We review books that deal with everything from financial independence topics to politics, and anything in between. We may sometimes stray into films and music if there is a “Findependence” angle.
Retirement planning used to be easy: you simply applied for your government benefits and your company pension at age 65. So, when did it get so complicated?
Things started to change in 2007 when pension splitting came into effect. While we did have Canada Pension Plan (CPP) sharing before that, not too many people took advantage of it. Then Tax Free Savings Accounts (TFSA) came along in 2009. At first you could only deposit small amounts into your TFSA, but in 2015 the contribution limit went to $10,000 (it’s since been reduced to $6,000 per year). Accounts that had been opened in 2009 were building in value, and the market was rebounding from the 2008 downturn. Registered Retirement Savings Plan (RRSP) dollars were now competing with TFSA dollars and people had to choose where they were going to put their retirement money.
In 2015 or 2016 financial planners suddenly started paying attention to how all of these assets (including income properties) were interconnected. There were articles about downsizing, succession planning, and selling the family cottage. This information got people thinking about their different sources of retirement income and which funds they should draw down first.
Of course, there is more to consider, such as the Old Age Security (OAS) clawback. When, where, and how much could this affect your retirement planning? People selling their business are often surprised that their OAS is clawed back in the year they sell the business, even if they’re eligible for the capital gains exemption. Not to mention what you need to do to leave some money behind for your loved ones. Even with all this planning, the fact that we pay so much tax when we die is never discussed, although the final tax bill always seems to be the elephant in the room. We just ignore it, and hope it’ll go away.
Income Tax doesn’t disappear at 65
Unfortunately, income tax doesn’t disappear at age 65, and you need time to plan ahead so you can reduce the amount of tax you pay in retirement. A good way to do this is to use a specialized software that takes all your sources of income and figures out the best strategy to get the most out of your retirement funds.Continue Reading…
Andrew Hallam’s new personal finance book Balance is unlike any other financial book I’ve read. He uses research to show us how to spend and invest in ways that create a happy and fulfilling life.
He uses vivid stories to illustrate his points that make the book a pleasure to read. There’s a lot more to life satisfaction than just amassing personal wealth and owning fancy toys.
The book opens with the “four quadrants to a successful life”: “Having enough money,” “Maintaining strong relationships,” “Maximizing your physical and mental health,” and “Living with a sense of purpose.”
“I’ve met plenty of conventionally successful people (measured by money and career) who appeared less satisfied than, say, a family of Argentinians traveling through Mexico in a motorhome.”
I’ve had a similar experience seeing many executives with highly successful careers who are divorced and work so much that they do little at home other than eat, slump in front of a television, and sleep.
Stuff vs. Experiences
“What do you value more, your stuff or your life?” This question has meaning for me having grown up with a parent who was a hoarder. However, even non-hoarders often prioritize buying stuff over relationships and avoiding debt. “If we want to live the best lives we can, we shouldn’t normalize credit card debts or auto loans.” “Cars are the greatest personal wealth destroyer.” Research shows that rich people often don’t drive fancy cars; when you see an expensive car, there’s a good chance its owner is in debt.
“Material things rarely boost life satisfaction.” “Spend less money on stuff and more on memorable experiences.” Experiences remain memorable for decades, but the stuff we buy is often quickly forgotten. Some of the worst purchases are the ones we make solely to impress others. “Before purchasing something, … Ask yourself, ‘Would I still buy this if nobody else could see it?’”
The things that affect happiness
Research shows that “we tend to be happier when we earn more than our neighbors.” This leads to the advice to move to a neighbourhood where you have above-average income. Unfortunately, that makes your new neighbours less happy. It would be better if we could all be above such comparisons, but that’s easier said than done.
“Close relationships — far more than money — are the single greatest influence on a happy life.” This resonates with me. When I plan to travel somewhere warm for the winter months, my biggest concern is who I’m traveling with and what social activities we can get involved in. For short trips, it’s good to go somewhere interesting, but for long trips, company trumps location.
“Research suggests we also narrow our social circles as we age.” Focusing on those “we’ve formed deep connections with” works well for a time, but I think it’s a problem when these people start to pass away. I wonder if this is part of the reason why we see so many desperately lonely older people living alone in a big house.
Hallam’s command of research on happiness and life satisfaction and his ability to use it to steer a good path in life are impressive. The broad strokes of his lessons appear solid, but I wonder if some of the specific studies will fall to the widespread reproducibility crisis. For example, there are “several large studies confirming that caring for others helps us live longer.” Isn’t it necessarily the case that healthy people care for the weak? It seems plausible that the causation is in the other direction: healthier people live longer and are more able to care for others. Perhaps the studies’ authors found some way to prove that causation goes both ways to some degree.
Big purchases and budgeting
On the subject of stretching to buy a home, Hallam makes an excellent suggestion: “Ask yourself if you could still afford the mortgage if the interest rate doubled or you were out of work for six months.” I’d change the “or” to an “and.” Too many people sign up for a decade or more of stress when they stretch to buy a house. Renting is not synonymous with failure. It’s possible to rent a nice place and get on with your life’s plans.
