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.

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…

The Case for Delaying OAS Payments has Improved

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By Michael J. Wiener

Special to the Findependence Hub

Canadians who collect Old Age Security (OAS) now get a 10% increase in benefits when they reach age 75.  The amount of the increase isn’t huge, but it’s better than nothing.  A side effect of this increase is that it makes delaying OAS benefits past age 65 a little more compelling.

The standard age for starting OAS benefits is 65, but you can delay them for up to 5 years in return for a 0.6% increase in benefits for each month you delay.  So, the maximum increase is 36% if you take OAS at 70.

A strategy some retirees use when it comes to the Canada Pension Plan (CPP) and OAS is to take them as early as possible and invest the money.  They hope to outperform the CPP and OAS increases they would get if they delayed starting their benefits.  In a previous post I looked at how well their investments would have to perform for this strategy to win.  Here I update the OAS analysis to take into account the 10% OAS increase at age 75.

This analysis is only relevant for those who have enough other income or savings to live on if they delay OAS.  Others with no significant savings and insufficient other income have little choice but to take OAS at 65.

OAS payments are indexed to price inflation, and the increases before you start collecting are also indexed to price inflation.  So, the returns that come from delaying OAS are “real” returns, meaning that they are above inflation.  An investment that earns a 5% real return when inflation is 3% has a nominal return of (1.05)(1.03)-1=8.15%.

In many ways, the OAS rules are much simpler than they are for CPP, but two things are more complex: the OAS clawback and OAS-linked benefits.  For those retirees fortunate enough to have high incomes, OAS is clawed back at the rate of 15% of income over a certain threshold.  This complicates the decision of when to take OAS.  Low-income retirees may be eligible for other benefits once they start collecting OAS.  These factors are outside the scope of my analysis here.

A One-Month Delay Example

Suppose you’re deciding whether to take OAS at age 65 or wait one more month.  For the one month delay, the OAS rules say you’d get an additional 0.6%.  So, for the cost of one missed payment, you’d get 0.6% more until you reach 75.  After that, you’d be getting 0.66% more.

For a planning age of 100, the real return from this delay is a little over 7%.  So, your investments would have to average 7% plus inflation to keep up if you chose to take OAS right away and invest the money.

All the One-Month Delays

The following chart shows the real return of delaying OAS each month for a range of retirement planning ages, based on the assumption that the OAS clawback and delaying additional benefits don’t apply.  The returns are slightly higher than they were before CPP payments rose 10% at age 75. Continue Reading…

Defensive Sectors for Retirement

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By Dale Roberts, cutthecrapinvesting

Special to Financial Independence Hub

Defence wins championships say many sports commentators. Defense can be a big winner for retirees as well. In fact, from the massive correction known as the financial crisis (2008-2009 and beyond) using defensive sectors was twice as effective as using bonds. Then, factor in the generous and growing dividends that Canadian retirees embrace, and we might have an unbeatable retirement funding model. Let’s take a quick look at defensive sectors for retirement.

The first question you will likely ask is – “what are the defensive sectors?”

Consumer staples / Healthcare / Utilities

For the utilities sector, we will include the modern utilities known as telco (we can’t live without being hooked up in the modern world). Pipelines are also in the mix.

The 3 defensive sectors are products and services that we can’t live without. And we often do not reduce spending in these categories, even during times of recessions and bear markets.

The sectors are more durable and will typically hold up quite well during the bear markets. Of course, bear markets can pull the rug out of your retirement plans if you are not properly prepared, and are exposed to too much stock market risk. In retirement we are looking to grow and protect.

Defensive sectors for retirees vs the market

Here’s a chart that looks at the defensive sectors in the U.S. vs the S&P 500. It is a retirement funding scenario, where the portfolios are funding retirement at a 4.8% annual spend rate. That is, a million dollar portfolio will deliver $48,000 in year one. Spending will then increase at the rate of inflation.

Here’s building the big dividend retirement portfolio.

Keep in mind that the ETFs used in the example are U.S. dollar funds and belong in U.S. dollar accounts. You may choose to build a stock portfolio from these sectors. That is what I do with great success.

