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 this blogger doesn’t invest in Canadian Dividend ETFs [An oldie but goodie from 2019, updated for 2023]

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By Mark Seed, myownadvisor

Special to Financial Independence Hub

It’s fun to look back and see how things change…or not. :)

Fans of this site, including many long-time readers and investors who enjoy this site, continue to tout the benefits of low-cost investing to others … I do too … but I still don’t invest in any Canadian Dividend ETFs.

That’s because when it comes to investing I believe you often get what you don’t pay for.

One way to reduce your investment fees, is to own lower-cost dividend ETFs but that doesn’t mean such funds are automatically suited for you and your approach.

In this updated post, I remind readers why I like some low-cost ETFs, why I own a few in my portfolio but when it comes to investing in Canada I’ve decided to build my own ETF per se.

I wrote about this in 2011. Yup, that long ago. I updated that post in 2017. And, it’s now 2023.

Learn how things change or what stays the same in this updated post and share your own story or comment about stocks or ETFs held for many years in a comment on the site. I read every comment and I try to answer every one of them as well.

Read on: Why I (still) don’t invest in Canadian Dividend ETFs.

Why I don’t invest in Canadian Dividend ETFs

Fans of this site, including many long-time readers and investors who enjoy this site, continue to tout the benefits of low-cost investing to others…but I still don’t invest in any Canadian Dividend ETFs.

That’s because when it comes to investing I believe you often get what you don’t pay for.

One way to reduce your investment fees, is to own lower-cost dividend ETFs.

In fact, here are some of the great benefits that come from investing in dividend ETFs beyond just ETF distribution income:

  • Transparency – within a few taps of my phone I can see what every single holding is in these funds. I can also read up on the fund’s prospectus to learn how fund turnover is managed and how often. Portfolio turnover within the fund costs money – someone needs to get paid! That brings me to my next point below.
  • Modest fees – you might recall, active fund management costs more because money managers are paid to perform. A pay for performance mandate encourages the mutual fund money manager to buy and sell stocks frequently in an attempt to beat the market or the index they are tracking. Fund management, buying and selling, incurs time and resources. Time is money. Those costs are passed on to you. Instead of this model, I think investors should strive to invest in a low-cost ETF that follows a reputable, established, broad market index such as the S&P/TSX Composite Total Return Index or for dividend investors in Canada, an established dividend-oriented index such as:
    • S&P/TSX 60 Index (my favourite – see low-cost ETF from iShares XIU), or
    • S&P/TSX Composite High Dividend Index, or
    • FTSE Canada High Dividend Yield Index.
  • Lower effort – if you’re going to invest in some individual stocks, you need to spend some time understanding these companies and understanding what you own, why you own it. I read a few annual reports every year and follow metrics like yield, payout ratio, earnings per share, cash flow to name a few. Dividend ETFs don’t have this complexity – they bundle all these companies together for you.

There are certainly many benefits to owning Canadian dividend ETFs…but I still don’t invest in any of these Canadian funds. 

Read on in this updated post…

Why I don’t invest in Canadian Dividend ETFs

Here are my reasons why:

1. I built my own Canadian Dividend ETF.

Many years ago, I learned there is merit to owning the same Canadian stocks the big funds own – so I started that process. I’ve never looked back.

In 2011 and updated again in 2017, I went so far as to say Canadian dividend stock selection could be made easy.

Here is one quick example – look at this RBC Canadian Dividend Fund in 2011:

RBC Fund 2011

And now the same fund’s top fund holdings as of April 2017:

RBC Fund 2017

And what does the RBC Canadian Dividend Fund own in 2023?

Lots of differences eh? (Images courtesy of RBC’s site.)

Source: https://www.rbcgam.com/en/ca/products/mutual-funds/RBF266/detail

Let’s look at another example and pick on one of my favourite ETFs: XIU.

Now, again, if you don’t want to buy and hold certain stocks, nor try and create your own Canadian Dividend ETF like I have, then no problem. This fund is arguably one of the best ETFs to own in Canada.

(I recall iShares XIU was one of the world’s first ETFs.)

XIU holds the largest of the largest Canadian companies. My perspective is, if collectively the largest 60 companies in Canada aren’t making money year-over-year, nobody is.

This ETF has provided strong Canadian market returns over the last decade and remains a great choice for your indexed portfolio should you decide to go that route.

Here are the top holdings from XIU, from April 2017:

XIU April Holdings 2017

And as of April 2019:

XIU April Holdings 2019

And what does low-cost XIU in 2023?

XIU ETF June 2023

Humm, not too many changes. Something to consider…

2. I control the portfolio turnover (which is largely non-existent)!

I can count on my hands how many stocks I’ve bought then sold over the last 15 years. Yes, full disclosure, I have sold a few stocks over the years. I believe that comes with the DIY investor territory.

However, for the most part, instead of buying and selling any stocks including Beat the TSX stocks, I buy and hold and reinvest dividends for higher income over time.

You can see how that (boring) approach is working out for me below. Continue Reading…

I interview RetireEarlyLifestyle’s Billy and Akaisha Kaderli

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Billy & Akaisha in Mesa, Arizona; courtesy Kiplinger

Earlier this spring, I was interviewed by Billy and Akaisha Kaderli, the globe-trotting early retirees who run the RetireEarlyLifestyle.com website and authors of several books on Early Retirement. 

You can find that interview on both our web sites: here’s the version from the Hub: RetireEarlyLifestyle.com interview on Financial Independence & the “Findependent” lifestyle.

And here is the same interview at RetireEarlyLifestyle.com.

Turnabout is fair play so today, I play interviewer and Billy and Akaisha are on the hot seat to answer.  

 

 

Jon Chevreau: What do you think of the term FIRE [Financial Independence/Retire Early)? You made it there in your early 30s but can Millennials, Gen X and GenZ expect to replicate your success, given the high cost of housing and everything else?

Billy & Akaisha: FIRE is a great marketing acronym filled with energy and intrigue. There was no such term when we left the working world in 1991, 33 years ago. There really wasn’t even the mental concept of being “financially independent” except for perhaps well-paid athletes, actors and trust fund babies.

We called ourselves Early Retirees, but we never retired from life, just from the conventional idea of working until age 65 or when Social Security kicks in. We had other plans for ourselves like travel, volunteer work, creative projects and continuous learning. We’ve always been productive and we like that feeling of pursuing our passions.

As for whether or not Millennials, Gen X and Gen Z can expect to become financially independent, we would say yes.

It’s a matter of discipline, focus, being aware of one’s financial choices, and most definitely finding a partner who is on the same financial page.

We have explained many times in our books and on our website that the four categories of highest spending in any household are Housing, Transportation, Taxes and Food/Dining/Entertainment. Pare down your personal infrastructure or modify your cash outlay in those categories and you will find money to invest towards your future life of freedom.

So yes, we say it can still be done.

JC: How many countries have you now visited around the world and how long do you tend to stay in any one location? Related question: do you maintain a home base in the United States and how long (and which seasons?) do you stay there each year?

Billy & Akaisha Karderli in Sorrento, Italy, with Mount Vesuvius in background

Billy & Akaisha: For some reason we have never cared to count the number of countries we have visited or lived in. We travel for ourselves, not to tick off boxes or to compete with other travelers.

We have visited all throughout Europe, lived in many Asian and Pacific Rim countries, visited and lived in Canada, most of the United States, all throughout Mexico, Central America and Northern South America, and have sailed throughout the Caribbean Islands.

In the early decades of our vagabonding, we’d be gone years at a time. We made trips back to the U.S. yearly to see family for a few months at a time, but then we’d get our backpacks and world maps out again and hit the road.

We utilized Geo-arbitrage long before there was a name for that hack and found it to be one of the best financial moves we have ever made.

We do still own a manufactured home in a resort in Arizona. But while on this topic, we’d like to say that living in an Active Adult Resort Community in the U.S. has been one of the most affordable and socially satisfying options for housing we have implemented.

That being said, we have many Readers and Friends who prefer to house sit all over the world and that is their gold standard of housing choice to keep costs down.

These are two examples of modifying the category of Housing to positively affect your budget.

JC:  I believe you took Social Security early. How much do you think average would-be retirees will be depending on that source of income?

Billy & Akaisha: In our case we planned our retirement as if we would not receive Social Security. We structured our portfolio to produce our needed income on its own. Now that we receive it, between dividends and SS we do not need to touch our portfolio, thus letting it grow. Continue Reading…

Now that interest rates are higher, is it time for near-Retirees to consider partial Annuitization?

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My latest MoneySense Retired Money column looks at our own family’s experience in starting to annuitize. Click the highlighted text for the full column: Should retirees in their early 70s partly annuitize?

Apart from the fact interest rates are now closer to 5% than zero, my wife and I are approaching the time when our RRSPs must be collapsed, converted to RRIFs, or fully or partly annuitized. That of course is required by the end of the year you turn 71.

One financial blogger and financial planner was ahead of the curve on rates and annuities. A year ago, on his Boomer & Echo blog, Robb Engen made the case for annuities just as interest rates were starting to rise. See Using annuities to create your own personal pension in Retirement. “Annuities fell out of favour (if they ever were in favour) when interest rates plummeted over the past 10-15 years,” he wrote, “But with interest rates on the rise, annuities are certainly worth another look.”

Engen’s case for annuities revolves around how they minimize longevity risk: the fear many retirees have that they’ll outlive their money. “An annuity provides a predictable income stream for life – much like how a defined benefit pension, CPP, and OAS pays benefits for as long as you live. Nothing protects you from longevity risk quite like having a guaranteed income that’s paid for life.”

 Those who lack an employer-sponsored Defined Benefit pension plan and therefore have hefty RRSPs are particular candidates for annuitization. Yes, it’s true that most Canadians will have some inflation-indexed annuities in the form of the Canada Pension Plan (CPP) and Old Age Security (OAS) but some may feel comfortable transferring a bit of stock-market and interest-rate risk from their own shoulders to that of the insurance companies that offer annuities.

With respect to the interest rate rises of the past year and what it means for annuities, “I agree that the timing is ripe for those approaching retirement,” says Rona Birenbaum, founder of Toronto-based Caring for Clients, a financial planning firm that includes annuities in its recommendations.

 Birenbaum – who is working to help our own family take a partial plunge to annuitization – suggested looking first to non-registered money that could be earmarked for an annuity, as it’s very tax efficient. Alterntively, “using RRSP assets makes sense providing the lack of liquidity doesn’t constrain future needs.”

Moshe Milevsky a fan of “slow partial” annuitization

Famed finance expert Moshe Milevsky, who has authored several books on retirement and annuities – notably Pensionize Your Nest Egg, coauthored with Alexandra Macqueen — told me in an email that “I will say that I have grown to become a fan of ‘slow partial’ as opposed to ‘rapid full’ annuitization, which helps smooth out the interest rate risk and is even more valuable from a behavioral psychological perspective.” Continue Reading…

Why technology + income can suit an uncertain market

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Markets are hesitant, but large-cap tech has been resilient. Learn why large-cap technology with an income strategy can help investors now.

 

By James Learmonth, Senior Portfolio Manager, Harvest ETFs

(Sponsor Content)

After recovering from some of their 2022 shocks early this year, markets have been trepidatious through most of 2023. That recovery and volatility story, on paper, looks broad based. Between January and mid-May, the S&P 500 is up around 8-9%. The S&P 500 Information Technology index, however, is up over 25% in the same rough time period. That outperformance skews even higher when we isolate some of the largest names in the technology sector.

So while overall market performance this year has been steady, turning choppier since the US banking crisis began in March, large-cap tech leaders are doing what they tend to do: lead.

In a macro environment of market uncertainty, high inflation and tech outperformance, one strategy can give investors exposure to large-cap technology companies, while providing income and ballast against volatility.

Why Large-cap Tech has been a leader

To understand how a tech income strategy can help investors, it’s worthwhile to unpack what has made technology a leading sector so far in 2023.

Q1 earnings season for tech shed some light on the sector’s outperformance. Part of that performance is due to a more broadly positive market sentiment in 2023, compared to 2022, in addition to some recovery following the sector’s struggles last year. Notable, however, is the positive reception large-cap companies have received for their artificial intelligence (AI) strategies.

