Financial Basics 12 - Keeping Track of Adjusted Cost Base

This post is about why and how to keep track of the adjusted cost base (ACB) of your ETFs in your taxable account. 

Why?

Just to make doing your taxes even more painful? Seems that way!

Updated May 2017 as the ACB spreadsheet has been enhanced to include foreign exchange input for transactions in foreign currency. 
Updated December 2016 to add another link in the Other Info section and update the RCGD table to include 2015 and 2016.

Financial Basics 14 - Simple Investing

This post is about describing, in the most simple terms, how to get started doing your own investing.

When I looked back at my financial basics series, I realized that there were 4 posts (#7 through #10) dedicated to the subject of simply how to invest and what to invest in. Even though I tried to simplify the guidance, it still ends up being long and a bit complicated. This may deter people from trying to invest on their own, which goes against my reason for writing this series.  This post is to simplify the process of investing even further than those 4 posts. Hopefully this post will give you enough information to get started and as you get more experience and confidence you will read posts #7 through #10 and many of the other resources available.

Financial Basics 10 - Investing and Re-balancing

This post is about managing your investments and accounts, how to make investments and how to re-balance your portfolio of investments.  



We will revisit the example portfolio from post #7 and the determination of which funds we will put in particular accounts. Then I will propose an easy way to make the contributions and buy the funds each month. We will make use of a Google Sheets spreadsheet that helps us determine which funds to buy in each account. 

Financial Basics 9 - Which Fund in Which Account?

This post is about which funds you should put into each of your different types of accounts (RRSP, TFSA or Taxable)

Which fund to put into which account? This is about taxes, so if you read further on in this post and think you are missing something, you should go back and read Financial Basics 2 - Income Tax to review how different types of income are taxed and Financial Basics 3 - How Different Savings Accounts Work to review how income in the different types of accounts are taxed. 

Financial Basics 8 - Investment Portfolio Alternatives

This post is about alternatives to the portfolio I recommended in the previous post

This post was originally created in April 2015 and updated in April 2017. The Portfolio Alternatives table has been updated along with some wording. 

If you consider alternatives to my recommendation, please remember that each of these ETFs already have a great degree of diversification.  If you stick to index tracking ETFs, have an appropriate percentage of Bond ETF and cover the worlds stock markets, you should not need more than 4 ETFs.  In some cases you may be able to reduce this to 3 by picking one world (non-Canadian) ETF instead of having one each for the US and International.

Financial Basics 7 - Investment Portfolio

This post is about your investment portfolio.  Which funds you hold, what percentages and what account you will put them in.  

This post was originally created in March 2015 and updated in April 2017. The Portfolio table has been updated along with some wording. 

One objective of these blog posts is to provide a simple reference for saving and investing for retirement. I want to take much of the available information on the internet and simplify it so that it is can serve as concise reference material.  Often when you do that much of the background information that goes into determining the best saving and investing strategy may be lost, but I don't want that to happen. I will structure this blog post to begin with the basics and providing more detail later on in this post and the subsequent one. 

Financial Studies 2 - CPP Early or Late? Part 3

In the Part 1 of my blog posts discussing whether to start CPP early or late, I talked about articles which had presented the break-even point analysis and I pointed out that this was the wrong question to ask. The break-even is the age at which the cash received from starting CPP early is the same as starting CPP at 65. 

The analysis is usually done on a spreadsheet, but there is actually a much easier way to calculate this. 

The result is:

The number of months from when your start CPP to the break-even age is the reciprocal of the actuarial adjustment discount rate. If you start CPP early the discount is 0.6% per month, or 0.006. The reciprocal of this (1/0.006) is 167 months or 13.9 years. For starting CPP at 60, the break-even is at age 74. If you live to less than 74, starting CPP at 60 is better than starting it at 65. 

So next time you're at a cocktail party and someone is going on about their spreadsheet to calculate the break-even for taking CPP early, you can one-up them by saying "Yeah, it's just the reciprocal of the actuarial adjustment discount rate".

Financial Studies 2 - CPP Early or Late? Part 2

After publishing the post on whether to take CPP early or late, a friend pointed out to me that if the situation was that the person retired earlier than the example, the conclusion may change. It occurs when the person has less than 40 years of contributions to CPP which can occur if you retire before 58, are unemployed for some years, or work outside Canada for part of your career. In the previous post the example person retired at 60 and had 40 years of CPP contributions. 

Just a note on terminology. When I say retire, I mean when the employment stops and stop CPP contributions. This is not the same as the age they start CPP benefits. 

When calculating your CPP benefit, the benefit is based on your average (inflation adjusted) pensionable earnings (on which your contributions are made) over your working life. If you earned more than the maximum pensionable earnings in a year the value is capped at that maximum, which is about $55k now. In the calculation you get to drop your 17% of lowest earning years, or in other words keep 83% of your highest pensionable earning years. 

Financial Studies 2 - Start CPP Earlier or Later than 65?

Summary

This is a long Blog post, so a summary of the results is in order, to keep your attention. 

