Decumulate & Downsize

Most of your investing life you and your adviser (if you have one) are focused on wealth accumulation. But, we tend to forget, eventually the whole idea of this long process of delayed gratification is to actually spend this money! That’s decumulation as opposed to wealth accumulation. This stage may also involve downsizing from larger homes to smaller ones or condos, moving to the country or otherwise simplifying your life and jettisoning possessions that may tie you down.

7 Hidden Traps of Retirement

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By Fritz Gilbert, TheRetirementManifesto

Special to Financial Independence Hub

The article was from the Harvard Business Review and highlighted 7 Hidden Traps of Retirement, which the writers discovered during interviews with “dozens of highly respected former chief executives.”

As I read the article, I realized the traps of retirement don’t apply only to folks retiring from top management positions.

These traps present a risk to all of us.

Today, I’m presenting each of the 7 Hidden Traps of Retirement and my thoughts on how best to avoid them.

Be forewarned.

Don’t get trapped.

Don’t fall into any of these 7 Hidden Traps of Retirement. Use these tips to avoid them and live a great life in retirement. Share on X

7 Hidden Traps of Retirement

The article that made me think was The Challenges of Retiring from a High-Powered Job, written by three founders of ONYX, an invitation-only group designed to build a community for current and former CEOs.  I encourage you to read the article, but I’ll summarize the key points below.

In their work helping CEOs prepare for retirement, the team has discovered seven hidden traps of retirement. While focused on senior managers, I’m taking a different twist with their list and considering how these traps apply to all of us. I’ve taken the liberty of renaming each of the seven hidden traps of retirement to better align with the readers of this blog and providing my thoughts on how to avoid falling into each.

The risks apply during our planning for and transition into retirement.  If you’re struggling with the transition into retirement, perhaps it’s because you’ve fallen into one of these traps.

1. Focusing on who you are, instead of who you want to become.

Original Title:  Looking through the lens of the present impedes you from seeing future possibilities.

In your final years of work, it’s easy to procrastinate on retirement planning and focus on your current role.  You’re busy doing your job and you can deal with that retirement stuff after you’re done working.  That’s a dangerous approach that far too many people follow.  It’s one of the traps of retirement for a reason. Seeing beyond your current role requires a creative imagination, the type that has likely been dormant for years.  Losing your sense of identity can be a shock in retirement, but the impact can be minimized by the appropriate planning.

How to Avoid the Trap:

Forget about your current role for a minute.  After all, it will be irrelevant the day after you retire. (Let that sink in)

Think about what you want your life to BECOME in retirement.  You’ll no longer have that title, and that sense of identity you get from your work will be gone.  That’s scary, and something a lot of people avoid thinking about. Don’t be that person.  Rather, think about your new identity in retirement. What do you want to be known for? What areas are you curious about?  What did you do as a child that you’d like to revisit now that you’re free from those chains of work? Carve out time to think about what impact you want to have with your newfound freedom.  It takes some time, so be patient.  The important thing is to think beyond your current role and imagine what you can do to make a difference once the job is gone.

In What I’ve Learned From Writing 400 Articles About Retirement, I wrote about my new identities in retirement (writer, running a charity, grandfather, etc).  A quote from that article is relevant here, and I’d encourage you to adopt it as one of your goals in retirement:

“I’m not who I used to be, and I love who I’ve become.”

2. Focusing on too many options.

Original Title:  A wealth of options can overwhelm and paralyze decision-making.

That busy schedule and rigid structure will disappear when you retire, and you’ll be looking at a “blank sheet of paper.”  Having no schedule or structure to your day sounds appealing, but it becomes disorienting after a surprisingly short period.  Your brain will start searching for something to do, and you’ll have difficulty prioritizing what you want to do with your life.

How to Avoid the Trap:

Take some quiet time to think about what impact you want to make with your retirement years.  Think about the causes you have a passion for.  Listen to your inner curiosity, and take that first step to see where it leads. When you’re thinking about something you could do, compare it to that list of things that matter to you.  For example, you may have enjoyed working with younger people during your career and would like to find a way to do that in retirement.  Perhaps you’ll become a mentor, a Big Brother, or a business coach to the next generation.

