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.

13 common and costly Retirement Planning Mistakes

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What is one common and costly retirement planning mistake to avoid? 

To help you avoid common and costly retirement planning mistakes, we asked financial planners and business leaders this question for their best advice. From not saving early on in life to poor tax planning, there are several retirement planning mistakes that you should be careful to avoid in order to build healthy financial security for your retirement.

Here are 13 common and costly retirement planning mistakes these leaders are mindful of:

  • Not Saving Early On in Life
  • Investing in Actively-Managed Funds With High Fees
  • Not Working a 401K to Your Full Advantage
  • Not Investing Your Savings
  • Not Planning for Health Care Cost
  • Investing Too Conservatively
  • Relying Only on 401K Savings
  • Retiring Too Soon
  • Carrying Debt into Retirement
  • Underestimating the Years You Live
  • Cashing Out Your 401K When Changing Employers
  • Withdrawing Early from Your 401k is a Major No-no
  • Poor Tax Planning

Not saving early on in Life

Your first dollar saved is your most important one. And whether you save that first dollar at 20 years old or 35 makes a huge difference because of compound interest. When compound interest is working FOR you, time is your best friend. Consider that with a 5% annual return, $1,000 grows to $5,516 in 35 years. Sounds pretty good, right? Well it gets better. That same $1,000 becomes $11,467 in 50, more than doubling in those last 15 years. So not saving early on in your life is a very costly mistake. — Paw Vej, Chief Operating Officer, Financer.com

Investing in Actively-Managed Funds with High Fees

Most people have good intentions when it comes to retirement. They put money into their 401K or IRA and don’t get cute with how they invest it, sensing that the diversification of mutual funds and ETFs is better than individual stocks and risky assets. However, one thing that is often overlooked is the drag that high management fees can have on a portfolio’s performance.

Actively-managed funds, including popular target date funds, have very high management fees, especially in comparison to low-cost index funds. And while the difference in fees may seem minuscule (often less than 1%), they can really add up. For example, for a normal retirement portfolio earning 4% per year, over the course of 20 years, when a fund has a 1% management fee versus no management fee, the total portfolio can be worth $50,000 less in the end. Just based on the drag of high fees! So make sure to watch for funds with hefty expense ratios – it’s a common trap. — John Ross,  Chief Executive Officer, Test Prep Insight

Not working a 401K to your Full Advantage

It’s unfortunate that many workers who participate in 401(k) plans either don’t take full advantage of an employer’s matching contributions or don’t increase their contributions when their income increases. The reticence to increase contributions is understandable given inflation putting stress on short-term purchasing needs, and making it even more difficult to pay attention to long-term goals. But not bringing your 401(k) up to the percentage of your employer’s matching contribution means you’re missing out on free money. And instead of falling victim to lifestyle creep whenever you get a raise, allocate the increase or a portion of it to your 401(k) to better secure your future. 

There are several ways you can save on short-term purchases so you have the funds to increase your 401(k). This includes curtailing or eliminating unnecessary expenses from your budget, comparison-shopping on large outlays such as car and home insurance, and lobbying creditors for a lower interest rate. –– Karen Condor, Insurance Copywriter, ExpertInsuranceReviews.com

Not Investing your Savings

Don’t keep your money sitting in a savings account. Instead, the best way to manage your savings and plan for retirement is to invest this money in an index fund that tracks the S&P 500. You’ll earn interest on your money in the market, whereas when your money sits stagnant in a savings account, you’re actually losing out on money due to inflation. — Cesar Cruz, Co-Founder, Sebastian Cruz Couture

Withdrawing Early from your 401k

Cashing out your savings early. If you have money in a retirement plan like a 401K, taking out cash can have a major impact on your long-term savings. In addition to the penalties, taxes and fees you’ll pay for the withdrawal, you also lose out on compounding interest. Depending on how old you are, how much you withdraw and various market factors, this could end up costing you big time. Whenever possible, avoid withdrawing from your retirement savings unless you have a true need that you can’t cover in other ways.

