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.

The benefits of Early Retirement

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By Billy and Alaisha Kaderli, RetireEarlyLifestyle.com

Special to Financial Independence Hub

Retirement is something that many people look forward to in their later years, but what if you could leave your career earlier?

The idea of retiring before the typical age of 65 may seem like a pipe dream to some, but it is becoming more and more of a reality for many people whether by choice or through layoffs. There are numerous benefits to this decision, both financially and in terms of lifestyle.

Financial Advantages

One of the main reasons people strive for early retirement is the financial benefits it provides.

To prepare, it’s important to have a solid financial plan in place. This is a great way to learn the skills of creating a budget, tracking your spending, and paying down debt. We learn the value of maximizing retirement contributions and investing in non-IRA accounts. It’s the time to build up retirement savings before beginning to withdraw from them. You can do this on your own, as none of this requires a professional advisor.

Acquiring these tools makes us financially strong and builds our self-confidence which then carries itself forward into other areas of our lives.

Of course there is the need to factor in the potential for unexpected expenses, such as medical bills or family emergencies. Which is why we recommend a few years of cash held in a highly liquid account such as Fidelity® Government Cash Reserves, FDRXX, currently paying over 4%. Access to this cash can also help in market downturns so you are not forced to sell at lower prices in order to live your lifestyle.

Another financial advantage is the ability to minimize taxes.

By retiring early, you may be able to reduce your taxable income and utilize tax-efficient investment strategies. For one thing, you will no longer be paying payroll taxes. Withdrawing money from your retirement accounts in a strategic manner, such as using Rule 72T before you are eligible, can minimize your tax burden in the future and potentially save you a significant amount of money in taxes over time. We did this as a monetary bridge until our Social Security was available. Once we started to receive these payments, we let our IRAs build back up again.

Lifestyle Improvements

Leaving your job or career early also offers a number of lifestyle improvements. For one, you will have more free time to pursue your passions. You could travel more, take up new hobbies, and spend more time with loved ones. We used this opportunity to give end-of=life care to our parents when that time came, something we could not have done while maintaining a full work schedule.

Early retirement can also allow you to lead a healthier lifestyle, with more time to exercise, cook healthier meals, and prioritize your mental health. You could even volunteer and give of your expertise and talents, something you never had time for while working your 9-5.

If you choose to become financially independent outside of your paycheck, you have the ability to avoid burnout. Many people feel overwhelmed by the demands of their jobs, and early retirement can provide a much-needed break while opening up new vistas for you. You are able to take a step back, reflect on your priorities, and perhaps even discover new interests and pursuits.

We did!

Taking advantage of options that seem to just appear

In our case we chose to travel the world, which gave us new perspectives on how to live our own lives. There is no one singular way to do anything, and seeing how other cultures approached community, family, and even the cooking of their food and the learning of a new language, opened up our eyes as well. Continue Reading…

A volatility play for the US bank sector

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Portfolio Manager explains why US banks have struggled, where opportunities might appear, and how investors can benefit from short-term volatility.

Image from Pixabay: Wendy Soon

By James Learmonth, Senior Portfolio Manager, Harvest ETFs

(Sponsor Content)

The US banking sector is facing uncertainty. In the wake of the collapse of Silicon Valley Bank in March of 2023 — and deposit liquidity issues at other regional banks — the whole US banking sector has suffered some significant stock market setbacks.

In those setbacks, however, investors may see opportunities, especially when we consider the scale and importance of the US banking sector. Of the 30 banks included in the global list of systemically important financial institutions, colloquially referred to as “too big to fail,” eight are based in the United States.

With those titans as ballast, investors may be able to find growth opportunities in US banking, if they understand why the sector is struggling now, where the upside could come from, and find a strategy suited to short-term volatility.

For someone seeking to take advantage of the dislocation we’ve seen in the US banking sector, a diversified approach is absolutely something you may want to look at. Adding a covered call strategy would give the opportunity to monetize the high volatility we’re seeing on the market now. It’s hard to say when the upside might come in US banks given all this uncertainty. But, there’s an argument to be made for someone who wants exposure to these US banks that a covered call strategy could make sense.

