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.

TFSA or RRSP? – The right answer for YOU

Posted By Financial Independence Hub | January 20, 2017

By Ed Rempel

Special to the Financial Independence Hub

TFSA vs. RRSP is one of the most common questions I am asked. If you want to know for sure which is better for you, then you need a financial plan.

Many articles have been written on this topic that list pros and cons with general opinions.

The truth is that:

1.) Rather than just having an opinion, there is a precise right answer specifically for you. To the extent that you know your present and future marginal tax brackets, you can calculate a precise optimal contribution for RRSP and TFSA for each year, as well as the optimal amounts to withdraw each year after you retire.

2.) The decisive factor is your tax brackets now vs. after you retire. Most people just assume they will be in a lower tax bracket after they retire, because their income will be lower. In many cases, that is not true.

When you include the clawbacks of government income programs that affect everyone over 65, many seniors are in shockingly high tax brackets!

The clawbacks cost you actual money and are the same as a tax. The three main clawbacks are the 50% clawback on GIS for low incomes (under $20,000), 15% clawback on the age credit for middle incomes ($35,000-85,000), and the 15% clawback on OAS for higher incomes ($75,000-120,000).

The chart above shows the actual approximate tax brackets before and after age 65. Check out the tax brackets over 45% in red:

Understand the differences

You can own the same investments in your TFSA as your RRSP. The main difference is that RRSP contributions and withdrawals have tax consequences, while TFSA contributions and withdrawals don’t.

Therefore, the answer to TFSA vs. RRSP is primarily based on your marginal tax bracket today compared to when you withdraw after you retire: Continue Reading…

Helping Boomers create their own Victory Lap Retirement

Posted By Michael Drak | January 17, 2017

Victory Lap Retirement is currently #7 on the Globe & Mail’s Canadian non-fiction bestsellers list

I’ve been working hard on my year-end review and goal setting, which I will share with you in next week’s blog. I’m excited by what we have accomplished over the past year, but recognize that there is still a lot to do in the years ahead.

My co-writer Jonathan and I are on a major mission and that mission is made up of two parts:

1.) To convince investment advisors to adopt a more holistic approach and provide quality lifestyle planning assistance to their clients.

2.) To teach young people about financial independence, or Findependence as we like to call it, so that they can get off to a good start in life.

It’s a big job, but it’s something that we just feel the need to do. Call it our way of giving back to the community! Today, I would like to expand on the first point a little more.

Retirement planning, as it is done today, is inadequate. We are constantly being told by the financial services industry that the more money we save for retirement, the better our retirement will be. This causes a lot of stress for people and the message they are sending is simply wrong.

Financial Planning Fails without Lifestyle Planning

Using Monte Carlo Simulations in your Retirement Planning

Posted By Robb Engen | January 10, 2017

Wouldn’t it be nice for our retirement planning purposes if stocks consistently gave us eight to 10 per cent returns each year? After all, that’s what stock markets have delivered on average over the very long term.

Indeed, between 1935 and 2016 U.S. stocks returned 11.4 per cent annually, Canadian stocks returned 9.6 per cent annually, and international stocks averaged annual returns of 8.3 per cent.

I have an eight per cent target in mind when projecting investment returns for my own retirement plan.

The trouble is that stock returns are anything but predictable and so while they may average eight to 10 per cent over a 25-or-50-year period, each single year could deliver panic inducing losses, euphoric gains, or something in-between.

Since 1988, the S&P 500 had single-year returns as low as negative 37 per cent (2008) and also gained as much as 37.58 per cent in a single year (1995). Only in three of those 29 years did the S&P 500 deliver annual returns between eight and 11 per cent. The rest of the years are all over the place.

Why does this matter to your retirement planning? Because it’s not enough to just plug “eight per cent” into your retirement projections and call it a day.

What happens if stocks plunge by 35 or 40 per cent in year one of retirement, as they did to those unlucky enough to retire in 2008?

Enter the Monte Carlo Simulation

A Monte Carlo Simulation can reveal a wide variety of potential outcomes by taking into account fluctuating market returns. So instead of basing your retirement calculations on just one average rate of return, a Monte Carlo Simulation might generate 5,000 scenarios of what hypothetically might happen to your portfolio as you draw it down and markets fluctuate.

Let’s look at an example of a 60-year-old who retires with $750,000 invested in a standard balanced portfolio of 60 per cent stocks and 40 per cent bonds. This retiree wants to know how much is safe to withdraw from the portfolio each year and whether it can last 30, 40, or even 50 years.

We can do this with a Monte Carlo Simulation. I used Vanguard’s retirement nest egg calculator. We’ll start with a safe withdrawal rate of 4 per cent per year:

How many years should the portfolio last: 30 years
What is your portfolio balance today: $750,000
How much do you spend from the portfolio each year: $30,000

The results: There’s a 93 per cent probability that this portfolio lasts 30 years.

