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.

How the FIRE Movement can help folks live out their Cruise Ship Retirement Dreams

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Image from Unsplash

By Evan Kaur

(Special to Financial Independence Hub)

Imagine waking up to new horizons each day, with the promise of adventure and luxury at your fingertips. For many, retiring and spending their golden years exploring the world from the comfort of a cruise ship is the ultimate dream, and some are turning it into a reality.

Citing data from the Cruise Lines International Association, MoneyDigest highlights that 50% of the 20.4 million people who took a cruise in 2022 were over the age of 50, while 32% were over 60. However, it’s also important to note that this lifestyle is not attainable for everybody.

A poll conducted by the National Institute on Retirement Security finds that more than half of Americans (55%) are concerned that they cannot achieve financial security in retirement, much less afford to live on a cruise ship. That’s where the FIRE (Financial Independence, Retire Early) movement comes into play. In this article, we’ll explore why so many are drawn to retiring at sea and how the FIRE strategy can help folks achieve enough financial security to live out their cruise ship retirement dreams.

The Appeal of Cruise Ship Retirement

Image by Pexels

Retiring on a cruise ship is an attractive option for those who seek adventure, comfort, and a unique globetrotting lifestyle, but its biggest draw is that it can be more affordable than retired life on land.

According to an article from CNBC, the average annual cost to retire comfortably in the U.S. can be anywhere between US$55,074 and $121,228, depending on which state you choose to live in. These numbers factor in living costs, including groceries, healthcare, housing, utilities, and transportation.

Meanwhile, the 2021 national average for a private room in a nursing home was estimated to cost $108,405 per year. By contrast, Business Insider reports that cruise ship companies looking to capitalize on the retirees-at-sea trend now offer fully furnished homes aboard their ships for roughly US$43 a day or less. Continue Reading…

Retired Money: The LIRA-to-LIF deadline and more on the RRSP-to-RRIF deadline

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My latest MoneySense Retired Money column is the second part of an in-depth-look at the deadline those with RRSPs don’t want to miss once they turn 71. Part 1 appeared in March and can be found here.

The full new column can be found by clicking on the highlighted headline here: RRSP to RRIF, and LIRA to LIF: How it all gets done.

For convenience, here are some highlights:

The first column looked at the necessity of winding up RRSPs by the end of the year you  turn 71: a topic that becomes increasingly compelling as the deadline approaches. This followup column looks at two related topics: the similar deadline of LIRA-to-LIF conversions and the alternative of full or partial annuitization.

LIRAs are Locked-in Retirement Accounts and analogous to RRSPs, albeit with different rules. They usually originate from some employer pension to which you once contributed in a former job. To protect you from yourself you can’t extract funds in your younger years unless you qualify for a few needs-based exceptions. LIFs are Life Income Funds, in effect the annuities LIRAs are obliged to become, also at the end of your 71st year.

The full MoneySense column looks at our personal experience in converting my wife’s LIRA to a LIF, aided by Rona Birenbaum, founder of Caring for Clients. Note that the timing of the conversion is NOT affected by having a younger spouse: that only affects the annual minimum withdrawal calculus.

In my case, having turned 71 early this April, I have until the end of this year (2024) to convert my RRSP to a RRIF. The first required minimum withdrawal must occur in 2025: by the end of 2025 I must have withdrawn the annual minimum.

You can choose RRIF payment frequencies: usually monthly, quarterly, semi annually or once a year: you just have to specify which date. I imagine we’ll go monthly.

Currently, our retirement accounts are held at the discount brokerage unit of a Canadian bank, although we use a second discount broker for some non-registered holdings. While the LIRA will be the basis of an annuity provided by an insurer selected by Caring for Clients, most of our RRSPs will likely become RRIFs, probably by November of this year.  Our hope is that we will keep largely the same investments as are being held now and administer them ourselves, with an eye to maintaining enough cash to meet our monthly withdrawal targets.

Self-directed RRIFs

The new vehicle will bear a familiar name for those with self-directed RRSPs: it’s a Self-directed RRIF. At our bank, it was a simple matter of entering the RRSP and finding the link to convert it to a self-directed RRIF. Once there, you tick boxes on when you want the money, withdrawal frequency and (optionally) choose a tax withholding rate. You can also specify that your withdrawals will be based on your spouse’s age, assuming they are younger.

