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.

Stocktrades.ca’s author interview on Findependence and Victory Lap Retirement

Posted By Financial Independence Hub | October 7, 2017

By Dylan Callahan, Stocktrades.ca

Special to the Financial Independence Hub

We’re constantly reaching out to financial authorities we feel would benefit our audience the most. From Mark Seed, to Xiaolei Liu, to Rob Carrick, we are always looking to compile information and pick the brains of experts in the industry. This is why we were ecstatic to hear that Jon Chevreau was willing to do a little interview with us about his most recent book. (Highlighted link is to original post at Stocktrades.ca)

A little bit about Jon before we start

Jon has long had our attention here at Stocktrades from his writing at Moneysense and the Financial Post. He is the owner of FinancialIndependenceHub, the author of Findependence Day and the co-author of Victory Lap Retirement, which is what this interview will be about. He was a columnist for the National Post from 1993 to 2012 and was Editor-in-Chief for Moneysense Magazine from 2012 to 2014. If we had to choose some financial authorities on the internet today that we’d follow, Jon would be near the top of the list.

We hope you enjoy this interview, and if you’re interested in purchasing Jon’s book, head on over Victorylapretirement.com to see what it’s all about or purchase it from Amazon here.

WHAT INSPIRED YOU TO WRITE THIS BOOK?

Jon: Co-author Mike Drak approached me with the idea of a book about Retirement/Victory Laps after he encountered my website, the Financial Independence Hub, and my financial novel, Findependence Day. We thought we could marry the two concepts since Findependence gets you to the point you can launch a proper Victory Lap.

COULD YOU BRIEFLY DESCRIBE THESE FOLLOWING TERMS IN YOUR OWN OPINION, OR AS THEY RELATE TO THE BOOK?

What is Findependence?

Jon: Findependence is simply a contraction of the phrase Financial Independence. And so Findependence Day is the day you achieve financial independence, which we define as the moment when all sources of passive income (pensions, investments, royalties etc.) exceed your monthly expenses nut (rent/mortgage, food, clothing, utilities etc.)

Explain a Victory Lap Retirement?

Jon: Victory Lap Retirement can be described variously as semi-retirement, self-employment, an encore career or launching a creative career (writer, artist, musician) that lets you monetize what was previously a hobby. Normally, the Victory Lap is made possible by first achieving Financial Independence. It differs from traditional full-stop retirement in that you may still be working, albeit not for a single employer.

Rather you have multiple streams of income, some of which may be passive (pensions, investments) and some of which may be active (part-time work, contracts, an online business). This allows you to pursue the inner creative dreams you may have harbored when you were young, and which you may have put aside during the decades you worked in a traditional “Job” and raised a family. In your Victory Lap, you work because you want to, not because you have to (financially speaking).

Lastly what is an Encore Career?

Jon: An Encore Career or Legacy Career is a late-life reinvention of your career, as described by the website encore.org and the book Encore by Marc Freedman. Its subtitle says it all: Finding Work that Matters in the Second Half of Life.

IN YOUR OPINION, HOW IS A VICTORY LAP RETIREMENT MORE BENEFICIAL THAN THE TRADITIONAL RETIREMENT?

Jon: We think it’s crazy to go from the 100% work mode of traditional salaried employment to 100% non-stop leisure, which is the traditional “full-stop” retirement that often occurs at age 65. By the way, I turn 65 next April and don’t expect to slow down much if at all. I’m in the fourth year of my own Victory Lap and am as productive as ever, and probably in much better physical and mental health.

How to “Liberate your Losers” from your RRSP to later save tax

Posted By Jonathan Chevreau | October 3, 2017

It is admittedly a complex strategy but the Globe & Mail’s Report on Business has just published my latest article for high-net-worth investors who don’t mind trading RRSP losses today for tax savings tomorrow. You can retrieve it by clicking on the highlighted headline here: An RRSP strategy to ‘liberate your losers” in order to save tax.

The article is a followup to an earlier Globe article I ran late in the summer, which was summarized in this Hub blog: The ‘Nice” problem of million-dollar RRSPs.

