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.

When should Early Retirees start their CPP benefits?

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When should you take your Canada Pension Plan (CPP) benefits? Like many personal finance decisions, the answer depends on your unique circumstances. In general, it makes sense to defer taking CPP until age 70. The caveat is that you need to have other resources to draw from while you wait for your CPP benefits to kick in. After all, who wants to delay spending in their “go-go” retirement years just to shore up their income in their 70s and beyond?

I’ve written before about when it makes sense to take CPP at age 60, why taking CPP at age 65 is never the optimal decision, and why taking CPP at age 70 can lead to $100,000 or more lifetime income.

But one question I often receive from readers and clients is when should early retirees take CPP? Here’s a reader named Keith, who decided to retire at the end of last year at age 60:

“My understanding is that since I won’t earn any income from now to 65, those five years will add to the CPP average calculation and potentially lower my eligible monthly amounts. If that’s the case, should I apply for CPP right away, or choose to defer it to 65 or 70? If I apply today, will those five years of zero income still be included in the average CPP calculation?”

It’s a great question. CPP is a contributory program based on how much you contributed (relative to the yearly maximum pensionable earnings) and how many years you contributed between ages 18 to 65.

To receive the maximum CPP benefit at age 65 you would need 39 years of maximum contributions. You can drop out your eight lowest years (more if you are eligible for the child rearing drop-out provision) from the calculation.

Related: How Much Will You Get From Canada Pension Plan?

You can see the problem for early retirees. They’re going to have more “zero” contribution years, which will reduce the amount of their CPP benefits.

Not so fast.

You will always get more CPP by waiting, even if you’re not working.

CPP expert Doug Runchey says that your “calculated (age-65) retirement pension” may decrease if you’re not working between age 60 and 65, but the age-adjustment factor will always make up for that decrease, and then some.

“In that situation I use the expression that you will receive a larger piece of a smaller pie if you wait, but you will always get more pie,” he said.

CPP checklist for early retirees

Here’s what to do if you’re in the early retirement camp and want to know when to take your CPP benefits. Log into your My Service Canada Account online and click on “Canada Pension Plan / Old Age Security.” My Service Canada Account

Scroll down to the “contributions” section and click on “Estimated Monthly CPP Benefits.”

CPP Contributions

You’ll see your expected CPP benefits at age 60, age 65, and age 70.

CPP benefit estimates

Now take that calculation and throw it in the garbage because it’s completely useless. That’s right. The CPP estimates you see here assume that you continue contributing at the same rate until age 65. That’s problematic if you plan to retire at age 58 or 60 and will no longer be contributing to CPP.

Go back to the previous screen and click on your CPP contributions. There you will find a web version* of your Statement of Contributions – a history of your contributions dating back to age 18. Right click on this page and “save as” (format: webpage, HTML only).

*Note you can request a copy of your Statement of Contributions in the mail, but you won’t need that for the next step.

Now visit www.cppcalculator.com and sign up for the website with your first name and email address. You’ll receive a confirmation email from the site founder David Field (co-created by Doug Runchey) to activate your account, followed by another email to login to the site and run your own unique CPP calculation. Continue Reading…

Medical Tourism: a Retiree Health-Care Solution?

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Thailand’s Bumrungrad Hospital, courtesy of RetireEarlyLifestyle.com

 

By Billy and Akaisha Kaderli,

RetireEarlyLifestyle.com

Special to the Financial Independence Hub

From hip replacement, dental procedures to heart surgery, more people are discovering the advantages of traveling abroad for their medical needs.

In just the past few years, medical vacations have gone from a tiny niche market to an impressive growth story with substantial market-share gains.

Hospitals in countries such as Mexico, India, Guatemala, Costa Rica and Thailand are taking advantage of this global trend. And U.S. companies are taking note as well tailoring their corporate health insurance plans to give employees the opportunity to head to India or elsewhere for surgeries such as knee replacements and the more modern, less invasive approach to hip replacement, hip resurfacing.

In the Western Hemisphere, Costa Rica is currently one of the “in” destination for travelers, especially for dental and cosmetic surgery needs. You can schedule online and receive a custom-made package, appointment and prices in your email response.

For years, people in the American Southwest have capitalized on the high-quality dental work available south of the border for a fraction of U.S. prices. Now more people are traveling to Guadalajara in Mexico for body augmentation and other surgeries, too. Many of the doctors there are US-trained, and the equipment is top of the line. (We know, because we’ve used it.)

In Asia, one of the world’s most acclaimed hospitals is located in Bangkok, Thailand. Bumrungrad looks more like a five-star hotel than a medical facility — until you get to the third floor. World leaders from around the globe fly here for medical procedures. Their website is user-friendly, as is its professional, English-speaking staff. The hospital has more than 200 surgeons who are board-certified in the United States. We have quipped many times that the cheapest health care plan is an air ticket to Bangkok.

Also close by is the Bangkok Heart Hospital. Both of these facilities are located in the center of the city, with easy access to shopping and attractions. If necessary, they will arrange your hotel stay along with the medical procedure you’re having performed, all without waiting times or disqualifications. Your entire extensive physical will be done in one morning, with your blood results and consultation that afternoon. In and out in a single day. How’s that for service?

Is it safe?

Many people interested in medical tourism are concerned about the quality and safety of going abroad for technical and complex medical care, and how to get post-operative care once they return home. All of the hospitals mentioned here use the latest equipment and are either internationally accredited facilities or have US- trained physicians on staff. Some U.S. health plans also provide an in-state network of physicians who will treat a patient who’s gone abroad for medical care. The one thing that sets these hospitals apart from many of their U.S. counterparts is their attention to customer service — they are professional and courteous in a way you rarely see any more at home.

For instance, award-winning Fortis Escorts Heart Institute in Delhi and Faridabad, India, manage over 14,500 admissions and 7,200 emergency cases in a year.

India also has top-notch centers for hip and knee replacement, cosmetic surgery, dentistry, bone marrow transplants, and cancer therapy. Virtually all of these clinics are equipped with the latest electronic and medical diagnostic equipment.

Sounds good, but what’s the cost? Continue Reading…

Are Dividend investors leading the charge?

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By Dale Roberts

Special to Financial Independence Hub

Where have all of the investors gone? It’s no surprise that “advised” Canadian mutual fund investors have been bailing on the wealth building thing. Most of them are sold high-fee funds and see little or no advice. They lose out on two counts. And in 2022 even ETF investors have largely bailed on buying growth assets (stocks and REITs) as they go on sale. The ETF’ers are moving to cash ETFs and bonds. Where I see continued enthusiasm (OK, they are rabid) is in the Canadian dividend investor camp. They love the lower prices that can bring bigger dividend payments. Dividend investors are leading the charge on the Sunday Reads.

ETFs gained while mutual funds felt pain in 2022.

From that Advisor’s Edge post …

As of the end of November, Canadian mutual funds had outflows of $35.6 billion in 2022, or 2% of 2021 year-end assets, National Bank Financial (NBF) said in a report on Jan. 5th. (Full-year mutual fund data is yet to come.)

“Only money market mutual funds recorded inflows, an indication of the capital-preservation mode that informed many investor decisions this year,” it said.

During 2021’s rising markets, mutual fund sales soared to a dramatic record-breaking $112 billion, outselling ETFs for the first time since 2018.

ETFs back on top

Canadian ETF inflows in 2022 landed back on top, with a “whopping” $35.5 billion in net flows in 2022, or 10% or of 2021 year-end assets, the report said.

As part of tactical positioning, cash-alternative ETFs were a “major story” of 2022, the report said, describing them as “an inflow darling” since the first such fund was launched in 2013. In 2022, the funds more than doubled in assets to $15 billion amid the year’s bond selloff. CI High Interest Savings ETF was the fund with the most inflow ($3.2 billion) for the year.

Equity ETFs scored $13 billion in 2022, or about 37% of ETF net flows.

(Back to Dale)

The move to safety

So while ETF investors did add equities in modest fashion, there was a greater move to safety: cash and bonds. Of course, we’re supposed to do the opposite: buy more growth assets as they go on sale. You know that ‘be greedy when others are fearful’ Warren Buffett kind of thinking.

I’ve continued to ask readers:  what stocks and ETFs are you buying? That post was from the end of September. Looking back that was near the bottom for 2022. Stocks have bounced back modestly from the time of the post. We could go below September of 2022 prices or not. Who knows? But sale prices are good, that we know.

On Findependence Hub: how to navigate the coming worldwide recession.

Dividend investors are on FIRE

While focusing (too much) on the dividends can have its drawbacks, there’s no denying that dividend investing leads to very good behaviour. I am truly pleased to see that Canadian dividend investors (friends) are chomping at the bit to buy more stocks and greater dividends.

On My Own Advisor, Mark offers the Weekend Reading: Dividends on FIRE edition. Thanks to Mark for including my Canadian Wide Moat Stock Portfolio update.

In Mark’s post you’ll find a few portfolio and dividend focused updates for the investing year of 2022. Included in the mix – drip investor, and Jordan at Money Maaster.

Mark also offered his recent portfolio update.

Rob at Passive Canadian Income updated his dividend and portfolio performance for December in this post.