— Vimla Black Gupta, Co-Founder & CEO, Ourself

Not Planning for Health Care Cost

There is an old saying “Disasters and diseases come without asking.” Therefore, health care costs are a huge expense that increases as you age. And it’s almost impossible to calculate, but if you want to live in peace for the rest of your life, this expense has to be saved separately. And consider it important in your retirement planning. But many people think that as healthy as they are now, they will remain the same in the future, and do not pay attention to the health care cost. With the passage of time, they realize how important it is to include health care costs in retirement planning. But at that time, they can’t do anything. Therefore, avoiding all these difficulties, including health care costs, is important in your retirement planning. — Kenny Kline, President & Financial Lead, BarBend

Investing too Conservatively

Investing too conservatively is a common retirement planning mistake. Many people are afraid of losing money, so they invest only in low-risk options, such as savings accounts or government bonds. While these investments are safe, they don’t offer the potential for high returns that you will need to reach your retirement goals. To reach your goals, you need to invest in a mixed bag of assets, including stocks, which have the potential for higher returns but also come with more risk. Working with a financial advisor can help you create an investment portfolio that meets your needs and helps you reach your goals. — Danielle Bedford, Head of Marketing, Coople

Relying only on 401K Savings

People who sign up for 401K benefits think they’re doing all they can to prepare for retirement. Don’t be too reliant on such a thing because that income stream can come to a screeching halt as a result of being laid off — or worse, as a result of nefarious business practices. It may seem like an extreme example, but ask any former Enron employee how their 401K investments turned out. You need more than what your company offers as far as retirement preparation, so seek out additional ways to save money for your future retirement. Find low-risk investments. Turn to random rewards banking. Own a rental property and set aside that income stream for your distant future. Don’t just rely on one source for retirement savings, because if it dries up or explodes on you, you’ll have nothing. — Trevor Ford, Head of Growth, Yotta

Retiring too Soon

Retiring too soon is a common and costly retirement planning mistake to avoid. Continuing to work for a few more years can increase your retirement income by up to one-third. The average retirement age for most people, according to the Social Security Administration, is between 66 and 67, but many Americans don’t wait that long. Working until your full retirement age will help you avoid the Social Security benefit reductions for early filing. You can continue to make contributions to your retirement savings plan at the same time, creating additional balances that can be used to make market investments. 

Retirement entails leaving a full-time job or career that a person has held for a long time. There are numerous options, such as working part-time in your current job or career; beginning a new job or career, part-time or full-time; working as a bridge job for a few years until full-time retirement; working for yourself or owning a business; or volunteering for a cause you care about. — Raviraj Hegde, Head of Growth, Donorbox

Continue Reading…

Harvest launches 5 new ETFs designed for higher income

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The new ETFs invest directly in established equity income ETFs but generate higher income through a specific strategy

By Michael Kovacs, President & CEO of Harvest ETFs

(Sponsor Blog)

Canadian investors — in large numbers — are seeking income from their investments. Some investors are seeking high monthl income to offset the rising cost of living. Others are incorporating the income paid by their investments in total return. Whatever the reason, many of those investors are finding the income they seek in equity income ETFs.

Equity Income ETFs have seen strong inflows in 2022, in a period when traditional equities have struggled. These ETFs — which generate income from a portfolio of stocks and a covered call strategy — offer yields higher than the rate of inflation and higher than most fixed income.

Harvest ETFs has seen over $1 billion in assets flow into its equity income ETFs so far in 2022, as investors seek high income from portfolios of leading equities from a reputable provider. Now, Harvest is launching 5 new ETFs to build on that reputation and demand for higher income.

The appetite for equity income among Canadian investors has grown and grown. We’re pleased to be launching these new enhanced equity income ETFs to help meet that demand and provide Canadians with the high income yields they’re seeking in today’s market.

The ETF strategies getting enhanced

Harvest has launched the following new enhanced equity income ETFs, with initial target yields higher than their underlying ETFs.

Name Ticker Initial Target Yield
Harvest Healthcare Leaders Enhanced Income ETF HHLE 11.0%
Harvest Tech Achievers Enhanced Income ETF HTAE 12.8%
Harvest Brand Leaders Enhanced Income ETF HBFE 9.70%
Harvest Equal Weight Global Utilities Enhanced Income ETF HUTE 10.20%
Harvest Canadian Equity Enhanced Income Leaders ETF HLFE 9.60%

We selected 5 established equity income ETFs to underpin our new enhanced equity income ETFs. They reflect our core investment philosophy, owning the leading businesses in a specific growth industry and generating income with covered calls.

Each enhanced equity income ETF has specific tailwinds from its underlying ETF. HHLE captures the superior good status of the healthcare sector by owning the Harvest Healthcare Leaders Income ETF (HHL:TSX). HTAE accesses a portfolio of established tech leaders in the Harvest Tech Achievers Growth & Income ETF (HTA:TSX). HBFE provides exposure to some of the world’s top brands through the Harvest Brand Leaders Plus Income ETF (HBF:TSX). HUTE captures a defensive global portfolio of utilities providers through the Harvest Equal Weight Global Utilities Income ETF (HUTL:TSX) and HLFE offers access to some of Canada’s leading companies by owning the Harvest Canadian Equity Income Leaders ETF (HLIF:TSX).