You can of course also go through a similar process with any financial institution’s full-service brokerage or investment advisor, ideally with at least one face-to-face meeting.  One thing Birenbaum says retirees often miss is specifying tax withholding, since there is no minimum withholding tax period required on the minimum withdrawal. I imagine we will ask to have 30% tax taken out at the time of each withdrawal: which is what we do with existing pension income. It’s on the high side to make up for the fact we also have taxable investment income (mostly dividends) that is NOT taxed at source.

             “I find the majority of retirees like having that withholding tax held at source so they don’t have to deal with installments and owing the CRA.” You can of course have more than 30% withheld.

            With a LIRA, you need to get the account liquid before the money is sent to the insurance company to annuitize. This means keeping tabs on the maturity dates of GICs or other fixed income.

            The paperwork is minimal: we provided a recent LIRA statement, then had an online meeting with one of Birenbaum’s insurance-licensed advisors to go through the application, then sign a transfer form to move the cash to the insurance company for a deferred annuity. The transfer takes a few weeks, with the actual annuity rate determined when the insurance company actually receives the money: registered transfers are recalculated at the point of purchase. There is a form T2033, which is an RRSP-to-RRIF transfer form that moves the money from the bank to the insurance company.

Having a mix of RRIF and annuities

Semi-retired actuary and author Fred Vettese says he has endorsed retirees buying a life annuity ever since the first edition of his book “Retirement Income for Life” back in 2018. “If you buy one, it should be a joint-and-survivor type, meaning it pays out a benefit to the survivor for life.” Continue Reading…

Mastering the Art of Podcast Production: A Director’s Guide

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Image courtesy Canada’s Podcast/unsplash royalty free

By Philip Bliss

Special to Financial Independence Hub

As a podcast Director, your role is pivotal in ensuring the seamless production of engaging and high-quality content.

With more than 750+ Podcasts Canada’s Podcast delivers Digital Multi-Channel Marketing the new influencer medium.

From planning and recording to editing and promotion, the success of your podcast hinges on a well-executed strategy.

In this comprehensive guide, we break down the essential tasks, timelines, and guest information you need to produce a podcast that captivates your audience.

 

Pre-production Planning

a) Define Your Podcast’s Concept (2 Weeks Before Recording):

Before diving into production, spend time refining your podcast’s concept. Define your target audience, choose a niche, and outline the overall theme of your show. This clarity will guide your content creation and resonate with your audience.

b) Identify Potential Guests (4 Weeks Before Recording):

If your podcast includes guest interviews, start identifying potential guests early. Research individuals who align with your podcast’s theme and have insights to share. Reach out to them, presenting your podcast concept and gauging their interest.

c) Develop Episode Outlines (3 Weeks Before Recording):

Work on detailed episode outlines for the first few episodes. This includes segment breakdowns, key talking points, and potential questions for guests. Share these outlines with your team to ensure everyone is on the same page.

Guest Information and Coordination

a) Guest Invitations and Confirmations (3-4 Weeks Before Recording):

Reach out to potential guests with a formal invitation, explaining your podcast’s concept and the value their participation brings. Once confirmed, share detailed information about the recording process, timeline, and any technical requirements.

b) Coordinate Recording Schedule (2-3 Weeks Before Recording):

Work with guests to coordinate recording dates and times that align with everyone’s schedules. Use scheduling tools like Calendly or Doodle to streamline the process. Ensure guests are aware of any pre-recording preparations, such as technical checks.

c) Provide Information Package (1 Week Before Recording):

Send guests an information package a week before recording. Include details about the podcast, the recording platform you’ll use, technical requirements, and any specific guidelines or expectations. This ensures a smooth recording experience for both you and your guests.

Recording Process

a) Technical Checks (On Recording Day):

Conduct technical checks before each recording session to avoid last-minute hiccups. Ensure microphones, headphones, and recording software are functioning correctly. Confirm that your internet connection is stable, minimizing the risk of disruptions.

b) Set Up Recording Environment (On Recording Day):

Create a comfortable and quiet recording environment. Remind guests to choose a quiet space with minimal background noise. Encourage the use of headphones to enhance audio quality.

c) Conduct Interviews (During Recording):

During the recording, focus on creating a relaxed and conversational atmosphere. Stick to the episode outline but allow for spontaneity. Make guests feel comfortable, prompting them to share insightful and engaging stories.