Totals For 2022

Dividends Year To Date Total – $10,692.84
Other Passive Income Year to date – $13,491.23
Total Passive Income for 2022 —– $24,184.07
Year End Goal – $25,000

Canadian stocks are offering very good value these days. Kyle delivered a very good post on MoneySense – Making sense of the markets. Kyle included some very good broader market and investment commentary. And on Canadian stocks …

Our current P/E valuation discount relative to the U.S.’s S&P 500 shows that as a group, Canadian stocks are substantially cheaper than in the past when compared to American stocks.

That crazy good savings rate

For some inspiration Bob offers 9 weird things he did to save money in his 20s. Bob has always had a crazy (good) savings rate. That is certainly one of the keys to building wealth. It’s not what you make, but what you keep, and then what and how you invest. Continue Reading…

Searching for a Safe Withdrawal Rate: the Effect of Sampling Block Size

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Image by Mohamed Hassan from Pixabay

By Michael J. Wiener

Special to the Financial Independence Hub

How much can we spend from a portfolio each year in retirement?  An early answer to this question came from William Bengen and became known as the 4% rule.  Recently, Ben Felix reported on research showing that it’s more sensible to use a 2.7% rule.

Here, I examine how a seemingly minor detail, the size of the sampling blocks of stock and bond returns, affects the final conclusion of the safe withdrawal percentage.  It turns out to make a significant difference.  In my usual style, I will try to make my explanations understandable to non-specialists.

The research

Bengen’s original 4% rule was based on U.S. stock and bond returns for Americans retiring between 1926 and 1976.  He determined that if these hypothetical retirees invested 50-75% in stocks and the rest in bonds, they could spend 4% of their portfolios in their first year of retirement and increase this dollar amount with inflation each year, and they wouldn’t run out of money within 30 years.

Researchers Anarkulova, Cederburg, O’Doherty, and Sias observed that U.S. markets were unusually good in the 20th century, and that foreign markets didn’t fare as well.  Further, there is no reason to believe that U.S. markets will continue to perform as well in the future.  They also observed that people often live longer in retirement than 30 years.

Anarkulova et al. collected worldwide market data as well as mortality data, and found that the safe withdrawal rate (5% chance of running out of money) for 65-year olds who invest within their own countries is only 2.26%!  In follow-up communications with Felix, Cederburg reported that this increases to 2.7% for retirees who diversify their investments internationally.

Sampling block size

One of the challenges of creating a pattern of plausible future market returns is that we don’t have very much historical data.  A century may be a long time, but 100 data points of annual returns is a very small sample.

Bengen used actual market data to see how 51 hypothetical retirees would have fared.  Anarkulova et al. used a method called bootstrapping.  They ran many simulations to generate possible market returns by choosing blocks of years randomly and stitching them together to fill a complete retirement.

They chose the block sizes randomly (with a geometric distribution) with an average length of 10 years.  If the block sizes were exactly 10 years long, this means that the simulator would go to random places in the history of market returns and grab enough 10-year blocks to last a full retirement.  Then the simulator would test whether a retiree experiencing this fictitious return history would have run out of money at a given withdrawal rate.

In reality, the block sizes varied with the average being 10 years.  This average block size might seem like an insignificant detail, but it makes an important difference.  After going through the results of my own experiments, I’ll give an intuitive explanation of why the block size matters.

My contribution

I decided to examine how big a difference this block size makes to the safe withdrawal percentage.  Unfortunately, I don’t have the data set of market returns Anarkulova et al. used.  I chose to create a simpler setup designed to isolate the effect of sampling block size.  I also chose to use a fixed retirement length of 40 years rather than try to model mortality tables.

A minor technicality is that when I started a block of returns late in my dataset and needed a block extending beyond the end of the dataset, I wrapped around to the beginning of the dataset.  This isn’t ideal, but it is the same across all my experiments here, so it shouldn’t affect my goal to isolate the effect of sampling block size.

I obtained U.S. stock and bond returns going back to 1926.  Then I subtracted a fixed amount from all the samples.  I chose this fixed amount so that for a 40-year retirement, a portfolio 75% in stocks, and using a 10-year average sampling block size, the 95% safe withdrawal rate came to 2.7%.  The goal here was to use a data set that matches the Anarkulova et al. dataset in the sense that it gives the same safe withdrawal rate.  I used this dataset of reduced U.S. market returns for all my experiments.

I then varied the average block size from 1 to 25 years, and simulated a billion retirements in each case to find the 95% safe withdrawal rate.  This first set of results was based on investing 75% in stocks.  I repeated this process for portfolios with only 50% in stocks.  The results are in the following chart.

The chart shows that the average sample size makes a significant difference.  For comparison, I also found the 100% safe withdrawal rate for the case where a herd of retirees each start their retirement in a different year of the available return data in the dataset.  In this case, block samples are unbroken (except for wrapping back to 1926 when necessary) and cover the whole retirement.  This 100% safe withdrawal rate was 3.07% for 75% stocks, and 3.09% for 50% stocks.

