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: What is Infinite Banking and should I consider it in Retirement?

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Image via MoneySense.ca: karlyukav on Freepik

My latest MoneySense Retired Money column looks at a topic I cheerfully admit I’d never heard of until the editors drew it to my attention: Infinite Banking (IB). Not to toot my own horn, but that’s unusual, as I have been writing about personal finance for the better part of three decades.

In any case, you can find the full MoneySense column by clicking on the highlighted headline here: Infinite banking in Canada: Should you borrow from your life insurance policy?

According to a  useful primer in Policy Advisor, Infinite banking is “a concept that suggests you can use your whole life insurance policy to ‘be your own bank.’ “ It was created in the 1980s by American economist R. Nelson Nash, who introduced the idea in his book, ‘Becoming Your Own Banker.’ He founded IBC (Infinite Banking Concept) in the U.S. and eventually it migrated to Canada.

One of the sources cited in the column evinced some skepticism when he said of Infinite Banking (IB for short): “those who have sipped rather than chugged the IB Kool-Aid say it’s a strategy that may be too complex to be marketed on a mass scale.”

If you’re not familiar with life insurance, Infinite Banking does seem a bit arcane. Rather than put your money in a traditional bank – which until the last year or so paid next to nothing in interest on accounts – you would invest in a Whole Life or Universal Life insurance product, either of which provides some “cash value” from the investment portion of those policies. Then if you want to borrow money, instead of paying hefty interest payments to a bank, you borrow against your life insurance policy.

Watch this YouTube video primer

Those new to Infinite Banking should definitely look at a YouTube primer made by Philip Setter, CEO of Calgary-based Affinity Life (Affinitylife.ca). There he readily concedes that much of the marketing hype is to portray Infinite Banking as some kind of “massive secret for the wealthy,” which essentially amounts to buying a whole life insurance policy and borrowing against it. In the video he calls out some of the conspiracy-mongering that seems to be attached to infinite banking, including the primary message from some promoters that traditional banks and governments are out to rip off the average consumer.  Continue Reading…

What Experts get wrong about the 4% Rule

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Pexels Photo by Miguel Á. Padriñán

By Michael J. Wiener

Special to Financial Independence Hub

 

The origin of the so-called 4% rule is WIlliam Bengen’s 1994 journal paper Determining Withdrawal Rates Using Historical Data.  Experts often criticize this paper saying it doesn’t make sense to keep your retirement withdrawals the same in the face of a portfolio that is either running out of money or is growing wildly.  However, Bengen never said that retirees shouldn’t adjust their withdrawals.  In fact, Bengen discussed the conditions under which it made sense to increase or decrease withdrawals.

Bengen imagined a retiree who withdrew some percentage of their portfolio in the first year of retirement, and adjusted this dollar amount by inflation for withdrawals in future years (ignoring the growth or decline of the portfolio).  He used this approach to find a safe starting percentage for the first year’s withdrawal, but he made it clear that real retirees should adjust their withdrawal amounts in some circumstances.

In his thought experiment, Bengen had 51 retirees, one retiring each year from 1926 to 1976.  He chose a percentage withdrawal for the first year, and calculated how long each retiree’s money lasted based on some fixed asset allocation in U.S. stocks and bonds.  If none of the 51 retirees ran out of money for the desired length of retirement, he called the starting withdrawal percentage safe.

For the specific case of 30-year retirements and stock allocations between 50% and 75%, he found that a starting withdrawal rate of 4% was safe.  This is where we got the “4% rule.”  It’s true that this rule came from a scenario where retirees make no spending adjustments in the face of depleted portfolios or wildly-growing portfolios.  So, he advocated choosing a starting withdrawal percentage where the retiree is unlikely to have to cut withdrawals, but he was clear that retirees should reduce withdrawals in the face of poor investment outcomes. Continue Reading…

The changing perceptions of Normal

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Image courtesty Outcome/Creative Commons

By Noah Solomon

Special to Financial Independence Hub

In response to rapidly accelerating inflation, central banks began raising rates aggressively at the beginning of 2022. Ever since, wild swings in bond markets have had a tremendous impact on virtually every single asset class.

This month, I examine the recent spike in rates from a historical perspective. Importantly, I will discuss the likely range of interest rates over the foreseeable future and the associated implications for financial markets.

