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.

Most near-retirees would keep working if they could reduce hours and stress

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Statistics Canada

Canada’s aging population means more retirees but most Canadians contemplating retiring say they would keep working if they could reduce their hours and stress. That was the top line of a Statistics Canada Daily release issued early in August. It was also the subject of a CBC Radio interview I conducted that aired in multiple cities on Thursday, Nov. 2.  Here’s the link.  Go to Episodes, then Nov. 2nd, then click on the line that says Canadians would choose to work past 65 under certain circumstances.

The interviewer is CBC Business columnist Rubina Ahmed-Haq, who focuses on money, workplace and financial wellness.  The 4-minute interview with me and others touched on most of the topics this site does, including semi-retirement, entrepreneurship, Findependence and Victory Lap Retirement (the latter a book I co-authored with ex banker Mike Drak.). At the outset I clarified that I myself am still working at at 70, albeit self-employed through this web site and regular writing and editing for MoneySense.ca.

I was asked about the FIRE movement (Financial Independence/Retire Early) and I explained that while there are many FIRE proponents who claim to have “retired” in their 30s, in my experience these people have not really retired: rather, they have ceased to be salaried employees with the commuting grind, bosses and meetings and all that comes with it. Most have in reality become self-employed or semi-retired entrprepreneurs: in fact, many of the FIRE bloggers I have read are running web sites that accept advertising, and/or writing books that pay royalties and in some cases are on the speaking circuit accepting speaking fees. Having done all of these myself over the years, that’s not my idea of full retirement!

10% of 70-plus cohort still working at least part-time

Statistics Canada

Going back to the Statistics Canada Daily, it reported that in June 2023, 21.8% of Canadians between ages 55 and 59 were either completely or partially retired. That doubles to 44.9% for those aged 60 to 64, and doubles again to 80.5% for those 65 to 69. By the time Canadians reach my age (70), it plateaus around 90% who are at least partially retired.

Interestingly, as I may have alluded to on-air, I can think of several people who are working well past 70, including some prominent journalists and financial gurus. I guess both are seen by proponents as a relatively satisfying occupation, particularly those who like myself do both by writing (or editing) about money.

Not surprisingly, for those who are completely retired, the main factor in determining the timing was financial: usually having qualified to start receiving pension benefits. This was cited by 35% of the men and 28.2% of the women who reported being completely retired.

Continue Reading…

Retired Money: A new DIY financial literacy course for aspiring Retirees

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Kyle Prevost: https://worryfreeretire.com/

My latest MoneySense Retired Money looks at a new Canadian DIY financial course created by MoneySense Making Sense of the Markets columnist Kyle Prevost [pictured above].

For the full column, click on the highlighted text: How to plan for retirement for Canadians: A review of Four Steps to a Worry-Free Retirement course.

November is of course Financial Literacy Month in Canada. And Kyle Prevost is well qualified to help Canadians boost their financial literacy, especially as it relates to Retirement.

In addition to being a subject matter expert in Canadian personal finance, Prevost is also a life-long teacher, which makes him doubly qualified to create this course, which he describes as a first in Canada.

And the combination shows: it’s a slick multi-media package that features snazzy graphics with voice-overs by Kyle himself, plus more in-depth PDF backgrounders and videos with various experts gathered through one of Prevost’s other projects: the annual Virtual Financial Summit (for which I have often been interviewed.)

Entitled 4 Steps to a Worry-Free Environment in Canada, the multi-media course is targeted to those thinking seriously of retiring from the workforce in the next decade or two, and even semi-retirees or those who have already reached that milestone but who want to finetune their retirement income strategy.

An ongoing theme throughout the course and related materials is “No one will care about your retirement as much as you do.” That’s a variant of the oft-used phrase “No one cares about your money more than you do.”

From CPP/OAS to Working for a Playcheck

You can find the course at this site: https://worryfreeretire.com/. You can get a flavor of what’s included before committing to payment by clicking on the “Tell me more” button. If you’re ready for the full enchilada, click on the “Get Started” button. There are various payment options, including major credit cards.

At C$499, the course does represent a major investment but the outlay could be considered a bargain if it helps some DIY retirees escape the clutches of a conflicted securities salesperson who cares more about their own retirement than that of their clients. Continue Reading…

Why would anyone own bonds now?

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By Mark Seed, myownadvisor

Special to Financial Independence Hub 

“Many investors have been saying for years that rates can only go up from here, rates can only go one direction, rates will eventually go up. Will they?” – My Own Advisor, September 2021.

My, how things can and do change.

In today’s post, I look back at what I wrote in September 2021 to determine if I still feel that way for our portfolio.

Why would anyone own bonds now?

Why own bonds?

