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.

Should you roll the dice with your retirement savings?

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By Dale Roberts, Cutthecrapinvesting

Special to the Financial Independence Hub

You’ve worked for decades to build your retirement nest egg. You have invested smartly. The investment portfolio is required to fund a significant portion of your retirement years. In fact, you need those monies to last for many decades. Should you invest in an all-stock portfolio? That approach might deliver greater income than the traditional stock and bond portfolio.

Yup. More stocks might deliver more growth. No one can deny that stocks are the growth engine of a portfolio. When we own stocks we become business owners and we share in the success (or failure) of those companies. In the past, owning a big basket of market-leading companies has worked out more than well.

When stocks earn 8% we can spend 8%?

Retirement funding is tricky business. It’s much more complicated than the accumulation stage. The sequence of returns does not matter that much at all when we are building our portfolios, and we have decades until that retirement start date. We might see several good years that are followed by two or three bad years. Those bad years will not affect your retirement readiness when you have decades to recover. A savvy investor will even enjoy those bad years as the stocks go ‘on sale’.

But in retirement the order of stock market and portfolio returns do matter. That’s called sequence-of-returns risk. A bad year or a few bad years early in retirement can permanently impair your portfolio and your retirement. Even before that retirement start date we are already in the retirement risk zone.

But stocks beat the crap out of bonds

Most retirees and most financial planners will add some bonds to the portfolios of retirees. Those bonds work like shock absorbers. While there is no guarantee, good bonds have a habit of going up in price when stocks get hit hard. This is typical retirement planning ‘thinking’. And yes, there are other weapons besides bonds.

On Twitter we had a very robust discussion on retirement funding and risk. Financial Planner Ed Rempel defended the all-stock portfolio for retirees. And he provided some support with this chart:

According to Mr. Rempel, the success rate for an all equity portfolio is 97% for a period that spans over 100 years. Success is defined as the retiree being able to spend at 4% of the portfolio value, every year, with an adjustment equal to inflation. Of course that’s called the 4% rule. That’s a retirement planning benchmark that is useful, but is then usually disposed of for dozens of reasons. For Boomer and Echo I had asked if there was a new normal for Canadian retirees . Continue Reading…

How to manage a Side Hustle while studying full time

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 There’s no denying that getting your MBA — or any graduate degree — is a costly endeavor. Even if financial aid covers the cost of tuition, there’s still a raft of fees and the cost of books, moving, and living, which will vary widely depending on where you attend school. On top of all that, you have to give up your income for the next X years while you study.

Or do you? If the expenses are making you sweat, then you might be one of the many full-time students who consider taking on a side hustle.

What is a Side Hustle?

A side hustle is any job you do “on the side” to earn a little extra cash, whether it’s babysitting for your next-door neighbors, running social media for start-ups, or driving for Uber. It’s not your main focus, not what you center your life around, and certainly not what you’d answer when asked, “What do you do?,” but it’s a little bit of your time each week or month that brings in extra cash. If you’re lucky enough, you can get into a list of rich side-hustlers. Side hustles have been around since, well, paid work, but with the rise of the gig economy and the advent of public university tuitions, there are more students side-hustling than ever before.

Keep in mind that you took on a graduate degree to invest in yourself; if you end up sacrificing your studies for some extra pocket change … well, you shouldn’t need a finance class to tell you that’s bad economics. There’s no way your side hustle is lucrative enough to be worth NOT getting the most out of your degree, so if it comes down to making time for one or the other, your studies should always take priority. However, it’s also possible that you could be lucky enough to find a side hustle that actually enhances your degree by giving you experience in a relevant field.

Finding a Side Hustle

Often, the best side hustles arise purely by luck. Your favorite professor happens to need someone to do a little research for him or write up some case studies, or some other task related to your field of study, and you’re the man or woman for the job. Continue Reading…

The ultimate guide to safe Withdrawal Rates in Canada (for any Retirement age)

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By Kyle Prevost, for MillionDollarJourney

Special to the Financial Independence Hub

Most Canadians approaching retirement have two questions:

1.) How much can I take out of my investment portfolio each year if I want to be guaranteed not to outlive my money?

2.) Once I know the answer to my first question, can I live on that much money, plus whatever government benefits or private pension plan I might get.

The truth is that there are a TON of variables that go into answering these two questions for each person.  BUT the best that we’ve come up with so far is the “4% rule of thumb”.

That said, our 4% number (much more discussion on what this actually means below) depends on you optimizing your portfolio and withdrawal strategy.  If you’re embracing early retirement, and are looking at a retirement horizon of 30, 40, or even 50+ years, the 4% rule of thumb can still working surprisingly well for you!

Before we get to a discussion on the details of this handy tool and how it might apply to you, I should note that after talking to several financial experts in Canada, we all agree on one general observation about Canadian retirees:

It was really hard to get people who had been determined savers to spend their money!

Turns out that flipping the switch from a safe & investment mindset to an “enjoy life and spend nest egg” mindset is not as easy as one might initially think.

You’ve been reading MDJ for years, have used your Questrade DIY discount brokerage portfolio to accumulate a solid nest egg that includes your TFSA, RRSP, and perhaps even a non-registered account.  Now comes the time to start your retirement drawdown or withdrawal strategy. Surprisingly, when it comes to discussing Canadian safe retirement withdrawal rates, and and talking to folks who have retired at all ages, spending their retirement savings represented a massive mental strain for them.  I guess (as someone who has never retired or sold investments to pay for retirement) that I always thought that saving for retirement would be the hard part. Isn’t spending supposed to be more fun than squirreling away?

It turns out that once you get into that savings mindset, it can be hard to flip the switch back to enjoying spending the fruits of your labour.  This is especially true for folks who are looking at an early retirement withdrawal rate or strategy, because they are much more likely to have been super-aggressive savers during their time in the workforce.

Since this will be my first post for MDJ, I wanted to make it a real beauty.  I didn’t go into it expecting the topic to be so deep and full of variables! Afterall, the concept seems simple enough right?

How much can I take out of my investment portfolio each year, if I need that nest egg to last for 30, 35, 40, or even 50 years?

Personally, much like Frugal Trader, I’m hoping to retire sooner rather than later, so this question had particular relevance for me.  After diving into the math on this topic, it turns out that there are many things to consider when looking at how long your retirement savings will last, and it’s actually much more difficult to get a 100% mastery of, than the math involved with building an investment portfolio.  Use the table of contents links below to navigate the article if you’re short on time, or are only interested in one aspect of the extended article.

The 4% Retirement Withdrawal Rule

What the 4% Rule Means for Your Magic Retirement Portfolio Number

Potential Problems of the 4% Rule

How Has the 4% Rule Done In the Past

If I Want to Retire Early or do this whole “FIRE” Thing – Does the 4% Work for Me?

What Could Force My Retirement Into a Worst-Case Scenario?

Fees Suck – Get Rid of Them to Up Your Chances

Will The Returns of My Portfolio Look Like the Last 100 Years?

PWL Capital & Vanguard & the Shiller CAPE ratio

If Lower Returns Are the New Normal – How Does This Affect Me?

Sequence of Return Risk 

Avoiding the Worst-Case Scenario: Handling the First Ten Years to Reduce Your Risk

How Does OAS and CPP Factor into Safe Withdrawal Rates?

Emergencies or Tax Changes

Conclusion

The 4% Retirement Withdrawal Rule

Ok, so let’s maybe start with the rule of thumb that advisors have used when looking at retirement drawdown plans for a while now.

Back in 1994 a financial advisor named William Bengen looked at the last 80 or so years of markets and retirement, did a bunch of math, and arrived at a concept we now call “The 4% rule”.

The basic idea of the 4% retirement withdrawal plan is that someone could safely withdraw 4% of their investment/savings portfolio each year and – assuming a 60/40 or 50/50 split of bonds/stocks in their portfolio – they would never run out of money.  This idea of withdrawing a certain percentage of your portfolio to fund your retirement is called the Safe Withdrawal Rate (SWR). The math behind this magic 4% figure means that if you have the nice round $1 Million investment portfolio that we all dream of, you could safely pull out $40,000 the first year, and then adjust for inflation and withdraw 4% plus inflation after that. (So if there was 2% inflation between year one and year two, you could now withdraw $40,800.)

Bengen, and another highly influential study took their rule and retroactively applied it to retirees from every single year from 1926 to 1994.  They found that nearly 100% of the time (depending on what was in the investment portfolio) people could retire, and withdraw 4% of their portfolio for 30 years of retirement – and not run out of money.  In fact, a large percentage of the time, if retirees followed the 4% rule, they not only didn’t run out of money, they finished life with more money than when they started retirement!

Keep in mind, these authors didn’t worry about OAS or CPP, or a workplace pension, or even the tax implications of different types of withdrawals.  They were simply trying to come up with a useful rule of thumb for how much a person could safely withdraw from their retirement portfolio.