When the Fed and other central banks were confronted with financial disaster in late 2008, they slashed interest rates to zero and deployed additional stimulative measures to ward off what many thought could be another Great Depression. Global rates then remained at levels that were both well below historical averages and the rate of inflation for the next 13 years.

In 2008, the runaway inflation of the 1980s and the painful medicine of record high rates that were required to subdue it were still relatively fresh in people’s minds. At that time, had you asked anyone what would be the most likely result of keeping rates near zero for over a decade, their most likely response would have been runaway inflation. And yet, inflation remained strangely subdued. According to most experts, this unexpected result is largely attributable to a relatively benign geopolitical climate and a related push toward global outsourcing.

This led to the notion of a “new normal” in which inflation was permanently expunged. Over the span of only 13 years, people went from fearing inflation to believing that it was a relic of the past unworthy of serious consideration. This false sense of comfort caused central banks and investors alike to be caught off guard in late 2021 when they realized that inflation had not been permanently vanquished but was merely hibernating.

These sentiments were evident in bond markets. After rates were slashed to zero during the global financial crisis, investors were skeptical that they would remain there for long before stoking inflation. Longer-term rates remained well above their short-term counterparts, with the yield on 10-year U.S. Treasuries retaining an average 1.9% premium above the Fed Funds rate from 2009 – 2020.

However, 13 years of ultra-low rates with no sign of inflation allayed such fears, with the yield spread crossing into negative territory late last year and reaching a low of -1.5% in May of 2023. Even the rapid acceleration in inflation in late 2021 failed to fully disavow investors of the notion that the era of low inflation had come to an end, with current 10-year rates falling below their overnight counterparts.

10 U.S. Treasury Yield Minus Fed Funds Rate (1995 – Present)

 

Equity markets danced to the same tune as their bond counterparts. When central banks cut interest rates to zero during the global financial crisis, investors were dubious that inflation would not soon rear its ugly head. Multiples remained relatively normal, with the P/E ratio of the S&P 500 Index averaging 16.4 for the five years beginning in 2009.

Over the ensuing several years, investors became complacent that the world would never again experience inflation issues, with the S&P 500’s P/E ratio climbing as high as 30 by early 2021. Multiples have since remained somewhat elevated by historical standards, indicating that markets have not fully embraced the fact that inflation may not be as well-behaved as what they are used to.

S&P 500 P/E Ratio (1995 – Present)

 

The Rising Tide of Declining Rates: Not to be Underestimated

According to legendary investor Marty Zweig:

“In the stock market, as with horse racing, money makes the mare go. Monetary conditions exert an enormous influence on stock prices. Indeed, the monetary climate – primarily the trend in interest rates and Federal Reserve policy – is the dominant factor in determining the stock market’s major direction.”

The 2,000-basis point decline in interest rates from 1980 to 2020 not only turbocharged aggregate demand (and by extension corporate revenues), but also dramatically lowered companies’ cost of capital. In tandem, these two developments were nothing short of a miracle for corporate profits and asset prices. Continue Reading…

The waiting is the hardest part, and the most profitable times for investors

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By Dale Roberts

Special to Financial Independence Hub

Investors are starting to notice that their portfolios have been treading water for a couple of years. Over the last two years, a global balanced growth portfolio would essentially be flat. Of course, move out to 3-year, 5-year and 10-year time horizons and we have very solid to generous returns.

At times investors have to wait. We build and springload the portfolio waiting for the next aggressive move higher. In fact, these holding periods can be beneficial: we are loading up on stocks at stagnating or lower prices. We’re able to buy more shares. The waiting is the hardest part for investors. But it is essential that we understand the benefits to sticking to our investment plan.

In January of 2021 I wondered aloud in a MoneySense post if the markets might not like what they see when we get to the other side of the pandemic. That’s an interesting post that looks back at the year 2020, the year the world changed with the first modern day pandemic. That suspicion is ‘kinda’ playing out as the markets stall and try to figure things out.

That’s not to suggest that my hunch was an investable idea. We have to stay invested.

Stick to your plan when the market gets stuck

Patience is the most important practice when it comes to wealth building. When done correctly, building life-changing wealth happens in slow motion and it is VERY boring.

Boring is good.

Waiting can be boring. But maybe it can look and feel more ‘exciting’ if we know what usually happens after the wait. Stock markets work like evolution. There are long periods of stagnation and status quo and then rapid moves and change.

