All posts by Financial Independence Hub

How much do you need to retire early at age 40, 45, 50 or 55?

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Image courtesy Tawcan

By Bob Lai, Tawcan

Special to Financial Independence Hub

It’s never too early to start looking forward. I’ve been doing this on my site for some time and doing a bunch of assumptions and simulations on what our financial independence retire early might look like.

I also have interviewed many Canadians who are financially independent and/or retired early in my FIRE Canada Interviews.

Having some plans on your hands is better than no plans at all. Furthermore, having some quantitative targets available will allow you to set up different financial milestones and goals each year. Doing so will help you to stay focused and work your way to achieve them.

If you aspire to retire or semi-retire earlier than most people, how much do you need to retire early at age 40, 45, 50 or 55? Thanks to my friends at Cashflows & Portfolios, I have that answer today.

‘Traditional’ retirement vs. the ‘new’ retirement

For those not familiar with Cashflows & Portfolios, it’s a site started by two long time Canadian bloggers, Mark and Joe. Mark runs My Own Advisor, which I started reading before I started this blog. Joe was the brain behind Million Dollar Journey, which I have been following for over a decade.

All three of us believe we need to retire the term: retirement. To be more specific, we believe it’s time to change the ‘traditional’ definition of retirement. It is also important to make sure you know what you’re retiring to. 

Back in the day, when you turned 60 or 65, and once you had grown tired of working by already clocking decades of company time – trading those years in the workplace for your workplace pension to supplement income for your senior years.

Well, workplace pensions are dwindling and more and more, pursuing retirement in any traditional sense seems rather unhealthy today. A traditional retirement can be unhealthy physically, emotionally and financially.

On a physical level, retirement has traditionally meant a decrease in activity. You no longer have a driving reason to get out of bed in the morning, grab a coffee and get to the office – so you take it easier. That may not be beneficial to your wellness and based on my personal fitness experiences, not something that appeals to me.

On an emotional level, retirement for some could lead to social isolation. Potentially, you’ve identified and linked your self-worth to your organization, your co-workers and your manager.

Retirement means you’re leaving your workplace but the organization will undoubtedly continue to work without you being there. Unfortunately, life just works that way; it doesn’t stop for anyone. So, I believe it’s important to maintain a modest level of stimulation at any age, including retirement.

Not remaining socially engaged with other people in retirement could lead to mental health struggles.

Finally, retirement is not cheap, financially. Unless you have a workplace pension (and let’s face it, many Canadians don’t, me included!), you’ll need to rely on your disciplined, multi-decade savings rate to maximize your retirement income stream at age 40, 45, 50 or 55 – by giving up your regular paycheque.

Sure, while there are other retirement income streams to enjoy eventually, like Canada Pension Plan (CPP) and Old Age Security (OAS), many readers of this blog probably don’t want to wait until ages 60 or 65 to tap those income streams respectively.

Let’s get one point straight, it’s a privilege to be able to retire early at age 40, 45, 50 or 55. Early retirement isn’t for everyone and those who can “retire” early typically enjoy some sort of privileges in their lives. Such privileges need to be highlighted more within the FIRE community.

The reality is that you do need to have a certain level of income to build up enough assets by your 40s so your portfolio can withstand some drawdowns in the subsequent decades. A relatively high savings rate combined with a certain level of income will help and is in my opinion crucial. Continue Reading…

How to Live Life to the Fullest when you don’t have a Lot of Money

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Image by Pixabay.com

By Beau Peters

Special to Financial Independence Hub

They say that money doesn’t buy happiness. But when funds are tight it sure can feel as though life is a little constrained. You may constantly feel as though you’re missing out on opportunities or fun events.

Learning to live within your means is a hard lesson, but many people who achieve it never feel as though they are going without. In fact, most have found ways to live their lives to the absolute fullest. Sometimes all that is required is a change of perspective or a minor reorientation of values.

It may come as somewhat of a surprise, but having a great and fulfilling life often isn’t tied to how much money you make or the fancy things you’re able to spend it on. Some of the most important things that really make life worth living don’t cost much and many come for free.