For years, decades, generations in fact, bonds have made sense for a diversified, balanced portfolio.

The main reason is this: bonds can reduce volatility due to their low or negative correlation with stocks. The more that investors learn about diversification, the more likely they are to add bonds to their portfolios.

That said, they don’t always make sense for everyone, all the time, always.

I’ll take a page from someone who was much smarter than I am on this subject:

Ben Graham on 100% stocks and cash

Ben Graham, on stocks, bonds and cash. Source: The Intelligent Investor.

Another key takeaway from this specific chapter of The Intelligent Investor is the 75/25 rule. This implies more conservative investors that don’t meet Ben Graham’s criteria above could consider splitting your portfolio between 75% stocks and 25% bonds. This specific split allows an investor to capture some upside by investing in mostly stocks while also protecting your investments with bonds.

Because stocks offer more potential upside, there is higher risk. Bonds offer more stability, so they come with lower returns than stocks in the long run.

As a DIY investor, this just makes so much sense since I’ve seen this playout in my/our own portfolio when it comes to our 15+ years of DIY investment returns. Our long-term returns exceed the returns I would have had with any balanced 60/40 stock/bond portfolio over the same period.

There is absolutely nothing wrong with a 60/40 balanced portfolio held over decades, of course.

From Russell Investments earlier this year:

“Fixed income has historically been considered the ballast in a portfolio, offering stability and diversification against equity market fluctuations. Over the last 40 years, a balanced portfolio of 60% Canadian equities and 40% Canadian bonds would have returned 8.5% annualized with standard deviation of 9.3%. While a portfolio consisting solely of fixed income would have had lower return with lower risk, a portfolio consisting solely of equities would have had only slightly higher return but substantially higher risk.”

Source: https://russellinvestments.com/ca/blog/the-60-40-portfolio

1/1983 – 12/2022 Canada Equities Canada Bonds Balanced Portfolio 
Annualized Return 8.8% 7.2%  8.5%
Annualized Volatility 14.4% 5.3%  9.3%

Pretty darn good from 60/40.

So, while I continue to believe the main role of bonds in your portfolio is essentially safety – not investment returns – we can see above that bonds when mixed with stocks can be enablers/stabilizers and deliver meaningful returns over long investment periods as well.

As Andrew Hallam, a Millionaire Teacher has so kindly put it over the years, including some moments on this site to me:

… when stocks fall hard, bonds act like parachutes for your portfolio. Bonds might not always rise when the equity markets drop. But broad bond market indexes don’t crash like stocks do …

Is that enough to own bonds in your portfolio?

Maybe.

Here are a few reasons to own bonds, in no particular order: Continue Reading…

Misleading Retirement Study?

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Ben Carlson, A Wealth of Common Sense

By Michael J. Wiener

Special to Financial Independence Hub

 

Ben Carlson says You Probably Need Less Money Than You Think for Retirement.  His “favorite research on this topic comes from an Employee Benefit Research Institute study in 2018 that analyzed the spending habits of retirees during their first two decades of retirement.”  Unfortunately, this study’s results aren’t what they appear to be.

The study results

Here are the main conclusions from this study:

  • Individuals with less than $200,000 in non-housing assets immediately before retirement had spent down (at the median) about one-quarter of their assets.
  • Those with between $200,000 and $500,000 immediately before retirement had spent down 27.2 percent.
  • Retirees with at least $500,000 immediately before retirement had spent down only 11.8 percent within the first 20 years of retirement at the median.
  • About one-third of all sampled retirees had increased their assets over the first 18 years of retirement.

The natural conclusion from these results is that retirees aren’t spending enough, or that they oversaved before retirement.  However, reading these results left me with some questions.  Fortunately, the study’s author answered them clearly.

At what moment do we consider someone to be retired?

People’s lives are messy.  Couples don’t always retire at the same time, and some people continue to earn money after leaving their long-term careers.  This study measures retirement spending relative to the assets people have at the moment they retire.  Choosing this moment can make a big difference in measuring spending rates.

From the study:

Definition of Retirement: A primary worker is identified for each household. For couples, the spouse with higher Social Security earnings is the assigned primary worker as he/she has higher average lifetime earnings. Self-reported retirement (month and year) for the primary worker in 2014 (latest survey) is used as the retirement (month and year) for the household.

There is a lot to unpack here.  Let’s begin with the “self-reported retirement” date.  People who leave their long-term careers tend to think of themselves as retired, even if they continue to earn money in some way.  Depending on how much they continue to earn, it is reasonable for their retirement savings either to decline slowly or even increase until they stop earning money.  What first looks like underspending turns out to be reasonable in the sense of seeking smooth consumption over the years.

