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, myownadvisor

Special to Financial Independence Hub

I’m not a huge listener to podcasts but I do enjoy them from time to time …

A few years back, I listened to a BiggerPockets Podcast with financial independence enthusiast, U.S. financial planner, commentator and educator Michael Kitces as a guest.

This podcast delved into the 4% safe withdrawal rate that so many, many, many….DIY 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 – to a point. 

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 below.

In this updated post (with some new links), I share my own thinking on this subject and why I won’t use the 4% rule myself for any detailed planning work for us.

Could the 4% rule remain a decent rule of thumb?

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

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 > $1M personal portfolio to start semi-retirement with. We hope those days are near. We’ve always considered the 4% rule a decent starting point for our portfolio drawdown ideas but that’s where it ends for us.

Using that desired investment value, if we can grow our portfolio to over $1M, the 4% rule tells us we could expect to withdraw about 4% of that million-dollar nest egg ($40,000 per year indexed to inflation) and have virtually no concerns we would run out of money for the next 30 years (early 80s).

But just living off dividends or distributions (which is about 4% of our portfolio yield) doesn’t make much sense in perpetuity. I’ll come back to that point in a bit.

To the podcast and some 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. Michael and his team replicated the Bengen study and generally arrived at the same number. And that’s not the only good news … 50% of the time using the 4% rule you will as Michael puts it “double your wealth.”

So, 50% of the time (market returns willing) you will finish with almost X3 wealth on top of a lifetime of spending using the 4% rule.

“…the reality remains that by withdrawing at “only” a 4% initial withdrawal rate, the overwhelming majority of the time retirees just finish with a massive excess amount of assets left over!”

4% rule Kitces

Check out the outstanding Michael Kitces study on the 4% withdrawal rule – that shows the extraordinary upside potential in sequence of return risk.

From that post:

“…taking even “just” a 5% initial withdrawal rate (and adjusting spending for inflation in each subsequent year) actually runs out of money in nearly 25% of historical scenarios… even though a higher 5.4% withdrawal rate “worked” when projecting the lowest 30-year average returns in history!”

What if you retire at the worst possible time? Example, on the eve of the 2008-2009 financial crisis?

Michael: Doesn’t matter. 4% worked. Thanks to a massive bull run for the 10 years that followed, as bad as the 2008-2009 financial crisis was, you were still trending far ahead. Continue Reading…

Millennials and Gen Z struggling with debt but open to finding solutions

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BDO Affordability Index Spring 2023 (CNW Group/BDO Canada LLC)

By Jennifer McCracken, BDO

Special to Financial Independence Hub

The cost of living has spiked significantly in the past year and Canadians across the country are feeling the pinch. Younger Canadians between the ages of 18 and 34 are particularly affected, having not had the chance to build up as much savings as older generations.

BDO’s newest Affordability Index shows that 45% of young Canadians say their debt load is overwhelming and they’re unsure how to tackle the problem. That’s higher than those between the ages of 35 to 54, where 39% say they’re in that situation and significantly larger than the 13% of Canadians between the ages of 55+ who feel the same.

Credit-card debt appears to be the main reason younger Millennials and Gen Z are falling behind, with 37% of 18-34 year olds saying this form of debt causes them the most stress. Mortgage debt and student debt were the next closest reasons, with 22% for the former and 21% the latter.

What are Canadians doing to cope with inflation and rising debt?

It’s not surprising then that 49% of younger Canadians say they’re reducing their living expenses to cope with inflation and the high cost of living, while 32% say they’re lowering how much they contribute to savings as well.

While younger Canadians may be struggling more than their older counterparts, they’re also more open minded when it comes to finding solutions.

The Affordability Index indicates that younger generations are much more willing to look for new streams of revenue compared to older ones. Some 24% say they are adding part-time work to keep up with inflation, compared to just 13% of 35-54-year-olds and only 5% of those 55 or older.

Young Millennials and Gen Z would also find side hustles and gig work to increase their income. Of those doing this, 35% said it was to help them pay for essentials and 27% say it’s to help them pay down debt.

It’s not just part-time and gig work that younger Canadians are using to fight inflation, they’re also looking for higher paying jobs. A total of 13% say they’ve recently found a new full-time job in response to the affordability crisis. That’s compared to just 7% of those aged between 35-54 and only 1% of those 55 and older.

However, while younger generations are keen to seek out new ways to increase their income, they’re very unfamiliar with many of the most common debt relief options available.

A lot of people just don’t know what their debt relief options are  …

Only 19% of them said they were familiar with the idea of bankruptcy, 11% said they know what a debt management plan is and 9% with a debt consolidation loan. Continue Reading…

The Value of Advice

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By John DeGoey, CIM, CFP

Special to the Financial Independence Hub

Over the past few years, there have been dozens of articles in magazines that are distributed to financial advisors about both the value and cost of financial advice.

Most are overly simplistic to the point of being inaccurate and downright misleading.  As you might imagine, any publication that caters to financial advisors will have a decidedly pro-advisor editorial perspective.  That’s all fine and well, but there are nuances that are glossed over too frequently that cause some observers to worry about the soundness of financial advice echo chamber that many advisors seem to live in.

