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.

11 practical ways Retirees can learn more about Personal Finance

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What is one way a soon-to-be retiree can learn more about personal finance?

To help retirees further their education on personal finance, we asked financial experts and business leaders this question for their best insights. From finding targeted podcasts to taking a class, there are several practical ways for a retiree to learn more about personal finance.

Here are eleven ways retirees can learn more about personal finance:

  • Find Podcasts targeted at soon-to-be Retirees
  • Use Online Resources
  • Look to a Financial Planner for Guidance
  • Lookout for Blogs
  • Join a Group
  • Assemble a Support Team
  • Speak to the Professionals
  • Non-profit Organizations
  • IRS Elderly Benefits
  • Read, Read, Read
  • Take a Class

Find Podcasts targeted at soon-to-be Retirees

There are plenty of great podcasts out there sharing incredibly useful information on retirement, although many these days are on retiring early, which may or may not be you depending on where in your financial journey you are (not to mention your age range!)

This is why it can really help for soon-to-be retirees to find podcasts targeted at their specific circumstances. One good example is Finishing Well with Hans Scheil, which covers all sorts of topics on retirement planning. You may also want to consider the podcast Retirement Answer Man hosted by Roger Whitney. A Certified Financial Planner, Whitney covers both the money-related aspects of retirement as well as some other questions on this stage of your life that you may have. –– Anna Barker, LogicalDollar

Use Online Resources

There are a number of online resources a soon-to-be retiree can make use of in preparation for this next big step in their life. It’s never too late to learn or improve your personal finance skills. I would urge retirees to get on YouTube and search for personal finance videos aimed at retirees. There is, no pun intended, a wealth of information in these videos about what steps to take and which actions to avoid to keep your head above water as you enter retirement. — Carey Wilbur, Charter Capital

Look to a Financial Planner for Guidance

The best thing you could do for yourself in preparation for retirement is going to a financial planner who can help you organize and explain your financial situation. Hopefully, you’ve been preparing for retirement in the form of something like a 401k, but if you haven’t, a financial planner can help to explain your options: which is what you need plenty of. The financial planner will likely emphasize the realm of tax efficiency, which is typically what matters most to people who are retired. If you want to do some independent research, I would look into literature discussing tax-loss harvesting, rebalancing your portfolios, and back-door Roths (while they last). — Tom Mumford, Undergrads

Continue Reading…

Is it ever too early to start thinking about Retirement Income Planning?

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By Ian Moyer,

Co-founder & President of Cascades

(Sponsor Content)

We normally think about it in the few years leading up to the “Retirement Date,” but should we be crunching the numbers at other times?

The short answer is yes and here is when: preceding a change in career or a shift to part time, following a large increase or decrease in annual income. You may also wish to take the measure of a move from salary to self-employment, or upon the death of a spouse or following a divorce.

It is important to keep in mind the difference between Retirement Planning — the amount of money you will have accumulated by a specific retirement date — and Retirement Income Planning, which is the income that you will derive from that accumulated cash. Those are the numbers that really matter and represent the income you will want to live on (and sustainably so) for the rest of your life.

The following commentary is from a user of Cascades software and highlights her specific number-crunching situation:

I am currently in my early fifties, but I had already been worrying for several years about how much I needed for my retirement and how best to plan for it. As academics, we often assume our pension is sufficient: if we are even tenured, as many of us are not; if we have been working at a decent salary for many years, as many of us have not; and if we have been taught to think about or plan for retirement, as most of us have not.

As I spoke to my colleagues, I began to realize that the problem of not planning was widespread. One colleague (and friend) told me she did not even know what an RRSP was. Another colleague and friend revealed she never considered saving money in a TFSA. Still another had no idea what her pension was because she had worked at four different Universities, and so her pensionable earnings were scattered across these institutions.

Going to the bank to gain some insight and assistance was not much better. The bank, one of the largest in Canada and the one with which I have dealt since I was eighteen years of age, could not have been more disappointing. Most institutions are comfortable taking your money to invest it, but they are considerably less interested in helping you plan what to do with it. It’s not just an egregious oversight, it’s bad customer service. So, the bank with which I work did some preliminary planning, but it was largely unsatisfactory. How would I know how much I would have upon retirement? What were the sources of income I could rely on? How long would the money I saved support me? I still had no idea. Continue Reading…

Affording our Lifestyle, post Financial Independence

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Billy and Akaisha enjoying Chacala Beach, Nayarit, Mexico

By Billy and Akaisha Kaderli, RetireEarlyLifestyle.com

Special to the Financial Independence Hub

It’s no secret that we have been living on around US$30,000 per year.

Now into our 31st year of financial independence we see no need to lower our spending. In fact, we are trying to increase it.

Some people do not believe we can have such a fulfilling lifestyle on this small annual amount, so in this article, we thought to explain how we do it.

Let us break this down

Decades ago we discovered the lower cost of living in Mexico. This is what is referred to as Geographic Arbitrage. You make your money in US Dollars – in our case dividends, capital gains and Social Security – and spend in the local currency. After running around the Caribbean Islands and RVing through the Western US, in 1993 we were invited to visit friends living in Chapala, Mexico. Since we track our spending daily, we saw our expenses in Dollar amounts drop rapidly by being there.

After spending 4 years in Chapala,we started traveling to Asia – another low-cost destination – again utilizing the strength of the US dollar to ease the pressure on our wallets. All the while, our stock market assets continued to increase in value.

For a handful of years again we made Dollars in the market and spent Quetzales in Panajachel, Guatemala. Easy living is what we call it and this is an essential style of our retirement approach.

In between all of these travels we spent time in our Adult Community Resort in Arizona. Surprisingly, our cost of living there was one of the best in all of the locations where we have lived. Yes, we were spending Dollars, but the price of living with value was attractive, and we modified our spending in other ways. