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.

Saving to Retire

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I see too much pessimism on whether it’s possible to achieve a comfortable retirement.

Hence, I highlight three observations on saving for retirement:

  • Surveys frequently remind investors that they don’t save enough for retirement.
  • Investors are keen to know what it takes financially to achieve a comfortable retirement.
  • This is a good time to start the optimistic retirement math discussion.

The number often mentioned is rounding up financial assets of $1,000,000 by age 65. However, accumulating that sum of money may be a tall order for some.

It can be done, but it is not always easy. So, I propose meeting halfway, say at $500,000.

Typical sources of income and capital are the registered accounts, saving accounts, stocks and bonds. Perhaps, income real estate, employer pensions and a family business also fit.

Adding regular savings to your investing plan is simply a must to reach retirement goals. Your degree of financial success has a lifetime of implications.

Assume you begin saving at age 30, 40 or 50 and have no other retirement assets. Here are some annual saving targets to reach $500,000 by age 65 (figures rounded):

Annual Returns to Age 65 Your annual saving targets starting at:
Age 30 Age 40 Age 50
8% $2,900 $6,800 $18,400
7% $3,600 $7,900 $19,900
6% $4,500 $9,100 $21,500
5% $5,600 $10,500 $23,200
4% $6,800 $12,000 $25,000

Say you are age 40, you will need to save $10,500/year to age 65 with 5% returns. That saving target reduces to $7,900/year to your age 65 with 7% returns.

If your aim is to accumulate $250,000, divide the above annual saving targets by two. For the $1,000,000 goal, multiply the above saving targets by two. Continue Reading…

Retired Money: How TFSAs can give seniors more tax-free retirement funds

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If you’re a senior, the holy grail in retirement is to have as much tax-free retirement funds as possible.

My latest MoneySense Retired Money column looks at this goal: Click on the highlighted text to access the full piece:  How Seniors can use TFSAs to have more in retirement.

This site has always been a strong proponent of Tax-free Savings Accounts (TFSAs) for young people. Starting at age 18, TFSAs are great vehicles for accumulating short-term savings for goals like saving a down payment for a home, buying a new car, or even going on to post-graduate studies or starting a business. And unlike RRSPs, the $5500 annual contribution room for TFSAs does not require having earned income the previous year. So as of next week, with the arrival of 2018, it’s highly advisable to add another $5,500 to your TFSAs. But not just if you’re young!

The MoneySense column makes the point that TFSAs are equally desirable for seniors in retirement, or for those in semi-retirement who are preparing for full retirement.

Why? First, unlike the RRIFs that many RRSPs become, and which generate taxable income, TFSAs generate no taxable income: neither on the withdrawals nor the investment income (whether dividends, capital gains or interest). In addition, TFSAs do not trigger clawbacks of means-tested government retirement income programs like Old Age Security or the Guaranteed Income Supplement.

But there’s another big benefit TFSAs confer on seniors and retirees: ongoing tax-sheltering of investment income well beyond age 71. In contrast, you can no longer contribute to RRSPs after the year you turn 71 and cannot contribute new money to RRIFs: they’re strictly vehicles that shelter what you’ve got until the next forced annual withdrawal limit, which escalates over time from 5.28% at 71 to 20% a year once you reach 95.

Unlike RRSPs and RRIFs, seniors can continue to add to their TFSAs each and every year even after age 71. Even if you live past 100, as my friend Meta has (and who, as the column relates, continues to use the TFSA herself!)

Two ways seniors can get money for TFSAs without having to find “new” money

Continue Reading…

5 sensible steps to improve your 2018 game plan

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“Your future depends on many things, but mostly on you.”
—Frank Tyger (1929–2011), cartoonist, columnist and humourist

Designing the investment plan for the long haul requires much serious thought. Unfortunately, investors shortchange themselves on two fronts. Firstly, they spend far too much time selecting investments. Secondly, and more important, they spend too little time researching and establishing their investment policies and strategies. The ones that the plans should put into effect to reach personal goals.

In my experience, few investors actually have a sensible game plan that is being followed. Too often, this results in a collection of “flavour of the day” investment selections. Designing the appropriate investment plan is essential, particularly the asset mix targets.

“Understanding the major investment risk factors brings perspective to the plan. The ability, willingness and need to take risks are your top three.”

Happily, this situation is easy to rectify. A new year is about to make its grand entrance. Let us take a breather to contemplate a few improvements.

