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.

How millennials can find Financial Independence

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By Mark Seed
Special to the Financial Independence Hub

New year, same movement. The FIRE (Financial Independence, Retire Early) movement remains a big thing.

How can millennials find financial independence?

Can millennials find FI via leverage?

What questions are millennials asking themselves when it comes to wealth building, saving and investing?

This post explores some answers: how millennials can find financial independence.

What do millennials want? Some millennials want financial independence!

While some age ranges will vary depending on the report you read, the millennial cohort (GenY) was born between 1981 and 1995, which puts millennials in the age range of 27-41 in 2022.

As you well know from my site, and my own journey, I believe your 30s are critical years to define your financial wellbeing. Many important life decisions are made during this period of life, such as career selection, buying a house, potentially getting married, starting a family, and much more.

The lifestyle and consumption decisions you make in your 30s could very well define your 40s and future decades, including how much wealth you can build.

In the succinct and well-written book If You Can – How Millennials Can Get Rich Slowly by William Bernstein, there is a simple five-step formula to help millennial investors realize some financial independence dreams. I encourage any 20- or 30-something reading this site to download and read that FREE e-book from my link above or below. I think it will be impactful.

While some millennials will be the major recipients of some of the largest wealth transfers in history, now underway from a mix of older GenX and Boomer parents, via large financial gifts, I suspect some millennials will not have that luxury to rely on for their financial footing.

This means many millennials will need to do what I have done: make their financial independence dreams happen on their own.

Personally, I’m a huge believer in charting your own financial path and not relying on others to do it for you. Sure, you’ll make money mistakes along the way (I have) but you’ll also learn to think for yourself and hopefully hone some critical thinking skills along the way.

Further Reading: My lessons learned in diversification. 

Millennial investor profile – Liquid from Freedom 35 Blog

For many years now, I’ve been inspired and motivated by financial independence. So have other investors that I’ve had the good fortunate to connect with by running this blog. So, in that light, I’ve also been inspired by their stories and what they do differently.

You can read many of those stories on this dedicated Retirement page here. I’ll link to some others below.

One blogger in particular that has an interesting story and some lessons to share is “Liquid” from Freedom 35 Blog.

Liquid moved out of his parent’s basement when he was 21 and hasn’t looked back – paying off some small student loans and building up his net worth recently (now in his mid-30s) to $1.5 million. His long-term goal was always to be “financially free before his 35th birthday”. That goal is now achieved. He ’got there’ by controlled leverage, value investing, taking advantage of market corrections, swing trading, dividend investing, alternative investing and more.

I thought it would be fun to have Liquid on the site, share a bit of his story, and discuss how he used leverage wisely to realize some financial independence dreams far earlier than most.

Liquid, welcome to the site and thanks for your time!

My pleasure Mark and very happy to spend time with you and your readers!

When it comes to our financial journey in general, I know we’re just ‘not there yet’ and I’ve got a few years on you! We are I believe, on a decent path – saving, investing and killing mortgage debt at the same time. Folks are quite familiar with my plan but maybe not so much about you!

Tell us about yourself? In what field do you work, did you work in?

Thanks Mark. Well, I have been enamored with finance and business since I was 18. But despite my best efforts to get into business school I was rejected because of my poor grades. I ended up taking applied sciences instead. But that was a mistake. The program was so difficult I failed all my classes. I was forced to drop out after the first year.

After flunking college, I found a job at Safeway, making minimum wage. Luckily, I was still living with my parents at the time.

One day in 2007 I noticed a local art school was offering a one-year program in graphic design. I’m clearly not academically gifted. But maybe I can draw. I thought it was worth a shot. So, I enrolled.

I received my diploma the following year at age 21 and began my career as a graphic designer. My starting annual salary was $35,000.

Today I’m a senior designer at a large entertainment firm making $75,000 a year. Although it wasn’t my first choice, I am happy with my career decision and how it turned out. The pay is decent. And I can save money to pursue what I’m truly passionate about – finance and investing.

Great stuff. You have found your passion with investing for sure. How did you get started with investing? When did you start investing? What is your investing approach?

In 2009 I wanted to move out of my parents’ basement. After considering my options I concluded that buying was better than renting. So, I purchased a 2-bedroom apartment in Vancouver for $230,000.

