All posts by Financial Independence Hub

Misleading Retirement Study?

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Ben Carlson, A Wealth of Common Sense

By Michael J. Wiener

Special to Financial Independence Hub

 

Ben Carlson says You Probably Need Less Money Than You Think for Retirement.  His “favorite research on this topic comes from an Employee Benefit Research Institute study in 2018 that analyzed the spending habits of retirees during their first two decades of retirement.”  Unfortunately, this study’s results aren’t what they appear to be.

The study results

Here are the main conclusions from this study:

  • Individuals with less than $200,000 in non-housing assets immediately before retirement had spent down (at the median) about one-quarter of their assets.
  • Those with between $200,000 and $500,000 immediately before retirement had spent down 27.2 percent.
  • Retirees with at least $500,000 immediately before retirement had spent down only 11.8 percent within the first 20 years of retirement at the median.
  • About one-third of all sampled retirees had increased their assets over the first 18 years of retirement.

The natural conclusion from these results is that retirees aren’t spending enough, or that they oversaved before retirement.  However, reading these results left me with some questions.  Fortunately, the study’s author answered them clearly.

At what moment do we consider someone to be retired?

People’s lives are messy.  Couples don’t always retire at the same time, and some people continue to earn money after leaving their long-term careers.  This study measures retirement spending relative to the assets people have at the moment they retire.  Choosing this moment can make a big difference in measuring spending rates.

From the study:

Definition of Retirement: A primary worker is identified for each household. For couples, the spouse with higher Social Security earnings is the assigned primary worker as he/she has higher average lifetime earnings. Self-reported retirement (month and year) for the primary worker in 2014 (latest survey) is used as the retirement (month and year) for the household.

There is a lot to unpack here.  Let’s begin with the “self-reported retirement” date.  People who leave their long-term careers tend to think of themselves as retired, even if they continue to earn money in some way.  Depending on how much they continue to earn, it is reasonable for their retirement savings either to decline slowly or even increase until they stop earning money.  What first looks like underspending turns out to be reasonable in the sense of seeking smooth consumption over the years.

The next thing to look at is couples who retire at different times.  Consider the hypothetical couple Jim and Kate.  Jim is 6 years older than Kate, and he is deemed to be the “primary worker” according to this study’s definition.  Years ago, Jim left his insurance career and declared himself retired, but he built and repaired fences part time for 12 more years.  Kate worked for 8 years after Jim’s initial retirement.

Their investments rose from $250,000 to $450,000 over those first 8 years of retirement, declined to $400,000 twelve years after retirement, and returned to $250,000 after 18 years.  Given the lifestyle Jim and Kate are living, this $250,000 amount is about right to cover their remaining years.  Although Jim and Kate have no problem spending their money sensibly, they and others like them skew the study’s results to make it seem like retirees don’t spend enough.

What is included in non-housing assets?

From the study:

Definition of Non-Housing Assets: Non-housing assets include any real estate other than primary residence; net value of vehicles owned; individual retirement accounts (IRAs), stocks and mutual funds, checking, savings and money market accounts, certificates of deposit (CDs), government savings bonds, Treasury bills, bonds and bond funds; and any other source of wealth minus all debt (such as consumer loans).

So cottages and winter homes count as non-housing assets.  This means that a large fraction of many people’s assets is a property that tends to appreciate in value.  Even if they spend down other assets, the rising property value will make it seem like they’re not spending enough.  It is perfectly reasonable for people to prefer to keep their cottages and winter homes rather than sell them and spend the money. Continue Reading…

Should you have 100% of your portfolio in stocks?

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The 100% equity ETFs from iShares and Vanguard/Canadian Portfolio Manager

By Mark Seed, myownadvisor

Special to Financial Independence Hub

A reader recently asked me the following based on reading a few pages on my site:

Mark, does it make sense to have 100% of your portfolio in stocks? If so, at what age would you personally dial-back to own more cash or GICs or bonds? Thanks for your answer.

Great question. Love it. Let’s unpack that for us. 

