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.

Less than Half of Canadians have a Will and many don’t even know where to start: NIA

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By Mark Venning, ChangeRangers.com

Special to Financial Independence Hub

Following Canada’s National Institute on Ageing (NIA) since their beginning in 2016, it’s been a year since I last commented on the value of the NIA as a knowledge resource for Canadians on topics related to ageing and longevity.

And I would say, their regular reports, generated often in collaboration with other groups, are also a resource for anyone engaged in comparative research outside this country.

Now here’s today’s feature on one report from the NIA files from 2023 so far

Where There’s a Will, There’s a Way: Exploring Canadian Perspectives on Estate Planning.

When I first received my NIA email notification of this report on May 17th, I was not surprised in the least by the lead headline: “Less than Half of Canadians Have a Will – and Many Don’t Even Know Where To Start.” For over twenty plus years, back when I was working in partnership with financial planners to deliver seminars on later life transitions, this was always a commonly known fact, and most people who didn’t have a Will knew that they should have had one.

The April 2022 Ipsos survey for this NIA report was conducted in collaboration with RBC Royal Trust. As the report details, it all starts with overall Estate Planning, and this includes setting up a Will, Powers of Attorney (POA) for care and property and, what was less discussed twenty years ago, Advanced Care Planning. As it happens my Will and POAs are ready for some small updating, but this time advanced care will also be on the agenda.

So if, as the report suggests, people know the value of planning and the subsequent sad consequences from not doing so – what’s the reason for inaction? I recall facilitating group conversations where literally some have said things like “if I do a Will, I know fate will bring me an early death” or, “I don’t have enough of an estate to worry about.” Of course the other concern I heard was about the perceived high cost of legal fees which halted the move to getting to the matter.

How fortunate for me, straightforward household budgeting and for that matter, estate planning Wills and POAs were things I learned early on at home from my parents, not from the education system. Today, learning from professionals in these topic areas should not be that intimidating or made difficult to access. Regardless of your age, picking up this report would be a great start. Continue Reading…

Do you have a case of the “What If’s”?

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An Interview with Brian Watkins by Billy and Akaisha Kaderli, RetireEarlyLifestyle.com

Special to Financial Independence Hub

We at RetireEarlyLifestyle love to bring you retirement stories of people we have met. There’s no one right way to get to Financial Independence, and we are happy to bring Brian’s adventure to financial freedom to you.

Thank you, Brian, for taking the time to answer all our questions!

Brian Watkins enjoying his last year of teaching

Retire Early Lifestyle: Could you tell us a little about yourself, and how old you are?

Brian Watkins: Hi, as of 14 months ago I quit my job as a teacher, a position I held for 22 years, and at 48 decided to travel and enjoy a different lifestyle. I wanted a life with more freedom and less obligation to debt. I had spent a lifetime accepting that debt was part of the American lifestyle and just wanted something different.

REL: What got you started investing and when?

BW: In my very first year of teaching, I was broke and struggling from month to month. At work I saw sign that read “Free Pizza….. in the Library.” Not sure what the rest of the sign said but I was down with free pizza, so I headed to the library. Little did I know that with a slice came some financial advice. By the time I left I was investing $100 a month in a 403B and only going to see a $70 difference in my check. The lesson: live on less and invest!

REL: When did you know you were ready to retire and what motivated you?

BW: At 46 both my mother and father passed within six months of each other. I really didn’t want to risk working till death. So at that point I started working on my exit plan.

REL: What do you do for income generation?

BW: When I turn 55 I will be eligible to withdraw from my pension. I have a 403B in place that will be eligible at 591/2 and I currently live off the sale of my condo. My overall goal has been to live off 4% of my total investments.

REL: What do you plan to budget annually for your retirement?

BW: I had an educated idea of what my expenses might be but purchasing your book and tracking my expenses helped me more than you’ll ever know. In my first 12 months I spent $16,542. Eight months of that was for two people. My annual budget broke down as follows:

REL: Can you share with us anything about how your portfolio is structured?

BW: My current portfolio is 75% equities, 25% bonds.  

