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.

Retired Money: How Vanguard’s 4% targeted payout on VRIF makes it easier for retirees to draw income

Posted By Jonathan Chevreau | September 20, 2020

My latest MoneySense Retired Money column looks at Vanguard Canada’s new targeted 4% annual payout vehicle for retirees and near-retirees, provided by its new VRIF ETF. You can find the full article by clicking on the highlighted headline: The lowdown on Vanguard’s Retirement Income ETF: can you rely on its 4% payout target?

The Vanguard Retirement Income ETF Portfolio [VRIF/TSX] started trading Sept. 16^th and offers retirees and near-retirees a 4% targeted — as opposed to guaranteed — payout. See also the Hub’s republication of Robb Engen’s preview on VRIF that appeared first on his BoomerandEcho site.

Positioned as a “Decumulation” product for retirees and near-retirees, it’s probably no coincidence that the 4% target is nicely in line with the long-established 4% Rule discussed on the Hub and MoneySense earlier this summer.

While a targeted return is NOT a guarantee – unlike the guaranteed but puny rates paid by GICs these days – Vanguard expects it will attract a fair amount of money from income-oriented investors suffering sticker shock when their GICs mature. Currently, many 1-year GICs pay around 0.5%, ranging from as little as 0.3% to no more than 1.1%. Even going out to 5-year terms, they’re typically paying only 1.4%, ranging from under 1% to 2% in the best case.

Technically, those GIC returns are “guaranteed” but a cynic might say they’re guaranteed to lose money on an after-tax, inflation-adjusted “real return” basis. Based on recent statements by the Bank of Canada and US federal reserve, this is not likely to improve before 2023. In the UK there are even renewed whispers of negative rates.

Of course, to achieve the 4% targeted payout, investors still have to bear some stock-market risk. VRIF consists of eight existing Vanguard stock and bond ETFs with an asset mix of roughly 50% stocks and 50% bonds.

VRIF has much lower fees than comparable income mutual funds and income ETFs

Monthly income mutual funds and ETFs have been around for years but as is typical, Vanguard aims to be the low-cost leader in the category. With such tiny returns from the fixed-income component, those costs are an important determinant of how much money is left for investors. The full MoneySense article recaps the fees relative to existing income mutual funds and income ETFs. Continue Reading…

Vanguard’s VRIF: Your new single-ticket Retirement Income Solution

Posted By Robb Engen | September 17, 2020

Two years ago, Vanguard launched a suite of asset allocation ETFs that changed the game for DIY investors in their accumulation years. These balanced ETFs provide low-cost, global diversification, and automatic rebalancing with just one fund.

On Wednesday (Sept 16), Vanguard announced another evolution in the asset allocation ETF space with a new product aimed at retirees in the decumulation phase. The Vanguard Retirement Income ETF Portfolio, or VRIF, uses global diversification and a total return approach to provide steady monthly income at a target payout rate of 4% per year.

ETF	TSX Symbol	Management fee	Target annual payout
Vanguard Retirement Income ETF Portfolio	VRIF	0.29%	4%

Saving for retirement is by far the number one objective for investors and Vanguard believes that space is well covered with their now flagship products like VEQT, VGRO, and VBAL. An investor in his or her accumulation phase could simply move down the risk ladder, switching from VEQT to VGRO to VBAL as they get closer to retirement age.

But what to do with your ETF portfolio in retirement? It’s a question I get every time I mention the benefits of investing in asset allocation ETFs. Prior to today, the answer was to sell ETF units as necessary to meet your spending needs or rely on smaller, quarterly distributions of around 2% per year.

With VRIF, investors get a predictable monthly income stream (targeted at 4% per year) to help meet their regular spending needs and not have to worry about rebalancing and/or selling ETF units.

Indeed, you could think of VRIF as the retirement equivalent of VBAL.

Vanguard Retirement Income ETF Portfolio (VRIF)

VRIF is a single-ticket income solution. It’s a wrapper containing eight underlying Vanguard ETFs that offer global exposure to more than 29,000 individual equity and fixed income securities.

