Decumulate & Downsize

Most of your investing life you and your adviser (if you have one) are focused on wealth accumulation. But, we tend to forget, eventually the whole idea of this long process of delayed gratification is to actually spend this money! That’s decumulation as opposed to wealth accumulation. This stage may also involve downsizing from larger homes to smaller ones or condos, moving to the country or otherwise simplifying your life and jettisoning possessions that may tie you down.

The retirement landscape in Canada

By Bob Lai, Tawcan

Special to Financial Independence Hub

Recently I wrote about what we’re doing in this bear market condition. Since we’re still in our accumulation phase, we’re following our investment strategy by continuing buying dividend stocks and index ETFs regularly and building up our dividend portfolio.

But what if you’re closer toward retirement or already retired? How do you protect yourself from the bear market so make sure you can sustain your expenses in retirement? What is the ideal retirement portfolio for Canadian? Should someone simply try to aim to build a dividend portfolio and live off the dividends? To answer this complicated question, I thought it’d be best to ask an expert. So I decided to reach out to Dale Roberts to talk about the retirement portfolio for Canadians.

For those who don’t know Dale, he is a former investment advisor and trainer with Tangerine. He now runs Cut The Crap Investing and is a regular contributor to MoneySense.

Please take it away Dale!

Thanks Bob.

The typical retirement is likely a thing of the past. Yours will not be your Mom and Dad’s retirement and it certainly won’t look much like Grandpa’s either. The traditional model of a workplace pension plus Canada CPP (Canada Pension Plan) and Old Age Security payments plus home equity won’t likely get the job done.

In previous generations many would work until age 65 and with life expectancy in the mid to upper 70s, the retirement was short lived, meaning that long-term inflation was not the threat it is today. And those workplace pensions were commonplace. A retiree could sit back knowing those cheques were coming in on a regular basis, and those pension amounts were often adjusted for inflation.

According to Statistics Canada the Life expectancy in Canada has improved considerably. Women’s life expectancy at birth has increased from 60.6 years in 1920–1922 to 83.0 years in 2005–2007, and men’s life expectancy from 58.8 to 78.3 years in the same period—increases of 22.4 years for women and 19.5 for men.

A Canadian male who makes it to age 65 will on average live another 20 years. It’s even longer for women. Many will live to age 90 and beyond. We all assess our own longevity prospects, but it may be prudent to plan for a retirement of 25 to 35 years. If you opt for an early retirement, your portfolio (and any pensions) might have to support you for 40 or 50 years.

A sensible retirement plan will work to make sure that you don’t outlive your money. You will also likely want to pass along wealth to children, grandchildren and charities. Estate planning and leaving a meaningful legacy will be a priority for many Canadians.

The pandemic has made Canadians rethink many areas of their lives. Our own mortality became a concern. For good reasons, during the pandemic more Canadians have sought out meaningful financial advice. They recognize the need for proper insurance, investments that can stand the test of time and a well-thought-out financial plan that ties it all together.

You don’t get a second chance 

It all adds up to greater peace of mind. There is that popular expression from Benjamin Franklin:

If you fail to plan, you are planning to fail

 

When it comes to retirement, that plan is essential. You don’t get a second chance.

Retirement building blocks 

The traditional building blocks of a secure retirement will be insurance, plus cash flow from savings and a well-diversified investment portfolio, plus government and company pensions. Income from investment properties are often in the mix.

Annuities offer the ability to pensionize more of your nest egg. Thanks to product innovation Canadians can add a pension-like component with a revolutionary new offering such as the Longevity Pension Fund from Purpose Investments.

Canadians who might have missed out on a workplace pension can fill that void. It operates like a pension fund with mortality credits. That is, it protects the risk of longevity as plan members who die sooner will top up the retirement of those who live to a very ripe old age.

  • Insurance
  • Cash
  • Pensions, public and workplace
  • Old Age Security (GIS for lower income)
  • Retirement portfolio
  • Annuities and investment pensions
  • Real estate and other
  • Part-time work
  • Inheritance

The retirement portfolio 

Historically, simplicity can work when it comes to building the retirement portfolio. That is to say, a simple balanced portfolio that owns stock market funds and bond market funds will do the trick.

