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.
Over the years, we have received thousands of questions from clients related to a wide range of financial and planning issues. Without doubt, the highest volume of questions relate to how to manage the transitions from working to retirement.
The Guide highlights ten different sources of retirement income. Some range from the very common, Canada Pension Plan, to those that may only apply to some – life insurance, corporations, or home equity. The Guide is free and doesn’t require any input to get it (such as name or email.) Perhaps the most common question is whether to take CPP at age 60 or 65 or even 70. The thoughts around a potential answer are discussed in the Guide as well as providing a link to a CPP calculator (CPP Calculator – TriDelta Private Wealth) and guidance on how to work with Service Canada. Similar discussions and links relate to Old Age Security (OAS), ranging from taking it at 65 to age 70, and also factors that might help you to avoid any clawbacks.
Other factors that need to be considered include minimizing taxes, not just for one year, but over the entire post-work period. One of the reasons for looking at every possible source of retirement income is that this can be the key to planning out the lowest tax retirement.
Some strategies discussed that could lower taxes could include:
Delaying OAS and CPP to age 70, but drawing down RRSPs between retirement and age 70 – if you are healthy. The lower income drawdown of RRSPs will result in lower taxes, while helping to maximize government pensions and potentially maintaining full OAS payments.
Using a balance of non-registered assets or a home equity line of credit, to keep taxable RRIF income a little lower. Continue Reading…
Canadians have faced cost pressures in many facets of their daily lives, including housing costs, food and gas prices, and insurance premiums to name a few. At the same time, Canadians may be thinking about how inflation and volatile interest rates may have impacted their retirement savings over Q4.
Canadians that participate in defined benefit (DB) pension plans are likely to have seen the financial health of their DB pension plans weaken in Q4, but show an overall improvement over the whole of 2023. DB pension plans that used fixed income leverage may have experienced stable or improved solvency ratios over the quarter.
The Mercer Pension Health Pulse (MPHP) is a measure that tracks the median solvency ratio of the defined benefit (DB) pension plans in Mercer’s pension database. At December 31, 2023 the MPHP closed out the year at 116%, which is a decline over the quarter from 125% as at September 30, 2023, but an improvement from 113% at the beginning of the year. The solvency ratio is one measure of the financial health of a pension plan.
In the final quarter, plans saw positive asset returns, but these returns were not enough to offset an increase in DB liabilities due to a decline in bond yields. While we saw a decline in the financial health of DB pension plans over Q4, it improved over the whole of 2023. In addition, compared to the beginning of year, there are more DB pension plans with solvency ratios above 100%.
Canadian inflation and interest rates
Canadian inflation came down over 2023 and is approaching the upper end of the Bank of Canada’s inflation-control target of 3%. General views are that inflation will continue to decline in 2024 and reach the policy target of 2% in 2025. In 2023 the Bank of Canada increased the overnight rate to 5.00% from 4.25%, which was a continuation of increases that commenced in 2022, to mitigate inflation and to balance against the risk of a recession.
However, DB pension plan benefits are accumulated and paid over periods that are significantly longer than the overnight rate. Interest rates on Canadian bonds with longer terms were volatile throughout the year and finished at lower levels than at the start of the year. It’s unclear whether the interest rates that apply to DB pension plans will stabilize in 2024, and if so, at what level. As such, interest rates continue to pose a significant risk for many DB pension plans. Continue Reading…
You might have read some of these articles also, you know, the ones that say Americans have not saved enough to retire.
Many of these pieces proclaim that you must save enough in your investments to throw off 80% of your current annual salary so that you can afford a comfortable life away from a job. Lots of them will say that you need US$2 million in investments (or more) and woe to the person who thinks they can do it on less.
Approximately 10% of the households in the U.S. have a net worth of one million dollars or more. What are the other 90% supposed to do? Not retire? What kind of common sense does this make? Expecting the regular “Joe”to meet this $2 million dollar mark is not realistic.
As you know, we have over three decades of financial independence behind us. And while everyone’s idea of a perfect lifestyle sans paycheck is different, we can tell you that for these 33-years, we have kept our annual spending around $30,000.
The secret: Living within your means
In all of our years of retirement and travel we cannot recall one retiree who regrets their decision to retire. In fact, most have told us that they wished they had done it sooner.