Struggles and risks in US banking today

The US banks’ stock market setbacks are due in part to a fear reaction from bank-specific failings at institutions like Silicon Valley Bank, but also reflect some structural headwinds for the sector.

The systemic issue comes down to deposit costs. As market-based interest rates rose sharply in 2022 and into 2023, the rates offered by banks to their depositors remained relatively low. Depositors, especially larger businesses, have begun to demand higher interest rates on their accounts, raising the cost of funding for many banks. Some of those depositors started transitioning some capital into other interest-bearing vehicles, such as money market mutual funds, which offered a higher interest rate as well. The whole banking sector is now facing some challenges to profitability growth due to the rising costs of deposits.

Those deposit costs can be more accurately described as a structural headwind, rather than an existential risk. While deposit costs contributed to the fall of Silicon Valley Bank, it’s notable that a range of company-specific factors played a role: Silicon Valley Bank’s high proportion of business clients, meaning its depositor base was concentrated and held high average account balances. When word spread across social media of venture capitalists sounding alarm bells to their investment companies, withdrawals cascaded. Continue Reading…

Retirement investments to avoid? Here are our thoughts on this critical subject

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Retirement investments to avoid include everything from bonds down to stock options. Here’s why.

Image courtesy TSInetwork.ca

Our best retirement planning advice is to invest early and often — and don’t forget to use our three-part Successful Investor philosophy.

But if you’re heading into retirement and are short of money, you should move your investing in the direction of safer, more conservative investments. That’s a far better option than taking one last gamble on retirement investments to avoid like the ones we look at below.

Investing in bonds will hurt your retirement finances

As some investors near retirement, their advisors recommend switching to bonds and other fixed-income investments instead of holding stocks.

To some extent, this is an understandable retirement investing strategy, since bonds can provide steady income and a guarantee to repay their principal at maturity.

Unfortunately, we don’t think using bonds for retirement is the best strategy for Successful Investors. Bond prices and interest rates are inversely linked. When interest rates go up, bond prices go down, when interest rates go down, bond prices go up — and with inflation still high, there is pressure for interest rates to keep increasing.

We continue to recommend that you invest only a small part of your Successful Investor portfolio — if any — in bonds and fixed-income investments.

Investing in annuities can fall into the category of retirement investments to avoid

Here are 3 key drawbacks you should keep in mind when deciding whether annuities are a good choice for your retirement investment options:

  • It may be hard to get out if you change your mind: Unlike stocks, it can be difficult or impossible to sell an annuity if you decide it no longer meets your needs. Moreover, you will likely get a low price for your annuity because the date of your death is uncertain.
  • Link to interest rates makes today a poor time to buy annuities: The rate of return you receive on an annuity is linked to interest rates at the time you buy it. That makes periods of still relatively low interest rates an especially poor time for buying annuities. However, if you want to buy annuities, you could buy one annuity a year for the next five years. That way, your returns will increase if interest rates rise, as we expect.
  • Tax treatment: When you own an annuity, the income payments you receive are made up of interest and a return of your principal. The return of your principal is tax free, but the interest portion of the payment is taxed as ordinary income.

Retirement investments to (especially) avoid include penny stocks, junior mines, and stock options

Penny stocks: Penny stocks are cheap and that’s why many novice investors think they make great investments when they don’t have a lot of money. Here’s some insight: it’s much easier to launch a seductive penny stock promotion than it is to create a successful, lasting business. Most penny stocks are over-hyped. Penny stocks tend to be speculative, and are engaged in such things as finding mineral deposits that can be mined at a profit, commercializing an unproven technology or launching new software. They are unproven companies that have very little chance of becoming a sustainable business. You’ll also have to be on the watch for unscrupulous stock promoters who will over-inflate earnings and talk up a stock for their own best interests. If you’re headed to retirement, stay away from penny stocks.