Stewarding the finances is truly a long journey. If you were my client, I would start with this question, “What is important about investing to your family in 2018 and beyond?”

My observation is that many investors opt for preservation of capital. Others focus on portfolio growth. The rest concentrate on the retirement income stream. Lifestyle needs are also high on the pecking order.

I touch on a handful of key steps in designing your game plan:

1.) Retirement prospects

Determine the family’s desired retirement income goal in today’s dollars. Calculate the size of portfolio to reach and sustain the goal. This provides portfolio direction and purpose. Estimate the personal rate of return required to achieve the retirement nest egg ballpark. Then treat that rate of return as the “investment benchmark” for the game plan.

Once the personal rate of return is identified, there is likely no need to incur higher investment risk than necessary. This is especially important to retired investors. Consider all the investment accounts owned as part of the big picture, not in isolation. Revisiting your “asset location” best practices helps fine tune the game plan.

2.) Investor profile

Analyze which type of investor profile suits and feels best. The most familiar ones are labeled as preservation, income, balanced, growth and aggressive. In my experience, investor profiles change infrequently.

The majority of investors are comfortable within 40% to 60% allocated to stocks and the remainder to cash and bond selections. For example, a balanced profile typically allocates about 50% to stocks, 40% to bonds and 10% to cash instruments.

3.) Asset mix 

Asset mix decisions have the greatest impact on portfolio outcomes than any other factor. Studies show that these decisions explain a substantial amount of variations in total portfolio returns. Continue Reading…

Advanced RRSP Strategies (Beyond the Basics)

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RRSPs are a valuable tool for many taxpayers, which is why they are the backbone of many retirement plans. Getting the most out of your RRSP often involves thinking several years ahead, rather than just when the contribution deadline is looming.

Here are five RRSP strategies to get you thinking beyond the basics:

Claiming RRSP deductions

Most of us claim our RRSP deductions in the tax year we make the contribution, but you don’t have to. In fact, you can choose to deduct only a portion or none at all and carry it forward.

If you expect to move into a higher tax bracket next year from say, a big promotion, or the sale of rental property, you should still make your contribution to take advantage of tax-free compounding. But, it may be worth waiting to claim the deduction the next year (or later) when your marginal rate will be higher and you will get a substantially bigger tax refund.

Level out income

Continue Reading…

How to build a sound and profitable Retirement portfolio

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By Patrick McKeough, TSINetwork.ca

Special to the Financial Independence Hub

To decide if an investment belongs in your portfolio for retirement, you need to take a close look at its attributes or features. But, just as important, you need a close look at how well the investment suits your needs. A superficial look can steer you in the wrong direction.

From time to time, for instance, investors say “Now that I’m retired, I can’t invest in stocks any more. I can’t risk a 30% to 40% drop in the value of my portfolio.” But these same investors may buy annuities without considering the fact that annuity rates are related to bond yields. Both are at historically low levels. A revival of inflation could do extraordinary damage to the purchasing power you get from the fixed returns on bonds or annuities.

Retirement planning and four key factors to consider when investing for retirement

Retirement planning is the process of setting retirement goals, estimating the income needed to meet those goals and assessing your potential sources of retirement income. These days, more investors suffer from what you might call “pre-retirement financial stress syndrome.” That’s the malady that strikes when it dawns on you that you don’t have enough money saved to be able to earn the retirement income stream you were banking on. The best way to overcome this is with sound investing.

Additionally, here are four key factors to consider for retirement saving:

  • How much you expect to save prior to retirement;
  • The return you expect on your savings;
  • How much of that return you’ll have left after taxes;
  • How much retirement income you’ll need once you’ve left the workforce.

Should you consider investment products in your portfolio for retirement?

The financial industry has created income-producing investment products to cater to investors who are wary of stock-market uncertainty. These products can provide steady income that’s higher than bond interest, or dividend yields from stocks. However, these products are almost always subject to hidden fees and risks that continually drain your capital, or leave it vulnerable to unexpected losses.

Successful investors understand that occasional market plunges are normal and unavoidable. A drop of 30% to 40% in stock prices is rare. But after the plunge ends, stocks bounce back and eventually recover. Meanwhile, if you follow our Successful Investor approach, you’ll still have dividend income. What’s more, you don’t need to (and probably won’t) sell at the low in prices.

You can maintain reserves for your cash flow needs by selling some stocks every year, during times of high and low prices.

Continue Reading…