The Society of Actuaries (SOA) recently conducted 62 in-depth interviews of retired individuals across both the U.S. and Canada. These people were not wealthy and had done little to no financial planning. But the vast majority of them shared that they had adapted to their situation and live within their means. Translation: they have adjusted their spending to the amount of money they have coming in every month.
So basically, it’s really that simple and this is why we say if you want to know about retirement, Go to the Source.
It doesn’t have to be complicated
In our books and in our articles about finance, we say over and over that there are four categories of highest spending in any household. We personally have made adjustments in all four of these categories, and have therefore reaped the benefits of having done so. We discuss these four categories in more depth below.
The financial guys and gals will have you tap dance all over the place with investment products, and a certain financial goal you must achieve. They will press upon you the seriousness of the decision to leave your job for a couple of decades of jobless living. We say it doesn’t really have to be that complicated, but it’s very important to pay attention to these four categories.
Listen up
Housing is THE most expensive category for you to manage. It’s not just the house itself, it’s the maintenance, the property taxes, the insurance, and any updating you might want to do to a place where you are going to be living for years down the road.
If you want to rebuild that boat dock to the lake where your boat is parked during the summer, that takes money. If you are tired of the style of faucets, sinks, tile and tub areas of your bathroom and want to upgrade, that is a large expense. Now that you are retired and want a more modern kitchen, more counter space, better lighting, prettier cabinet covers – Ka-Ching! You are hearing the cash register tallying up the cost.
If you have a hot tub, an extensive garden, or if you want to build a deck to connect the house to the garden, or put in a Koi pond … Well, you get the idea.
I understand that for some people, their home is their castle, and those homes are gorgeous and a comfortable place to stay. All we are suggesting is that homes will never say no to having money poured into them.
If you want to travel or to snow bird part time, then you will find yourself paying twice for housing – the one you have left in your first location, and the hotel or the vacation home in which you will spend part of the year.
If you are not vigilant, this one category will suck the life out of your retirement. We just want you to know that you have a choice.
Downsizing in retirement is not a bad thing. Relocating to a state or country with less taxation is a smart move. You could move to an Active Adult Community where you could choose to own the land or lease it. Here a variety of social activities are offered and the maintenance of your front yard is taken care of in your lifestyle fees.
When you travel, you could choose to house sit. Or take advantage of better pricing for apartments or hotels that rent for the month and include utilities, WiFi, and a maid. You could try AirBnB for less than a hotel room, and live like a local instead of a tourist.
Do you know how much your home (including the taxes, insurance and utilities) costs you per day? It is a figure that might startle you.
Transportation is the second highest category of expense. Now we realize that especially in the States, it is a bit more challenging to wrap your mind around the idea of not owning a car, or just having one for your household instead of three.
According to the latest AAA’s report on car ownership in 2023, it costs an average of $12,182 every year — $1,015.17 every month — to drive for five years at 15,000 miles per year.
So then, in the category of transportation, if you decide you want to fly to an island for a vacation, you must add in the cost of the flight… and any boat trips you might take, and any taxis from the airport to your hotel, and the price of a car rental for the week or two that you will be vacationing.
It all adds up and it’s all a part of this category. Continue Reading…
As retirement approaches, you ask yourself if you should work after retirement. Here’s a list of pros and cons to find out which path is right for you.
Image courtesy Arista Reality Group
By Dan Coconate
Special to Financial Independence Hub
Retirement is something we dream about. After years of hard work, we look forward to a slow life. However, for many people, the thought of stopping work altogether can be a little daunting.
There’s a big question looming over your head: Should you work after retirement? Find out the pros and cons to make an educated decision.
PRO: Mental Stimulation
Many older individuals discover that they thrive on the challenge and stimulation that work provides. This is especially true when the work involves using skills and experience, as it adds a sense of fulfillment and purpose to your life.
Engaging in such work will keep your brain sharp to enhance cognitive abilities as you age. You can feel fulfilled while reaping the benefits of an agile mind.
CON: Reduced Free Time
The beauty of retirement is the substantial freedom to spend your time as you wish. However, a new job may limit your abilities to embark on new hobbies, travel, and spend time with loved ones.
If you want to pursue a job during retirement, be sure to select a position that’s part-time and flexible. This will ensure that you have the free time you deserve to partake in the activities you desire.