“To me, budgets are like diets. Sometimes they work … but they usually don’t.” Hallam advocates tracking your spending with a handy app, but he finds trying to set limits in advance on spending in various categories ineffective. Just knowing how much you spend in each category will drive any needed change.
Investing
“Contrary to what many talking heads on YouTube, On TV, or in financial magazines may lead you to believe, you don’t need to follow the economy or know how to choose the best stocks to buy.” “Banks, insurance companies, and investment firms … are filled with legally sanctioned crooks (and sometimes kind, naïve people).”
Hallam tells an interesting story to illustrate how savings accounts fail over the long- term because of inflation. Many people pine for the days when savings accounts paid higher interest, but the story shows that the same inflation problem existed back in 1980. One illuminating table shows how often U.S. savings accounts beat inflation over 5-year rolling periods from 1972-2020. The answer: none! The best place for long-term savings is stocks and bonds.
“Index funds are part of financial literacy.” “If you learn to invest effectively, you could enjoy your chosen career instead of selling your soul for a higher-paying position you hate.”
Advisors and their Anti-Index Battle Plan
One of my favourite sections is “Financial Advisors and Their Anti-Index Battle Plan.” It shreds the many practiced arguments the pushers of expensive mutual funds use to persuade people to avoid indexing. The funny thing is that financial advisors seem to believe the things they are trained to say by their organizations. In their own portfolios, “researchers found that they performed almost as badly as their clients. When comparing their performances to an equal-risk-adjusted portfolio of index funds or ETFs, the advisors underperformed by about 3 per cent per year.”
The best plan is to choose some index funds or ETFs, and set some automatic contributions. “The less you think about your investments, the more money you’ll likely make.”
Hallam lays out three choices for index investing: financial advisor, robo-advisor, or do-it-yourself (DIY). Which you choose depends on your skills and interests. He goes on to explain in detail how investors in different countries can succeed with index investing using each of the three approaches.
I enjoyed a story that began with “Do you believe in ghosts?” It explained why new investors should probably choose a slightly more conservative asset allocation than they think they can handle. While I think it’s possible to learn to take market volatility in stride, if you haven’t had a chance to develop this equanimity, Hallam’s advice makes sense.
Social Responsibility
“Buy less of everything. This should improve your happiness, your financial bottom line, and your children’s and grandchildren’s future.” Buying less stuff isn’t just about saving the world; you’ll likely be happier as well. Continue Reading…
We are in the midst of a personal financial crisis in this country from coast to coast to coast. The Bank of Canada has been sounding the warning alarm for years that Canadians are taking on way more debt than they can afford. Many are suffering in silence since we just don’t talk about money, and we certainly don’t teach about it.
The goal of my book Lessons on Mastering Money is to empower you – Canadian adults in their 20s and 30s ─ with the core personal financial literacy knowledge needed to control your money on your life’s personal financial journey.
No one should care about your financial well-being more than you. Delegating your financial decision-making to another person, such as a family member or an advisor, leaves you financially blind. You need to be able to ask the right questions and stay involved in the conversations; you need to be at the table so as to understand the decisions.
Success in any organization can often be traced back to strong leadership. Surely, you have witnessed this in your life in countless settings. Once you view your financial life as a very, very important business, then you will instantly recognize that you must put steps in place to financially prosper. Look in the mirror: the person staring back at you owns your financial success.
Mere Hope isn’t going to cut it
By the way, ‘hoping’ for the best financial outcome isn’t going to cut it; you need to understand the financial game because you play it every day of your adult life, and this is one game that we can all win!
There are many personal financial hurdles to overcome in life. Three of the biggest financial tests are saving enough for retirement, saving for the kids’ education and solving the housing-affordability puzzle successfully. These three are crucial. You MUST pass all three of these major financial tests or you will struggle mightily with your financial life: getting just one right or even two of the three right is just not good enough.
You need to get 100% right on this test, and this book provides help with all three of these pieces. Saying that Canadians struggle with debt is a total understatement; there’s help here for this too. A recurring mistake that many Canadians make financially is leasing a brand-new car: there’s guidance around this also. Getting a handle on how you think about and approach your personal finances – your money mindset ─ is really bedrock learning; all good financial decisions lead right back to this. The book begins by teaching you these key money mindset lessons.
6 major thematic sections
The format of the book aligns with the biggest personal financial hurdles that Canadians face. It is broken down into six major thematic sections: Continue Reading…
On Friday, the Hub republished the first part of a two-part Question-and-Answer session between finance professor and author Dr. Moshe Milevsky and Gordon Wiebe of The Capital Partner [TCP]. This is the second and final instalment:
TCP: I wanted to turn to your Book, Longevity Insurance for a Biological Age. Your thesis is that we should be looking at our biological age and using that to calculate and project our income and how much we should be drawing from our savings.
M.M. And, more importantly than that, making decisions in our personal finances, right?
You know, somebody is trying to figure out at what age they should take C.P.P. Should I take it at 60? 65? 70?I don’t think they should use their chronological age to do that.
Trying to figure out when to retire? Stop using your chronological age.
I mean there’s a whole host of decisions that you have to make based on age and I’m saying we’re using the wrong age metric. It should be based on your biological age.