The chart below are results calculated using my Retirement Forecaster spreadsheet and shows the optimum age to take CPP (blue line). The Retirement Forecaster spreadsheet takes into account effects of income tax, investment return and OAS clawback when determining the optimal strategy. You can estimate your life expectancy and use this chart to make an informed decision on when to start CPP. The red line is the result, just using a simple Total Cash calculation, only considering how much cash you receive as CPP payments. This comes to a different conclusion as the more accurate results from the Retirement Forecaster spreadsheet. 

Note that the assumptions that went into this calculation are specific and may not represent your situation. You can estimate the best age to start CPP by using my Retirement Forecaster spreadsheet for your specific situation. 

Okay, on with the Blog Post

Why should I write about this? Much has already been written on this subject, and by very competent and capable people. I want to look at this to see if it is possible to simplify the conclusions. 

Many of the articles do not address the tax implications or the OAS clawback of a lower or higher CPP benefit for a different period of time. Nor do many consider the time value of money. Using my Retirement Forecaster spreadsheet, we can account for these. 

Financial Basics 13 - Tracking your Financial Performance

When you decide that you want to track how something is performing, usually this is done by measuring something actual and comparing against a target. An Athlete's performance is measured by such things as time, distance, height or score. But what do they measure against? In their competitions they are trying to get the fastest time, longest distance, lowest or highest score depending on the sport. In training and warm-up competitions they may be measuring their performance against something else. They may have a target time they want to achieve, or maybe they just want to continually improve over their personal best time.

So when you want to measure your performance your need to:

• Decide on what you are measuring.
• Decide on what targets or progression are considered success.

The simplest form in term of finances is to measure your Net Worth and compare it to a target amount that you want to achieve. 

Financial Basics 11 - Optimum Frequency to Reinvest Cash Dividends and Interest

This post is about the frequency at which you should re-invest the cash dividend (or interest) payment you receive from your ETF funds.

Normally you will received dividends or interest from mutual funds or ETFs either monthly or quarterly. Many stocks return dividends quarterly.

Financial Basics 6 - Saving and Investing Strategy

This post is about our saving and investing strategy. We all share a common goal of retiring comfortably.  What I want to do here is summarize a set of guidelines that will help us maximize the success of our savings. 

In my Financial Basics post #5 I referred to Jim Collins Stock Series set of blog posts and asked you to read the first three of those. You should also read this one that's not part of the stock series - How I failed my daughter and a simple path to wealth. If you haven't read them yet, go and read them and then come back here. 

Financial Basics 5 - Types of Investments

This post contains brief information on the different types of investments available.  In a later post I will discuss which one of these types I recommend (Index tracking ETFs).

Toronto Stock Exchange 

From the "Types of Investment Accounts" post you will recall the 3 level hierarchy (for saving and investing accounts)

• Bank or Investment company
• Type of account (TFSA, RRSP, RESP, Taxable)
• Type of investment

Financial Basics 4 - Self-directed Accounts

This post is about what type of account you should have to contain all your different types of savings accounts. From the title you should expect that I am going to suggest a self-directed account and you are right. For clarity, I will refer to this as your Trading Account, so that I don't confuse it with the savings accounts (TFSA etc.). This trading account will be with one of the big banks or an online brokerage.  

The Bank

(A famous night club, now restaurant, in Calgary.  My wife used to go there in the 80s)

Recommendation

I use BMO Investorline. I have made a list of functionality below that you should look for in a trading account, and mine has all of these. Trades are $9.95 and you can find trading accounts with cheaper trades, but I only need to make about 20 trades per year.  

Financial Basics 3 - How Different Savings Accounts Work

This post is about the different types of savings accounts you can use in Canada.  

Article was edited March 2017, to update TFSA and RRSP limit amounts.

There are 3 levels of hierarchy to savings accounts and investments.  The three levels are:

• Bank or Investment company
• Type of account (TFSA, RRSP, RESP, Taxable)
• Type of investment

Financial Basics 2 - Income Tax

This post is about understanding income taxes enough to know how they impact saving, investment and retirement income.  Income tax is a very complex subject and this post will NOT be a complete summary of all the income tax laws and rules (in Canada).  This post will attempt to summarize just what you need to know for saving and investing, provide links to additional references (if you wish to read more) and also links to tools to help understand the quantitative impact of income taxes. 

If you are not familiar with the origins and purpose of income tax you should read the Wikipedia entry on the subject Wikipedia: Income Tax. Pay attention to the sections "Defining Income" and "Deductions Allowed" as these are important concepts when considering saving and investing as not all types of income are taxed in the same manner, some contributions to savings (ie RRSP) are deductions and some investment income (ie dividends) are allowed tax credits against taxes. 

Financial Basics 1 - Stuff I wished I knew when I was 22

I've had this blog up for a couple of years now.  All I have posted so far are some spreadsheets that I wish to share with others.  Two are related to my profession and two related to retirement planning. Spreadsheets eh?  Yes, I am an Engineer.

I'm thinking that it is time to broaden my horizons and actually write posts about subjects other than spreadsheets?  Will anyone care?  Maybe not, but I'll let the readers decide that. 

This post is about summarizing in a simple way the basic information one needs in order to save and invest for retirement or financial independence.  I now wish that I would have both received and heeded this advice when I was starting out in the working world, mainly because I would have worried less about investing and would not have made some mistakes that cost me a bit of money along the way.  Not losses per se, but more like gains that were missed.