All posts by Financial Independence Hub

Why the 4% rule is actually (still) a decent rule of thumb

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By Mark Seed

Special to the Financial Independence Hub

I’m not a huge listener to podcasts but I do enjoy them from time to time – beyond the ever popular Joe Rogan Experience that is.

Recently, I found the BiggerPockets Money Podcast with financial independence enthusiast, financial planner, along with a host of other financial designations Michael Kitces very interesting.

For an hour+ the hosts of that podcast dove deep into the simple math behind the 4% safe withdrawal rate so many investors in the early retirement community rely on, and, why Michael Kitces ultimately believes the 4% rule actually remains a very good rule of thumb to plan by.

If you don’t have an hour and 22 minutes to listen to this episode (not many people do…) then no worries, I’ve captured the essence of the interview from this solid podcast below. Kudos to the folks at BiggerPockets for the deep dive.

Let me know your thoughts about the 4% rule in the comments section. I look forward to them.

Mark

Background – what is the 4% rule???

In general terms, the “4% rule” says that you can withdraw “safely” 4% of your savings each year (and increase it every year by the rate of inflation) from the time you retire and have a very high probability you’ll never run out of money.

Some things to keep in mind when you read this:

  1. This ‘rule’ originated from a paper written in the mid-1990s by a financial planner in the U.S. who looked at rolling 30-year periods of a 50% equity/50% fixed income asset allocation. His name was Bill Bengen.

4% rule

You can find the details of the report here.

2. This rule was developed almost 30-years ago. A lot has changed since then including real returns from bonds. There are also products on the market now that allow investors to diversify far beyond the mix of large-cap U.S. stocks and treasuries the Bengen study was based on.

3. The study was designed to answer the question: “How much can I safely withdraw from my retirement savings each year and have my nest egg last for the duration of my retirement?” Little else.

4. The study assumed (at the time) most retirees would retire around age 60. Therefore, a “good retirement” would be ~30 years thereafter; what is the safe withdrawal rate to make it through retirement until death.

5. The rule takes none of the following into account:

  • Will you (or your spouse) have a defined benefit pension plan?
  • Do you expect to receive an inheritance?
  • Will you downsize your home?
  • Do you have a shortened life expectancy or health issues that should be considered?
  • Will you continue to earn some form of income in your senior years?
  • And the list of what ifs goes on and on and on

My 4% rule example:

My wife and I aspire to have a paid off condo AND own a $1 M personal portfolio to start semi-retirement with in the coming years.

If we can grow our portfolio to that value, markets willing, the 4% rule tells us we could expect to withdraw about 4% of that million nest egg (or about $40,000 per year indexed to inflation) and have virtually no concerns we would run out of money for the next 30 years (mid-70s by then).

To the podcast and my takeaways!

On the subject of a 4% withdrawal rate – is that conservative?

Michael: Yes. If your time horizon is 30-years, it probably is. Because, when Bengen looked at his different rolling periods … he found the worst case scenario was a withdrawal rate of about 4.15%. “It was the one rate that worked in the worst historical market sequence…”

Does recent data say anything different since the 1994 study?

Michael: Not really. Continue Reading…

4 essential End of Life preparations

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By Sia Hasan

Special to the Financial Independence Hub

End of life preparations are difficult to think about, for obvious reasons, but they’re something that everyone needs to work out in advance. Ensuring the best possible situation for you and your family, or for loved ones, is crucial. When a loved one passes, it’s a hard time for everyone involved, and squaring away your end of life preparations gives your family and friends much less to worry about. Here are some key ways you can make end of life preparations in a timely and intelligent fashion.

Get a Life Insurance policy

Life insurance is likely the single most important facet of end of life preparations, and that’s because life insurance provides your loved ones with funds that can allow them to make funeral arrangements and also continue to thrive in your absence. Because of the weight of the topic, the average person doesn’t even consider life insurance until later on in life. However, it’s best to set up your life insurance policy as early as possible. For one thing, the cost of a life insurance policy increases with your age, and your policy generally provides greater benefits the longer it remains in effect. When setting up your life insurance policy, carefully consider your dividend options, because they vary tremendously, and the right answer depends on your needs and your circumstances.

Write a Will

In much the same way one declines to think about life insurance, a person’s will is often relegated to one’s twilight years. However, the reasons for getting it out of the way early are very different. Continue Reading…

Renting out your Home: Here’s what you need to remember

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By Rebecca L. Clower

Special to the Financial Independence Hub

There are many valid reasons why a house is to be rented. Maybe you don’t have to sell to buy one, and you could like to maintain it as a property for your investment. If they purchased the property, the rental of the house could have been your plan.

Other homeowners may still have to rent because they’ve got to move and can’t sell yet. Perhaps they were transferred by an employer and realize that they can’t sell their house because the present market is only not suitable for home sales. Sellers of submarine homes would prefer not to sell in the short term and could choose instead to ride the marke

There is, in all cases, a correct and incorrect way to lease your property. Although some errors may be minor, others may be much more serious. At Tamarindo Real Estate | Costa Rica Real Estate and Rentals, any errors are corrected to provide the best experience.

How to prepare your Home for Rentals

On the downstream market, the rental of the house is probably not going to get away. The tenants at these times are more careful and more selective because of the increased availability and the expectations of rentals.

