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.

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…

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…