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.
Since being restructured out of my 14-plus-year, rather comfortable position with a global insurance company, I’ve been asked one question more than any other.
Did you see it coming? The answer in my case is yes. I suspect that’s true for most 50- or 60-somethings who’ve found themselves accepting an invitation to “the touchpoint” from their boss, only to find that it’s been moved from their office to HR at the last moment.
Of course, if you’re anything like me (which is to say that you go to work every day like a Jimmy Stewart character in a Hitchcock movie) then nothing comes as a surprise.
I had two thoughts in quick succession when I received my summons. First, what day is it? Tuesday. Dreaded dead-man-walking Tuesday.
Second, how many documents can I email home between now and zero hour? (Nothing sensitive of course, for the record.)
It’s at this point that things began to turn a bit darkly comic. On my walk to HR, I’m stopped to commiserate with a colleague about the dumb email she just got from her boss. Smile and nod.
Young HR person hands me “The Package”
Turn the corner and my fears are realized. The boss is sitting with a too-young member of the HR team, both sporting the kind of sympathetic look that makes you wish you’d forgotten your glasses. I’m told I’ve “had a good run,” which makes me feel a good deal older than my 52 years. Continue Reading…
When to take CPP/OAS? My latest MoneySense Retired Money column passes on a fresh perspective on the old topic of whether you should take CPP or OAS early or late. You can find the full piece by clicking on the highlighted text here: Why aggressive stock investors should consider taking CPP early.
When he recently turned 60, Rempel opted himself to take CPP himself because of course he considers himself primarily a “stock” when it comes to investing (using the concept from Moshe Milevsky’s book, Are you a stock or a bond?). He figures he can get good enough returns by investing the early CPP benefits that he will more than make up for the higher payouts CPP makes available for waiting till 65 or 70. Same with OAS, which he figures even balanced investors should take as soon as it’s on offer at age 65.
The corollary of this is that if you consider yourself primarily a fixed-income investor, then you should probably take CPP and perhaps OAS too closer to age 70. Compared to taking CPP at 65, taking it at 70 results in 42% more payments, while OAS is sweeter by 36% by delaying the full five years.
The MoneySense piece also quotes retired financial advisor Warren Baldwin, who chose to take CPP himself by age 66. Like Rempel and most financial advisors, Baldwin has a healthy exposure to equities. But he also cites a couple of other reasons for his decision. Baldwin, (formerly with T. E. Wealth), figures the value of the CPP fund to pay you the pension at age 65 is at least $250,000: more if you factor in its inflation indexing. The latter is an important consideration, especially for those (like Yours Truly), whose Defined Benefit pensions are not indexed to inflation.
Baldwin took his own CPP at 66, a year after his final year of full-time employment income. He did so “mainly for the cash flow and portfolio maintenance.” But Baldwin has other reasons too. “I do not want to leave the CPP too long into the future in case the government changes the terms on it or the rate of income tax might rise … Look at how many changes they have made in the last 20 years.”
If a retiree’s marginal tax bracket jumped from 35% to 45%, Baldwin says deferred CPP would face a heavier tax load, while if benefits are taken earlier they would be taxed at more modest rates. And if retirees also have significant sums accumulated in RRSPs and RRIFs, the extra income might push up their Marginal Tax Bracket.
CPP survivor benefits also need to be considered
Warren Baldwin
Finally, Baldwin considers the “estate value” of CPP. “If two spouses have the maximum CPP and one dies, the survivor will not get much from the ‘survivor-ship’ aspect of CPP … So, if the ‘value’ of the CPP at 65 is in the range of $300,000, then if you die before you collect, there is quite a loss. Continue Reading…
Nothing has worked more effectively for the financial industry to justify asset accumulation or AUM (Assets Under Management) than the theoretical underpinnings of the 4% “rule” or “guideline.”
There are innumerable articles on how individuals will require one million dollars or more for retirement based on this dubious principle.
Certainly it is crucial to save but to focus on any particular threshold misses the point that what counts in retirement is a regular, dependable stream of income for a lifetime.
There are two factors in retirement to balance: lifestyle and longevity. Any 4% or otherwise rule is irrelevant if longevity is uncertain. Most people want to maintain a certain quality of life in retirement as well as living healthy.
Here is a hypothetical question: would you take Social Security if it were offered as a lump sum or continue to collect it monthly for the rest of your life (with the bonus of inflation adjusted payouts)? Continue Reading…
Pension incomes are not created equal. They come in all shapes and sizes. They are as varied as the people who have accumulated them and who seek to use them.