Instead of boring, maybe it should feel like a kid waiting for Christmas. The good stuff is on its way.

Here’s an example of a waiting period, from 1999. The chart is from iShares, for the TSX 60 (XIU/TSX). The returns include dividend reinvestment.

And here’s the stock market ‘explosion’ after the wait.

That’s more than a double from the beginning of the waiting period.

And here’s the wait from 2007, moving through the financial crisis. Ya, that’s a 7-year wait. Talk about the 7-year itch, many investors filed for divorce from the markets.

It was a costly divorce.

Markets went on a very nice run for several years. Continue Reading…

Timeless Financial Tip #9: Beware Conflicted Financial Advice

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Lowrie Financial: Canva Custom Creation

By Steve Lowrie, CFA

Special to Financial Independence Hub

There’s only so much you and I can do about life’s many surprises. Some things just happen, beyond our control. Fortunately, to make the most of your hard-earned wealth, there is one huge and timeless best practice you can control: You can (and should) avoid seeking unbiased financial advice from biased sales staff.

How do you separate solid investment advice from self-interested promotions in disguise? Here’s a handy shortcut: Are the investments coming from your friendly neighborhood banker? If so, please read the fine print — twice — before buying in. Due to inherently conflicting compensation incentives, most banks’ investment offerings are optimized to feed their profit margin, at your expense.

Compensation Incentives Matter … a Lot

I’ve been covering the conflicted compensation beat for years, like in On Big Banks, Conflicting Compensation and Bad Behaviour, and my message has remained the same, for all the same reasons:

Compensation drives behaviour.

It’s human nature.  It’s true for Canadian bankers and their investment offerings. It’s also true in the U.S. and around the globe.

For example, a 2017 Consumer Federation of America report, “Financial Advisor or Investment Salesperson?” reflects on this very conflict:

“After all, people expect salespeople to look out for their own interests and maximize profits, but advisors are expected to meet a higher standard. … Investors who unknowingly rely on biased salespeople as if they were trusted advisors can suffer real financial harm as a result.”

Let’s imagine I’m a banker, on a bank’s payroll. Pick a bank, any bank. Assume I’m at any level, from teller to VP. Here’s how my compensation package is likely structured:

  1. I can expect to earn more if I promote my employer’s proprietary Widget X products over any comparable, but generic Gadget Y offerings. Sure, Widget X will cost my customers more. But by helping me and my bank thrive, aren’t we both better off?
  2. I and my team may even score special perks if we exceed our Widget X sales quotas. There may be contests, celebrations, or at least positive performance reviews.
  3. In fact, if I don’t sell enough Widget X’s (or if I sell too many Gadget Ys), my performance reviews may suffer. I could lose my job, or at least not rise in the ranks.

Under these sales-oriented conditions, guess which investment product I’m going to recommend as often as I can? As a bank employee, I may well care about my customers. But the bottom line is that they don’t determine how much or little I am paid for my efforts. When my bank’s profits rise or fall, so does my career.

“Our Way or the Highway” Investments

In theory, banks have plenty of flexibility to structure their investment lineup however they please. They could promote the same low-cost, globally diversified, evidence-based mutual funds and ETFs that independent, fee-based, evidence-based financial advisors typically deploy.

Instead, most banks tend to heavily promote their own, proprietary investment products: built, managed, and priced in-house.

In its title alone, a 2023 The Globe and Mail report speaks volumes about this approach: “Pervasive sales culture at Canadian banks designed to push customers into high-fee products.” Its authors observe:

“The commission earned from selling the bank’s products may be five times higher than on a GIC, for example. In this way, the system incentivizes the sale of funds with higher fees, even when a GIC might be a better fit for the client.”

Suitable vs. Fiduciary Advice

At best, your bank’s compensation conundrums may leave you paying more than necessary for sound investments. Worst-case (and from what I’ve seen, more likely), you’ll end up overpaying for the “privilege” of holding investments that fail to fit your short and long-term personal financial goals.

That’s because your banker may be required to offer products that are broadly “suitable” for you, but as I’ve described before, like in What is the Cost of a Financial Advisor?, they don’t have to be the best choice for you.

There’s a big difference between suitable versus fiduciary advice. Your banker’s role as an “adviser” may sound comforting. But make no mistake. Regardless of their title or compensation, they are not in a fully fiduciary relationship with you; they don’t have to always place your highest, best interests ahead of their own. Continue Reading…