How the Enhanced Equity Income ETFs will deliver a higher yield

These new enhanced equity income ETFs use leverage to deliver high income. They apply a leverage component of approximately 25% to an existing Harvest equity income ETF. That leverage raises the annualized yield of the ETF while elevating the risk-return profile and the market growth prospects of the ETF.

The graphic and example below shows how a hypothetical enhanced ETF investment can work: Continue Reading…

Opportunity Cost Impact of Daily Financial Decisions on Retirement Plans

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Via Steve Lowrie, CFA

Special to the Financial Independence Hub

Editor’s Note:

Editor’s Note: The following is a guest blog by Maureen Thorne, a Small Business Owner. It is republished on the Hub with their joint permission.

A Personal Journey on how Today’s Choices can spoil your Retirement (or Early Retirement) Dreams

By Maureen Thorne, Small Business Owner/Guest Author

As my husband and I approached our late 40s/early 50s, we decided it was time to solidify our previous hastily sketched plans for early retirement. We had worked hard for many years and skimped in places (never purchased a brand-new car) and were confident that we had done everything right to retire early and live our best early retirement lives.

However …

When we sat down with the numbers, we realized our dreams of an early retirement with travel and adventure were farther from reach than we thought. We both had well-paying careers and didn’t feel that we had splurged so much that we should be this far behind.

What happened?

And, more importantly …

How do we get back on track?

We read a great article from Lowrie Financial, Retirement Planning for Gen Xers: Build Wealth and Retire Happy, which gave us some great insights and seemed to speak directly to our financial situation. Another topic area that Lowrie Financial introduced us to was behavioural finance / holistic financial planning for savings. We felt these were areas we should explore more to help us achieve our long-term financial goals.

Once panic-mode subsided, we sat down with some spreadsheets to see what had gone awry and figure out how (and if?) we could still retire early and be able to comfortably afford the things we wanted from retirement.

Here’s what we did to right the (sinking?) ship:

Real Talk from an Independent Financial Advisor

We booked a meeting with an independent financial advisor who had lots of questions for us about what we wanted to achieve. We explored behavioural finance which allowed us to really look at the impact on our spending habits and investing history. One of the most helpful tough-love comments from him:

“You make a lot of money. Where is it all going?”

Good question.

This led us to one of the steps we took to financially recover our early retirement plans: Family Spending Forensics.

We also realized we had missed opportunities to pack away excess cash in the past. Every time we stopped shelling out for something, we simply cheered and lived it up to that higher level of cash flow. We finished paying our mortgage, so we took the entire family to Europe. We stopped paying into our kids’ RESP, so we re-renovated the house. This identified another area that was a stumbling block for us to achieve that long-dreamed-of early retirement: Retain (and Make the Most of) “Found Money.”

Our financial advisor also pointed out something we begrudgingly already knew. We had really hurt ourselves with DIY investing. Although there were times we won big, there were many times we lost, both small and big. Although, it was fun for us to see how well we could do on our own and we reveled in keeping up with the financial and investing insights online to help guide us, always seemed to be behind the eight ball and not getting ahead like we should have been. We were driven by emotions. In hindsight, our DIY investment strategy seemed to be: 1 step forward, 2 steps back. There were so many things we didn’t focus on: tax ramifications, behavioural investing, opportunity costs, chasing returns, FOMO (Fear of Missing Out) investing … We knew we needed to: Stop Emotion-Driven DIY Investing.

How we got back on track for our Early Retirement Financial Goals

1. Family Spending Forensics

“You make a lot of money. Where is it all going?”

Our independent financial advisor’s words kept ringing in our heads. So, as advised, we tracked our spending and instituted a realistic budget.

There were areas that immediately jumped out as places we could restrain our big over-spending: clothing, dining out, vacationing, etc. That didn’t mean that we stayed at home wearing rags and eating Kraft Dinner. It simply translated to setting aside a reasonable budget for the year or month for that particular spending category and sticking to it. We still vacationed, we still shopped, we still ate out – but all with the budget in mind.

We also found that we could pull back in multiple smaller areas – putting a budget figure in place helped us shave small amounts in many areas, and it added up.

