Victory Lap

Once you achieve Financial Independence, you may choose to leave salaried employment but with decades of vibrant life ahead, it’s too soon to do nothing. The new stage of life between traditional employment and Full Retirement we call Victory Lap, or Victory Lap Retirement (also the title of a new book to be published in August 2016. You can pre-order now at VictoryLapRetirement.com). You may choose to start a business, go back to school or launch an Encore Act or Legacy Career. Perhaps you become a free agent, consultant, freelance writer or to change careers and re-enter the corporate world or government.

Book Shop Remix: Where would you shelve Retirement?

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By Mark Venning, ChangeRangers.com

Special to the Financial Independence Hub

 

If you slid into your virtual bookshop to look for a book on the subject of Retirement, where would you begin? A keyword search would likely begin with the phrase “books on retirement” and …

Kaboom! An explosion of titles appear. Depending on your mindset, where your thinking was at a given moment, what triggering event gave rise to a conversation, you would gravitate to where? Titles such as The New Retirementality – Redefining Retirement: New Realities for Boomer Women– How to Retire Happy, Wild, and Free – Purposeful Retirement – What Retirees Want. Only a slice of texts on an almost endless bookshelf, which began to expand after 2004.

In the year 2001, while working as a consultant at a career services firm, (aka Career Transition/Outplacement), a managing partner asked me to deliver a Retirement program. For the first time since the late 1980’s, a corporate client suddenly requested a set of workshops for their employees approaching what they prescribed as retirement age. When I looked through the thick Retirement binder with its referenced reading resources, I ached in the head after what I read.

Sparing the colourful expletives, my response to the managing partner the next day was that I needed to re-design the whole thing before I dared to set foot inside that corporate boardroom. We needed to not only be contemporary, but we also had to be futuristic, to constantly respond to changing attitudes on what I then described as later life journeys as opposed to Retirement. The trouble was it would all seem too cryptic, too ethereal in concept unless I spoke of Retirement.

In prep for the Retirement re-design, I scoured bookshelves to see what new thinking was prevailing at the time and, to my disappointment, there wasn’t much that ground breaking. Much of the material was from the mid to late 1990’s. When you walked into a bookshop, you would find these “Retirement” books in the Business section, likely under the sub shelf “Financial Planning.” The issue with many of these was that specific references became quickly time stamped “out of date.”

Scouting out the extravaganza of Retirement books

While still shelving Retirement books in the Business section, they are usually broken into two categories – Financial Planning and Lifestyle Planning, you may wander into the Careers section – Retire Retirement: Career Strategies for the Boomer Generation for example. With luck, visit Self Help (DIY retirement is a thing). One recommended book I found sits in the Christian Living section. Try fiction! Yes, there are those too; and no doubt, somewhere out there is a Boomer Retirement book club discussing the latest find.

Over my twenty years of scouting out the extravaganza of Retirement books there have been a few peaks in inspired writing and in some cases the writing, aimed at a corporate audience, advised on how organizations should be prepared to “survive the graying of the workforce” and be ready for the “looming wave of Boomer retirements.” Yet there is a trip wire here.

A funny thing happened on the road to Retirement. Where I live, in Ontario Canada, even with the provincial government prohibition of mandatory retirement (with the odd exception) in 2006 there continue to be sinister ways Retirement conversations with employees occur in the workplace. Continue Reading…

Was the F.I.R.E. movement doused by the pandemic?

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Cutthecrapinvesting: Image by Mohamed Hassan via Pixabay

By Dale Roberts

Special to the Financial Independence Hub

F.I.R.E is an acronym for Financial Independence Retire Early. It is a very popular movement that gets a lot of attention in the blogosphere and on social media. The idea is to eat excess amounts of ramen noodles, squeeze your budget until it squeals, save 90% of your income, invest like crazy in an all-stock portfolio, and then never work another day of your life after the age of 38. I’m kidding, please don’t “OK Boomer” me.

In reality, most from the F.I.R.E. movement will not “retire” early, but many may reach a wonderful form of financial independence. In 2020, was the F.I.R.E. movement doused by the pandemic?