Find your “North Star” and pursue only those opportunities with strong alignment to the things that matter to you.  Don’t pursue “busyness” for the sake of being busy.  Rather, invest your time in areas where you have a real interest (lack of experience doesn’t matter, as I’ll demonstrate below).

Using your time to impact an area you care about is the true path to happiness.

3. Not building relationships outside of work.

Original Title:  Relying on your old network can distract you from the critical task of building your new one.

Everybody thinks they’ll keep in touch with folks they worked with.  Almost no one does. It’s one of those strange realities of retirement, and it will likely happen to you.  (Note this statistic in “Shining The Light on Retirement Blind Spots”: 62% of retirees missed the relationships from work, whereas only 29% of pre-retirees expected it to be an issue).The relationships at work are about “work.”  Once you’re out of the scene, it becomes difficult and awkward to maintain those relationships.

And yet, relationships matter.

I dedicated an entire chapter in my book to relationships.  People think about their paycheck stopping when they retire, but they often overlook the “softer” benefits they receive from work which will also disappear:

  • Structure
  • Sense of Identity
  • Relationships
  • Sense of Purpose
  • Sense of Accomplishment

Ironically, these 7 traps of retirement align almost perfectly with that list.  That doesn’t surprise me in the least.  If you’re a regular reader, you know I’m passionate about the importance of the “soft side” of retirement.

How to Avoid the Trap:

In your final year or two of work, be intentional about building relationships outside your workplace.  Your mission: build relationships that will be there after you retire.  Spend a few Saturdays volunteering at a local charity.  Get involved with a few Facebook groups in your area that do things that interest you.  Join a gym and learn to play pickleball. Join a local hiking club. Go to a Trout Unlimited meeting.  Call an old friend. Attend a local church.

Explore whatever interests you and pay attention to the people in the groups you visit.  In time, you’ll find a group that feels “right.” Pay attention, that’s where you’ll get your retirement relationships.

They matter more than you expect.

4. Waiting to figure out retirement until after you retire.

Original Title:  Delaying retirement planning can lead to urgent, anxious, and awkward outcomes.

don't retire without a plan

A quote from the original article is telling:

“The majority of CEOs and executives we talked with told us they failed to appropriately plan for their retirement — and nearly all told us they waited too long to start.”

It is, perhaps, the most common of the traps of retirement.  Many people are nervous about retirement, and procrastination is a common response.  “I’ll deal with it when I’m retired,” many people think.  That’s one approach, but research has shown that taking that route will lead to a difficult transition. The cliff is coming, and you can prepare your parachute or just take the leap and figure it out once airborne.  I recommend the former approach, it makes for a much smoother landing.

How to Avoid the Trap:

As I was in my final working years, I was interested obsessed with figuring out why some people had a smooth transition to retirement, whereas others struggled.  As I’ve written before, there’s one single element that is the most highly correlated with the smoothness of your transition.  That element?

The amount of time you spend planning for retirement in your final years of work (both on financial and non-financial issues).

Spend a lot of time planning, and your retirement will be smooth.  Ignore it until you retire, and buckle in for a rough ride.  As I wrote in The 4 Phases of Retirement, only 15% of retirees skip over the dreaded Phase II.  I was lucky enough to be one of them.  So can you. Continue Reading…

A Misunderstanding about Taking CPP Early to Invest

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By Michael J. Wiener

Special to Financial Independence Hub

Recently, Braden Warwick at PWL Capital created an excellent CPP calculator that we can all use.  One of the numbers this calculator reports is the IRR (Internal Rate of Return) you’ll get between your CPP contributions and the CPP pension you’ll collect.  Some financial advisors (but not Braden) decide it makes sense for their clients to take CPP as early as possible (age 60), and invest the proceeds.  Their reasoning is that they believe they can earn a higher return.  Here I explain why this logic compares the wrong returns.

The return you’ll get on your CPP contributions depends on the contributions you and your employer have made and the benefits you’ll get.  These amounts depend on many factors about your life as well as some assumptions about the future.  Typically, the return people get on CPP is between inflation+2% and inflation+4%.  (However, it can go higher if you took time off work with a disability or to raise your children.  It also goes higher if you ignore the CPP contributions your employer made on your behalf, but I think this makes a false comparison.)