Make sure the equipment works and is in good health for your new tenant, by thoroughly cleaning your home. You can secure this area from the rest of your home if you have decided to rent a room or a place in your house.

When the house is straightened out, develop a list that describes what it is attractive to put on the market. Take note of the features you want commonly such as washing and drying facilities, air conditioning,g and garage. To “sell” the property, use the rental conditions.

Next, post a home ad on renowned websites and in local journals. Furthermore, some real estate agents will help owners rent out their homes, though if the agent finds you a renter, he or she will make a commission.

Alternatively, you can employ a property management firm, but you have to pay for them. You have to rent a house. The costs vary by company but often vary between 8% and 10% of the monthly rent, and additional charges may apply.

It may seem like a simple task to transform your home into residential property. Still, it is important that you talk to real estate lawyers and accountants to see to it that you comply with tax law, zoning regulations, and local property rules.

Know what costs are tax deductible

It is essential to know exactly what costs are deductible. You can qualify for taxation deductions. Also, there are limitations as to how much you can deduct annually and how much you can deduct may differ from the rental activity in your tax return. Continue Reading…

Small Business owners are subsidizing big Insurers during Covid

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By Robert J. Crowder

Special to the Financial Independence Hub

Small owner-managed businesses ravaged by Covid-19 are subsidizing big insurance companies during this pandemic and don’t even know it. In many cases, they have been paying for several months the full cost for employee health and benefits plans while all or most services are no longer provided. And if they are now starting to get a reduction in premiums, it’s not enough.

Since mid-March, dentists and other professional healthcare providers such as chiropractors, physiotherapists and massage therapists have been shut down, with the exception of emergency treatments. But small businesses continued to pay full benefits premiums while their employees didn’t use these services.

The numbers tell the tale

The value of premiums paid during the coronavirus pandemic has been truly staggering. Three-quarters of Canada’s 600,000 small businesses have employee benefits plans and over the past three months they paid out approximately $1.6 billion in premiums for benefits coverage at a time when virtually no services were provided. Keep in mind those same businesses and the business owners were suffering because of Covid.

Using claims data since the pandemic began (representing thousands of Canadian small businesses), it is clear that the number of claims for health and dental services is down 50% with some components of benefits plans, such as dental visits, down as much as 95%!

A real-life example

Let’s take an actual owner-managed small business, a distribution facility with 25 employees. The owner pays $9,500 per month in premiums for an employee benefits plan with a major insurer that includes comprehensive health and dental coverage. As the Covid crisis unfolded in mid-March, company sales plummeted dramatically and customers held back payment, causing an acute cash crunch.

As the crisis deepened, the owner was able to reduce non-essential expenses and negotiate a reduction in rent. Benefits represented a major part of expenses but actual usage came to a halt for dental and paramedical services. The owner asked his insurer to temporarily pause unused coverage in order to conserve cash, which would have meant a savings of over $6,000 per month, but was told it wasn’t possible.

By mid-June the company had paid out almost $20,000 in cash during a crisis when not a single employee had been to visit a dentist, physiotherapist, massage therapist or any other practitioner covered under the benefits plan.

Too little, too late

Thus, most small businesses paid full premium for their benefits plans in March, April and May, and only in June did some start to see any credit from large insurers, some of which are now offering future credits to mitigate lower numbers of claims. More on this in a moment. But still, that is $1.6 billion of unnecessary premiums that small business owners could have used to stabilize their businesses and keep people employed during the height of the crisis when their cash flow was severely impacted. Continue Reading…

Spousal Loans: Loan money to your spouse, save on your tax bill

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By John Natale

Special to the Financial Independence Hub

Canadians often consider tax-saving strategies on an individual basis but don’t consider how their families can also contribute to lowering the tax bill. While often overlooked, family tax-saving strategies are effective and legitimate ways for households to save big on tax dollars each year.

The Canadian government recently announced the reduction of its prescribed interest rate from 2% to 1% starting on July 1, 2020 – the first time the prescribed interest rate has been this low since April 2018. For Canadian families, this represents a significant opportunity to make a loan directly to family members or where minors are involved, to a family trust, and use this income-splitting strategy to their advantage.

How does it work?

If you loan your spouse money for the purpose of income-splitting, the prescribed rate (the rate of interest you charge your spouse) remains fixed for the term of the loan. Through this tax-saving strategy, that many may not be aware of, transferring income from a high-income earner to a family member in a lower tax bracket allows Canadian families to pay less taxes overall, potentially saving hundreds or even thousands of dollars per year.

Although the Canada Revenue Agency (CRA) restricts most forms of income-splitting, there are legitimate ways to split taxable income with a spouse or minor child such as this strategy. Provided the loan is properly structured, the loan proceeds can be invested by the spouse receiving the loan, with the income taxed at their lower marginal rate.

Of course, one of the keys to a successful income-splitting strategy is to ensure that investment returns are higher than the interest rate charged on the loan: so keep that in mind when choosing your investment.

A real-life example

Let’s suppose spouses Jack and Jill are looking for ways to lower their family tax bill. They are in different tax brackets, Jack at 48% and Jill at 20%. Jack loans Jill $100,000 at a prescribed rate of 1%. Jill invests the money and earns 4% – or a total of $4,000. She then pays Jack the $1,000 loan interest and deducts the same amount as “loan interest expense.”  Jill pays $600 in tax on the remaining $3,000, and Jack pays $480 on his interest income. Continue Reading…