. Sometimes these recoveries are simply a bounce that will run out of energy and the stocks will begin sliding downhill again. I may get a second kick at the can.

I should mention that I am up almost five percent from the portfolio low reached at the worst of the quick correction. Leave the panic talk to the newspaper reporters and television talking heads.

Wednesday, August 26, 2015

TFSAs are a godsend to many retirees

I have a friend who despises Stephen Harper and his Conservative government. (My friend is a bright guy.) He will not be voting for our boy from the West or the party he leads in the upcoming election. My friend considers himself and his wife as middle class. He feels forgotten by Harper as our PM piles the goodies onto Canada's wealthy. In this vein, my friend has a great hatred for the increased TFSA contribution limit.

This is another tax break for the wealthy, he says. Is he right? As a senior stuck firmly in the middle class, I have my doubts. My wife and I both have TFSAs and we both believe that these may prove to be financial godsends, especially for my wife as she gets older. And we are firmly anchored in the middle class.

According to the Conservatives:

By the end of 2013, almost 2.7 million Canadian seniors had TFSAs.  Of those, nearly 60% had annual incomes of less than $40,000. And of the people who contribute the maximum amount to their TFSAs, almost half are seniors.

Yes, the source of the above is biased. I'm sure my friend would insist on seeing these claims backed-up by someone not part of the Conservative establishment. I believe he would give more credence to information supplied by the CBC. Well, let's see what Canada's broadcaster has to say, "Who benefits seems to be more tied to age than income, although both are obviously factors. Fully one in five people over the age of 75 maximized their TFSAs . . . "

According to the blog Life on Credit:

Finance and tax experts say the new contribution limit offers more flexibility, whether you are in the middle income bracket or have a more limited income. Even an income of $50,000 or lower makes the tax-free savings account a better alternative to the RRSP because TFSAs help save on taxes. . . .

The new limit is designed to benefit middle class couples. . . .

The federal government believes retirees will be the major beneficiaries of the new contribution limit. Seniors may want to move cash from their RRIF to a TFSA. There are multiple benefits to doing this but a big driver is that less cash in an RRIF means less money to which the minimum withdrawal applies.

The Liberals, under Justin Trudeau, have announced that if elected they would reduce the TFSA contribution limit back to $5,500. Trudeau argues the new, higher limit disproportionately benefits the wealthy and he finds support from left-leaning think tanks such as the Broadbent Institute. I beg to differ.

My wife and I are retired. My health is poor but my wife's is not. She might well live into her nineties. Buying an annuity today is a fine option for me but a fixed annual annuity payout could easily prove to be a disaster for my wife. Even a modest three percent inflation rate would destroy the value of the buying power of her annuity in the 20 some years it will take for my wife get into her 90s.

We have opted to put our money in the market rather than in annuities. Today, $100,000 will buy 1400 Royal Bank shares. Those share will pump out a dividend income of $4424 annually. With those shares sitting in a TFSA, that income would be more like $5000 in taxable income, for many retired Canadians. This is almost, but not quite, the income to be expected from a $100,000 annuity.

The annuity payout is fixed. The Royal bank dividend is not. My gut feeling is that the money we have sitting in stocks will, over the next two or more decades, prove to be a better source of income than an annuity.