I was mainly concerned with the gap between two cases: (1) the case similar to the Anarkulova et al. research where the average sampling block size is 10 years and we seek a 95% success probability, and (2) the 100% success rate for a herd of retirees case described above.  For 75% stock portfolios, this gap is 0.37%, and it is 0.32% for portfolios with 50% stocks.

In my opinion, it makes sense to add an estimate of this gap back onto the Anarkulova et al. 95% safe withdrawal rate of 2.7% to get a more reasonable estimate of the actual safe withdrawal rate.  I will explain my reasons for this after the following explanation of why sampling block sizes make a difference.

Why do sampling block sizes matter?

It is easier to understand why block size in the sampling process makes a difference if we consider a simpler case.  Suppose that we are simulating 40-year retirements by selecting two 20-year return histories from our dataset.

For the purposes of this discussion, let’s take all our 20-year return histories and order them from best to worst, and call the bottom 25% of them “poor.”

If we examine the poor 20-year return histories, we’ll find that, on average, stock valuations were above average at the start of the 20-year periods and below average at the end.  We’ll also find that investor sentiment about stocks will tend to be optimistic at the start and pessimistic at the end.  This won’t be true of all poor 20-year periods, but it will be true on average.

When the simulator chooses two poor periods in a row to build a hypothetical retirement, there will often be a disconnect in the middle.  Stock valuations will jump from low to high and investor sentiment from low to high instantaneously, without any corresponding instantaneous change in stock prices.  This can’t happen in the real world. Continue Reading…

How Robb Engen invests his own money

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*Updated for August, 2022*

Regular blog readers know that I’m a big proponent of passive investing with low cost, globally diversified index funds and ETFs. Why? Low fees are the best predictor of future returns. Global diversification reduces the risk within your portfolio. Index funds and ETFs allow investors to hold thousands of securities for a very small fee.

Investors who eventually come to understand these three principles want to know how to build their own index portfolio. There are several ways to do this: pick your own ETFs through a discount broker, invest with a robo-advisor, or buy your bank’s index mutual funds.

Still, the amount of information can be overwhelming. There are more than 1,000 ETFs, thousands of mutual funds, a dozen or more discount brokerage platforms, and nearly as many robo advisors. The choices are enough to make your head spin.

I narrowed these investment options down when I wrote about the best ETFs and model portfolios for Canadians. I’ve also explained how you can retire up to 30% wealthier by switching to index funds. Finally, I shared why you should hold the same asset mix across all of your accounts for maximum simplicity.

Now, I’ll explain exactly how I invest my own money so you can see that I practice what I preach.

My Investing Journey

I started investing when I was 19, putting $25 a month into a mutual fund. When I began my career in hospitality, I contributed to a group RRSP with an employer match. The catch was that the investments were held at HSBC and invested in expensive mutual funds.

When I left the industry I transferred my money (about $25,000) to TD’s discount brokerage platform. That’s when I started investing in Canadian dividend-paying stocks. I followed the dividend approach after reading Norm Rothery’s “best dividend stocks” in Canada articles in MoneySense.

I later found dividend growth stock guru Tom Connolly (plus a devoted community of dividend investing bloggers) and started paying more attention to stocks with a long history of paying and growing their dividends.

Five years later I had built up a $100,000 portfolio with 24 Canadian dividend stocks. My performance as a DIY stock picker was quite good. I had outperformed both the TSX and my dividend stock benchmark (iShares’ CDZ) from 2009 – 2014. My annual rate of return since 2009 was 14.79%, compared to 13.41% for CDZ and 7.88% for XIU (Canadian index benchmark).

But something wasn’t quite right. I started obsessing over oil & gas stocks that had recently tanked. I had a difficult time coming up with new dividend stocks to buy. I read more and more opposing views to my dividend growth strategy and realized I was limiting myself to a small subset of stocks in a country that represents just 3-4% of the global stock market.

Related: How my behavioural biases prevented me from becoming an indexer

Furthermore, new products were coming down the pike – including the introduction of Vanguard’s All World ex Canada ETF (VXC). Now I could buy a tiny piece of thousands of companies from around the world with just one product.

So, in early 2015 I sold all of my dividend stocks and built my new two-ETF solution (VCN and VXC). I called it my four-minute portfolio because it literally took me four minutes a year to monitor and add new money. No more obsessing over which stocks to buy or worrying if a stock was going to go to zero.

Fast-forward to 2019 and another product revolution made my portfolio even simpler. Vanguard introduced its suite of asset allocation ETFs, including VEQT – my new one-ticket investing solution.

The next change to my investment portfolio was in January 2020 when I moved my RRSP and TFSA from TD Direct Investing over to Wealthsimple Trade to take advantage of zero-commission trading. Continue Reading…