Here’s a look under the hood of VRIF:

Asset class	ETF	Weight
Canadian equity	VCN	9.0%
Canadian aggregate fixed income	VAB	2.0%
Canadian corporate fixed income	VCB	24.0%
Emerging markets equity	VEE	1.0%
U.S. fixed income (CAD-hedged)	VBU	2.0%
U.S. equity	VUN	18.0%
Developed ex North America equity	VIU	22.0%
Global ex U.S. fixed income (CAD-hedged)	VBG	22.0%

Here is the geographic breakdown of VRIF’s holdings:

Canada – 35%
United States – 20%
Developed ex North America – 44%
Emerging markets – 1%

VRIF focuses on a total return approach using an approximate asset allocation of 50% equity and 50% fixed income. This approach allows the portfolio to payout from capital appreciation in years when the portfolio yields fall below the target.

A total-return approach is more tax-friendly because VRIF can distribute from capital appreciation. In that case, only the difference between the cost basis and the sale price is taxed. Meanwhile, the full dividend distribution from underlying securities is taxable.

Vanguard highlights the transparency of VRIF and its underlying holdings, saying because its building blocks are clear, you always know what you’re investing in and why, adding that regular monitoring and rebalancing helps maintain exposures across key sub asset classes and risk levels.

VRIF’s 0.29% management fee (before taxes) is roughly one-third the cost of any comparable monthly income mutual fund in Canada. Costs matter, especially to retirees with sizeable portfolios who are looking to keep more of their returns and protect their investment base. Continue Reading…

8 financial benefits employers can use to attract good employees

Posted By Financial Independence Hub | September 15, 2020

In today’s environment, great candidates are not just looking for a competitive salary. They want great benefits as well! With many companies offering unique perks like extended vacation days or flex time, it is important that you bring something to the table that stands out. Financial benefits are a great way to do just that!

By rewarding employees with more than just disposable income, you are creating new opportunities for things that they find rewarding. To get a better understanding of how different companies implement financial benefits, we chatted with eight business leaders about their approaches. Check out their ideas below!

Signing Bonus

While offering a signing bonus isn’t a necessity, employees greatly appreciate it. This could give your new employee some extra cash to compensate for moving or for making up for the time in between jobs. It is a great way to say “welcome to the team!” — Pete Newstrom, Arrowlift

Pension Matching

To attract good employees, it is necessary to offer something competitive that other companies might not offer. Matching your employee’s 401(k) contributions up to a certain percentage is a great way to let the people that work for you know that you care about their future. — Chris Dunkin, Portable Air Continue Reading…

Understanding the Chargeback Process to ward off Credit-card Fraud

Posted By Financial Independence Hub | August 24, 2020

By Gary Bordeaux

Special to the Financial Independence Hub

Proper accounting and cash flow management is critical for both big and small business owners. This seems obvious enough, but when we move from accounts receivable into the world of refunds and chargebacks, the water can begin to get muddy, and it can be more difficult to keep track of where you stand. The first action to take towards fixing and preventing the problems this can cause is to understand what chargebacks are, and what to expect when you are presented with one.

The two types of Chargebacks

If you’re a new entrepreneur, you may be asking “what is a chargeback?” A chargeback is a form of fraud dispute that comes in two basic methods. First, a chargeback can be a transaction that is reversed due to activity that may be fraudulent designed to protect a consumer a business or both. In the second type of chargeback, the credit card company demands a vendor replace or make good a loss incurred by the consumer due to a fraudulent charge.

It’s important to mention early that a refund is very different from a chargeback. A refund is instigated by one or both parties, and usually involves the re-exchange of an item for its purchasing price or value. Chargebacks are inherently fraud mitigation processes that may have additional fees that must be paid by the party deemed at fault, usually the retailer.

Who is involved and what is the process?

The key players in the chargeback process begin with the customer, who usually is the one to dispute a charge. They file a complaint with their credit card’s issuing bank, which may be their local branch or a national finance company that has provided them with their card. The issuing bank takes the concern up with their issuing bank processor, which will verify the account balances of the customer and then approve or reject transactions that have come through any of the four major card networks (MasterCard, Visa, Discover, or American Express).