Improve Life, Save Money

Entertainment can be one of the draining items on your budget. A couple drinks with co-workers after work one night, going to a show with a gal pal another, maybe paying for tickets to the big game the next. It seems like everything fun costs money and over the course of a week or a month that really adds up.

But not all hobbies have to cost a lot of money, or really any money at all. Rather than grabbing drinks after work, you can invite people over to your house to hang out around the fire pit and have a potluck-style barbeque. Or instead of going to a show with a friend, you strive to attend free local events like music in the park, farmers’ markets, or explore new neighborhoods. Maybe instead of paying for a ticket to the big game, you can invite your friends to a tailgate in the parking lot. Continue Reading…

Checking in on our U.S. stocks

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By Dale Roberts, cutthecrapinvesting

Special to Financial Independence Hub

Eight years ago, I bought 15 U.S. dividend growth stocks as a real-life portfolio demonstration. More than a demonstration, it was the total value of our U.S. holdings in our retirement accounts. The strategy was to create a more defensive and retirement-ready portfolio. The portfolio slants to quality, profitability and business moats. The 15 stocks were added to three companies that were already held – we’ll call those stock picks. The portfolio mix beat the S&P 500 by 3.2% annual while delivering better risk-adjusted returns.

Here’s the link to my recent Seeking Alpha article – the dividend growth portfolio 8 years later. You might be able to get one of three free reads for that post on Seeking Alpha. But just in case you can’t I will share a few of the key details.

And keep in mind the post and stocks that I mention is not advice. Do your own research, and know why you do what you do.

The U.S. dividend growth, plus picks portfolio

I sold my VIG, and purchased 15 individual holdings from the top 20-25 of the index. The 15 companies that I added are 3M (MMM), Pepsi (PEP), CVS Health Corporation (CVS), Walmart (WMT), Johnson & Johnson (JNJ), Qualcomm (QCOM), United Technologies (UTX), Lowe’s (LOW), Walgreens Boots Alliance (WBA), Medtronic (MDT), Nike (NKE), Abbott Labs (ABT), Colgate-Palmolive (CL), Texas Instruments (TXN) and Microsoft (MSFT).

I also have 3 U.S. stock picks by way of Apple (AAPL), Berkshire Hathaway (BRK.B), and BlackRock (BLK). For the record, these stocks are held in my wife’s accounts and my own accounts.

United Technologies merged with Raytheon (RTX) and then spun off Carrier Global Corporation (CARR) and Otis Worldwide (OTIS). We continue to hold all three and they have been wonderful additions to the portfolio. In fact, from the time of the spin-off, the 3 stocks have greatly outperformed the market (IVV) and the dividend achievers. Given that the United Technology stocks are not available for evaluation from 2015, I have run the performance update with the remaining 14 dividend achievers. Continue Reading…

Timeless Financial Tips #4: How to Manage your Financial Behavioural Biases

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By Steve Lowrie, CFA

Special to Financial Independence Hub

There are countless external forces influencing your investment outcomes: taxes, market mood swings, breaking news, etc., etc.

Today, let’s look inward, to an equally important influence: your own financial behavioural biases.

The Dark Side of Financial Behavioural Bias

Having evolved over millennia to secure our survival, our deep-seated behavioural biases precondition us to frequently depend more on “gut feel” than rational reflection. Sometimes, our instincts are life-saving, like when a car brakes hard right in front of you. Chemical reactions in the lower brain’s amygdala trigger you to brake too, even as your higher brain is still enjoying the scenery.

Unfortunately, these same rapid-fire triggers often hurt us as investors. When we make snap financial decisions that “feel” right but are rationally wrong, we tend to sabotage our own best interests. By recognizing these reactions as they occur, you’re more likely to stop them from ruining your financial resolve, which in turn improves your odds for better outcomes. Let’s explore some behavioural finance examples that you’ll want to prepare for…

Behavioural Finance Example #1: Fear and FOMO

The point of investing is to buy low and sell high. So, why do so many investors so often do the opposite? You can blame fear, as well as Fear of Missing Out (FOMO investing). Time after time, crisis after crisis, bubble after bubble, investors rush to buy high by chasing hot holdings. They hurry to sell low, fleeing falling prices. They’re letting their behavioural biases overcome their rational resolve.

