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.

Why Retirees own cash, bonds & GICs

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By Dale Roberts

Special to Financial Independence Hub

Imagine retiring, and then you have to head back to work, or you cancel your planned trips and greatly curtail your lifestyle. That’s what happened to too many who retired at or near the recesssions created by the dot com crash and the financial crisis. Risk in retirement is perhaps the flipside of risk in the accumulation stage. In the accumulation stage, lower stock prices can be very good. Lower prices in retirement can impair retirement. The equity risk in retirement is called sequence of returns risk. Poor stock market returns early in retirement can create a situation where the portfolio value has decreased, and selling more shares at lower prices might be hazardous to your retirement health. That’s why retirees own bonds, cash and GICs.

I will start off with a few charts that demonstrate the path of a retiree’s portfolio who retired at the start of the dot com crash (late 90s) and the financial crisis (2007-2009).

Here’s the drawdown history in recessions using the U.S. market as an example.

Yes, two of the most recent major corrections were epic and extraordinary. In the dot com crash and the financial crisis, stock markets were down 50%. In the early 2000s U.S. stock markets were down 3 years in a row.

The “average” decline in a recession is close to 25%. But as we know, average rarely happens when it comes to investing and stock markets.

The dot com crash retirement scenario

In the following scenario the retiree has a  C$1,000,000 portfolio and spends 4.2% of the portfolio value in year one. The $1,000,000 creates $42,000 of income. The spending rate then increases, adjusted for inflation. If inflation is 3%, the retiree gets a 3% raise.

The portfolio is 50% U.S. stocks and 50% global.

Portfolio Visualizer

We can see that it was “over” quickly for the equity portfolio in this scenario. Even the strong market returns from 2003 to 2008 could not bring the portfolio back to health. In late 2007 the portfolio value was $870,000 but the spend rate would have been considerable. We have a portfolio value much lower than $1,000,000 and the amount taken out of the portfolio has increased at the rate of inflation. It is a dead portfolio walking, even in 2007. The financial crisis essentially finished it off, and was limping through the 2010s. 2024 would be its final year.

Unfortunate start date

The retiree was a victim of bad luck. They strolled into a very unfortunate start date – at the beginning of a recession and a severe stock market correction.

Let’s head back two years to see what happens to a retiree who retired in 1998.

What a difference two years makes. That said, I would suggest that the portfolio was impaired in 2003 and 2008. It was outrageous stock market gains that brought the portfolio back to the land of the living. There is no guarantee that after 40% and 50% portfolio declines that 30% and 20% annual stock market gains will ride to the rescue.

It’s also likely that a retiree who has watched 30% to 40% of their portfolio value disappear is not comfortable keeping up the spend rate. They have cancelled trips, dinners, gifting and more. They might have self-imposed retirement withdrawal.

Risk is different and feels different in retirement.

That self-imposed retirement withdrawal may have occurred during the financial crisis as well.

Who is going to keep the spend rate when the portfolio is down over 50%? I’d suggest no one. And I’d count that as a retirement failure, having to change your retirement plans.

Are you feeling lucky?

Now, let’s give the retiree a very fortunate start date. 1991.

The portfolio never sees new lows. And obvioulsy, the retiree could have treated themself to a much higher spend rate of 4.2% inflation-adjusted. That’s called a variable withdrawal strategy. You spend more when times are very good. And you spend less during recessions. More on that later. Continue Reading…

Starting a Business to attain Findependence

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Unsplash: Chris Liverani

By Devin Partida

Special to Financial Independence Hub

Many people seek the life Findependence [aka Financial Independence] can bring. While there are many ways to achieve this status, one great way is to start a business.

Building a company can be daunting, but it’s vital to consider if it’s something you really want to do.

How does starting a Business help you reach Findependence?

Many business owners trying to obtain findependence implement an exit strategy. This is where the company still operates normally but doesn’t rely on the person who started it to do the work. In other words, the company is automated to function without intervention from the owner. Other people prefer to sell their organization and live on the profit they get from it.

Instead of selling the enterprise, another route is to invest the capital in different areas. Some entrepreneurs use the profit their business generates to create additional passive-income streams.

You can invest your money in many different areas to reach findependence. Here’s a summary of a few popular avenues:

● Roth IRA: This individual retirement account [in the U.S.; similar to Canada’s TFSA] offers the investor tax-free growth and withdrawals. To withdraw money from an IRA, the owner must own the account for at least five years and exceed the age of 59 and six months.