It’s also important to note that our “scrimping” went virtually unnoticed in our every day lives. We didn’t feel deprived at all.

A great article we discovered, Spending Decisions That End Up Costing a Million Dollars by Andrew Hallam, talks about an often overlooked impact of spending decisions: opportunity costs.

“Those massages also cost far more money than initially meets the eye. ‘Opportunity cost’ is the difference in cost between making one decision over another. An opportunity cost isn’t always financial. But in my case, those massages might have cost us more than $770,000.

Confused? Check this out:

We spent about $150 a week on massages during an 11-year period (2003–2014).

That’s $85,800 over 11 years.

Over that time, our investment portfolio averaged 8.34% per year.

If we had invested the money we spent on massages, we would have had an extra $143,239 in our investment account by 2014.

That’s a lot of money. But I’m not done yet. We left Singapore in 2014 (when I was 44). Assume we let that $143,239 grow in a portfolio that continued to average 8.34% per year. Without adding another penny to it, that money would grow to $770,241 by the time I am 65 years old.

That’s the long-term opportunity cost of spending $150 a week on massages for just 11 years.”

We realized very quickly how much a little restraint in our spending habits impacted our bottom line. Within just 1 year, we could see the light back to our early-retirement goal. Just 2 years later and we are well ahead of plan.

2. Retain (and Make the Most of) “Found Money”

“Found Money” – sounds great! So, what is it. In my mind, it is excess cash flow that was not expected or presents a sudden or continuous influx of cash to the household. This can be: Continue Reading…

High inflation in 2022 changes calculus on delaying CPP till 70

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Actuary Fred Vettese had a couple of interesting (and controversial!) articles in the Globe & Mail recently that may give some near-retirees  who were planning to defer CPP benefits until age 70 some pause.

The gist of them is that because of inflation, those nearing age 70 in 2022 might want to take benefits sooner than later: despite the almost-universal recommendation of financial pundits that the optimum time to start receiving CPP (or even OAS) benefits is at age 70. From what I glean from Vettese’s analysis, those who are 69 this year should give this serious consideration, and possibly those who are currently 68 (or even 67!)  might also think about it.

You can find the first piece (under paywall, Sept 27) by clicking the highlighted headline:  Thanks to a Rare Event, Deferring CPP until age 70 may no longer always be the best option.

The second, quite similar, article ran October 6th:  Deferring CPP till 70 is still best for most people. But here’s another quirk for 2022, when inflation is higher than wage growth.

Certainly, Vettese’s opinion carries weight. He is former chief actuary of Morneau Shepell (LifeWorks) and author of several regarded books on retirement, including Retirement Income for Life.

My own financial advisor [who doesn’t wish to be publicized] commented to his clients about these articles,  noting that they:

“aroused interest among some of you on when to begin receiving the Canada Pension Plan (CPP) given an unusual wrinkle that has occurred over the past couple of years where it may be more beneficial  to not defer it to 70 in order to maximize the dollar benefit.  It is particularly relevant for those who are within a year or two of approaching  70 years old and have so far postponed receiving CPP … My take on the piece is that if you are not receiving CPP and you are closer to 70 years old than 65, then the odds move more favourable to taking it before reaching 70. That is particularly true if there are health concerns that affect longevity.”

I must confess that I found Vettese’s thought process hard to follow all the way, but I respect his opinion and that of my advisor enough that it altered our own CPP strategy.  People who had originally planned to take CPP  at age 70 early in 2023 may be better off jumping the gun by a few months, opting to commence CPP benefits late in 2022. This is because of a unique “quirk” in the Canada Pension Plan that is occurring in 2022, whereby “price inflation is higher than wage inflation.”

Personally, I took it at age 66 (3 years ago) but we had planned to defer my wife Ruth’s CPP commencement till 70, still about 18 months away. Vettese himself turns 70 in late April [as do I] and in an email he clarified that because of the inflation quirk, he’s taking his own CPP in December: 5 months early.  But as his example of Janice below demonstrates, even those a year or two younger may benefit by doing the same.

A lot is at stake with such a decision, however, so I would check with your financial advisor and Service Canada first, or engage a consultant like Doug Runchie of DR Pensions Consulting, to make sure your personal situation lines up with the examples described in the article.