Puerto Galera, Philippines

REL: You are one of the new generation of Early Retirees who are well versed in a digital lifestyle. How have you used this technology to enhance your retirement?

BW: I have actually learned so much from the retirees who are digitally inclined. I use a Virtual Private Network (VPN) for those countries IP address that my bank blocks. I have a Google voice number so that I can call (or text) a U.S. number from Google Hangouts using wifi only.

The most important people to me have the Cash App and I can send or receive money on it and have it deposited for free (3 day waiting period) or for a fee same day. Continue Reading…

The 5 factors needed for timing your Retirement, and a 6th that shouldn’t be

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My latest MoneySense Retired Money column reprises a couple of interesting takes on the key factors in deciding one’s timing of taking on Retirement. You can read the full column by clicking on the highlighted headline here: The 5 Factors of Retirement for Canadians.

One take is from the Plutus-award winning US blogger and author Fritz Gilbert; the second a Canadian take from MyOwnAdvisor’s Mark Seed.

Gilbert started the ball rolling back in April with a blog on his The Retirement Manifesto blog, entitled The 5 most important factors in your decision to retire. Gilbert is also the author of a book on retirement: Keys to a Successful Retirement. After more than 30 years in Corporate America, Fritz retired (as planned) in June 2018 at Age 55.

Then this site, as it often does with bloggers’ permissions, re-reran Gilbert’s blog late last year. It was then noticed by Mark, who was inspired to write his own version of the blog, with more of a Canadian spin and remarks on his personal perspective. It was also republished on the Hub.

So what was it that so intrigued three different financial bloggers (I’ll count this blog and the MoneySense column as evidence that three of us found it worthy of a write-up)?

Fritz Gilbert

Succinctly, here are the five factors originally identified by Gilbert:

  1. Do you have enough money?
  2. Are you mentally prepared for Retirement?
  3. Have you made a realistic spending estimate?
  4. Is your portfolio ready for withdrawals?
  5. What’s your risk tolerance?

            By now, you may be wondering about the mysterious sixth factor which in his blog Fritz says “doesn’t really matter at all.” Strangely, he adds, many people consider it to be the most important in their decision.

            Spoiler alert: if you like a bit of suspense, read Fritz’s original blog before proceeding. For those who want the quick-and-dirty reveal, if you’ve not already guessed, it’s your age. Or as Fritz wrote: “For once in your life, age has nothing to do with this decision.  Unlike driving, voting, and drinking, there are no legal constraints on when you can choose to retire.  As long as you can check the boxes on the important factors listed earlier, you can choose to retire regardless of your age.” Continue Reading…

How much do you need to retire early at age 40, 45, 50 or 55?

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Image courtesy Tawcan

By Bob Lai, Tawcan

Special to Financial Independence Hub

It’s never too early to start looking forward. I’ve been doing this on my site for some time and doing a bunch of assumptions and simulations on what our financial independence retire early might look like.

I also have interviewed many Canadians who are financially independent and/or retired early in my FIRE Canada Interviews.

Having some plans on your hands is better than no plans at all. Furthermore, having some quantitative targets available will allow you to set up different financial milestones and goals each year. Doing so will help you to stay focused and work your way to achieve them.

If you aspire to retire or semi-retire earlier than most people, how much do you need to retire early at age 40, 45, 50 or 55? Thanks to my friends at Cashflows & Portfolios, I have that answer today.

‘Traditional’ retirement vs. the ‘new’ retirement

For those not familiar with Cashflows & Portfolios, it’s a site started by two long time Canadian bloggers, Mark and Joe. Mark runs My Own Advisor, which I started reading before I started this blog. Joe was the brain behind Million Dollar Journey, which I have been following for over a decade.

All three of us believe we need to retire the term: retirement. To be more specific, we believe it’s time to change the ‘traditional’ definition of retirement. It is also important to make sure you know what you’re retiring to. 

Back in the day, when you turned 60 or 65, and once you had grown tired of working by already clocking decades of company time – trading those years in the workplace for your workplace pension to supplement income for your senior years.