In this seemingly infinite variety, in this mathematical complexity, there is a common thread as far as advisors are concerned: delivering clients the most after-tax income possible.
CPP, OAS, Defined Benefit Pension, Dividend Income, Interest Income, RRIFs, Part Time Employment Income, Corporate Dividends, TFSAs: These are just a few of the various sources of income individuals may have access to when they exit the workforce. Upon retirement, decisions about what, when, and how much income to draw upon, move to the forefront.
Tax is key to coordinating multiple income streams
Coordination here is key as each of these sources of income is subject to different tax rates, different tax deferrals and different estate taxes. Tax is key, in other words.
Recent or prospective retirees need more than a competent advisor at this stage. Understanding the tax rates, tax deferral rates and the implications regarding OAS and Income Splitting is one thing. But accounting for these sources of income and the complicated ways in which they interact requires an algorithm.
The specialized software, Cascades, cascadesfs.com, performs these calculations, giving users informed withdrawal strategies. Designed by financial advisors in partnership with software developers, Cascades uses actual tax rates, not average tax rates, projecting for the duration of retirement, including longevity risk.
Because numbers require context to be meaningful, let us consider prospective retirees Bill and Anne Smith.
Case Study: a Couple in their late 60s
Retirement Plan: Bill and Ann are 68 and 67 currently. They have been retired for a few years but still have RRSPs and a LIRA and want to know if they should start using them for income or defer payments until age 71.
Income Sources: Both have CPP and OAS. Anne has a defined benefit pension from having worked as a teacher.
Investments: Bill has a healthy RRSP and Anne has a modest RRSP and a LIRA. They have maxed out their TFSAs and each have about $100,000 additionally in individual non-registered accounts.
Total: 12 different income sources and investment accounts to manage for retirement income
Cascades provides direction in the following way. Users — whether they be Anne and Bill themselves, or their advisors — fill in a detailed online questionnaire, submit their responses and in under ten seconds they have a report. This report (an excerpt is shown at the top of this blog) automatically gives three potential strategies and shows which one works best. For Anne and Bill, drawing down and re-investing their registered accounts first is expected to save them over $75,000 in their estate compared to a complete deferral of their registered money.
As far as Bob and Linda Sanderson are concerned, on the other hand, a Cascades report advises them to do just the opposite and ultimately predicts a savings of $125,000. Here’s how:
Quite different withdrawal recommendations for this younger couple
Bob and Linda are both 55 and currently working. They plan to retire in 10 years. They have a rental property they maintain that they plan to sell in 15 years and want to know how to plan for the long-term.
Income Sources: Both will receive CPP and OAS. Bob will receive a small defined benefit pension. Both will earn rental income until sale of the property. Both will receive corporate dividends until age 80 from a holding company.
Investments: Both have large RRSPs, nearly capped TFSAs, and a small amount of non-registered savings. Additionally, Linda has a small LIRA.
Total: 18 different income sources and investment accounts to manage for retirement income.
Cascades proposes three withdrawal strategies and highlights the best plan. Using all of their non-registered savings before rolling over registered investments will save Bob and Linda over $125,000 in their estate compared to an early drawdown of their registered money. Cascades software is designed to help users do their due diligence on the matter of retirement planning. The results are specifically tailored to the retirement in question and they are reliable, informed and rigorously defined as they are by Canada’s vast and varied tax laws.
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Ian Moyer is the founder of Ian C. Moyer Insurance Agency Inc. and Cascades Financial Solutions Inc.
Just over 6 months ago I left a job that I truly enjoyed and moved to what I like to call a new life-work stage. I’m not retired; let’s call it a stage of semi-retirement. My RSP and TFSA portfolio was not retirement ready; it’s only halfway there. The acronym FIRE has become very popular over the last few years: Financial Independence Retire Early. I guess I would fit that definition to some degree, but I don’t have that financial part down yet.
I still need to make half a living, and that’s by design.
Many will attempt to sprint to the finish line of retirement. That is, they will work hard and as much as they can so that when they reach that magic age and that magic number (considerable retirement portfolio or pension) they can stop and rest and enjoy that financial freedom. That sounds wonderful, but perhaps troublesome for many. We hear of too many stories of retirees falling ill or passing away within the first few months or years of retirement. There are many physical and biological and psychological reasons for that unfortunate reality. I’ll cover that in a separate article.
Many will take the halfway-to-retirement route and instead of a sprint to the finish line, they’ll stroll to the finish line. That’s me, strolling. The thing is I am walking this walk alone; my wife still works and she wants to work for another 4 or 5 years. She’s ‘not ready to retire.’ And that’s good, we do need her income for now, until I can start to earn half a living. For us to fully retire we would need to downsize from our accidental investment: our Toronto home. Next year we’ll have our 2 kids in University and we want to keep our home as a base and a familiar comfort zone. This is not the time to take off to the beach.
