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.

Why the 4% rule is actually (still) a decent rule of thumb

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By Mark Seed

Special to the Financial Independence Hub

I’m not a huge listener to podcasts but I do enjoy them from time to time – beyond the ever popular Joe Rogan Experience that is.

Recently, I found the BiggerPockets Money Podcast with financial independence enthusiast, financial planner, along with a host of other financial designations Michael Kitces very interesting.

For an hour+ the hosts of that podcast dove deep into the simple math behind the 4% safe withdrawal rate so many 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.

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 from this solid podcast below. Kudos to the folks at BiggerPockets for the deep dive.

Let me know your thoughts about the 4% rule in the comments section. I look forward to them.

Mark

Background – what is the 4% rule???

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

You can find the details of the report here.

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 a $1 M personal portfolio to start semi-retirement with in the coming years.

If we can grow our portfolio to that value, markets willing, the 4% rule tells us we could expect to withdraw about 4% of that million nest egg (or about $40,000 per year indexed to inflation) and have virtually no concerns we would run out of money for the next 30 years (mid-70s by then).

To the podcast and my 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. Continue Reading…

4 essential End of Life preparations

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By Sia Hasan

Special to the Financial Independence Hub

End of life preparations are difficult to think about, for obvious reasons, but they’re something that everyone needs to work out in advance. Ensuring the best possible situation for you and your family, or for loved ones, is crucial. When a loved one passes, it’s a hard time for everyone involved, and squaring away your end of life preparations gives your family and friends much less to worry about. Here are some key ways you can make end of life preparations in a timely and intelligent fashion.

Get a Life Insurance policy

Life insurance is likely the single most important facet of end of life preparations, and that’s because life insurance provides your loved ones with funds that can allow them to make funeral arrangements and also continue to thrive in your absence. Because of the weight of the topic, the average person doesn’t even consider life insurance until later on in life. However, it’s best to set up your life insurance policy as early as possible. For one thing, the cost of a life insurance policy increases with your age, and your policy generally provides greater benefits the longer it remains in effect. When setting up your life insurance policy, carefully consider your dividend options, because they vary tremendously, and the right answer depends on your needs and your circumstances.

Write a Will

In much the same way one declines to think about life insurance, a person’s will is often relegated to one’s twilight years. However, the reasons for getting it out of the way early are very different. Continue Reading…

Small Business owners are subsidizing big Insurers during Covid

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By Robert J. Crowder

Special to the Financial Independence Hub

Small owner-managed businesses ravaged by Covid-19 are subsidizing big insurance companies during this pandemic and don’t even know it. In many cases, they have been paying for several months the full cost for employee health and benefits plans while all or most services are no longer provided. And if they are now starting to get a reduction in premiums, it’s not enough.

Since mid-March, dentists and other professional healthcare providers such as chiropractors, physiotherapists and massage therapists have been shut down, with the exception of emergency treatments. But small businesses continued to pay full benefits premiums while their employees didn’t use these services.

The numbers tell the tale

The value of premiums paid during the coronavirus pandemic has been truly staggering. Three-quarters of Canada’s 600,000 small businesses have employee benefits plans and over the past three months they paid out approximately $1.6 billion in premiums for benefits coverage at a time when virtually no services were provided. Keep in mind those same businesses and the business owners were suffering because of Covid.

Using claims data since the pandemic began (representing thousands of Canadian small businesses), it is clear that the number of claims for health and dental services is down 50% with some components of benefits plans, such as dental visits, down as much as 95%!

A real-life example

Let’s take an actual owner-managed small business, a distribution facility with 25 employees. The owner pays $9,500 per month in premiums for an employee benefits plan with a major insurer that includes comprehensive health and dental coverage. As the Covid crisis unfolded in mid-March, company sales plummeted dramatically and customers held back payment, causing an acute cash crunch.

As the crisis deepened, the owner was able to reduce non-essential expenses and negotiate a reduction in rent. Benefits represented a major part of expenses but actual usage came to a halt for dental and paramedical services. The owner asked his insurer to temporarily pause unused coverage in order to conserve cash, which would have meant a savings of over $6,000 per month, but was told it wasn’t possible.

By mid-June the company had paid out almost $20,000 in cash during a crisis when not a single employee had been to visit a dentist, physiotherapist, massage therapist or any other practitioner covered under the benefits plan.

Too little, too late

Thus, most small businesses paid full premium for their benefits plans in March, April and May, and only in June did some start to see any credit from large insurers, some of which are now offering future credits to mitigate lower numbers of claims. More on this in a moment. But still, that is $1.6 billion of unnecessary premiums that small business owners could have used to stabilize their businesses and keep people employed during the height of the crisis when their cash flow was severely impacted. Continue Reading…

Tackling changes to your Retirement Income Plan

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Spending money is easy. Saving and investing is supposed to be the difficult part. But there’s a reason why Nobel laureate William Sharpe called “decumulation,” or spending down your retirement savings, the nastiest, hardest problem in finance.

Indeed, retirement planning would be easy if we knew the following information in advance:

  • Future market returns and volatility
  • Future rate of inflation
  • Future tax rates and changes
  • Future interest rates
  • Future healthcare needs
  • Future spending needs
  • Your expiration date

You get the idea.

We can use some reasonable assumptions about market returns, inflation, and interest rates using historical data. FP Standards Council issues guidelines for financial planners each year with its annual projection assumptions. For instance, the 2020 guidelines suggest using a 2% inflation rate, a 2.9% return for fixed income, and a 6.1% return for Canadian equities (before fees).