What is shocking is that through just one investment cycle (bear market through bull market), the defensive sectors for retirees finished the period with twice as much as the traditional balanced portfolio approach. Team defense was also better than a mix of defensive sectors and bonds.

Disclaimer: past performance does not guarantee future returns.

Canadian defensive sector ETFs

These ETFs are Canadian dollar ETFs, suitable for Canadian dollar accounts. Some of the ETFs will offer international exposure.

Canadian healthcare ETFs

  • Harvest – HHL
  • BMO – ZHU

Canadian consumer staples ETFs

  • BMO – STPL
  • iShares – XST

Canadian utilities  ETFs

  • iShares – XUT
  • BMO – ZUT
  • BMO Covered Call Utilities – ZWU
  • Horizons – UTIL
  • Hamilton – HUTS. This ETF uses modest leverage.

The all-weather models for retirees

Readers will know that I embrace the all-weather portfolio models for retirement. In the above scenario the time period is almost exclusively during a period of disinflation. Stock markets and bonds love disinflation. In the defensive portfolio there would be no meaningful protection from robust inflation.

The all-weather portfolio – ready for most anything.

Given that I would suggest that you consider adding (bolting on) inflation protection. In Canada, that can be as easy as adding the Purpose Real Asset ETF. That holds a very nice mix of dedicated inflation fighters, from energy stocks, REITs, gold and commodities. Continue Reading…

Timeless Financial Tips #2: Rising above the Noisy News

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By Steve Lowrie, CFA

Special to Financial Independence Hub

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.

News versus Noise

These days, we’re all familiar with the term “clickbait.” Long before that term came along, the popular press already knew it could profit similarly by embracing an “if it bleeds, it leads” approach to delivering the news. The more eyeballs or clicks scored, the higher the potential advertising revenue.

Driven by profit motivations, popular newsfeeds have long been incented to showcase that which will elevate your excitement. They care more about whether you look, than what you’re seeing. This means our duty as informed consumers remains the same:

Consider the true incentives for any given news source.

Are they aligned with yours? If not, it’s best treated as noise rather than news.

Noise versus Knowledge

We’re not advocating that you stop learning. Rather, a successful, long-term investor’s goal is to tune out the pointless distractions, so we can tune into more thoughtful action. What’s the difference?

The noise we’re exposed to from never-ending newsfeeds is …

  • Demanding: New news arrives at a breakneck pace and insane volume that never lets up. Don’t you dare blink.
  • Distracting: The constant stream delivers endless lures to STOP whatever you’re doing and tune right in, lest you miss right out. (There’s a reason the popular media’s favorite crawler is: “BREAKING NEWS.”)
  • Fleeting: News is inherently new. By the time you hear it, something else has probably already happened to change it. Over and over again, forever.
  • Inaccurate: Given the speed of the spin, rumors and half-baked hunches are more frequent than facts. All the conjecture feeds on our fears and preys on our emotions.
  • Incoherent: Even when information is correct, it comes in so fast and furious, we can’t possibly make sense of it all in real time.

Where noise is loud, wisdom is quiet …

Acquiring knowledge calls for the opposite of all this commotion. Knowledge takes reflection. It takes selectivity. Perhaps most of all, it takes time:

  1. Time to translate the reams of random information into meaningful insights.
  2. Time to separate fact from fiction.
  3. Time to distinguish reputable sources from biased blather.

What’s the Problem with Noisy News?

In his post “Why You Should Stop Reading the News,” Knowledge Project podcast host Shane Parrish explains why news-based noise can be so damaging to an investor’s well-being:

“Our obsession with being informed makes it hard to think long-term. We spend hours consuming news because we want to be informed. The problem is, the news doesn’t make us informed – quite the opposite. The more news we consume, the more misinformed we become.”

Put another way, the more noise you encounter, the harder it becomes to make good investment decisions. Good investment decisions are the kinds guided by your own goals rather than market noise. They’re the kind you can more readily trust, because they’re grounded in solid evidence and feel built to last. They help you stay focused and on track. Continue Reading…