If we examine people’s lifetime investment record, not many beat inflation by as much as CPP does.  However, some do.  And many more think they will in the future.  In particular, many financial advisors believe they can do better for their clients.

But what are we comparing here?  These advisors are imagining a world where CPP doesn’t exist.  Instead of making CPP contributions, their clients invest this money with the advisor.  In this fictitious world, the advisor may or may not outperform CPP.  However, this isn’t the world we live in.  CPP is mandatory for those earning a wage.

The choice people have to make is at what age they’ll start collecting their CPP pension.  The CPP rules permit starting anywhere from age 60 to 70.  The longer you wait, the higher the monthly payments get.  Consider an example of twins who are now 70.  The first started CPP a decade ago at 60 and the payments have risen with inflation to be $850 per month now.  The other waited and has just started getting $2000 per month.  The benefit of waiting is substantial if you have enough savings to bridge the gap between retiring and collecting CPP, and don’t have severely compromised health.

Those with enough savings to bridge a gap of a few years have a choice to make.  Should they take CPP immediately upon retiring, or should they spend their savings for a while in return for larger future CPP payments?  Some advisors will say to take CPP right away and invest the money, but this is motivated reasoning.  The more money we invest with advisors, the more they make. Continue Reading…

The Cost of Overspending in Retirement: How a Withdrawal Strategy saved $16,500 annually

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A Retirement Income Solution: How Milestones Retirement Insights helped one Alberta Couple Save $16,500 annually

By Ian Moyer

Special to Financial Independence Hub

Retirement is meant to be a time of relaxation and enjoyment, but for many Canadians, managing retirement income efficiently can be a major challenge. This was the case for a couple in Alberta, aged 70 and retired for five years. They were concerned about depleting their savings too quickly and needed a tax-efficient withdrawal strategy to better sustain their retirement lifestyle.

The Problem: Overspending Without a Plan

The couple had a mix of financial assets, including:

  • RRSPs: $400,000 remaining
  • TFSAs: $75,000 remaining
  • Joint Non-Registered Savings: $50,000 remaining

They were spending $80,000 a year without a clear withdrawal strategy, leading to inefficiencies and over-taxation. This lack of guidance was costing them $16,500 annually, money that could have been used to enhance their lifestyle.

 

 The Solution: A Tailored Withdrawal Strategy

Using Milestones Retirement Insights, they were able to restructure their withdrawals to maximize after-tax income while preserving their savings for the long term. Here’s how:

  1. Prioritizing TFSA Withdrawals: We tapped into their tax-free savings account first, allowing them to access funds without triggering additional taxes.
  2. Splitting RRSP Withdrawals Over Time: By drawing from their RRSP in smaller increments, we kept their income within lower tax brackets.
  3. Non-Registered Savings for Gaps: Joint savings were used strategically to fill gaps, minimizing tax exposure while ensuring consistent income.
  4. Optimal RRIF Conversion: We structured their RRSP to RRIF transition to further reduce taxes and take advantage of pension income splitting.

Key Consideration: RRSP to RRIF Conversion

When you reach retirement, a registered retirement savings plan (RRSP) has the option of converting to a registered retirement income fund (RRIF). To provide a sustainable retirement income and minimize your income and estate taxes, we’ve calculated an average annual RRIF payment of $28,112 starting at age 70. At an assumed rate of return of 5%, this investment will deplete to $0 at age 88. Continue Reading…

Canada’s best Asset Allocation ETFs

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By Dale Roberts

Special to Financial Independence Hub

When the Canadian asset allocation ETFs were introduced several years ago, the investment community hailed them as “game changers.” That is, the final nail in the coffin for high-fee / low-performance Canadian mutual funds.

The asset allocation ETFs are well-diversifed, managed global portfolios available at 5 risk levels. The fees represent about a 90%-off sale compared to the typical mutual fund. The fees range from 0.17% to 0.25%. It’s a no-brainer for most Canadians. You can open an account with a discount brokerage, enter one ticker symbol (XEQT for example), enter an amount, press Buy and own thousands of companies around the globe. Are these the best funds available in Canada? Yes, that’s a rhetorical question.