What the 4% Rule Means for Your Magic Retirement Portfolio Number

If you can safely withdraw 4% of your portfolio to fund your retirement, then the simple math tells us that if you can accumulate 25x your annual retirement budget, you no longer have to work. Continue Reading…

Retirement planning programs revisited

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More than a year ago I wrote a column for the Financial Post about a handful of Canadian retirement income planning software packages that help would-be retirees and semi-retirees plan how to start drawing down from various income sources: Click on the highlighted text to retrieve the full article: How you draw down your retirement savings could save you thousands: this program proves it.

The focus of the FP piece is Cascades but you can also find a MoneySense piece I wrote from late 2018 that looked at Viviplan, and one I wrote for the Globe & Mail last November that described Cascades, Viviplan and Doug Dahmer’s Retirement Navigator and BetterMoneyChoices.com.

Dahmer has been writing guest blogs on decumulation here at the Hub almost since this site’s founding in 2014. See for example his most recent one, or the similar articles flagged at the bottom: Top 10 Rules for Successful Retirement Income Planning. Dahmer says he’s pleased that others are waking up to the need for tax planning in the drawdown years: “Cascades provides a very good, easy-to-use introduction to these concepts.”

There may be as many as 26 distinct sources of income a retired couple may encounter, estimates Ian Moyer, a 40-year veteran of the financial industry and creator of the Cascades program described in the articles.

When he started to plan for his own decumulation adventure, six years ago, he felt there was very little planning software out there that was both comprehensive and easy to use. So, he hired a computer programmer and created his own package, now called Cascades.

Continue Reading…

Retirement not what many were expecting, and not in a good way: Sun Life survey

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My latest Financial Post column, which is on page FP 3 of Tuesday’s paper, looks at a Sun Life retirement survey released this morning. You can find it online by clicking on the highlighted headline: Canadians finding retirement is not all it’s cracked up to be.

So if you think Retirement is about eternal sea cruises and African safaris, you may be abashed by the Sun Life finding that almost one in four (23%) describe their lifestyle as a frugal one that involves “following a strict budget and refraining from spending money on non-essential items.”

Furthermore, many can expect to still be working full-time at age 66, which just happens to be my own age. And as you can see from this blog, I’m still working, if only on a self-employed semi-retirement basis.

In fact, among the 2150 employed Canadians polled by the 2019 Sun Life Barometer poll conducted by Ipsos, almost half (44 per cent) expect they’ll still be employed full-time at age 66. Among the “frugal” retirees still working after the traditional retirement age, 65 per cent say it’s because they need to work for the money rather than because they enjoy it.

In an interview, Sun Life Canada president Jacques Goulet mentioned most of the main reasons, few of which will come as a surprise to this blog’s readers. Mostly there is a failure to plan for Retirement early enough to save the kind of sums involved. Another familiar culprit is the ongoing decline of employer-sponsored Defined Benefit pension plans, which are becoming more and more rare in the private sector. Most of us can only envy the tax-payer backed guaranteed inflation-indexed DB pensions enjoyed by most government workers, politicians and some members of labor unions: a bulletproof source of income that you can’t outlive.

47% at risk of outliving their money

The alternative for many are employer-sponsored Defined Contribution pensions (DC plans), group RRSPs or personal RRSPs and TFSAs, which means taking on market risk and longevity risk. Both are challenges in the current climate of seemingly perpetual low interest rates and ever volatile stock markets, not to mention rising life expectancy. Even then, Goulet told me Canadians with DC pensions are leaving a lot of money on the table: $3 or $4 billion a year in “free money” that is obtainable if you enrol in a DC pension where the employer “matches” the employee contributions: typically 50 cents for every $1 contributed.

Finally, there is a large group that have no employer pension of any kind, or indeed any steady job with benefits, and these people are unlikely to have saved much in RRSPs or even TFSAs, which they should if they can find the means. This group may account for a whopping 47% of working Canadians, Sun Life finds, and about the only thing they’ll be able to count on in Retirement is the Canada Pension Plan (CPP) as early as age 60, Old Age Security at 65 and probably the Guaranteed Income Supplement (GIS) to the OAS. These people would be better off continuing to work till 70 in order to get higher government benefits, a time during which they can build up their Tax-Free Savings Accounts (TFSA)s. TFSA income does not impact CPP/OAS/GIS, which is not the case for RRSPs and RRIFs.

Finally, a word about continuing to work into one’s 60s and even 70s. I know many who do, and not always for the money. I’m in the latter category myself, even though personally my wife and I could be considered the poster children for maximizing retirement savings, living frugally and investing wisely. There are worse things in life than going to a pleasant job that provides mental stimulation, structure and most of all purpose. Many of these ideas are explored in the book I jointly co-authored with Mike Drak: Victory Lap Retirement.