The famous, or infamous 4% rule shows that a 60% stock and 40% bond portfolio can provide a 4% (or slightly more) spend rate that will support a retirement of 30 years or more.

Note: a 4% spend rate suggests that 4% of the total portfolio value can be spent each year, with an increase at the rate of inflation. The 4% rule is more of a rule of thumb to help you figure out how much you need to save and invest to hit your magic retirement number. This video demonstrates why no one really uses the 4% rule.

You’ll find examples of these core balanced portfolios on my ETF portfolio page. You might look to the Balanced Portfolio with More Bonds and the Balanced Growth Portfolio as potential candidates for a core retirement portfolio. There are also the all-in-one asset allocation ETFs.

I would suggest that the traditional balanced portfolio can be improved with a cash allocation and dedication inflation protection. You might consider the Purpose Diversified Real Asset ETF, ticker PRA on the TSX. The cash will help during periods of extended bear markets. In 2022 saw how stocks and bonds can fall together in a rising rate environment.

Given that you might consider for a simple balanced model:

  • 50% stocks
  • 30% bonds
  • 10% cash
  • 10% PRA

But Canadians love their dividends

While a core ETF portfolio might do the trick, most self-directed investors love their dividend stocks and ETFs. That’s more than fine by me.

In fact, building around a core Canadian stock portfolio is likely a superior approach for retirement funding. Thanks to wide moats (lack of competition) and oligopolies, Canada is home to the most generous and retirement-friendly dividends on the planet.

That said, don’t sell yourself short by only living off the Canadian dividends. Total return matters and dividend investors should always consider selling some shares to supplement their dividend income and for tax efficiency purposes.

Tawcan: Can’t agree with you more Dale! Selling some shares later on during your retirement will help with estate planning as well. I’d say living off dividends and not touch your principal early on during your retirement may provide some margin of safety.

Dale: My Canadian core stock portfolio provides a generous and growing (though not guaranteed) income stream and a defensive stance. I call it the Canadian Wide Moat 7. Bob always has listed some top Canadian dividend stocks to consider as well.

To boost the yield you might also consider some Canadian Utilities as bond proxies (i.e. replacements). And certainly, thanks to the defensive telcos, utilities and other defensives, you might go much lighter on any bond allocation.

I recently posted on building the defensive big dividend portfolio for retirement.

I prefer dividend growth stocks for the U.S. allocation. In the post below you’ll find our (for my wife and me) personal stock portfolio, and how the Canadian stocks work with the Canucks. The portfolio offers generous market-beating returns with a more total portfolio defensive stance.

To generate modestly better retirement funding (compared to core balanced index portfolios) we can boost the dividend stream, and hold a greater concentration in defensive stocks.

We’ll find that defensive nature in telcos, pipelines, utilities, healthcare and consumer staples. U.S stocks help fill in those Canadian portfolio holes as we find wonderful healthcare and staples stocks south of the border. The U.S. offers ‘the best companies on the planet’ – my sentiment. And many of those companies are in the technology and tech sectors. It’s a great idea to add growth in retirement, but we do want to make sure that we are defense first.

Tawcan: Yup, since the Canadian market is very financial and energy heavy, investing in U.S. stocks will help with sector diversification.

Dale: On the defensive front, I’d throw in Canadian financials as well – they will offer up those generous, and mostly reliable dividends. And yes, you might also consider international, non North American ETFs. I prefer to mostly get my international diversification by way of the U.S. multinationals.

While not advice, my personal portfolio shows how easy it is to build a simple retirement stock portfolio. As you can see from that above post, we also hold other assets in moderation – including cash, bonds, gold and other commodities plus oil and gas stocks. Continue Reading…

When is it wise to spend more in Retirement?

Photo courtesy Unsplash and RetireEarlyLifestyle.com

By Billy and Akaisha Kaderli

Special to Financial Independence Hub

Recently, an interesting question was presented to us: How much is Enough?