When I re-run the simulation using a withdrawal rate of 5.3 per cent (spending $40,000 per year) there’s now just a 74 per cent chance the portfolio survives 30 years.

What happens if our retiree lives until 100? We’ll need to make the portfolio last for 40 years instead of 30.

Spending $40,000 each year means the portfolio has only a 62 per cent chance of surviving 40 years. If we go back to our original 4 per cent safe withdrawal rate ($30,000 per year) then our portfolio jumps back up to an 87 per cent survival rate.

In one interesting simulation, I increased the stock allocation to 100 per cent and changed the annual spending to $50,000 (or 6.7 per cent of the portfolio). The $750,000 portfolio has a 50 per cent chance of lasting 40 years. Not something I’d chance to a coin-flip!

How does a Monte Carlo Simulation work? According to Vanguard, they randomly select the returns from one year of the database for each year of each simulation.

Using those values, they calculate what would happen to your portfolio – subtracting your spending, adjusting for inflation, and adding your investment return.

This process is repeated one year at a time until the end of your retirement or until your portfolio runs out of money. After 5,000 independent simulations there’s a broad range of possible scenarios and clear patterns begin to emerge.

Final thoughts

For those of you close to retirement or that have recently retired, I strongly encourage you to speak with your financial advisor about running a Monte Carlo Simulation for your own portfolio using several different inputs that match your goals and projections. DIY investors can find calculators such as Vanguard’s online to run their own simulations.

Err on the side of caution so that you’re comfortable with the outcomes. If there’s only a 50 per cent chance that your portfolio lasts the length of your retirement, that’s not a plan, it’s a gamble.

In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on his site on January 2nd and is republished here with his permission.

3 simple techniques for overcoming financial stress in Retirement

Posted By Financial Independence Hub | January 4, 2017

By Leigh Marcos

Special to the Financial Independence Hub

We all look forward to retirement: complete freedom. We can do what we want, when we want, and don’t have to traipse into an office every day to join the rat race that dominates younger people’s lives.

Unfortunately, the transition to not working can come with a different set of pressures, not least the financial stress triggered by your drop in income. Current statistics show that 68% of working-age people in the U.S. don’t participate in an employer-sponsored pension plan, so this is a common anxiety that affects much of today’s retired populace.

Luckily, there are ways to combat financial stress and still relish what should be some of the most enjoyable years of your life. Here are three simple steps to help you do so:

Value yourself, and act like it

All too often, the change of routine involved in retiring after a lifetime of work can cause us to drift into a kind of daily limbo where time starts to lose meaning, and so as a consequence does our everyday life. Combat this lack of direction by actively redefining who you are without your job. What do you stand for? What do you still want to achieve? What do you enjoy doing? How do you spend your time? Take some time to reflect on these questions: brainstorming can help, as can physically writing things down or discussing them with a friend.

Make sure to avoid isolation by getting involved in regular, structured activity that enriches your life and brings you into contact with people who have a positive influence on you. This will help you keep financial worries in perspective and remind you that there are other important and valuable things in life.

Stay healthy

The sad decline of Defined Benefit pension plans

Posted By Financial Independence Hub | December 28, 2016

ryanbull — Ryan Goldsman, author of Financial Myths

By Ryan Goldsman

Special to the Financial Independence Hub

When times change but our pension options don’t, we are quick to point the finger. “You made a promise, now I’m going to hold you to it. Even though it will be paralyzing for you to keep this promise, that’s ok – you will keep this promise.”

“Oh and by the way, the next generation is entitled to the same promise.”

It makes no sense, but last summer we’ve seen a few major employers — Canada Post and GM (General Motors) to name a few — go into the wee hours to get a deal done, both arguing over pension benefits. It’s been a major sticking point for a number of employers and their employees over the years and will only continue to increase in frequency.

The reality is the DB (Defined Benefit) Pension Plan — which was a very good idea a generation ago — is no longer readily offered to employees today. Effectively, gone are the days of the gold watch and the even more valuable promise of income for life: “You don’t have to worry, we’re your employer, we will worry for you.”

In the past, an employee gave the very large majority if not 100% of their working years to one employer; in return he or she was offered the benefit of income until death and it was the employer who would pay up if needed. It was a wonderful deal for employees who lived to an average age of under 70. Employers were also able to hire the best employees and make them this promise. It made sense. With contributions made over 30 working years and a payout not usually exceeding 10 or even 15 years in the worst case, employers had a fair amount of money in the employee pension plan, allowing everyone to sleep well at night.

Many pensions today underfunded

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