We also have rules of thumb such as the 4% safe withdrawal rule. But how useful is this rule when, for example, at age 71 Canadian retirees face mandatory minimum withdrawals from their RRIF starting at 5.28%?

What about fees? Retirees who invest in mutual funds with a bank or investment firm often find their investment fees are the single largest annual expense in retirement. Sure, you may not be writing a cheque to your advisor every year. But a $500,000 portfolio of mutual funds that charge fees of 2% will cost an investor $10,000 per year in fees. That’s a large vacation, a TFSA contribution, and maybe a top-up of your grandchild’s RESP. Every. Single. Year.

For those who manage their own portfolio of individual stocks or ETFs, how well equipped are you to flip the switch from saving to spending in retirement? And, how long do you expect to have the skill, desire, and mental capacity to continue managing your investments in retirement?

Finally, do you expect your spending rate will stay constant throughout retirement? Will it change based on market returns? Will you fly by the seat of your pants and hope everything pans out? What about one-time purchases, like a new car, home renovation, an exotic trip, or a monetary gift to your kids or grandkids?

Now are you convinced that Professor Sharpe was onto something with this whole retirement planning thing?

One solution is a Robo Advisor

One solution to the retirement income puzzle is to work with a robo advisor. You’ll typically pay lower fees, invest in a risk appropriate and globally diversified portfolio, and have access to a portfolio manager (that’s right, a human advisor) who has a fiduciary duty to act in your best interests.

Last year I partnered with the robo advisor Wealthsimple on a retirement income case study to see exactly how they manage a client’s retirement income withdrawals and investment portfolio.

This article has proven to be one of the most popular posts of all time as it showed readers how newly retired Allison and Ted moved their investments to Wealthsimple and began to drawdown their sizeable ($1.7M) portfolio.

Today, we’re checking in again with Allison and Ted as they pondered some material changes to their financial goals. I worked with Damir Alnsour, a portfolio manager at Wealthsimple, to provide the financial details to share with you.

Allison and Ted recently got in touch with Wealthsimple to discuss new objectives to incorporate into their retirement income plan.

Ted was looking to spend $50,000 on home renovations this fall, while Allison wanted to help their daughter Tory with her wedding expenses next year by gifting her $20,000. Additionally, Ted’s vehicle was on its last legs, so he will need $30,000 to purchase a new vehicle next spring.

Both Allison and Ted were worried how the latest market pullback due to COVID-19 had affected their retirement income plan and whether they should do something about their ongoing RRIF withdrawals or portfolio risk level.

Furthermore, they took some additional time to reflect on their legacy bequests. They were wondering what their plan would look like if they were to solely leave their principal residence to their children, rather than the originally planned $500,000. Continue Reading…

Retired Money: What I’m reading this summer in personal finance

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My latest MoneySense Retired Money column is a mini review of roughly a dozen personal finance or Retirement books I’ve been reading of late, or intending to finish. You can find the full column by clicking on the highlighted headline here: 12 Top Personal Finance books to read this summer.

First up are a couple of macroeconomics books: Graham Summers’ The Everything Bubble: The Endgame for Central Bank Policy, first published in 2017. It describes what the author calls “serial bubbles” – not just stocks but virtually every asset class, including fixed income and real estate. The book also tackles the two sources of financial repression for retirees hoping to live on interest income: ZIRP and NIRP, which stand respectively for Zero Interest Rate Policy and Negative Interest Rate Policy.

Like it or not, the November 2020 U.S. election is likely to have an impact on investors and would-be retirees, no matter how it works out. Two years ago, my MoneySense column reviewed several other Trump books in an attempt to understand the investment implications of his presidency.

Have we reached Peak Trump?

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Since then, I’ve also read Peak Trump: The Undrainable Swamp and the Fantasy of MAGA, by David Stockman, published in 2019.  Peak Trump includes a chapter also titled The Everything Bubble. Stockman believes the Trump boom – aided by the Federal Reserve’s “rotten regime of Bubble Finance” — has been a mirage and is fated to fade away. Presidential incumbents usually win re-election if the economy and stock market stay strong, but that’s hardly a slam dunk after the depression-level unemployment and social unrest that has come about in the wake of Covid-19.

Dual citizen and political pundit David Frum has just released his second Trump book: Trumpocalypse: Restoring American Democracy, a followup to his earlier Trumpocracy, which was mentioned in the link above. The blizzard of online and media reviews seem to suggest Frum believes Trump has lost the plot and may be vulnerable in the upcoming election.

With all this talk of asset bubbles and negative interest rates, it seems everyone is fated to worry about money and not just near-retirees. Worry-Free Money, by financial planner Shannon Lee Simmons, was published in 2017, and will primarily interest younger investors with a long time horizon. Simmons declares “everyone is worried about money” and says social media has only aggravated the situation. But if you’re worried she will nag you about things like budgeting, fear not: she gives reasons why “you need to stop budgeting.” Rather, you have to control your spending, living within your “hard limit” and say “No” to unhappy spending.

The Joy of Being Retired

For those closer to Retirement The Joy of Being Retired, by the prolific Edmonton-based international self-publishing master Ernie J. Zelinski, is a light read, with 365 reasons (and cartoons) on why Retirement Rocks “and Work Sucks.” Continue Reading…