The card networks are responsible for settlement. Their next step is working with an acquiring bank (or acquirer) that accepts funds for the retailer from the buyer. They are responsible for the settling of additional fees like processing, interchange, or network fees. Their merchant account processor does just what their name implies: process payments for the merchant. These go into the merchant commercial bank account, which is simply the retailers’ account; the destination for funds. But this is where funds can be pulled for chargebacks and given back to the customer.

Reason Codes

When dealing with Chargebacks, it’s important for a business to be familiar with reason codes. Reason codes are the shorthand for the card networks, and signify why a charge has been disputed, resulting in a chargeback. Continue Reading…

Determining your Financial Independence number

Posted By Financial Independence Hub | August 21, 2020

By Mark Seed, MyOwnAdvisor

Special to the Financial Independence Hub

Passionate readers of this site have long understood I’ve never been fully convinced about the “retire early” element in the Financial Independence Retire Early (FIRE) movement.

I mean really, what 30- or 40-something is never going to work for any money ever again??

(Answer = you know it.)

Surely some of them will hustle a blog, a course, a book, a podcast or other at some point. The list goes on.

Such FIRE-seekers and very early retirees are not likely misleading people on purpose: some are just simply entrepreneurs …

Forget “RE”, “FI” is the worthy goal

While I couldn’t care less about the retire early part of FIRE, I am working towards the FI part and have been doing so for at least a decade now.

I think most people should absolutely strive for FI instead of early retirement. (See this 2019 blog, Strive for Financial Independence, not Early Retirement).

How much do you need to save for any comfortable retirement?

“It depends.”

According to Fidelity, to be on track for a healthy retirement:

You should have x1 your annual salary saved up for retirement by age 30.
You should have x3 your annual salary saved up for retirement by age 40.
You should have x6 your annual salary saved up for retirement by age 50.
You should have x8 your annual salary saved up for retirement by age 60.
You should have x10 your annual salary saved up for retirement by age 67.

As a 40-something, according to the pros we should have at least x3-x6 of our annual savings in the bank.

I’m glad I don’t listen to Fidelity. We’re beyond that milestone and we’ll be better off financially (sooner) because of it.

Here in Canada, MoneySense did some similar work on this a while back:

Do you really need this much? $1 million or $1.5 million? More?

“It depends.”

I can’t tell you unfortunately: since that answer comes with a complex set of income needs and wants and everyone’s spending goals are very, very different.

I can say with a rather firm set of certainty that if any Canadian or U.S. citizen that amasses this much portfolio value by age 65 and has modest spending needs they will be far better off financially than most.

Our FI number

For years, I’ve pegged our FI number to be around the $1 million portfolio value mark not including any home equity (and our soon-to-be debt-free home: we have to live somewhere!), excluding our workplace pensions, and excluding any future government pensions such as Canada Pension Plan or Old Age Security.

I largely arrived at this number by using a rather standard FI formula.

Financial Independence means:

earning enough passive income from my assets such that my asset-producing passive income is > general expenses, and/or
amassing a portfolio value such that reasonable withdrawals will be > general expenses for many decades on end.

What are reasonable withdrawals???

You could argue the birth of any reasonable and therefore any safe portfolio withdrawal formula was originated by U.S. financial advisor William Bengen.

You can read about his genesis for the 4% rule and why it still makes sense by reading this blog from earlier this year: Why the 4% Rule is (still) a decent rule of thumb.

Following Bengen and largely reinforcing his work, three professors at Trinity University published a paper about safe retirement withdrawal rates.

Those professors looked at stock and bond data from the mid-1920s through to the mid-1970s and their conclusion was that essentially over any 30-year investment period in that range, a retiree could safely withdraw 4% of their total assets per year without much fear (meaning barely any fear) of running out of money. Only in a handful of cases, the very worst cases in any 30-year period, would the portfolio go to absolute zero.

So, let’s look at that context when it comes to our goals:

If we managed to enter retirement with our desired $1 million goal of invested assets (along with no debt of course), then we could reasonably expect to assume we could withdraw $40,000 per year for our living expenses from that portfolio with very little fear of running out of money.

Henceforth, the study by those three professors from Trinity University, The Trinity Study, have set the framework for a gazillion FI number crunching exercises to this day and likely the same number into the future …