Junior mining stocks: One rule of thumb for mining stocks is that you have to look at 1,000 “anomalies” to find one “prospect,” and that fewer than one “prospect” in a thousand turns into a mine. In other words, finding a mineable deposit is a million-to-one shot. Continue Reading…

Fixed Income: The Outlook & Opportunities

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Image by BMO ETFs

By Winnie Jiang, Vice President, Portfolio Manager, BMO ETFs

(Sponsor Content)

Little about the current economic cycle has conformed to historical norms. With divergence in employment data and leading economic indicators, recent data released sent mixed signals that left investors perplexed about the near-term economic outlook.

On one hand, the job market remains overwhelmingly strong, with ISM (Institute for Supply Management) Services bouncing back from extreme lows in December and retail sales also rebounding. The re-opening of the Chinese economy will likely provide a breather on global supply chain issues while boosting demand. Consumer credit remains well retained as default rates stay low with no warning signs of near-term upticks.

On the other hand, yield curve inversions, a precedent of most recessions, continue to worsen. 3-month U.S. Treasury yields are pushed above 10-year yields by the widest margin since the early 1980s. ISM Manufacturing PMI (purchasing managers’ index) and housing data also point to a gloomy outlook. Corporate sentiment and capital expenditure showed little signs of recovery, and housing permits have rolled back to pre-pandemic levels after surging strongly during Covid.

Source: Bloomberg, January 31st, 2023

The Outlook

While robust job markets and consumer data keep inflation well above the Fed’s long-term target, recent CPI (Consumer Price Index) announcements indicate things are steadily, albeit slowly, moving towards the right direction. The inversion of the yield curve caps the magnitude of further rate increases that could be absorbed by the economy before it slips into a recession.

Continue Reading…

Surviving a “Bear Scare” in or just before Retirement

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Image Leonard Dahmen/Pexels

Billy Kaderli, RetireEarlyLifestyle.com

Special to Financial Independence Hub

It’s everyone’s nightmare: watching retirement assets vanish in a bear market, especially in or just before retirement.

Many of you will remember the severe market downturn of 2000-2002, the Dot Com Bubble, when the Standard & Poor’s 500 Index fell 37%.

We’d be lying to say that this declining market didn’t affect us. Our finances dropped about the same as most others on a percentage basis. As retirees, with no regular paycheck coming in on Friday, this event could have spelled disaster for our future plans of maintaining our financial independence.

Then there was the 2007-2009 “Great Recession,” where the market fell by almost 50% lasting 17 months, testing our courage.

The 2020 Covid scare shook the market’s foundation, earning the title of the “shortest bear market” in the S&P 500 history, lasting only 33 days.

And now here we are again in 2023, where the market is in the grip of a bear. How much longer will this last? How low will we go?

What should we do? How do we cope?

First, we’ve learned from past bear markets the importance of some cash flow. Having aged a bit and now receiving Social Security we have adjusted our portfolio to a more balanced one adding DVY, iShares Select Dividend ETF as a dividend-producing asset as well as increasing our cash holdings.

Then, there are regular chats about our finances and the state they are in, in hopes of averting a possible worst-case meltdown. We have discussed the fiscal facts and tried to extrapolate them out into the future.

One obvious problem: No one can predict the future.

Friend asks “Billy, why are you investing now? You know the market is crashing, right?” Same friend 10 years later: “Hey Billy I heard you retired early. How did you do that?”

Using history as a guide

Researching bear markets, we take heart from the knowledge that past downturns always ended.

Retiring is definitely easier when markets are rising as compared to when they are falling. But how do you know if you are in a rising or falling market? That depends on your starting point and there has been no 20-year rolling negative returns.

Another question to ask – is this is a good time to buy equities? For every buyer there is a seller and they both think they are right. Maybe the cure for cancer will be announced tomorrow or the global economy will collapse. We just don’t know.

That’s the point. Continue Reading…