AI has been the hot new topic this year, and large-cap tech companies have been quick to capitalize on the rapid pace of innovation in this space. Whether they are innovating their own AI tech, or applying AI to new areas these companies are creating serious value for shareholders with this technology.

It’s worth emphasizing the dominance of large-caps in this moment, companies like Meta, Apple, and Microsoft. In recent history, major tech leaps have been associated with ‘disruption’ of traditional larger players. So far in the rise of AI we’ve seen the largest companies leading, demonstrating their value as innovators and appliers of innovation.              

Why Volatility is persisting in the broader market

Despite all the positivity in large-cap technology, broad markets have been choppy this year. Most of their recovery took place in the first months of 2023, and since the onset of a US banking crisis in March market performance has been choppy up and down, aggregating out flat.

Macro forces are largely to blame. The banking crisis highlighted the ongoing impacts of rapid rate hikes by central bankers starting last year. Even as that hiking period seems to be ending, the consequences of those raised rates will be felt over the next several months. More recently, fears about the US debt ceiling have troubled markets while geopolitics continues to impact sentiment. Continue Reading…

Discovering Retirement Blind Spots – Part Two

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IV. Discovering Retirement Blind Spots – Part Two

By Fritz Gilbert, TheRetirementManifesto.com

Special to the Financial Independence Hub

The full report includes three other graphs focused on the gap between retirees and pre-retirees, each of which includes some important discoveries.  For brevity, the main findings for each topic are summarized below:

Things That People Miss About Their Career

what will you miss when you retire

A surprisingly large 62% of retirees miss the Social Interaction from work, whereas only 29% of pre-retirees expect that to be an issue.  With a 33% gap, this was one of the largest retirement blind spots discovered by the survey.

The other two big blind spots related to what you’ll miss from your career include missing Mental Stimulation (38% retirees vs. 21% pre-retirees) and a Sense of Identity (31% vs. 22%)

FRITZ:  I’ve written extensively on the many non-financial benefits we receive from work, and yet it’s something that most pre-retirees continue to underestimate.  The most successful retirees discover ways to replace the non-financial benefits they once received from work, such as social interaction, mental stimulation, and a sense of identity highlighted by this study.

ERIC: I see this all the time among my clients who are still working. At this stage in their lives, they primarily associate their jobs with a paycheck and bonus. Their eyes are focused on the prize money at the finish line. They fail to see the psychological income that does not show up on their paystubs in the form of intellectual stimulation, purpose and meaning, and the most ignored component of all, social interaction.  I can’t put a number on how much of your work paycheck comes from psychological income, but in my experience it’s a significant amount that until you retire you are probably seriously under-estimating.  Most people assume that the primary challenge of retirement planning is financial when, for most people, the real challenge is replacing the psychological benefits from their work days with new activities that provide meaning and purpose as well as social interaction.

Challenges of The Retirement Transition

the challenges of retirement transition

The highest response rate for transition challenges was finding the right Balance of Structure, with 39% of retirees citing that as a challenge.  Fortunately, it appears that many pre-retirees also recognize this will be a challenge, with 45% citing it as a concern.

In other areas, pre-retirees are also more concerned with the challenges than appear to be warranted by the actual experience of retirees.  In particular, pre-retirees responded with a higher % of concern than retirees for each of the following categories:

  • Anxiety Over Future  (30% pre- vs. 23% post-retirement)
  • Meaning/Purpose    (33% pre- vs. 23% post-retirement
  • Outdated Identity     (27% pre- vs. 20% post-retirement
  • Mental Stimulation (30% pre- vs. 18% post-retirement
  • Finding Happiness  (23% pre- vs. 18% post-retirement

The Retirement Transition Isn’t As Smooth As Expected

having a difficult transition to retirement

A concerning 52% of pre-retirees “mostly agree” that the retirement transition will be smooth, whereas only 32% of retirees feel the same.  This 20% gap is a warning to all pre-retirees and is further strengthened by the 26% of retirees who responded “mostly or strongly disagree” (vs. only 5% of pre-retirees).  The reality is that transitioning into retirement is more challenging than most folks expect.  A good takeaway for pre-retirees is to expect some turbulence during the transition.  Ignore this retirement blind spot at your own risk.