This was my first investment, and my first home. At this time, I had $15,000 in personal savings. Not much. But it was enough to cover the downpayment and closing costs. Then I began to invest in the stock market, and other asset classes.

My investing approach can be broken down into 2 parts.

The first part is to mimic the strategies used by the best investors.

Allan Mecham was a college dropout like me. But he managed a fund that compounded at 30% a year.

Activist investor Bill Ackman produced a 70% investment return in 2020. But his long-term record is more like 20% a year, which is still pretty good. Macro investor George Soros managed a fund that returned 30% a year on average for many decades. And of course, value investors like Mohnish Pabrai and Warren Buffett have outstanding long term track records as well.

These public figures in the investment sphere have written books, appeared in interviews, and spoken on podcasts to discuss their ideas, strategies, and outlooks on the markets. Bill Ackman even has a list of 8 core principles that he uses to screen investments. Whenever he deviates from those principles his performance suffers. Furthermore, it’s easy to find exactly what these investors are buying because they have to submit 13F filings regularly to disclose their holdings publicly.

By understanding what these successful investors are doing with their money, I can essentially copy their methods and buy the same stocks as them. This naturally leads to my portfolio having the same kind of high returns as them.

Often the top performing investors will like the same stocks. But sometimes their strategies diverge so I have to decide which one works the best for my situation.

This brings me to the second part of my investing approach, which is to document my investment transactions and track the results. I like to use a spreadsheet for this. I also like to track my thought process, and the reason for making my decisions. This allows me to go back, review what happened, keep what worked, and throw away what didn’t so I can improve my process for next time. This experience has helped me become a better investor over time.

Copy the best, or at least tailor what the best do for you. Good stuff. So Liquid, like some other millennial bloggers are you a fan of FIRE? Why or why not? Have you achieved FIRE or FI? What is the key difference in your opinion between FIRE / retired early or FI or are they same to you?

As a kid I was constantly being told what to do (or not do) by others, and it was frustrating. Despite all the guidance I still felt a lack of direction. However, once I grew up and started to live on my own terms, I began to discover more purpose in life. I was free to make my own decisions and it was liberating. There was just one problem. I still had to work to put food on the table. That’s when I discovered financial independence.

I deeply value freedom so I made it a priority to become wealthy. I’m a fan of FI, but I don’t know about FIRE. I achieved financial independence in 2020 so I consider myself to be FI right now. I’m turning 35 later this spring. And that’s when I will hand in my letter of resignation and quit my 9 to 5 job permanently. Although I will be retired from full time work, I wouldn’t consider myself to be “retired.” There is no universal consensus on what retirement means anymore as the world embraces Web 3.0 and the gig economy.

You’ve had some interesting investments over the years on your path to FI. Can you highlight some investing successes or mistakes along the way? What did you learn from those lessons to help you move forward that might help other millennials reading this?

I’ve been very fortunate to see high returns investing in exotic assets such as Zimbabwe’s banknotes and Playboy magazines.

(Mark: that’s funny but good!)

But I often learn the most from the investments that didn’t do well.

One of my earlier investing mistakes was buying a leveraged volatility ETF that makes trades in the futures market. I knew this fund was risky, but I didn’t really understand what made it so. I initially wanted to make a quick swing trade. But when the ETF’s price fell, I held on – waiting for a reversal instead of cutting my losses. That was the wrong decision. Eventually a lower VIX and the adverse effects of contango wiped out 99% of my position, and I lost $2,000. From then on, I only invest in things that I actually understand. I learned the importance of knowing what I own. Today I can explain any investment I have to a 4th grader, and I can delineate why I own it. Continue Reading…

When did Retirement Income Planning get so complicated?

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Photo by Gustavo Fring from Pexels

By Ian Moyer

(Sponsor Content)

Retirement planning used to be easy: you simply applied for your government benefits and your company pension at age 65. So, when did it get so complicated?

Things started to change in 2007 when pension splitting came into effect. While we did have Canada Pension Plan (CPP) sharing before that, not too many people took advantage of it. Then Tax Free Savings Accounts (TFSA) came along in 2009. At first you could only deposit small amounts into your TFSA, but in 2015 the contribution limit went to $10,000 (it’s since been reduced to $6,000 per year). Accounts that had been opened in 2009 were building in value, and the market was rebounding from the 2008 downturn. Registered Retirement Savings Plan (RRSP) dollars were now competing with TFSA dollars and people had to choose where they were going to put their retirement money.