The next thing to look at is couples who retire at different times.  Consider the hypothetical couple Jim and Kate.  Jim is 6 years older than Kate, and he is deemed to be the “primary worker” according to this study’s definition.  Years ago, Jim left his insurance career and declared himself retired, but he built and repaired fences part time for 12 more years.  Kate worked for 8 years after Jim’s initial retirement.

Their investments rose from $250,000 to $450,000 over those first 8 years of retirement, declined to $400,000 twelve years after retirement, and returned to $250,000 after 18 years.  Given the lifestyle Jim and Kate are living, this $250,000 amount is about right to cover their remaining years.  Although Jim and Kate have no problem spending their money sensibly, they and others like them skew the study’s results to make it seem like retirees don’t spend enough.

What is included in non-housing assets?

From the study:

Definition of Non-Housing Assets: Non-housing assets include any real estate other than primary residence; net value of vehicles owned; individual retirement accounts (IRAs), stocks and mutual funds, checking, savings and money market accounts, certificates of deposit (CDs), government savings bonds, Treasury bills, bonds and bond funds; and any other source of wealth minus all debt (such as consumer loans).

So cottages and winter homes count as non-housing assets.  This means that a large fraction of many people’s assets is a property that tends to appreciate in value.  Even if they spend down other assets, the rising property value will make it seem like they’re not spending enough.  It is perfectly reasonable for people to prefer to keep their cottages and winter homes rather than sell them and spend the money. Continue Reading…

Despite recession fears & inflation, DB pension health improving: Mercer

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Things appear to be looking up for members of Defined Benefit [DB] pension plans in Canada, despite inflation and rising fears of a looming recession.

In the third quarter, Canadian defined benefit (DB) pension plans continued to improve, according to the Mercer Pension Health Pulse (MPHP), released on Monday.

The MPHP, which tracks the median solvency ratio of DB pension plans in Mercer’s pension database, finished the third quarter at 125%, up from 119% last quarter. At the beginning of the year, the MPHP was at 113%, as shown in the chart above left.

This strengthening appears somewhat counterintuitive, as pension fund asset returns were mostly negative in the quarter, Mercer said in a news release. Over the quarter, bond yields increased, which decreases DB liabilities.  This decrease, along with a fall in the estimated cost of buying annuities, “more than offset the effect of negative asset returns, leading to stronger overall funded positions.”

Plans that use leverage in the fixed-income component of their assets will not have seen this type of improvement, it added.

Of plans in its database, at the end of the third quarter 88% were estimated by Mercer to be in surplus positions on a solvency basis (vs. 85% at the end of Q2). About 5% are estimated to have solvency ratios between 90% and 100%, 2% have solvency ratios between 80% and 90%, and 5% are estimated to have solvency ratios less than 80%.

Ben Ukonga

“2023 so far has been good for DB pension plans’ financial positions,” said Ben Ukonga, Principal and leader of Mercer’s Wealth practice in Calgary [pictured on right],” “However, as we enter the fourth quarter, will the good news continue to the end of the year?”

The global economy is still on shaky grounds, Mercer says.  “A recession is not completely off the table, despite continued low unemployment rates. Inflation remains high, potentially back on the rise, and outside central banks’ target ranges.”

Geopolitical tensions also remain high, reducing global trade and trust and fragmenting global supply chains – which further reduces global trade. And the war in Ukraine “shows no sign of ending – adding economic uncertainty atop a geo-political and humanitarian crisis.”

Mercer also questions whether recent labour disruptions at U.S. auto manufacturers will be resolved quickly, with Canadian workers expecting large wage increases, leading to further inflationary pressures.

Interest rates may stay at high levels

Mercer also worries that central banks globally may continue to keep benchmark interest rates at elevated levels.

 “Given the delayed effect of the impact of interest rate changes on economies, care will be needed by central banks to ensure their adjustments (and quantitative tightening) do not tip the global economy into a deep recession, as the full effects of these actions will not be known immediately. As many market observers now believe, the amount of quantitative easing during the COVID-19 pandemic was more than was needed.”

Most Canadian DB pensions are in favourable financial positions, with many plans in surplus positions, the release says: “Sponsors who filed 2022 year-end valuations will have locked in their contribution requirements for the next few years, with many being in contribution holiday territory (for the first time in a long time).”

That said, it added, DB plan sponsors should not be complacent: “Markets can be volatile, and given that plans are in surplus positions, now more than ever is the time for action, such as de-risking, pension risk transfers, etc. These actions can now be done at little or no cost to the sponsor.”

Mercer also said DB plan sponsors should “remain cognizant of the passing of Bill C-228, which grants pension plan deficits super priority over other secured creditors during bankruptcy and insolvency proceedings.”   Continue Reading…