2022 is the exception that proves the rule

Actuary and author Fred Vettese

Vettese starts the first article by recapping that CPP benefits are normally 42% higher if you postpone receipt from age 65 to age 70. However, he adds:

“Almost no one knows – and this includes many actuaries and financial planners – that the actual adjustment is not really 42 per cent; it will be more or less, depending on how wage inflation compares with price inflation in the five years leading up to age 70. It turns out this arcane fact is crucial. The usual reward for waiting until 70 to collect CPP is that the pension amount ultimately payable is typically much greater than if you had started your pension sooner, such as at age 65. In 2022, that won’t be the case. As we will see later on, someone who is age 69 in 2022 and who was waiting until 70 to start his CPP, is much better off starting it this year instead.”

Those most directly affected are people over 65 who have not yet started to collect their CPP pension. Here’s how he concludes the first article:

“In a way, 2022 is the exception that proves the rule. It is the result of COVID, a once-a-century event, creating a one-year spike in price inflation without a corresponding one-year spike in wage inflation. This analysis, by the way, has no bearing on when to start collecting the OAS pension.

This should send an SOS to financial planners and accountants, as well as retirees who take a DIY approach. Deferring CPP will usually continue to make sense but not necessarily in times of economic upheaval.”

In an email to Fred, he sent me this: “I wouldn’t spend too much time on the Wade example (first article). Situation is rare. More common is the Janice example (second article). It applies just as I state in the article.”

Example of those turning 68 early in 2023

For the Janice scenario, Vettese describes someone currently age 67 who had planned to start taking CPP benefits in April 2023, a month after she turns 68: Continue Reading…

Living off the Dividends?

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

It is the most popular rallying cry for self-directed investors in Canada and the U.S. – I plan to “live off of the dividends.” Or in retirement – “I am living off of the dividends.” The notion leaves money on the table in the accumulation stage and living off of the dividends leaves a lot of money on the table in retirement. Don’t get me wrong, I love the big juicy (and growing) dividend as a part of our retirement plan. But as an exclusive strategy, the income approach simply comes up short.

It’s not a popular Tweet, but I have suggested that no investor with a viable and sensible financial plan would live off the dividends. Add this to the points made in the opening paragraph; it might not be tax-efficient. Also, the dividend would have no idea of what is a financial plan and what is the most optimal order of account type spending. Check in with the our friends at Cashflows&Portfolios and they can show you a very efficient order of asset harvesting.

On Seeking Alpha, I recently offered this post:

Living off dividends in retirement; don’t sell yourself short.

Thanks to Mark at My Own Advisor for including that post in the well-read Weekend Reads.

Financial Planner: It may be a bad idea

From financial planner Jason Heath, in the Financial Post.

Why living off your dividends in retirement may be a mistake.

Retirement planning is a personal decision, but you might be making a big mistake if you go out of your way to ensure you can live off your dividends, since you will be leaving a great deal of money when you die. In the process, you may have worked too hard at the expense of family time or spent too little at the expense of treating yourself.

In that Seeking Alpha post, I used BlackRock as the poster child for a lower-yielding dividend growth stock. The yield is lower but the dividend growth is impressive. That can often be a sign of underlying earnings growth and financial health.

2022 update: BlackRock is falling with the market (and then some); the yield is now above 3%.

Making homemade dividends

In that Seeking Alpha post, I demonstrated the benefit of selling a few shares to boost the total retirement take from BlackRock. The retiree gets an impressive income boost, and only had to sell 2.8% of the initial share count. The risk is managed.

Starting with a hypothetical $1 million portfolio, $50,000 in annual income represents an initial 5% spend rate. That is, we are spending 5% of the total portfolio value. Without share sales the retiree would have been spending at an initial 3.3%.

Share Sales (in the table) represents the income available thanks to the selling of shares: creating that homemade dividend.

The retiree who has the ability to press that sell button to create income enjoyed much higher income. In fact, the retiree would have been able to sell significantly more shares (compared to the example above) to create even more additional income.

Plus the dividend growth is so strong, it quickly eliminated the need to sell shares.

BlackRock Dividend Growth – Seeking Alpha

In fact, the BlackRock dividend quickly surpasses the income level of the Canadian bank index. It can be a win, win, win. Even for the dividend-loving Canadian accumulator, BlackRock is superior on the dividend flow.

But of course, the aware retiree will keep selling shares and making hay when the sun shines. They might cut back any share sales in a market correction: also known as a variable withdrawal strategy.

It’s a simple truth. Don’t let the income drive the bus. It doesn’t know where you need to go. This is not advice, but consider growth and total return and share harvesting.

Don’t sell yourself short.

In the Seeking Alpha post, I also offered:

The optimal mix of income and growth for retirement Continue Reading…