In 2015 or 2016 financial planners suddenly started paying attention to how all of these assets (including income properties) were interconnected. There were articles about downsizing, succession planning, and selling the family cottage. This information got people thinking about their different sources of retirement income and which funds they should draw down first.

Of course, there is more to consider, such as the Old Age Security (OAS) clawback. When, where, and how much could this affect your retirement planning? People selling their business are often surprised that their OAS is clawed back in the year they sell the business, even if they’re eligible for the capital gains exemption. Not to mention what you need to do to leave some money behind for your loved ones. Even with all this planning, the fact that we pay so much tax when we die is never discussed, although the final tax bill always seems to be the elephant in the room. We just ignore it, and hope it’ll go away.

Income Tax doesn’t disappear at 65

Unfortunately, income tax doesn’t disappear at age 65, and you need time to plan ahead so you can reduce the amount of tax you pay in retirement. A good way to do this is to use a specialized software that takes all your sources of income and figures out the best strategy to get the most out of your retirement funds. Continue Reading…

Target Date Retirement ETFs

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Image licensed by Evermore from Adobe

By Myron Genyk

Special to the Financial Independence Hub

Over the years, many close friends and family have come to me for guidance on how to become DIY (do-it-yourself) investors, and how to think about investing.

My knowledge and experience lead me to suggest that they manage a portfolio of a few low-fee, index-based ETFs, diversified by asset class and geography.  Some family members were less adept at using a computer, let alone a spreadsheet, and so, after they became available, I would suggest they invest in a low-fee asset allocation ETF.

What would almost always happen several months later is that, as savings accumulated or distributions were paid, these friends and family would ask me how they should invest this new money. We’d look at how geographical weights may have changed, as well as their stock/bond mix, and invest accordingly.  And for those in the asset allocation ETFs, there would inevitably be a discussion about transitioning to a lower risk fund.

DIY investors less comfortable with Asset Allocation

After a few years of doing this, I realized that although most of these friends and family were comfortable with the mechanics of DIY investing (opening a direct investing account, placing trades, etc.) they were much less comfortable with the asset allocation process.  I also realized that, as good a sounding board as I was to help them, there were millions of Canadians who didn’t have easy access to someone like me who they could call at any time.

Clearly, there was a looming issue.  How can someone looking to self-direct their investments, but with little training, be expected to sensibly invest for their retirement?  What would be the consequences to them if they failed to do so?  What would be the consequences for us as a society if thousands or even millions of Canadians failed to properly invest for retirement?  

What are Target Date Funds?

The vast majority of Canadians need to save and invest for retirement.  But most of these investors lack the time, interest, and expertise to construct a well-diversified and efficient portfolio with the appropriate level of risk over their entire life cycle.  Target date funds were created specifically to address this issue: they are one-ticket product solutions that help investors achieve their retirement goals. This is why target date funds are one of the most common solutions implemented in employer sponsored plans, like group RRSPs (Registered Retirement Savings Plans).

Generally, most target date funds invest in some combination of stocks, bonds, and sometimes other asset classes, like gold and other commodities, or even inflation-linked bonds.  Over time, these funds change their asset allocation, decreasing exposure to stocks and adding to bonds.  This gradually changing asset allocation is commonly referred to as a glide path.

Glide paths ideal for Retirement investing

Glide paths are ideal for retirement investing because of two basic principles.  First, in the long run, historically and theoretically in the future, stocks tend to outperform bonds – the so-called equity risk premium – which generally pays long-term equity investors higher returns than long-term bond investors in exchange for accepting greater short-term volatility (the uncertain up and down movements in returns).  Second, precisely because of the greater short-term uncertainty of stock returns relative to bond returns, older investors who are less able to withstand short-term volatility should have less exposure to stocks and more in less risky asset classes like bonds than younger investors. Continue Reading…

How to handle Fear of a Market downturn

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Image courtesy Kiplinger/RetireEarlyLifestyle.com

By Billy and Akaisha Kaderli, RetireEarlyLifestyle.com

Special to the Financial Independence Hub

On our latest adventure, we were on the beach in Isla Mujeres, Mexico when a lady recognized us from our website RetireEarlyLifestyle.com. After some pleasantries, she asked if we could address the fears of the market declining and how to handle it.