PRO: Extra Income
It’s no secret that with a job comes additional income. While you most likely have a retirement fund arranged, a little extra money can go a long way.
Extra income can contribute to new hobbies, traveling, and treating your family with gifts. But that’s not all it’s good for.
The big question when buying a retirement home is how you will fund the endeavour. Purchasing a house is a costly investment, even if you’re planning to downsize. An additional income can cover portions of mortgage payments, property taxes, and maintenance costs for a more manageable investment.
CON: Social Security Benefits
While the additional income earned from working post-retirement can be advantageous, remember that it may impact your Social Security benefits. In certain circumstances, the Social Security Administration might reduce your benefits if you earn above a specific limit while receiving monthly payments. This could mean that they withhold a portion of your Social Security benefits.
PRO: Social Interaction
Retirement brings about one of the most significant changes: the loss of daily social interaction. Many individuals struggle to adapt to the sudden absence of colleagues and feel a sense of missing out. Continuing to work after Retirement lets you enjoy the much-needed social connection and fostering of new friendships. Continue Reading…
Yet another year has gone by. With 2023 behind us and 2024 on the horizon, it’s important to take stock, set goals, and make plans – keep steadfast in your quest for long-term financial planning and wealth management success.
In 2023, I shifted my focus to keep some core financial planning principles at the forefront of your mind. These principles are timeless and are a good touchpoint for whenever your financial resolve starts to soften.
Let’s look back at these timeless financial tips from 2023…
Let’s talk about the price of stocks. To make money in the market, you need to sell your holdings for more than you paid. Of course, we’re all familiar with good old buy low, sell high. But despite its simplicity, many investors fall short. Instead, they end up doing just the opposite, or at least leaving returns on the table that could have been theirs to keep.
You can defend against these human foibles by understanding how stock pricing works and using that knowledge to your advantage.
In investing and life, information overload, aka “noisy news,” has long been a thing. In fact, before the Internet came along, I used to publish a hardcopy newsletter called “Rising Above the Noise.” Because even then, investors seemed awash in TMI (too much information).
If media noise was a problem back then, imagine the implications today. Which brings me to today’s Play It Again, Steve – Timeless Financial Tip #2.
To be a successful investor, it’s as important as ever to dial down all the noisy news you invite into your head.
I would be remiss if I didn’t dedicate at least one post in my “Play It Again, Steve” series to everyone’s least favourite, but still significant topic: taxes. It’s a good thing there’s no tax on writing about tax planning; if there were, I would surely owe a lot.
Read about these six timeless techniques for reducing your lifetime tax load.
So, what’s really going on inside your head as you make critical decisions about managing your money? By considering this pivotal question each time you’re tempted to react to the latest news, you stand a much better chance of being the boss of your investment outcomes.
There are countless external forces influencing your investment outcomes: taxes, market mood swings, breaking news, etc.
Let’s look inward, to an equally important influence: your own financial behavioural biases.
If I could, I would grant amazing investment returns to every investor across every market. Unfortunately, that’s just not how it works. In real life, we must aim toward our financial ideals, knowing we won’t hit the bullseye every time.
That’s why I recommend evidence-based investing: or investing according to our best understanding of how markets have actually delivered available returns over time, versus how we wish they would. Our “best understanding” may still be imperfect, but it sure beats ignoring reality entirely.
I’ve spent my entire career railing against the dangers of market-timing — i.e., dodging in and out of markets based on current conditions. But there is a time when “timing” of a different sort matters. I’m talking about your investment time horizons.
Your driving force for when to invest — and stay invested — is ideally based on the timing of your own spending plans, rather than external market moves. Let’s look at how to use your personal time horizons to successfully separate today’s spending from tomorrow’s future wealth.
Retirement isn’t the only reason to set aside current income for future spending. But since it’s usually the elephant in the financial planning room, it’s worth a Timeless Tip of its own.
Essentially, this is what retirement planning is all about:
By being thoughtful about how to save and invest toward retirement, you can best sustain, if not improve your ongoing lifestyle: especially once your prime earning years are over.
If you are walking the line between investing, spending, and your investment time horizon, check out these 6 ways to leverage lifelong financial planning, so you can retire on your own terms and on your own timeline. Continue Reading…
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By Ted Rechtshaffen, CFP