2020 brought us a very quick and violent stock market correction. It was the most violent in history, but so was the recovery as governments and central banks came to the rescue of stock and bond markets. Looking back it feels like a blip. But in the moment it was more than scary, considering that we did not know the path of destruction that SARS-coV-2 might leave behind.

We still don’t know.

Did the F.I.R.E movement change course?

From what I read from my F.I.R.E friends (they’ll say I’m being rather presumptuous with the use of that friends description), they embraced the volatility. After all, volatility is not risk, if you can handle that risk, and you have an incredibly long time horizon. Volatility and falling stock prices are an opportunity, whether you are seeking to build that growing dividend stream or plan to one day also harvest shares to create retirement income.

In March of 2020 I asked …

Is this an incredible investment opportunity or what?

In the Globe and Mail, Brenda Bouw offered how F.I.R.E investors are managing through the pandemic. (Sorry that is paywall, but I’ll give you the important deets). That is a great piece with some good commentary, especially from advice-only planner Jason Heath.

The F.I.R.E. traps

F.I.R.E. followers need to be extra vigilant as their nest eggs need to last decades longer than those who retire in their 60s and 70s. There is the perception that the F.I.R.E. gang have less risk, because they are young. In fact the opposite is true. From Jason …

“You may need to over-save and underspend longer than you might think when you’re pursuing the F.I.R.E. movement,” says Jason Heath, an advice- and fee-only certified financial planner at Objective Financial Partners Inc. in Markham, Ont. “When you’re retiring at age 40 versus age 65, there’s so much more margin for error.”

Jason also pointed out that funds can quickly disappear because of costs associated with an extraordinary event, such as a serious injury or illness that requires long-term care or having a child with a disability.

“If you don’t budget for the unexpected, that could really compromise your early retirement plan,” he says.

Of course it is true that the F.I.R.E. folks may have the opportunity to go back to work if need be. But it’s also important to use the word “MAY.”  It’s not a given that health would permit the opportunity to work. There is no guarantee that meaningful work would be available. I hate to be a Dale Downer, but this is the reality that we should accept and recognize.

The good new is, they won’t actually “retire”

Nobody really retires early except for teachers and other public servants. So if you want to really retire early, you know where to apply for a job. You’ll need that guaranteed, defined benefit, indexed-to-inflation-for-life pension. And those may be hard to come by these days as governments are also doing the math on funding or backstopping those options.

Most will use that F.I. and ditch the R.E. And most will admit to that reality. They just want that freedom to do more of what they want in life with respect to leisure and travel and work. And that’s why I am a big fan of the movement. It is based on a wonderful end game (freedom) and it employs some more than important financial basics, behaviour and lessons.

You build wealth by living beneath your means. Here’s my personal finance book. OK, you may notice, it’s a blog post. Who needs a book? It all ain’t rocket surgery.

Everybody say FIWOOT!

Jonathan Chevreau calls it all Findependence. That’s perfect. Mark from My Own Advisor frames it nicely with his own acronym …

I prefer Financial Independence Work On Own Terms (FIWOOT) versus FIRE The Financial Independence Retire Early (FIRE).

Here’s Mark’s Weekend Reads.

Dance with the one that brought ya?

The greatest mistake within the community will likely be the commitment to an all-stock portfolio. There is that expression that you might ‘dance with the one that brought ya’. But that’s not the case when it comes to protecting your wealth and your F.I.R.E. Continue Reading…

Checking in on Vanguard’s VRIF

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Cutthecrapinvesting: Image by Cris Ramos from Pixabay

By Dale Roberts

Special to the Financial Independence Hub

In September, Vanguard’s VRIF ETF was launched. The ETF is an all-in-one retirement funding solution. It is designed to pay out 4% of the portfolio value in 12 monthly distributions. That level of income is set at the end of each calendar year, based on the year end value. After the Santa Claus rally, it looks like VRIF holders will be getting a modest raise.