References:

My Dividends page.

My ETFs page.

Should you have 100% of your portfolio in stocks?

Maybe as a younger investor, you should.

Let me explain.

Members of Gen Z, which now includes the youngest adults able to invest (born in the late-1990s and early-2000s), represent a cohort that could be investing in the stock market for another 60 more years. 

According to a chart I found on Ben Carlson’s site about stuff that might happen in 2023, over 60+ investing years in the S&P 500 (as an example) historical indexing performance would suggest you’d have a better chance of earning 20% returns or more in any given year than suffering an indexing loss. Pretty wild.

S&P 500 - 100 stocks

Source: A Wealth of Common Sense. 

Shown another way as of early 2023:

S&P 500 Returns Updated

Source: https://www.slickcharts.com

This implies younger investors, in my opinion, should at least consider going all-in on equities to take advantage of long-term stock market return power when they are younger given:

  1. As you age, your human capital diminishes – your portfolio (beyond your home?) can become your greatest asset.
  2. Younger investors can also benefit from asset accumulation from periodic price corrections – adding more assets in a bear market; allowing assets to further compound at lower prices when corrections or crashes occur (i.e., buying stocks on sale).

Consider in this post on my site:

In the U.S.:

  • a market correction occurs at least once every 2 years, of 10% or more
  • a bear market at least every 7 years, where market value is down 20% or more
  • a major market crash at least every decade.

And in Canada for additional context:

The C.D. Howe Institute’s Business Cycle Council has created a classification system for recessions, grouping them together by category.

According to the council: Continue Reading…

Managing your Finances after Immigrating to the United States

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Pexels photo by Matt Barnard

By Devin Partida

Special to Financial Independence Hub

Every day, the United States welcomes people worldwide who epitomize the American dream. After settling into their new country, many buy homes, launch businesses, become outstanding citizens and live prosperous lives.

However, moving to another country often presents financial challenges. Those new to the U.S. should remember these tips when setting up and managing their assets after immigrating.

1.   Open a Spending Account

A spending account will allow you to store your money and make everyday transactions safely, such as clothing or groceries. It may help to see if your bank in your native country has international branches. In that case, you could likely open an account in the U.S. without changing institutions.

TD Bank and RBC Bank are just some of the Canadian financial institutions with U.S. branch offices. If not, many banking institutions simplify opening a new spending account and may even offer some perks.

2.   Ask Questions

There is much to know about financial management in a new country. The best way to learn is to reach out for support. Some experts — bankers, accountants and financial advisors — specialize in helping immigrants and will offer guidance on taxes, investing, and other benefits.

Likewise, seeking community organizations or local government agencies to bring yourself up to speed is a good idea. Community groups in particular are an excellent way to connect with other immigrants, and learn with and from one another.

3.   Build Credit

Building credit will allow you ample opportunities in your new country: a daunting feat if you’ve established excellent credit in your native country and must start over. Fortunately, some apps allow you to import your previous credit.

Like any U.S. borrower, establishing legal residency and maintaining good credit is crucial for loan eligibility. Lenders require at least two to three years of credit history to qualify. With excellent credit, newcomers can take out a loan to purchase a home, refinance or take out a second mortgage. You can use a second mortgage to pay off credit cards or fund home projects.

4.   Set a Budget

Immigrating to the United States can be expensive, with international relocation costs totalling anywhere between $2,000 USD and $10,000 USD. With these and the various expenses that follow, it’s important to create a budget for your relocation.

U.S. goods may cost less or more than your native country. Once you arrive, you’ll have a much better idea of what to expect from your monthly spending. Items you may not consider at first are car and health insurance, or the fees to obtain a driver’s license. Creating a budget by categorizing your spending — food, medical, housing and transportation — will help you determine how much you’ll need to set aside from your paycheck. Continue Reading…

10 Lifestyle Changes that could Lower your Life Insurance Premiums

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Image courtesy FitInsure.ca

By Lorne Marr, Jane Cotnam and Mohammed Azeez Amer,

FitInsure.ca

Special to Financial Independence Hub

Getting the best life insurance premium for the highest possible coverage amount is important. Life insurance is what stands between your and your loved ones’ financial future should something catastrophic happen. Whether it is critical illness insurance that pays a lump sum to the life insured to help with the costs of treatment or a bucket list trip, or life insurance that goes to a beneficiary, applicants have the power to lower their premiums. How? Through lifestyle changes.