We appreciated that input from one of our Readers.

Previous market declines

Since the surviving the 1987 crash when the Dow Jones Industrial Average fell over 20% in one day, there have been other downturns including the recent ones of 2007-2008 and the Covid meltdown in March of 2021. We have learned from each of them.

They can be trying on one’s patience and confidence, so how is it best to handle them?

Noise, corrections and bears

First, let’s define these meltdowns.

Between a 5-10% decline in the averages is called noise and can happen at any time.

Many individual stocks have these gyrations, which is why we own the Indexes. They are more stable.

Over a 10% drop is called a correction, meaning it is wringing the excesses out of the markets. The markets are constantly being over-extended and under-extended and these 10% moves correct for those times.

If the averages drop 20% or more, it is considered to be a bear market and we tend to have these every 56 months.

On average, bear markets last 289 days or 9.6 months with an average loss of 36.34%. These can be painful for one’s financial health — or an opportunity — depending on where you are in the investment cycle.

A number of events can lead to a bear market: including higher interest rates, rising inflation, a sputtering economy, and a military conflict or geopolitical crisis. Seems we have all of these presently!

If you are in the accumulation phase and buying more shares at cheaper prices, this can be a bonus for you. However, if you are now retired and living off your investments with your account values dropping, that can be difficult to swallow.

How to calm your nerves to prevent panic selling

It’s important to note the difference between trading and investing.

Traders drive the day-to-day activity, booking profits and hopefully taking losses quickly. We investors take a longer view to ride out these cross currents of the markets knowing that — over the long run — we will be fine. Continue Reading…

Retirement Readiness: The investment fee gap can set retirement back four years

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By Jillian Kennedy, Mercer Canada

Special to the Financial Independence Hub

If someone said you could have four extra years to enjoy your retirement, you’d probably be thrilled. Now imagine being forced to hold off on retirement for four years longer than you planned. 

As it turns out, a gap in investment management fees can potentially make that a reality for many Canadians – but there is a fix.

Our newly released 2022 Mercer Retirement Readiness Barometer analyzed the various investment management fees in the market and their impact on retirement readiness. What we found is that someone paying the median level of fees for an individual investment account – 1.9% – would have to wait until age 70 to be retirement ready. Obviously, that’s well past the traditional retirement age target of 65 that many of us have in our sights.

 

It’s a different story if you consider the benefits of a workplace defined contribution (DC) plan. An individual paying 0.6% in fees – the median for a DC savings plan – would be ready for retirement four years sooner, at age 66. (The analysis assumed individuals are invested in a “balanced” target date portfolio with a 12% combined contribution rate – with 6% coming from the employee and 6% from the employer).

Those who have access to a workplace DC and savings plan can benefit from pooling power and lower fees in a group arrangement. Personal finance experts have commented for years on this fee disparity between group workplace plans and other investment savings vehicles, but this analysis puts that into clear perspective. Consider not only shaving years off your working life but having a better quality of life in the retirement years that follow.

The fee gap’s impact before – and after – retirement

This gap in fees doesn’t only affect the savings phase, but also the period after someone begins to draw from their retirement savings. It’s common to move retirement savings from a workplace plan into an individual account and at that point, higher fees tend to kick in.

Take, for example, an individual retiring at 65. Our analysis shows that if that person pays the median retail fee (1.9%) when they begin drawing money from their individual retirement savings account, they’ll run out of money five years earlier compared to someone paying the median group fee of 0.6%. 

If someone is paying the median group fee (0.6%) throughout their career, on the other hand, then retires at age 65 and subsequently invests their nest egg in an account paying that same rate, they will have an average of 12 more years of retirement income compared to a similar person paying the median retail fee (1.9%) over the same period.

Group pooling is a powerful tool

Of course, successful retirement income planning takes a comprehensive approach including workplace savings programs, government benefits and personal savings. Higher contribution levels and a smart investment strategy also play an important role, as does money management post-retirement.  Continue Reading…