We posed this same question to ourselves years ago when we were contemplating early retirement. But what about now, three decades later?

4% rule be damned

Years of capital appreciation due to decades of compounding and proper money management has paid handsomely in the growth of our net worth and financial wellbeing. Now, 33 years later, do we still need to be diligent in monitoring our spending and outflows, or is now the time to seize the day and go first class? Eat in trendy restaurants, be seen and show off our wealth?

This is definitely not our style …

Flying under the radar living a bohemian lifestyle is more like us, and we’re still here livin’ the dream.

In fact, some family members and friends consider us “poor” as compared to their consumer-based standards. That’s fine with us. We have not owned a car for years and we tend to live in foreign countries where we can geographically arbitrage value for money spent. We prefer experiencing cultures and cuisine as compared to a shiny new car, club membership and debt payments.

We are just trying to make it to Friday

There are many ways to live a life, and our choice is unique to us. It’s a lifestyle not a vacation and our approach is one that we created based on our personal values and interests.

But back to the question of when we might loosen the purse strings … Should we start living on more – or less – than the US$35,000 that we have done for years?

We now use more private drivers than chicken buses, stay in pricier hotels (not always a better choice), and we’ve set up a stable, semi-permanent home base in Chapala, Mexico.

We donate freely, giving our time and money, helping others less fortunate, as well as teaching people better money management and life skills.

There are needs everywhere and we do our best to contribute. As always, we want results rather than throwing money at a problem to feel good and brag about it.

Checking back in with the 4% rule, we took a look at what that number would be for us today and both of us asked “How would increasing our spending to that amount change our lives?” Granted, it’s not Bill Gates’ level, but how much more can we eat, drink, travel, be merry and give away?

But that’s us.

What about you?

Is it time for you to flip the switch from saving and being frugal for your future – to enjoying a higher standard of living and giving back to the community?

Below are a couple of suggestions which might clarify this question for you.

Know where you are

Life circumstances change.

None of us know our exit date from this planet. As each day passes, we are one day closer to the end of our adventure. But you could check some actuarial tables to see where you stand in general. We are not saying throw caution to the wind and start “X-ing” out days on your calendar. Rather, utilize this bit of information to get a clearer picture of where you might be.

Imagine if you knew your Date of Death. Would that change your spending habits or the way you live?

Other thoughts

Have you or your spouse had an awakening in regards to health? Do you want to open a foundation that produces results and wealth? Begin a new business or leave a particularly handsome legacy for your grandchildren? Continue Reading…

How to deal with uncertainty in Investments and in Life

By Alain Guillot

Special to Financial Independence Hub

“I will invest in the stock market when things calm down,” said my friend Mercedes after the market crashed following the COVID pandemic.

Another friend said something similar after the terrorist attack of 9/11.

The thing is that in the markets and in life, everything is always uncertain.

Even when everything seems calm, there might be a surprise the next hour. And when everything is chaotic, long periods of peace and calm may follow. Between WWI and WWII, there were 20 years and 9 months of peace and prosperity.

After WWII there have been almost 80 years of economic, scientific, and technological improvement.
* Countries like China, India, and Brazil took millions of people out of poverty.
* The information technology changed how business, governments, and people communicate.
* There have been medical breakthroughs for various diseases which have improved global health.

Dealing with uncertainty in the stock market isn’t too difficult. At my age (56), I have seen a few economic cycles. I know that markets go up and markets go down. The best action I can take is to sit on my hands and do nothing.

In our regular life, it’s more challenging. Life also works in cycles, but these cycles can be more difficult to discern, and we don’t always know what to do.

Market cycles

How to deal with uncertainty in Life

These are some tips from our community on how to deal with uncertainty:

Kelly Bron Johnson, IDEA Advisor Supporting Businesses to Create Completely Inclusive Workplace Cultures: I won’t lie – it makes me feel very destabilized. It affects all my planning. For example, right now the teachers are on strike and my kids are home from school. We don’t know how long it will go for. It’s hard to make plans and to work without knowing how long the strike will last. I just try to take one day at a time and one task at a time and keep going. Continue Reading…

Real Life Investment Strategies #1: Will Geopolitics Ruin my Financial Plans?