● Property: Many entrepreneurs decide to invest their capital into real estate to sell or rent it again. Buying property could be an excellent chance to obtain passive income, which can aid with the end goal of reaching findependence. However, real estate might have additional costs, such as hiring someone to manage the investment for you.

● The stock market: You can’t talk about investing and not mention stocks. Most people are already familiar with this option, where someone purchases a portion of a company and receives shared ownership. Stocks can also generate monthly passive income via dividends, but many consider them high-risk investments.

If investing company profits to reach financial goals is something you’re interested in, there are other opportunities to look out for. Consider researching bonds and index funds to determine if they’re something you want to invest in.

What kind of Business should you start?

The type of organization you should start comes down to personal preference. Consider looking at your interests and what excites you. Many entrepreneurs create a company around what they already know. For example, if they have coding experience, they could build a business offering customers web development services. Whichever idea you choose, ensure you conduct sufficient research to know what it will take to make it a success.

Here are a few popular business ideas: Continue Reading…

Retired Money: What ETFs are appropriate for retirees?

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Photo by Alena Darmel from Pexels, via MoneySense.ca

My latest MoneySense Retired Money column looks at what ETFs might be appropriate for retirees and near-retirees. You can find the full column by clicking on the headlined text here: The Best ETFs for Retirement Income.

I researched this topic as part of a MoneyShow presentation on the ETF All-Stars, scheduled early in September, to be conducted by myself and MoneySense editor Lisa Hannam. Regular MoneySense and some Hub readers may recall that I was the lead writer for the annual ETF All-Stars package but after almost a decade decided to pass the reigns to new writers: this year’s edition was spearheaded by Michael McCullough.

While the ETF All-stars (which are selected now by a panel of seven Canadian ETF experts) are appropriate for all ages and stages of the financial life cycle, a solid subset of the picks can safely be considered by retirees. A prime example are the Asset Allocation ETFs, many of which have been All-Star picks since Vanguard Canada launched them several years back, and since matched by BMO, iShares, Horizons and others.

Generally speaking, young people can use the 100% growth AA ETFs like VEQT etc., or (which I’d be more comfortable with), the 80% growth/20% fixed income vehicles like VGRO. Near-retirees might go with the traditional 60/40 stocks/bonds mix of classic balanced funds and indeed pension funds: VBAL, XBAL, ZBAL, to name three.

Those fully in Retirement who want less risk but a bit of growth could flip to the 40/60 stocks/bonds mix of VCNS, XCON (check) and ZCON (check.).

In theory all you need is a single asset allocation ETFs, no matter where you are in the financial life cycle. After all, all these ETFs are single-ticket highly diversified global plays on the stock market and bond market, covering all or most geographies and asset classes. And their MERs are more than reasonable: 0.2% or so.

A single Asset Allocation ETF can suffice, but consider adding some tactical layers

In practice, most investors (whether retired or not) will want to do a bit more tinkering than this. For one, the asset allocation ETFs tend to have minimal exposure to alternative asset classes outside the stocks and bonds realm. They will include gold stocks and some real estate stocks or REITs, but little or no pure exposure to precious metals, commodities or indeed cryptocurrencies. (Maybe that’s a good thing!).

The MoneySense article bounces my ideas for adding tactical layers to an AA ETF. For example, you might use the 40/60 VCNS instead of 60/40 VBAL, for 80% of your investments, reserving the other 20% for more tactical mostly equity specialized ETFs. You’d aim for a net 50/50 asset mix after blending the AA ETF and these tactical ETFs. Continue Reading…

Managing Debt: How Business Leaders Overcame Financial Challenges

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Image via Pexels, Andrea Piacquadio

In this article, we’ve gathered seven effective strategies from founders and investment bankers on how to pay off significant debt while striving for financial independence. From embracing the “Snowball Method” to prioritizing high-interest debts, these experts share their personal approaches to achieving a debt-free life.

  • Embrace the “Snowball Method”
  • Achieve F.I.R.E. through Diversified Income
  • Reverse Order your Debt Payment Strategy
  • Utilize the “Debt Snowflake Method”
  • Consider Debt Settlement Options
  • Budget and Start a Side Hustle
  • Prioritize High-Interest Debts

Embrace the “Snowball Method”

In my journey to financial independence, I’ve found the “Snowball Method” to be an effective strategy for paying off significant debt. It’s like rolling a snowball down a hill; you start small and gain momentum. 

I began by paying off the smallest debts first, regardless of interest rates. The psychological boost of eliminating a debt was a powerful motivator, propelling me to tackle the next one. It’s akin to cleaning a cluttered room; you start with one corner and before you know it, the entire room is clean. 