Liberating your Losers is a phrase used by a broker source of mine who prefers for now not to be identified. The strategy describes a possible bright side to crystalizing RRSP losses by “withdrawing them in kind” to non-registered status. That is, you keep the position but in effect move it outside the RRSP.

An alternative to early RRSP drawdowns

This is an alternative to the more typical RRSP drawdown tactic of first selling your stocks inside the RRSP, then withdrawing the cash. Either way you are “deregistering” some of your RRSP, which means paying withholding taxes. You’ll pay 10% for withdrawals under $5,000, 20% for those between $5,001 and $15,000 and 30% beyond that. This can be handled automatically by your RRSP trustee.

Liberating your losers can make sense under three circumstances, my source says: when you have had bad timing in your RRSP/RRIF investment choices; when you’re confident your investment will return to its previous higher value; and if you prefer to pay tax on 50% of a capital gain rather than 100% of income.

Making Lemonade from Lemons

Mind you, I also talked to three sources who were willing to be on the record, and some were skeptical that the strategy was worth implementing. Continue Reading…

Smart withdrawal strategies that ensure a comfortable Retirement

Posted By Financial Independence Hub | October 3, 2017

By Rick Pendykoski

Special to the Financial Independence Hub

Retirement planning is critical — no doubt about that. You worked hard all your career to save enough money and now that you have comfortable retirement savings, you must ensure that it lasts you through the golden years. If you don’t handle the retirement savings properly, you will run out of money earlier than expected.

It is important to have a withdrawal strategy in retirement, which needs to be handled tactfully. The objective of a withdrawal strategy must be to help you provide with the income you need, minimize the effects of taxes, and keep your investment mix diversified and in line with your personal lifestyle and situations.

How Much To Withdraw

Withdrawal rates are the most important factor because you’ve got a limited supply of assets in retirement.

Consider your age, life expectancy, living expenses and rate of return on investment to determine an approximate withdrawal rate.

If you fall under the ‘healthy-have adequate savings-will retire by 65’ bracket, it would be a good idea to begin with a 4%-6% withdrawal rate during the first year of retirement. After the first year, you can build in the cost-of-living adjustment each year to account for the inflation.

5 Key Points to Remember

Consider the Withdrawal Strategy.

The simplest withdrawal strategy is to take assets from the retirement and savings accounts in the following order:

Minimum required distributions (MRDs), also referred to as required minimum distributions (RMDs) in the United States,
Taxable accounts
Tax-deferred retirement accounts, such as a traditional IRA, 401(k), 403(b), or 457
Tax-exempt retirement accounts, such as a Roth IRA or Roth 401(k)

Tap Taxable Accounts First

Ideally, you must tap into the taxable accounts first as a source of income. When you use money from taxable mutual funds, individual stocks and other investments, you allow tax-favored assets to enjoy compounded growth for as long as possible.

Once the reserves of the taxable sources of income, which include personal savings, are spent you can move on to tax-deferred accounts, including traditional IRAs, 401(k)s, 403(b)s. This helps in delaying paying taxes on this money for as long as possible, until RMD withdrawals must begin.

Ensure that you are at least 59½ years before you take money from a tax-deferred account as you will incur a 10% early withdrawal penalty if you withdraw before that age, although exceptions to this rule do exist. Start taking distributions from your traditional IRA by the age of 70½ to avoid paying a 50 percent excise tax on the amount not distributed.

Leave Roth IRA as the last option as there are no minimum withdrawal rules for a Roth, thus allowing your earnings to grow tax-free.

Check the Tax Bracket

It is important that you monitor the source of your withdrawals to understand the effect of the withdrawals on your tax rate. It will also avoid a move into a higher tax bracket.

If you withdraw any distributions at all from a tax-deferred account, it would result in undesirable outcomes that are not directly related to income tax but that are tied to taxable income like Medicare costs.

If you withdraw from a taxable account, it would require selling assets that are held less than a year, resulting in short-term capital gains, which are taxed at ordinary income tax rates.