Lowrie Financial Canva Custom Creation

By Steve Lowrie, CFA

Special to Financial Independence Hub

Now that we’re well into 2024, it’s time to turn the page on last year’s “Play It Again, Steve – Timeless Financial Tips”.

To shift gears, I recently polled my blog post readers, asking them what was on their mind and, although specific topics were varied, the underlying question resounded:

Timeless financial tips are well and good – but how do they apply to my investment decisions in real life?

To address that question, I’m launching Lowrie Financial’s “Real Life Investment Strategies.” Each post in this new series will use case studies to illustrate the choices real people are making, as they contemplate money management concerns in real time.

Active Concerns around Geopolitical Events and their Impact on your Financial Future

In our blog post readers survey, there were several responses with a clear theme:

  • worrying thoughts about current events,
  • what the geopolitical climate may mean to your money, and
  • what investment strategies to avert setbacks for your financial future

So, let’s address some of the more worrisome flash points looming large at this time: the world, its politics, and its politicians.

Of course, it’s natural, and advisable, to want your investments to weather the market storms wrought by geopolitical forces. The catch is there’s always a crisis going on somewhere and we never know for sure how it’s going to play out, until it has. That’s true whether it is history repeating itself, a new and unexpected upset, or (usually) a blend of both.

The other reality is that the most significant risks, with the greatest negative financial impact, are those you don’t see coming.

For example, in the last 25 years, we have had to deal with these three and unexpected and significant events:

If there is any good news in these events, which I realize is a stretch, they only come around every ten years or so.

That’s why I’ve long advised the best way to protect your wealth during each crisis du jour is to avoid getting tossed around in its waves. We seek to accomplish this by building — and maintaining — a steadfast, globally diversified portfolio designed to skim across the rough surfaces toward more dependable destinations.

Let’s use a couple of case studies to illustrate how we manage real-life portfolios in the face of ever-evolving, often unnerving current events. Although my stories will be drawn from real conversations and actual investor experiences, they will be fictionalized to protect individual privacy. In particular, names are not real.

The Accumulators: Suzie and Trevor Hall

Financial Accumulators Suzie and Trevor Hall

Meet the Halls

Suzie and Trevor are hard-working professionals in their late 40s, with two teenage children. They own a home, which is almost fully paid off. While they intend to stay in their home long-term, the place could definitely use some renovations.

Current Lifestyle: The Halls have been good about living within their means, while also sustaining a satisfying lifestyle. They take occasional vacations, but they’ve also diligently saved excess cash flow over time.

Financial Goals: The Halls hope to retire within 15–20 years. They also want to fully fund their children’s education, as well as complete those home renovations before they retire.

Investment Profile: Suzie and Trevor consider themselves to be conservative investors. They would like their portfolio to continue to grow. But they also worry: what if today’s global crises really do a number on their nest egg? They think they should avoid experiencing much more than a 30% hit during any given market downturn.

Suzie and Trevor’s Financial Planning Action Items

Here’s how I might advise the Halls moving forward:

  1. Start with planning, not investing.

 “How will the 2024 U.S. presidential elections impact our investments?”

Except in hindsight, the only correct answer is, “Who knows?”

As we’ve covered before in the 2020 blog, Should I Change My Investments During an Election?, leading with these kinds of queries steer the Halls’ conversation toward the market’s concerns, instead of their own.

They are better off considering geopolitical volatility in a more manageable context:

  • What is your expected retirement date?
  • Other lifetime goals?
  • Personal investment style? and so on.

True, personal goals may shift over time. But defining manageable targets helps us define desired saving targets, rate of return expectations, and asset allocations for meeting them. As the Halls’ own circumstances and larger world events evolve, we can review and update their progress annually.

  1. Establish a spending plan.

Next, I’d advise the Halls to use their available cash flow to support their three key mandates: saving for their kids’ education costs, completing their home renovations, and investing toward retirement. Three goals, calling for three different investment amounts, return expectations, and timeframes.