Post-production Editing

a) Initial Editing Pass (1-2 Days After Recording):

Immediately after recording, perform an initial edit to address any major issues or glitches. This can include removing background noise, adjusting audio levels, and trimming unnecessary segments.

b) Final Editing and Enhancements (3-5 Days After Recording):

Take the time for a thorough final edit. Enhance audio quality, add music or sound effects if desired, and make any necessary adjustments. Ensure the episode flows smoothly and meets your podcast’s standards. Continue Reading…

Dividend ETFs: Finding Stability and Growth in Income Investments

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Discover the Keys to Identifying Dividend ETFs that offer Consistency, Quality, and Long-Term Growth

Image from Pexels/Anna Nekrashevich

Higher interest rates mean dividend-paying stocks must increasingly compete with fixed-income investments for investor interest. However, sustainable dividends still offer an
attractive and growing income stream for investors.

Companies that pay regular and growing dividends have performed very well over the long run when compared to the broad market indices. For example, a simple strategy such as selecting stocks with an extended history of uninterrupted dividend growth, such as represented by the S&P 500 Dividend Aristocrats, has added 11.5% per year over the past 30 years. This compares to the 10.0% annual gain for the S&P 500 Index. And not only did the dividend payers beat the overall market, but they were also less volatile.

The superior long-term performance of the dividend growth companies can be attributed to a combination of several factors: Companies with long histories of regular and growing dividend payments generally have sound competitive business models and growing profits; these are also companies with experienced managements that make disciplined capital allocation decisions, strive for lower debt levels, and operate firms more profitable than their peers.

Notably, though, the Dividend Aristocrats’ performance lagged over the past 5 years against the S&P 500 index.

Most of this underperformance came over the last year and a half, as higher interest rates made fixed-income investments, such as GICs, more attractive for income-seeking investors when compared to dividend-paying equities.

The dividend sweet spot

Income-seeking investors who decide to take on the risk of the stock markets are faced with a wide range of options including “yield enhanced” dividend-paying ETFs, moderate-yielding companies with average growth rates, and low-yielding but fast-growing companies. Then there is also the group of companies that have very high dividend yields and may seem attractive but, unfortunately, come with elevated risk.

In many cases, a high yield may be a warning sign that all is not well with a company and that future dividend payments are at risk of being cut.

As well, a dividend cut, or even an outright dividend suspension, is often accompanied by a steep decline in the share price, as income investors dump their former dividend favourites.

A 2016 study by a group of U.S.-based academics provides some statistical guidelines for sensible dividend-based investing.

In reviewing the performance of almost 4,000 U.S. companies over 50 years, they found that dividend-paying stocks beat non-dividend payers.

In particular, the middle group of dividend yielders (i.e., those with an average yield of 4.3%) surpassed both the low yielders and the high yielders in terms of total return. Equally important, this superior performance was achieved with lower risk, as measured by the standard deviation of returns.

Based on this long-term study, it makes sense to avoid the highest-yielding stocks and rather look for companies with moderate yields and sound growth prospects. This safety-first approach will result in a lower yield but likely provide a better total return (dividends plus capital) at lower risk.

How to spot dividend ETFs worth investing in

When investing in dividend-paying companies through an ETF, here are key factors to consider: Continue Reading…

Real Life Investment Strategies #3: What is the Difference Between a Lifestyle Reserve and an Emergency Fund / Financial Cushion?

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Image Lowrie Financial/Canva Custom Creation

By Steve Lowrie, CFA

Special to Financial Independence Hub

Having an emergency fund is common advice, whether you are reading this in the financial media or hearing it from a financial advisor. Many people who are later in life and feeling comfortable with their financial situation might disregard this advice, assuming it only applies to those that don’t have as much financial stability.

The truth is that an Emergency Fund is something that everyone (even you!) should have. In addition, the added financial security planning of a Lifestyle Reserve should also be part of your financial plan. So, let’s explore exactly what an Emergency Fund is, how a Lifestyle Fund is different, and why both should be in place to ensure long-term financial alternatives and adaptability. Most importantly, I’ll highlight how this applies to Suzie & Trevor Hall (The Accumulators) and Jim & Carol Oates (Almost Ready to be Retirees), so you can see how it can work for you.

What is an Emergency Fund / Rainy-Day Fund / Financial Cushion and Why do I Need it?

Let’s talk about an Emergency Fund, which is often used interchangeably with Financial Cushion or Rainy-Day Fund. They are close but have slightly different purposes. An Emergency Fund / Rainy-Day Fund is a safety net for unexpected financial surprises; this could be an immediate need to replace a furnace or roof, an unforeseen job loss, or a medical condition requiring unpaid time off from work. An Emergency Fund / Rainy-Day Fund would generally be kept in cash in a separate account from day-to-day-expenses, usually in a high-interest savings account.