Here’s my original review of the Vanguard VRIF ETF. Simple and cost effective asset allocation portfolios can (historically) work very well to provide consistent and generous retirement income. The Vanguard VRIF option does it all for you, from portfolio management to paying out that income each month. Of course, you can also create your own ETF portfolio for retirement funding.

The key message is that simple works. And fees are important. I am a big fan of financial planning at the right cost, but keep in mind that investment fees and advisory fees will reduce the amount that your investments can deliver each year. You would subtract that percentage off the top. That’s why you might consider a fee-for-service advisor. In the end they might provide that retirement funding plan that would include an investment option such as VRIF.

The VRIF payout

The initial monthly distribution for VRIF was set at .083333 cents per unit.

As per the ETF mandate the distribution will stay the same throughout the year. The amount in your pocket includes fees and any withholding taxes within the ETF assets. It’s 4% in the clear. Of course, you would (most often but depending on your tax situation) create taxes payable from receiving the income in an RRSP, RRIF or taxable account. Within your TFSA the income would be tax free.

The performance of VRIF

In addition to paying out the monthly distributions, the ETF has also increased in price by 4.5% from inception. Continue Reading…

Variable Percentage Withdrawal: Garbage In, Garbage Out

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By Michael J. Wiener
Special to the Financial Independence Hub

 

The concept of Variable Percentage Withdrawal (VPW) for retirement spending is simple enough: you look up your age in a table that shows what percentage of your portfolio you can spend during the year.

The tricky part is calculating the percentages in the table.  Fortunately, a group of Bogleheads did the work for us.  Unfortunately, the assumptions built into their calculations make little sense.

If we knew our future portfolio returns and knew how long we’ll live, then calculating portfolio withdrawals would be as simple as calculating mortgage payments.  For example, if your returns will beat inflation by exactly 3% each year, and your $500,000 portfolio has to last 40 more years, the PMT function in a spreadsheet tells us that you can spend $21,000 per year (rising with inflation).

Instead of expressing the withdrawals in dollars, we could say to withdraw 4.2% of the portfolio in the first year.  If the remaining $479,000 in your portfolio really does earn 3% above inflation in the first year, then the next year’s inflation-adjusted $21,000 withdrawal would be 4.26% of your portfolio.  Working this way, we can build a table of withdrawal percentages each year.

Of course, market returns aren’t predictable.  Inevitably, your return will be something other than 3% above inflation.  You’ll have to decide whether to stick to the inflation-adjusted $21,000 or use the withdrawal percentages.  If you choose the percentages, then you have to be prepared for the possibility of having to cut spending.  If markets crash during your first year of retirement, and your portfolio drops 25%, your second year of spending will be only $15,300 (plus inflation), a painful cut.

A big advantage of using the percentages is that you can’t fully deplete your portfolio early.  If instead you just blindly spend $21,000 rising with inflation each year, disappointing market returns could cause you to run out of money early.

Choosing Withdrawal Percentages

One candidate for a set of retirement withdrawal percentages is the RRIF mandatory withdrawals.  These RRIF withdrawal percentages were designed to give payments that rise with inflation as long as your portfolio returns are 3% over inflation.

Unfortunately, the RRIF percentages would have a 65-year old spending only $20,000 out of a $500,000 portfolio.  Some retirees chafe at being forced to make RRIF withdrawals, but when it comes to the most we can safely spend in a year, most retirees want higher percentages.

A group of Bogleheads calculated portfolio withdrawal percentages for portfolios with different mixes of stocks and bonds.  Most people will just use the percentages they calculated, but they do provide a spreadsheet (with 16 tabs!) that shows how they came up with the percentages.

It turns out that they just assume a particular portfolio return and choose percentages that give annual retirement spending that rises exactly with inflation.  You may wonder why this takes such a large spreadsheet.  Most of the spreadsheet is for simulating their retirement plan using historical market returns.

The main assumptions behind the VPW tables are that you’ll live to 100, stocks will beat inflation by 5%, and bonds will beat inflation by 1.9%.  These figures are average global returns from 1900 to 2018 taken from the 2019 Credit Suisse Global Investment Returns Yearbook.