  1. Invest systematically.

Next, we can invest systematically across future unknowns. For example, whether Russia and Ukraine remain at war indefinitely or eventually reach an accord, global markets are expected to trend upward over time; we just don’t know when or where the growth spurts will occur. For the Halls, I may recommend adding assets monthly, so they can dollar-cost average across varied market conditions. If (or more likely, when) another crisis occurs and prices decrease, they may even want to increase their saving and investing during these “buy low” windows of opportunity.

  1. Do a lifeboat drill.

Suzie and Trevor had said they wouldn’t want their portfolio to ever drop by more than 30% as they pursue expected market returns. But would they really be ok with that much of a drop? I like to replace vague percentages with real dollar declines. We would look at past market downturns and corrections, how long they lasted from start to finish, and how long the Halls’ target portfolio would have taken to recover from each. This “life-boat drill” helps them use realistic numbers for withstanding real future declines.

  1. Remember, it’s priced in.

How will today’s heightened Middle East tensions play out for Suzie and Trevor’s investments? Once again, we don’t know; we can’t know. But I do know, whatever happens next, “by the time you’ve heard the news, the collective market has too, and has already priced it in” (as we wrote in our first timeless tip, Play It Again, Steve – Timeless Financial Tips #1: Repeat After Me: “It’s Already Priced In”). Besides, since the Halls are still in their wealth accumulation years, a price decline could even come as welcome news. Lower prices today give future market prices more room to grow over time.

In our next case study, let’s look at how today’s geopolitical pressure points may impact a couple closer to retirement.

Almost Ready to Retire: Jim and Carol Oates

Financial Almost Ready to Retire Jim and Carol Oates

Meet the Oates’

Jim and Carol are in their early 60s. Jim owns a business and Carol manages the household. They became empty nesters when the youngest of their three children recently moved to British Columbia. They own their principal home outright and are considering purchasing a winter property in warmer climes.

Current Lifestyle: To pursue a satisfying retirement, the Oates were careful to avoid lifestyle creep during their career years. Now, Jim is making moves to sell his business, and their retirement days are fast approaching. They expect to support their retirement lifestyle with the proceeds of Jim’s business sale, along with their investments. Will they be ready to loosen up a bit? Yes … and no. Maybe? They wonder whether they will have enough to do so.

Financial Goals: The Oates would like to make significant travel plans, after many years of shorter getaways, closer to home. (A business owner is never fully “off duty.”) Plus, if the sale goes well, they’d like to help their children buy into today’s housing market. Continue Reading…

Dividend investing vs Index Investing (& Hybrid strategies)

By Bob Lai, Tawcan

Special to the Financial Independence Hub

 

Ahh, the age-old debate… dividend investing vs. index investing. Is one better than the other?

Well, like any good debate, there is much evidence that can support both sides of the argument.

For example, dividend investors will quickly point out that over the long term, dividend stocks return better than non-paying dividend stocks.

SP500-and-SP-500-with-Dividends-Reinvested-Returns-Chart

On the other hand, index investors will point out that dividends are irrelevant.

I’m not going to argue which one is better on this post, but you can probably figure out where we stand given we are hybrid investors.

When it comes to investing, it’s super easy to just take all the numbers, plug them into the different formulas, and analyze the results to the nth degree. There have been a lot of books on how to invest based on mathematical formulas or theories.

They are all good and all, but I would argue that investing in real life is very different than running mathematical analysis.

30% investment strategy vs 70% psychology

In my short +15 years of DIY investing career, I have come to realize that investing in real life is not just about investment strategy and analysis. Rather, I believe investing in real life is about 30% investment strategy/theory and 70% psychology.

Psychology plays an important role in deciding whether your investment is going to be a success or a failure. It is also the number one reason why people end up buying high and selling low even though they should be doing the complete opposite.

When your hard-earned money is melting away faster than ice cream on a sunny day, all you care about is preserving whatever money you have left, so you end up selling low on emotion. On the other hand, when stocks are going higher and higher and you’re seeing everyone and their dogs making money hand over fist (and paw ha!), you want to get in on the action as well, so you end up buying high on emotion. Continue Reading…