Since I’m an advisor myself, it should be obvious that I am a strong proponent of quality financial advice.  The concern that I have is that within my own industry, the financial media has taken that perspective a step further and is moving toward boosterism that is almost jingoistic.  There are two things that the ‘for advisors only’ media seems to gloss over.  In both instances, the short shrift is because a more fulsome discussion might be awkward for certain elements of the industry.

The two things “Advisors Only” media gloss over

The two issues are:

1.) The distinction between good advice and bad advice. This is admittedly subjective, but the media doesn’t ever seem to venture into making a distinction because it seems unwilling to alienate a segment of the advisor population.  Surely to goodness, not all advice is good advice and not all advisors are good advisors.

2.) The ongoing focus on the cost and value of advice while simultaneously and conspicuously remaining silent on the cost and value of investment products. Clients pay for both advice and products, so why explore one aspect ad nauseum while saying almost nothing about the other?

Let’s begin by looking at the touchy subject of what constitutes good advice in the first place.  Obviously, there is no single best set of answers to this matter.  Continue Reading…

Less than Half of Canadians have a Will and many don’t even know where to start: NIA

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By Mark Venning, ChangeRangers.com

Special to Financial Independence Hub

Following Canada’s National Institute on Ageing (NIA) since their beginning in 2016, it’s been a year since I last commented on the value of the NIA as a knowledge resource for Canadians on topics related to ageing and longevity.

And I would say, their regular reports, generated often in collaboration with other groups, are also a resource for anyone engaged in comparative research outside this country.

Now here’s today’s feature on one report from the NIA files from 2023 so far

Where There’s a Will, There’s a Way: Exploring Canadian Perspectives on Estate Planning.

When I first received my NIA email notification of this report on May 17th, I was not surprised in the least by the lead headline: “Less than Half of Canadians Have a Will – and Many Don’t Even Know Where To Start.” For over twenty plus years, back when I was working in partnership with financial planners to deliver seminars on later life transitions, this was always a commonly known fact, and most people who didn’t have a Will knew that they should have had one.

The April 2022 Ipsos survey for this NIA report was conducted in collaboration with RBC Royal Trust. As the report details, it all starts with overall Estate Planning, and this includes setting up a Will, Powers of Attorney (POA) for care and property and, what was less discussed twenty years ago, Advanced Care Planning. As it happens my Will and POAs are ready for some small updating, but this time advanced care will also be on the agenda.

So if, as the report suggests, people know the value of planning and the subsequent sad consequences from not doing so – what’s the reason for inaction? I recall facilitating group conversations where literally some have said things like “if I do a Will, I know fate will bring me an early death” or, “I don’t have enough of an estate to worry about.” Of course the other concern I heard was about the perceived high cost of legal fees which halted the move to getting to the matter.

How fortunate for me, straightforward household budgeting and for that matter, estate planning Wills and POAs were things I learned early on at home from my parents, not from the education system. Today, learning from professionals in these topic areas should not be that intimidating or made difficult to access. Regardless of your age, picking up this report would be a great start. Continue Reading…

A Self-Checkup on your Financial Health to help your Mental Wellbeing

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Image courtesy FPCanada

 

By Sahar Abdul Zahir, BlueShore Financial

Special to Financial Independence Hub

Many people view money as simply numbers that get you from point A to point B, and may not make a connection between how finances can also impact mental and physical health. However, FP Canada’s 2022 Financial Stress Index survey found that 38% of Canadians believe finances are their biggest source of stress, ahead of both health and relationship issues. More alarmingly, FP Canada’s study also found that 43% of respondents had lost sleep over financial anxiety.

There are a variety of reasons why many of us do not seek professional advice for our financial problems, ranging from not thinking we need the help, to being embarrassed, or not knowing where to go. Regardless of the reason, there is a clear link between finances, anxiety, stress, and mental health, and avoidance of the problem is not the answer. The good news is, there are many steps you can take today to help get yourself back on track.

Understand your relationship with money

Many people still believe that talking about money is taboo, or feel embarrassed to discuss financial troubles, even with a professional. Financial literacy should begin at an early age and continue as a lifelong learning process. Having an open dialogue around finances and money management as a family can be a good thing as your experience with money, or lack thereof, in your childhood can impact your attitude and emotions towards money later in life. Make note of impulse buying behaviour and what may trigger it: perhaps a hard day at work, or an argument with your partner. Understanding these spending patterns will allow you to find better ways to manage these stresses and adjust accordingly.

Financial health checkups

Just like doing a regular physical health checkup, having periodic financial wellness checkups is important for detecting any areas that you should focus on. This can be done by completing a thorough audit of finances, budgets, and plans with an advisor. An annual checkup can help you better prepare for the future and minimize the impact of any surprise events. Also utilizing online advice tools such as BlueShore’s Financial Wellness Checkup tool can help get you started, by providing an assessment of how you are doing, and advice on where you need to improve along your path to financial wellness.

Small cuts for long-term impact

We have all heard the latte-a-day and avocado toast analogy. While these items can seem like small expenses that are not likely to make a big impact on our overall financial health, they are really representative of our spending habits. Cutting out your morning coffee is not going to make you wealthy, but you may have some ongoing small expenditures that quickly add up and could affect your long-term financial goals. Continue Reading…