On the other hand, a Financial Cushion is more of a buffer to cover elevated or lumpy day-to-day or month-to-month costs like a higher than usual heating or grocery bills, etc. A Financial Cushion is often kept in the main bank account in cash, just to keep a financial safety margin-of-error to allow for a secure feeling about covering regular expenses.

Whether we say Emergency Fund or Rainy-Day Fund or Financial Cushion, they are similar, so let’s simplify the definition: a liquid/cash reserve to cover unforeseen and unbudgeted for expenses which allows for financial stability and peace of mind.

You may already have this is place, without formal planning. The next question you should ask yourself is whether you’ve set up your Emergency Fund / Financial Cushion in a way that truly provides the stability and comfort that you need.

Before we dive into that, let’s hear what New York Times Bestselling author and one of MarketWatch’s 50 most influential people, Morgan Housel, shared in his book, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness:

“The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future.”

How much should my Emergency Fund be?

So, let’s explore some questions about an Emergency Fund:

  • How much of an Emergency Fund / Financial Cushion is needed?
  • How long will it take to build a strong Emergency Fund /Financial Cushion?

I know you hate to hear it but, as with many financial planning questions, the answer is “It depends!” But I won’t leave you hanging; let me give you an idea of factors to consider when building your Emergency Fund:

  • Current and Future Financial Outlook: Have you just started a new business and don’t have a good handle on your upcoming income? Alternately, do you have a stable job that you feel fairly confident on relying on that income for the foreseeable future? Another consideration is potential upcoming surprises – Is a new baby on the horizon? Will your grown kids need financial support? Do your properties and/or vehicles have any approaching maintenance or replacement needs? Or, do you have parents who may need financial support as they age? Keeping these, and other potential unforeseen expenses in mind, will help you determine the ideal size of your Emergency Fund; at least 3-6 months of necessary expenses is ideal, but a 1-month Emergency Fund might be appropriate, in some financially stable situations.
  • Risk Tolerance: The size of your Emergency Fund / Financial Cushion is also dependent on your own personal financial risk tolerance. Although some people may feel completely comfortable with 1–2-months of necessary expenses for their Financial Cushion, others may feel the strong urge to keep 12 months aside. Whatever the amount is that will allow you to sleep at night is a good indicator.
  • Balancing the Budget for Current & Future Needs: How quickly you can build your Emergency Fund is highly dependent on how much of your existing income can be diverted to fund it. That may mean reallocating a portion of your long-term savings or tightening the discretionary spending belt until you’ve built your Financial Cushion to the level of comfort you need.
  • Opportunity Cost: Some people want to hold too much in cash, which may be a financial security blanket, but keeping more than needed is detrimental in the long run because “money in the mattress” could be used to build wealth. So, when deciding how much your Financial Cushion should be, consider that keeping too much will cost you in lost investment opportunity.

To hammer home the importance of an Emergency Fund / Financial Cushion and the financial benefits it provides, let’s hear a little more advice from Morgan Housel in The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness:

“Saving does not require a goal of purchasing something specific. You can save just for saving’s sake. And indeed, you should … Saving is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment … Savings without a spending goal gives you options and flexibility, the ability to wait and the opportunity to pounce. It gives you time to think. It lets you change course on your own terms.”

“Six months’ emergency expenses means not being terrified of your boss, because you know you won’t be ruined if you have to take some time off to find a new job.”

Even though everyone’s talking about Emergency Funds and Financial Cushions (and that’s a great starting point), let’s look at the bigger picture and think about long-term financial security. To do that, we want to focus on Lifestyle Reserve.

What is a Lifestyle Reserve / Cash Wedge and Why do I need it?

You may have heard me talk about a Lifestyle Reserve in my previous blogs, Using a Lifestyle Reserve To Ride Out Market Storms and Play It Again, Steve – Timeless Financial Tips #6: Aligning Your Investments with Your Investment Time Horizon. A Lifestyle Reserve, or sometimes referred to as a Cash Wedge, is essentially enough money in safe investments to cover your spending needs; this can be (and often is) at retirement or it could also be needed to supplement income in working years to meet your lifestyle needs. For clarity, I’m talking about the lifestyle to which you’ve become accustomed or the level of lifestyle you want, which would include both “needs” spending (non-discretionary) and “wants” spending (discretionary). So, your lifestyle needs would include vacations, club memberships, gifts to kids, charitable donations, etc.

A Lifestyle Reserve / Cash Wedge should be secured in a low-risk manner: cash or high-quality, short-term fixed income investments, which may produce a lower-than-expected return on investment but is exposed to significantly less volatility to ensure that your principle is preserved. Continue Reading…