First 6 months of semi-retirement.
Out of the gate the new work-life stage was nothing short of incredible. Last June I packed up the laptop and set up shop in Prince Edward Island. My first home office was a little beach cottage in Stanhope. It was my ‘workcation’. I launched my site from the wonky Wifi of Lyon’s Cottages. The property manager Ken did everything he could to keep that Wifi signal chugging along for 3 weeks.
It was an incredible period, being able to hang out with my daughter who is just finishing up her undergrad work ‘on the island.’ My wife and son joined us for a week of family vacation. That’s a whirlwind of new activities and emotions. Leaving your career and co-worker friends, starting a new business and taking off to Canada’s most lovely beaches. There was a lot of ‘new and exciting’ all rolled into a few weeks.
That said, I got a good taste of that ‘waiting.’ And as Tom Petty (RIP) sang, ‘The Waiting Is The Hardest Part.’ While I have a very generous amount of loner in me I was surprised at how uncomfortable a feeling that was – that working alone and being alone for many hours on end. I couldn’t wait for my daughter to finish work and head up to the cottage for dinner and a walk along the beach.
I couldn’t wait for the rest of the family to join us for that week of family vacation.
I was offered a very quick introduction to the ‘feeling of retirement.’ And I can tell you that is feels a lot different when you are doing that retirement thing – alone. It’s well-known that we have to have a solid plan when we retire. To run to that retirement finish line and then wonder what the heck you are going to do is at the very least misguided. Your time will not magically fill itself with wonderful and fulfilling activities.
When we are working our week is filled with tasks that need to get done on time. We usually know how to fill that time and we often wish there were more hours in the day or more days in the week. Retirement is not much different. We have to fill our days and weeks with tasks and chores and accomplishments. We need some structure. You likely will not be on vacation most weeks or months. Vacation is the easy part, and that may not feel all that different to the vacations that you took in your working life.
That said, I would guess that we can start to take our vacations for granted when those vacations are a regular event. We humans can get used to (and bored with) just about anything. I love to travel with family, that might be my most cherished time. But I think I could get somewhat bored of endless travel, or at least the trips could lose some of the magic. Vacations feel great in our working years because there is anticipation and there is an end date.
Retirement has to have meaning and purpose.
The concept of purpose might be the most important consideration. That word gets used a lot by those who study retirement and retirees. When we lose our purpose that can send a lot of negative signals to our brain and our body. And certainly that purpose can take many shapes and forms. A retiree might look after the grandkids on regular basis, take care of older parents, volunteer, work on a side job that includes a useful mission.
If you are retiring alone for a few years, waiting for your partner, you’d best have a very good plan built around that purpose. And you might want to fill your 9-5 Mondays to Fridays with enough contact with others – engaging human contact. Free time to do ‘nothing’ loses its appeal real quick. It’s not all that special when free time is followed by more free time.
Make the most of your time when you are waiting for your spouse to retire. I’d suggest that the real retirement starts when you are both retired. But you can make the waiting years very enjoyable and fruitful and meaningful.
Retirees who are doing it right.
Fritz Gilbert at Retirement Manifesto retired the same month, June of 2018. He offers a wonderful blog that details his and his wife’s FIRE journey. Here’s 6 Lessons From The First 6 Months of Retirement.
You’ll find their retirement consists of a lot of structure and a lot of purpose. There’s regular exercise. There are Grandkids and dogs to take care of. It’s busy enough. There’s lots of room for vacations. As much as one can try to prepare, Fritz is also surprised by the new venture known as retirement.
I’m Lucky
I semi-retired with a purpose, my blogand other writings that help Canadians with their own search for FIRE and other financial goals. That’s all very exciting and interesting and rewarding. But I know I need more. I need to get ‘out there’ more to promote the blog and mission and to reach Canadians face to face. I will also add some volunteer work for more tasks and greater purpose.
My first 6 months of semi retirement reinforced what is well-known, that being financially prepared is only half of the prep work that is required for a successful and happy retirement. Retirees need a plan. A newlife plan for your newlife.
Money + Plan = FIRE-AH.
Financial Independence Retire Early – And Happy.
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Dale Roberts is the Chief Disruptor at cutthecrapinvesting.com. A former ad guy and investment advisor, Dale now helps Canadians say goodbye to paying some of the highest investment fees in the world. This blog originally appeared on Dec. 11, 2018 and is reproduced here with his permission.
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