Financial Jungle

The landscape of tax-sheltered investing will forever be changed as the 2008 Canada Federal Budget unleashed the new Tax Free Saving Account (TFSA). When my co-worker, Tony, first mentioned the name “Tax Free Saving Account”, my first guess was a high interest saving account that grows tax-free. To my pleasant surprise, you can pretty much throw any instrument at it. My understanding is that anything that’s eligible for RRSP is also eligible for TFSA. This includes GIC, bonds, stocks and income trusts.

In a nutshell, here’s how TFSA works:

• Starting in 2009, Canadians aged 18 and older can save up to $5,000 every year in a TFSA.
• Contributions to a TFSA will not be deductible for income tax purposes but investment income, including capital gains, earned in a TFSA will not be taxed, even when withdrawn.
• Unused TFSA contribution room can be carried forward to future years.
• You can withdraw funds from the TFSA at any time for any purpose.
• The amount withdrawn can be put back in the TFSA at a later date without reducing your contribution room.
• Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits and credits.
• Contributions to a spouse’s TFSA will be allowed and TFSA assets can be transferred to a spouse upon death.

I have attached a few TFSA references below, so I won’t regurgitate too much. What I pray is that the 15% US dividend withholding tax won’t be applied to TFSA. Since my RRSP is already congested with US dividend payers and Canadian income trusts, I can use a little breathing room with TFSA.

Secondly, I hope they’ll modify the rules such that people over 18 can reclaim their contribution room retroactively. Someone turning 18 this year will stand to benefit the most, but what about me? I’m 33 year-old. I want my contribution room from the past 15 years. (15 x $5,000 = $75,000)

Either way, I’m thrilled about TFSA.

More resources from:
Jonathan Chevreau
National Post
Canada.com
Canadian Capitalist
Michael James
Thicken My Wallet
Tax Free Saving Account calculator

All right, that’s it! Those ETF bullies have tormented us dividend stock pickers long enough. I’m retaliating. My headgear is on. My gloves are strapped. Give me your best shot.

1. Less MER - In fact, buy-and-hold dividend investors pay no MER at all. Regrettably, iShares CDN LargeCap 60 ETF (XIU.to) and TD Canadian Index eSeries seize 0.17% and 0.31% respectively. Which means, dividend investors have a 0.17% to 0.31% head start each and every year.

2. More Diversified - Most investors refer to the other types of diversification: by sectors and by geographical locations. This is a non-issue for investors with 30 or more stocks. As long as your eggs are properly spread amongst different baskets, the portfolio will achieve similar volatility as the general market. At least one study found that 90% of the unsystematic risk can be diversified away with as little as 12 stocks.

Sure, diversification does alleviate uncertainties in a portfolio due to particular sectors or countries, but there is a much bigger monster in the room, and that is market sentiment. No matter how much you slice and dice your portfolio, all sectors are still subject to market sentiment. The past few months are a testament of how every sector limps along while the market is howling over its PMS. No one can escape the carnage. The way I see it, dividend investing is the only remedy to help us cruise through the turbulence while remaining fully invested in the stock market. Just look at Bank of Nova Scotia. It’s basically the same old boring bank as yesterday, last week, last month, last quarter and last year, but its 1 year chart resembles 6-flags roller coaster. All that while, their distribution policy is steady as she goes.

So, dividend investing offers you another dimension of diversification by easing reliant on market speculations, and rewarding you with real hard cash straight from the operations of your high-caliber businesses.

3. More Tax Efficient - A $35,000 salaried British Columbian profiting from a $5,000 capital gain must pony up an extra $615 in taxes. The same British Columbian receiving a $5,000 dividend would pocket a $175 tax refund. (That’s almost enough to pick up 4 more BNS shares!) So, ETF investors must overcome both the MER and the tax refund every year.

4. Extended Investment Horizon - Due to market sentiment described in point 2, ETF investors must gradually shift their equity exposure toward bond to protect their nest eggs from market volatility. Consequently, a 25 year old ETF investor may only have a 30 to 35 year weighted investment time horizon before reaching 65. This is a double whammy for them: the investments have less time to compound, and the turnovers create tax-drags against the portfolio return. And don’t forget that bonds are taxed as regular income.

On the other hand, dividend investors can prolong a carefully crafted portfolio because dividends are never at the mercy of market turbulence. By sticking to stocks with a history of rising dividends, or businesses that provide essential goods and services, you can afford to hang on to the portfolio longer. I think the best defense is the best offence. If anyone can prolong a dividend portfolio for 40 years, the dividend compounding coupled with the preferential tax treatment will deliver enough capital cushion to hold to the stocks forever.

5. Less Market Timing - Contrary to popular belief, a thoroughly hands off approach to investing is an illusion. Eventually, a retired ETF investor will have to live off his equities. Unless he turns over 100% of his portfolio to bonds (I smell capital gain taxes), the 4% withdrawal rule is going to pinch during bear markets. If hysteria sinks the market down 15%, can he afford to devour another 4% and erode his already undervalued capital? If euphoria drives the market up 15%, should he take out a little more in anticipation of a trend reversal? You see? There are so many crucial market timing decisions. Doesn’t sound to me like a relaxing golden age.