Each applicant’s lifestyle figures heavily into the underwriting process for traditional/standard and rated policies. While simplified issue insurance does not have a medical exam, lifestyle/health questions are asked; the answers affect both the success of the application and the premium. Guaranteed issue insurance has no questions or medical exams – but this is typically reserved for applicants as a last resort. Guaranteed issue is expensive, has limiting conditions, and offers low coverage.

By taking care of the following lifestyle factors today, applicants greatly improve their access to favourable premiums on standard insurance.

10 Lifestyle Factors and how they Impact Life Insurance Premiums

  1. Quit smoking – Smoking has been proven to be a major risk factor for many health issues including cancer, heart disease, and stroke.
  2. Lose weight – Being overweight or obese increases your risk of developing chronic diseases such as diabetes, heart disease, and stroke.
  3. Reduce alcohol consumption – Excessive drinking can increase your risk of developing liver disease, high blood pressure, stroke, and other health problems.
  4. Get your blood pressure under control – High blood pressure increases your risk of developing several serious diseases. Keeping your blood pressure under control through diet, exercise, and medication will help reduce this risk.
  5. Lower your cholesterol – High cholesterol increases your risk of developing heart disease, among other problems. Eating a healthy diet and exercising regularly will help lower cholesterol levels.
  6. Increase water intake – Water makes you feel full faster so that you eat less food overall, which helps with weight loss efforts as well as reducing the amount of sugar in the body – and that helps with diabetes management too! Drinking more water throughout the day is an easy way to improve overall health.
  7. Meditate – Meditation has been shown to have positive impacts on both mental health and physical health by reducing stress levels, which in turn helps with weight management efforts too. Taking some time each day to practice meditation is an easy way to improve overall well-being.
  8. Eat more vegetables – Eating more vegetables is an easy way to improve overall nutrition while helping to lower life insurance premiums at the same time. Vegetables are packed with vitamins, minerals, antioxidants, and fibre, which all work together to promote better health outcomes.
  9. Exercise – Regular exercise has been proven to have numerous benefits for both physical and mental well-being including improved moods, increased energy levels, and improved cardiovascular fitness, which all contribute towards lowering life insurance premiums.
  10. Develop good sleep habits – Getting enough quality sleep each night is essential for maintaining good physical and mental health.

A Closer Look: Examples

Insurance broker Jane Cotnam shares a story about the power of weight loss impacting life insurance premiums.

“I had a client who applied for level CI with Canada Life. She was rated for her weight,” says Cotnam. “Bordering on obesity, this was the determining factor in her finally losing the weight. It’s been six months and she is down 50 pounds so far. She’s so much more confident now and will continue to lose weight in order to get a standard premium.”

Broker Mohammed Azeez Amer is also happy to share details by showing how Equitable Life’s Stop Smoking Incentive Program (ELSSIP) works.

“Applicable to Equation Generation IV and Equimax, the ELSSIP can be offered to applicants that have ‘quit smoking for 12 consecutive months within the first two policy years. Equitable Life will refund the difference between what they paid as a smoker and what they would have paid as a non-smoker for a maximum one month period. Eligibility is subject to certain conditions including a negative cotinine level and evidence of continued insurability. Term clients may be eligible to move from a Class 4 Preferred Smoker or Class 5 Smoker to a Class 3 Non-Smoker.’”

The Best Way to Get the Best Rate

Taking care of one’s health improves more than life insurance premiums. It improves quality of life and longevity. Health is a gift you can give yourself, and then enjoy its many resulting benefits. Yet, good health is not always in our hands. Illnesses or accidents can rob us no matter our good intentions. Continue Reading…