This method may not be the fastest or the one that saves the most money in interest, but it’s the one that kept me going, and that’s what matters in the end. It’s not just about the numbers, it’s about the journey and the habits you build along the way. — James Allen, Founder, Billpin.com

Achieve F.I.R.E. through Diversified Income

I am an advocate of the F.I.R.E. movement, having both personal and professional experience with personal finance. I pursued F.I.R.E. because I wanted to follow my interests outside of my 9-to-5 job. I wanted to live a great life while exploring the world and spending more time with family and friends. Most importantly, I didn’t want to worry about finances all my life!

After making wise financial decisions over the years, I could leave my high-stress finance job in July 2019 to pursue my side hustles full-time. What I did was to diligently add to my emergency fund and invest as much as possible. In the first half of 2020, my partner and I could pay off $57,000 in debt, and we are now debt-free. I am now a full-time entrepreneur, with my businesses and side hustles generating a combined multi-six-figure per year income. — Samantha Hawrylack, Founder, How To FIRE

Reverse Order your Debt Payment Strategy

One strategy that has worked for me is to pay off my debt in the reverse order in which it was accrued. This means that I paid off the smallest debt first, and then worked my way through the rest of my debt: the highest interest rate last. 

The reason I did this was because it made me feel empowered and focused. I would think about how much money I was saving by paying off one bill early, and then use that motivation as fuel to keep going. — Jaanus Põder, Founder and CEO, Envoice

Utilize the “Debt Snowflake Method”

One effective strategy that helped me pay off significant debt while striving for financial independence is the “Debt Snowflake Method.” 

While the “Debt Snowball Method” is more well-known, the Debt Snowflake Method involves finding small, everyday ways to save or earn extra money and immediately using those funds to make additional debt payments. It might seem insignificant, but consistently directing small amounts toward debt can add up surprisingly quickly. 

For example, I would take advantage of cash-back apps, sell items I no longer needed, or even offer small freelance services during my free time. Every little contribution would go directly towards my debt, creating a snowflake effect that accelerated my debt payoff journey.  Continue Reading…

Timeless Financial Tip #7: 6 Steps to Retiring as Planned

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Canva Custom Creation: Lowrie Financial

By Steve Lowrie, CFA 

Special to Financial Independence Hub

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.

The following are 6 ways to leverage lifelong financial planning, so you can retire on your own terms and on your own timeline.

  1. 1. Don’t Delay Retirement Planning, Start Today

I know, it’s easy to assume retirement planning is for when you get older. How old? Well, older than you are today (you tell yourself).

It’s also true that a detailed retirement plan is unlikely to come into focus until you’re at least mid- if not late-career. It’s hard to take clear steps toward hazy targets.

But none of this means it’s wise to be too Rip-Van-Winkle-like about your retirement planning. Even if it’s decades away — and especially if it’s not — a few sensible financial planning steps should help you avoid having to take any huge leaps 20 years down the road.

  1. Do Some Financial Forensics

To get started, try doing some Family Spending Forensics. Don’t worry, no forceps will be required to get a grip on what you’ve got and where it’s going. No judgment! Just take a few hours every year or so to ask yourself:

  • How much am I currently spending, in what categories?
  • How much am I saving for upcoming expenses?
  • How much am I investing for the future?
  1. Have a Personalized Financial Plan

Once you have a sense of where you’re at, create a financial plan that outlines where you’d like to go, including in retirement. Your plan should describe what your goals are, when you would like to achieve them, their approximate cost, and where the money will come from. Revisit your plan annually to freshen it, as needed. Having a plan in place will help you:

  • Spot any spending or saving leaks early on. It’s easier to heal a hole when it’s still small.
  • Make the most of new income. If you receive a raise, pay off your mortgage, receive an inheritance, or otherwise come across “new” money, your financial plan will inform you how to use the assets for maximum benefit, instead of randomly spending them on “whatever.”
  • Make good lifetime choices. Few families have more money than they know what to do with. Instead, most of us must bridge gaps between our assets and our aspirations. So, think about:
    • How will you bridge your gaps?
    • Will you work longer or pursue a higher-paying job?
    • Should you spend less, now or in the future?
    • Will you choose to invest more aggressively?

A financial plan helps you make good choices among spending/saving tradeoffs: during your working years and into retirement.

  1. Invest Toward and In Retirement

For most of us, our financial success comes from income earned during our career years. But it’s usually essential to also have invested a significant portion of that income into an inflation-beating, globally diversified investment portfolio we can tap in retirement. A financial needs analysis quantifies what your investment portfolio might look like to sustain a satisfying lifestyle in retirement: Continue Reading…