Well, workplace pensions are dwindling and more and more, pursuing retirement in any traditional sense seems rather unhealthy today. A traditional retirement can be unhealthy physically, emotionally and financially.

On a physical level, retirement has traditionally meant a decrease in activity. You no longer have a driving reason to get out of bed in the morning, grab a coffee and get to the office – so you take it easier. That may not be beneficial to your wellness and based on my personal fitness experiences, not something that appeals to me.

On an emotional level, retirement for some could lead to social isolation. Potentially, you’ve identified and linked your self-worth to your organization, your co-workers and your manager.

Retirement means you’re leaving your workplace but the organization will undoubtedly continue to work without you being there. Unfortunately, life just works that way; it doesn’t stop for anyone. So, I believe it’s important to maintain a modest level of stimulation at any age, including retirement.

Not remaining socially engaged with other people in retirement could lead to mental health struggles.

Finally, retirement is not cheap, financially. Unless you have a workplace pension (and let’s face it, many Canadians don’t, me included!), you’ll need to rely on your disciplined, multi-decade savings rate to maximize your retirement income stream at age 40, 45, 50 or 55 – by giving up your regular paycheque.

Sure, while there are other retirement income streams to enjoy eventually, like Canada Pension Plan (CPP) and Old Age Security (OAS), many readers of this blog probably don’t want to wait until ages 60 or 65 to tap those income streams respectively.

Let’s get one point straight, it’s a privilege to be able to retire early at age 40, 45, 50 or 55. Early retirement isn’t for everyone and those who can “retire” early typically enjoy some sort of privileges in their lives. Such privileges need to be highlighted more within the FIRE community.

The reality is that you do need to have a certain level of income to build up enough assets by your 40s so your portfolio can withstand some drawdowns in the subsequent decades. A relatively high savings rate combined with a certain level of income will help and is in my opinion crucial. Continue Reading…

A Failure to understand Rebalancing

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By Michael J. Wiener

Special to the Financial Independence Hub

Recently, the Stingy Investor pointed to an article whose title caught my eye: The Academic Failure to Understand Rebalancing, written by mathematician and economist Michael Edesess.  He claims that academics get portfolio rebalancing all wrong, and that there’s more money to be made by not rebalancing.  Fortunately, his arguments are clear enough that it’s easy to see where his reasoning goes wrong.

 

Edesess’ argument

Edesess makes his case against portfolio rebalancing based on a simple hypothetical investment: either your money doubles or gets cut in half based on a coin flip.  If you let a dollar ride through 20 iterations of this investment, it could get cut in half as many as 20 times, or it could double as many as 20 times.  If you get exactly 10 heads and 10 tails, the doublings and halvings cancel and you’ll be left with just your original dollar.

The optimum way to use this investment based on the mathematics behind rebalancing and the Kelly criterion is to wager 50 cents and hold back the other 50 cents.  So, after a single coin flip, you’ll either gain 50 cents or lose 25 cents.  After 20 flips of wagering half your money each time, if you get 10 heads and 10 tails, you’ll be left with $3.25.  This is a big improvement over just getting back your original dollar when you bet the whole amount on each flip in this 10 heads and 10 tails scenario.  This is the advantage rebalancing gives you.

However, Edesess digs further.  If you wager everything each flip and get 11 good flips and 9 bad flips, you’ll have $4, and with the reverse outcome you’ll have 25 cents.  Either you gain $3 or lose only 75 cents.  At 12 good flips vs. 12 bad flips, the difference grows further to gaining $15 or losing 94 cents.  We see that the upside is substantially larger than the downside.

Let’s refer to one set of 20 flips starting with one dollar as a “game.”  We could think of playing this game multiple times, each time starting by wagering a single dollar.  Edesess calculates that “if you were to play the game 1,001 times, you would end up with $87,000 with the 100% buy-and-hold strategy,”  “but only $11,000 with the rebalancing strategy.”

The problem with this reasoning

Edesess’ calculations are correct.  If you play this game thousands of times, you’re virtually certain to come out far ahead by letting your money ride instead of risking only half on each flip.  However, this is only true if you start each game with a fresh dollar. Continue Reading…