A retired dividend investor doesn’t need to fiddle with his portfolio whether the market is sad or happy, because the dividend stream is more dependable even when the market is tumbling. And courtesy to points 1, 3 and 4, a dividend portfolio should enter retirement with a much larger base and yield, and be able to outpace inflation and cushion any unforeseen dividend cuts.

Further reading: A brief history of high yield stocks

Canadian Capitalist recently wrote another thoughts-provoking article. This time the subject was on Fidelity’s Retirement Math.

Instead of going off-topic with a long comment, I decided to write a separate article on an unconventional way to retire; live in exotic countries on a shoestring. My wife and I went on a vacation two years ago to Thailand and Malaysia, and we were thrilled to discover how affordable these two countries were. We ate delicious Thai curry chicken noodle soup for $0.75 Cdn, and stayed in a Chiang Mai hotel for $8/day with air conditioning. Although I haven’t done a complete analysis, this retirement seems doable.

The best time to travel is during the Canadian winters when utility bills are the costliest. Some of the eliminated expenses include electricity, heat, telephone/cell phone connections, cables, internet, grocery, gas, car insurance and dine outs, all of which could cost around $1,200/month depending on your lifestyle. $1,200/month is a lot of money to spend in Thailand and Malaysia. To give you some ideas:

• Pad Thai noodles for $1.25/plate. Desserts are even cheaper.
• Hotels in Bangkok run around $25/night. As mentioned, you can rent hotels in Chiang Mai for less than $10.
• Air Asia has countless sub $50 flights inside South East Asia.
• Meals in Malaysia range from $2.50 to $5.00. We ordered a $5/person meal that included a sting ray, chicken satay, frogs, vegetables and drinks. Yummy.
• $30/night for a courtyard double right at the heart of Kuala Lumpur, Malaysia.
• $42/night for an executive room with air condition at Sepilok Jungle Resort, Malaysia.

Another money-saving tip is to plan for extended stays in exchange for rate discounts. To help fund the trip, you could also hire a property manager to lease out your home temporary during your vacation. Again, I’m only scratching the surface here, but it’s something to ponder on.

I had so much fun writing the Top 10 Reasons For Dividend Investing post that I decided to do another one for the Top 10 Exciting Semi-Retirement Jobs.

Many folks don’t know what they want to do with their retirement, but semi-retirement is a fabulous way to phase in by sampling the various possibilities out there. Is it really work if you enjoy doing it? If you’re passionate about a hobby, why not turn it into a cash cow 10 years ahead of your scripted retirement? If you can’t think of a hobby, I have some good news for you. Below is a list of potential semi-retirement jobs which I compiled with help from a couple of forums. The list is sorted by a complex-proprietary algorithm, and is subject to change.

Without further ado, here’s my Top 10 Exciting Semi-Retirement Jobs in reverse order:

10. Geek Squad Agent - Geek Squad needs you to lead their “fight against computer upheaval: a critical mission in their goal of obtaining world domination.” Faint at heart need not apply. You’ll be recognized by your short-sleeved white shirt, black pants, shoes, belt, clip-on tie and your Geek Mobile.
9. Bartender - Have a craving to entertain and get tipped well for it? For as little as $199, you can register for a bartending academy to learn advanced pouring and mixing techniques and how to create an engaging atmosphere. For the adventurous ones, toss, flip and spin your way to hugh tips through the process of flair bartending.
8. eBay Entrepreneur - There are plenty of resources on the web to help you identify a niche market, and to get your business up and running. A great place to begin is to read the articles on Entrepreneur’s eBay Center.
7. Pet Sitter - Some people live for the moment of opening the front door to reveal the little pooch doing the dance of joy. For pet fanatics, consider running a pet sitting business. If your home is pet friendly, it doesn’t take much capital to get the business going other than the business insurance and some supplies. The basic services include picking up and dropping off pets, walking them around the neighbourhood, grooming, organizing play groups, visiting the vets for check-ups and taking pictures.
6. Golf Course Ranger - I know a few buddies who can barely type an email without alluding to their next golf trip. If you can’t drag yourself off the golf course, look into becoming a golf course ranger as Frank Reed did.
5. Musical Band - We had a few music enthusiasts performing during our company Christmas parties for the past 2 years. One of them even setup mini-studios at home to practice. If you have a talent in music, you might want to read Nirv4ever’s tips on starting a successful band.
4. Retail Sales Associate at Home Depot - Do you have a green thumb or a nose for home renovation? Home Depot is looking for people like you to fill vacancies across Canada.
3. Blogger - Pick a subject that you’re fascinated about and blog about it. Can’t figure out how bloggers make money? Check out this excellent article by ProBlogger.
2. Photographer - I love taking pictures of little bugs. With my portfolio starting to look respectable, there may be a chance to show case my work in iStockPhoto.
1. Explorer - My #1 exciting semi-retirement job? I want to dance around the world with Matt Harding, and blog about it to fund the trips.
   
   

Now that you’re done with the list, I hope you’ll get off your chair and start beating your chest, because now you can conquer your life. It is your turn to share. Did you re-discover your old passions, or at least spark a few new ideas?