So, as long as future stock and bond returns match historical averages, you’d be fine following the VPW percentages.  Of course, about half the time, returns were below these averages.  So, if you could jump randomly into the past to start your retirement, the odds that you’d face spending cuts over time is high.

For anyone with the misfortune to jump back to 1966, portfolio spending would have dropped by half over the first 14 years of retirement.  More likely, this retiree wouldn’t have cut spending this much and would have seriously depleted the portfolio while markets were down.

The VPW percentages have no safety margin except for your presumed ability to spend far less if it becomes necessary.

Looking to the Future

But we don’t get to leap into the past to start our retirements.  We have to plan based on unknown future market returns.  How likely are returns in the next few decades to look like the average returns from the past? Continue Reading…

Q&A with MyOwnAdvisor’s Mark Seed on speculating near Retirement

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Mark Seed’s MyOwnAdvisor website has just published a Q&A with Yours Truly. The Hub often republishes Mark’s blogs here (with his permission of course) and this Q&A covers topics like dividend investing, asset allocation ETFs, hybrid strategies using both and even crypocurrencies.

You can find the original blog by clicking here, or you can read the republished version below:

MyOwnAdvisor’s Mark Seed

Mark Seed: “Fun money” is an apt term for monies you can afford to lose. I mean, nobody wants to lose money on purpose of course but there is always an undeniable trade-off when it comes to investing.

Risk and return and related.

Higher risks can signal a higher potential return. Higher risks taken can also signal flat-out failure.

I was curious to hear about how some retirees or semi-retirees invest and keep speculation in their portfolio.

So, I reached out to author, blogger and columnist Jon Chevreau for his thoughts including how much he speculates in his own portfolio, at age 67.

Jon has already contributed to My Own Advisor a few times.

Jon, welcome back to the site to discuss this interesting topic!

Jon Chevreau: Glad to be back Mark.

Mark: In our last post Jon, we talked about low-cost ETF investing, investing in stocks and more in your Victory Lap Retirement book.  

Let’s back up a bit…

What should Canadians consider before Do-It-Yourself (DIY) investing? I mean, it’s not for everyone including those in retirement right?

Hub CFO Jonathan Chevreau

Jon: No, DIY investing is probably not for everyone: some need good advice and like most things in life, you get what you pay for.

If you need a full-service advisor or a fee-based advisor that can add value not just on investments but on tax strategies, estate planning, retirement income, insurance and the like, then paying on the order of 1% a year of assets is not unreasonable. On the other hand, with interest rates so low, the more you can save on the fixed-income portion of a portfolio the better. That applies doubly to retirees, who should have a good percentage of their investments in fixed-income (say 40 to 60% depending on objectives and risk tolerance.) I often tell retired readers that if all they use is a discount brokerage in order to hold a Vanguard or iShares asset allocation ETF, that can be a good compromise: you get the equivalent of near professional stock-picking prowess via indexing, asset allocation and rebalancing all for a very good price; and you could then hire a fee-only financial planner for specific guidance outside that pure investing realm.

(Mark: you can find many of those asset allocation all-in-one ETFs here.)

Mark: Seems wise Jon.

So, given some aspiring retirees might not want to invest entirely alone, what good options might be available to help them out (beyond blogs like yours and mine of course)!? Ha!

Jon: I often direct new or aspiring retirees who are worried about the shift from wealth accumulation to generating regular retirement income to the books by good Canadian authors like Moshe Milevsky, Daryl Diamond and Fred Vettese. Sites like yours and mine probably have reviewed these. There are also several retirement planning software packages that are worth considering; ViviPlan, Cascades and Retirement Navigator, to name three I once reviewed in a Globe & Mail article.

(Mark: you can find many references to those authors and their books below.)

Daryl Diamond – Your Retirement Income Blueprint

Fred Vettese – Retirement Income for Life

Fred Vettese – The Essential Retirement Guide