Here’s an ode to XEQT from Loonies and Sense.

 

Cut The Crap Investing is the only blog that tracks the performance of the leading Asset Allocation ETF providers. I also sort them by risk level. For example, you’ll see the performance comparison between the balanced portfolios from Vanguard and BlackRock and the rest of the AA gang. You’ll also see the surprising outlier “winner” that includes modest amounts of bitcoin in its offerings.

Check out the ultimate Canadian asset allocation ETF page. Here’s a teaser: the balanced growth models. They range from 80% stocks / 20% bonds to 90% stocks / 10% bonds. The returns listed are average annual.

Build your own portfolio

While the asset allocation ETFs are the easiest, hands-off way to go, you can certainly build your own ETF portfolio. You’ll save modestly on fees, and you will be allowed some flexibility on how you would like to shape the portfolio. I’ve offered examples of core portfolio models.

Here’s the updated (to the end of 2024) total returns for the core Canadian ETF Portfolios on Cut The Crap Investing. The build-your-own models have outperformed the asset allocation ETFs, in modest fashion. Continue Reading…

7 Business Leaders on handling Dividend Stock volatility

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Image: Jakub Zerdzicki on Pexels

Navigating the unpredictable waters of dividend stocks requires a steady hand and a well-informed strategy. To help you master the art of managing volatility and work toward Financial Independence, seven seasoned business leaders share their invaluable advice. From adopting a long-term perspective to assessing the fundamentals of dividend stocks, these insights are grounded in real-world experience. Whether you’re a seasoned investor or just starting out, this article delivers practical strategies from top professionals to strengthen your investment approach and achieve sustained success.

 

  • Focus on Long-Term Perspective
  • Track Dividend Payout Ratios
  • Maintain a Cash Cushion
  • Diversify Across Multiple Sectors
  • Stay the Course
  • Reinvest Dividends Automatically
  • Check Dividend Stock Fundamentals

During periods of volatility, I focus on maintaining a long-term perspective with dividend stocks and ensuring that the underlying companies have strong fundamentals. I recommend prioritizing dividend growth over just high yields, as companies with a history of increasing dividends, even in turbulent times, tend to be more resilient. One specific piece of advice I offer is to avoid panic selling when the market dips. Instead, consider reinvesting dividends or using the volatility as an opportunity to acquire shares at a lower price, provided the company’s outlook remains strong. This strategy allows you to take advantage of market fluctuations while staying focused on the long-term growth potential of the dividend stream. — Peter Reagan, Financial Market Strategist, Birch Gold Group

Track Dividend Payout Ratios

I discovered that tracking dividend payout ratios has been crucial during market swings: I specifically look for companies maintaining ratios below 75% even in tough times. Just last quarter, when the market got shaky, I held onto Procter & Gamble despite price drops because their steady 60% payout ratio showed they could sustain dividends through the volatility. — Adam Garcia, Founder, The Stock Dork

Maintain a Cash Cushion

As a financial expert, I’ve learned that the best defense during volatile periods is maintaining a cash cushion equal to about 2-3 years of living expenses alongside my dividend stocks. Last month, this strategy helped me stay calm when one of my core holdings dropped 15%: instead of panic-selling, I actually bought more shares at a discount because I knew my basic needs were covered. — Jonathan Gerber, President, RVW Wealth

Diversify across Multiple Sectors

As a financial advisor specializing in income investments, I understand that periods of market volatility can be unsettling: especially for dividend investors who rely on steady income. However, my approach is centered on maintaining a long-term perspective and staying disciplined with my strategy. Here’s how I handle volatility in my dividend stock portfolio: 

In volatile markets, it’s easy to get caught up in short-term price swings. However, I prioritize the fundamentals of the companies I invest in. Are they consistently generating revenue and profits? Are they able to maintain their dividend payouts, even if the stock price fluctuates? Companies with a history of stable earnings and reliable dividend payments are generally better equipped to withstand market downturns.

During times of volatility, I make sure my dividend stocks are well-diversified across multiple sectors. Some sectors—such as utilities and consumer staples—are typically more stable during economic downturns. Diversification helps mitigate the risk that a downturn in one sector will significantly impact my overall income stream. Continue Reading…