Behavioural Finance Example #2: Choice Overload and Decision Fatigue

Our brains also don’t deal well with too much information. When we experience information overload, we may stop even trying to be thoughtful, and surrender to our biases. We’ll end up favouring whatever’s most familiar, most recently outperforming, or least scary right now. When choosing from an oversized restaurant menu, that’s okay. But your life savings deserve better than that.

Behavioural Finance Example #3: Popular Demand and Survival of the Fittest

Inherently tribal by nature, we humans are susceptible to herd mentality. When everyone else gets excited and starts chasing fads, whether it is cryptocurrencies, alternative investments, or the other financial exotica-du-jour, we want to pile in too. When the herd turns tail, we want to rush after them. It’s like that old joke about escaping a bear: you don’t need to run faster than the bear; you just need to run faster than the guy next to you. In bear markets, this causes investors to flee otherwise sound positions, selling low, and paying dearly for “safer” holdings, rather than holding their well-planned ground.

Behavioural Finance Example #4: Anchor Points and Other Financial Regrets

Successful investors look past their occasional setbacks and remain focused on capturing the market’s long-term expected returns. But that’s hard to do, as we are often trapped by financial decisions regret. For example, loss aversion causes the average investor to regret losing money approximately twice as much as they appreciate gaining it. Similarly, anchor bias causes us to cling to depreciated holdings long after they no longer make sense in our portfolio, hoping against hope they’ll eventually recover to some arbitrary, past price. Ironically, you’re less likely to achieve your personal financial goals if you’re driven more by your financial regrets than your willpower.

Taking Charge of Your Financial Behavioural Biases

We’ve now looked at some of the damage done by behavioural biases. Once you know they’re there, you can at least minimize your exposure to them. Better yet, by using what behavioral psychologists call “nudges,” you can even harness your biases as forces for financial good. Following are two examples. Continue Reading…

A Failure to understand Rebalancing

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By Michael J. Wiener

Special to the Financial Independence Hub

Recently, the Stingy Investor pointed to an article whose title caught my eye: The Academic Failure to Understand Rebalancing, written by mathematician and economist Michael Edesess.  He claims that academics get portfolio rebalancing all wrong, and that there’s more money to be made by not rebalancing.  Fortunately, his arguments are clear enough that it’s easy to see where his reasoning goes wrong.

 

Edesess’ argument

Edesess makes his case against portfolio rebalancing based on a simple hypothetical investment: either your money doubles or gets cut in half based on a coin flip.  If you let a dollar ride through 20 iterations of this investment, it could get cut in half as many as 20 times, or it could double as many as 20 times.  If you get exactly 10 heads and 10 tails, the doublings and halvings cancel and you’ll be left with just your original dollar.

The optimum way to use this investment based on the mathematics behind rebalancing and the Kelly criterion is to wager 50 cents and hold back the other 50 cents.  So, after a single coin flip, you’ll either gain 50 cents or lose 25 cents.  After 20 flips of wagering half your money each time, if you get 10 heads and 10 tails, you’ll be left with $3.25.  This is a big improvement over just getting back your original dollar when you bet the whole amount on each flip in this 10 heads and 10 tails scenario.  This is the advantage rebalancing gives you.

However, Edesess digs further.  If you wager everything each flip and get 11 good flips and 9 bad flips, you’ll have $4, and with the reverse outcome you’ll have 25 cents.  Either you gain $3 or lose only 75 cents.  At 12 good flips vs. 12 bad flips, the difference grows further to gaining $15 or losing 94 cents.  We see that the upside is substantially larger than the downside.

Let’s refer to one set of 20 flips starting with one dollar as a “game.”  We could think of playing this game multiple times, each time starting by wagering a single dollar.  Edesess calculates that “if you were to play the game 1,001 times, you would end up with $87,000 with the 100% buy-and-hold strategy,”  “but only $11,000 with the rebalancing strategy.”

The problem with this reasoning

Edesess’ calculations are correct.  If you play this game thousands of times, you’re virtually certain to come out far ahead by letting your money ride instead of risking only half on each flip.  However, this is only true if you start each game with a fresh dollar. Continue Reading…