Limit Taxation on Social Security

The government considers up to 85% of your Social Security benefits to be taxable. This formula depends upon taking into account other income sources, along with one-half of your benefits. You must manage your income in such a way that a smaller percentage of your Social Security benefits will be taxable.

Have Sizable Emergency Funds

Ideally, as a retiree, you should have a financial safety net in place to cover your living expenses for at least 1-2 years. Strive for an 8 percent investment return on average.

Smart withdrawing strategies from the retirement savings will guarantee you of a comfortable retirement.

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last 10 years has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement as well as Business.com, SAP, MoneyForLunch, Biggerpocket, SocialMediaToday and NuWireInvestor. If you need help and guidance with traditional or alternative investments, email him at rick@s

Will investing in your child’s business endanger your retirement?

Posted By Financial Independence Hub | October 2, 2017

By Dave Faulkner, CLU, CFP

Special to the Financial Independence Hub

Your son or daughter just asked you for a short-term loan to help them start a business. If everything goes well, they will pay you back with interest in a few years. But what if they never pay you back? How much will it impact your ability to enjoy your retirement?

RediNest is a personal financial planning application that you can use to get answers to your retirement planning questions.

How RediNest can help

John and Joan plan to retire in 10 years. Although they do not have a pension plan, they have $300,000 in RRSP and $100,000 in TFSA investments. With no mortgage, they are able to contribute the maximum each year to both RRSP and TFSA.

Using RediNest they calculated their Retirement Potential™ at $73,900 of after-tax retirement income, slightly more than the Canadian average* of $69,000.

Their son has asked them to invest $100,000 in his business. He has prepared a business plan, and expects to repay the full amount over five years. John and Joan want to fully understand the risks before loaning their son the money, so they modified their RediNest plan and reduced their TFSA balance to zero.

Assuming a worst case scenario where they never get their money back, John and Joan re-calculated their Retirement Potential to be $67,800, a reduction of over $6,000 / year for life! A significant amount when you consider it is after-tax and fully indexed for inflation. If they never get their money back, John and Joan want to understand the options available to them to restore their Retirement Potential, as they do not want to have less disposable income in retirement.

Using RediNest, John and Joan discovered they would have to increase their monthly savings by over $900/month for the next 10 years: something they feel they cannot do.

Deferring retirement by a year

Retired Money: Is your pension covered by a Pension Guarantee Fund?

Posted By Jonathan Chevreau | September 28, 2017

My latest MoneySense Retired Money column just went up and covers the subject of a Pension Guarantee Fund for employer-sponsored Defined Benefit pension plans. The United States and United Kingdom both have versions of these but as the piece points out, the only Canadian province to have one is Ontario.

Click on the highlighted headline to access the full article: What to know about the Pension Benefits Guarantee Fund.

Earlier this year, the Ontario Government announced that its Ontario Pension Benefits Guarantee Fund (PBGF for short) was boosting the amount of guaranteed pension (should a plan go bust) from the previous $1,000 a month to $1,500 a month. But as I point out, depending on how a plan is funded, because of partial payouts in the case of plan insolvency, this actually means pensioners are protected for somewhat more than $1,500 a month.

So, according to my sources, in the case of a pension fund that’s 50% funded on windup because of a bankrupt plan sponsor, someone with a $3,000 monthly pension would receive $1,500 from the funded part of the $3,000 pension, plus $750 from the PBGF, which tops up the unfunded part of the first half of the pension.

Established in 1980, Ontario’s PBGF covers more than 1,500 DB plans and 1.1 million members in the province. Participation is mandatory for most DB plans registered in Ontario. As the article notes, the amount of protection is somewhat less than in the US and UK: the US one covers a whopping $5,000 a month. Even so, $1,500 a month sure beats the non-existent guarantees of the other nine Canadian provinces.

What if your pension is not covered by a PBGF?

One source in the article suggests that those in pension plans carefully scrutinize the solvency of their employers’ plans. And if you’re in a DB plan and don’t have any PBGF, you might consider taking the commuted value and rolling it into an RRSP or equivalent vehicle, where you’d have more control over the fate of your retirement funds.