FRITZ:  It’s interesting to study the above results.  While retirees tend to have better scores than pre-retirees on specific challenges, a much higher percentage of retirees report some difficulty in the transition compared to the expectation of pre-retirees.  In fact, only 51% of retirees Agree/Strongly Agree that the transition was smooth, compared to 70% of pre-retirees who expect it will go smoothly.

ERIC: I think that most people in the planning phase only think of the positives of life in retirement. They seriously underestimate how big of a transition retirement can be. In fact, other industry surveys show this disconnect between expectations and reality. The greatest source of disconnect usually happens after the “honeymoon” period wears out. That typically happens within the first two years of retirement. I call this the “messy middle”. Many people associate retirement with a new beginning without ever acknowledging the ending of our prior stage in life or recognizing that all transitions in life usually involve a period of introspection and uncertainty before finding the necessary clarity and direction to move forward. Only a few of us skip out on the “messy middle.” I think it’s best when we plan for some turbulence ahead so that when we are shaken out of our comfort zone we’re neither surprised nor paralyzed from making the required adjustments. I like to remind my clients that a plan is just a guide meant to be revised as new data comes in. Keep iterating forward!

V. Which Components Lead To A Good Life in Retirement?

The final section of the survey was, in hindsight, a bit of “Motherhood and Apple Pie.”  What does it take to lead a good life?  Ask anyone, and you’ll likely see similar responses to what was revealed in the survey.  In the survey, you’ll see we asked both pre- and post-retirees to rank these components.  Results were similar between both groups, so for this summary, we’ll simply rank the components identified by those already retired, in descending order:

Components Rated as Very Important

  •  Healthy Living (77%)
  • Time Management (68%)
  • Financial Plan (53%)
  • Relationships (52%)
  • Purpose/Meaning (41%)
  • Self-Identity (27%)

VI. Conclusion

We thank the 1,734 of you who participated in this joint study and hope all of you have found the results to be useful. We trust the findings on retirement blind spots will be helpful for those who are planning their retirements in the coming years.  To reiterate the key blind spots, below is the conclusion of the key points from the Full Study write-up:

Major Retirement Blind Spots 

  • You’ll miss more than just the paycheck when you retire. You’ll miss the mental
    stimulation and social interaction associated with work. Start now cultivating new social
    connections and finding new sources of mental stimulation to replace the psychological
    benefits of work.
  • It will take you longer to shed your work identity than you expect. This will be primarily a
    challenge in your early days in retirement. Don’t hang on to an outdated image of who
    you were in the past. Retirement gives you the freedom to re-invent yourself.
  • The transition from full-time work to life in retirement won’t go as smoothly as you
    expect. You’ll struggle initially to come up with a new sense of purpose and meaning. Be
    patient, but not complacent. Only you can figure out what’s important to you!
  • Finding the right balance of structure in your schedule will be a greater challenge than
    you currently likely anticipate. Making time for activities that bring joy and fulfillment is
    important. A schedule is not a bad thing if it reflects your values and aspirations.
  • Once you retire, you’ll worry less about money issues and more about your health and
    that of your loved ones. As you plan your retirement think beyond just money issues. Take
    a holistic approach that incorporates all the important areas of your life. Emphasize
    balance.

In closing, it’s reassuring to see that the life satisfaction scores were highest among people who have been retired for more than two years.  The future is bright.

Learn from those who are ahead of you on the retirement journey.

Your retirement will be better as a result.

Your Turn:  If you’ve already retired, what was your biggest surprise about the transition?  If you’ve not yet retired, what’s your biggest takeaway from this study, and are there any modifications you’ll make in your planning as a result?  Let’s chat…

 

Fritz Gilbert is the Founder of The Retirement Manifesto, a Plutus Award winning blog dedicated to helping people Achieve A Great Retirement.  After 30+ years in Corporate America, most recently as a Commodity Trader, Fritz retired as planned in June 2018 at Age 55.  He and his wife are looking forward to extended travel and “giving back” to their community through charitable work in retirement. This blog was published on his website on May 18, 2023 and is republished here with his permission.