Now, at this point, biological age sounds like this funny number that comes out of some website, but sooner or later we’ll all have it. And, it’s going to be faster than you think. Your watch will tell you your biological age. And, then in a couple of years, people will stop associating themselves with their chronological age.
They will just stop using it.
And you’re going to sit down with your antiquated compliance driven forms that say, “I need to know my client’s age. Oh, you’re 62.”
And, the client says, “Ha, ha. That’s chronological age. We don’t use that anymore, buddy. I use biological age. Sixty-two, that’s not my age.”
It’s about preparing people for the world in which age is not the number of times we circle the sun.
TCP: What metrics do you think we’ll lean towards to measure biological age? Telemeres? Others?
M.M. There’s a whole bunch of bio-markers that can be used. Some people use telomeres or something called “DNA methylation” or epigenetic clocks. There are about fifty of them, but eventually they’ll all coalesce into a number called “biological age.”
There will be a consensus on how to measure it and you’ll go to your doctor and your doctor will say, “your chronological age is 50, but your biological age is 62.” You’re doing something wrong.
Then a financial advisor will use that information differently when you build a retirement plan.
TCP: That makes sense, but trying to achieve a consensus and getting everyone to use the same metrics from a compliance standpoint or trying to get pension plans and policy makers to agree would be a challenge, wouldn’t it?
MM: It would be. In fact, that’s exactly where I’m headed now. I’m giving a speech in Madrid and that’s exactly what regulators from a number of different countries want me to talk about.
They want to know, “is this feasible? We want to implement this in our pension system. We don’t want wealthy people retiring at the age of 65, they’re going to live forever and bankrupt our system. We want people to retire at a biological age.”
TCP: Let’s talk about that a little more. Advisors typically use a 4% draw on savings as a benchmark withdrawal rate. But, if we use our biological age, there would then be a range. I assume somewhere between 3-6%?
Adjusting the 4% Rule
M.M. You’re absolutely right. That’s where I would go with this. You have to use your biological age and the 4% rule has to be adjusted.
But, what I’m saying is more than that. That rule has to change. It’s not just about the number or percentage. It’s how the rule is applied.
I really don’t like the idea of fixing a spending rate today and sticking to it for the rest of your life no matter what happens. Your spending rate has to be adaptable.
What you have to tell people is, “look, this year we can pull out 6.2%. Next year, it really depends on how markets behave. If markets go down, we may have to cut back. If markets go up, we can give you a bit more.”
I think the 4 per cent rule is really what I call a one-dimensional rule. It’s not that four is one dimensional. Any one number is one dimensional: just telling them a per cent.
It’s got to be at least two dimensional. Meaning, this is what it is now, but next year if this is what happens we’ll do that. ..
Three dimensional is to go beyond that is to go beyond that and say let’s take a look at what other income and assets you have.
“Oh! You’ve got a lot more income from guaranteed sources, you can afford more than four per cent, this year.”
TCP: It’s a dynamic scenario, a moving target.
M.M. That’s the key word, dynamic versus static.
The threat of rising Interest Rates
TCP: Canadian investors currently have over two trillion invested in mutual funds. Over half is invested in balanced funds or fixed income and we’re in a horrible position where fixed income is concerned. We’ve had declining rates for the past forty years. At best, bonds will stay flat. At worst, bonds could lose up to thirty per cent of their value.
You talk about the importance of the sequence of returns and how that affects income potential. Have you or your students run scenarios with higher interest rates and the impact it could possibly have?
M.M. I haven’t thought about it beyond what you’re noting. The obvious scenario is as interest rates move up, these things are going to take a big hit.
And, retirees who feel they’ve been playing it safe by putting funds in bonds will suddenly realize there’s nothing safe about bonds in a rising interest rate environment.
I think they’re confusing liquidity and safety with interest rate risk. It’s liquid and its safe. Government is not going to default but boy, can it lose its value.
We’ve become accustomed to this declining pattern. Anybody who is younger than forty doesn’t even understand what higher interest rates means. It’s never happened in their lifetime. They don’t believe it. Understand it. Never felt it. You show them graphs going back to the 1970s. That’s not how to convince them. They’re empiricists. They’ve never lived it themselves, they don’t believe you. Continue Reading…
Late in October, bestselling author and pyschologist Mihaly Csikszentmihalyi passed away in California at age 87. You can read the obituary in the Washington Post here.
Czikszentmihalyi — pronounced “chick-SENT-me-high” — was a university professor who built a mini empire around the nebulous concept of Flow. See this Wikipedia entry for more on his life and work.
As noted in the earlier reviews, I’m intrigued by the concept of Flow as it applies to Encore Careers and life after corporate employment. As many blogs in the Hub’s Victory Lap section have pointed out, aging baby boomers still have a potentially long and creative period ahead of them that lies between the traditional career and what used to be called Retirement.
So it seems to me that if late-bloomer Boomerpreneurs are going to make a success of this new stage of life, they’d better tap into the concept of Flow. It’s all tied in with passion and mastery, which is why I went to the well one last time with Czikszentmihalyi.
Posted By 
Posted By 
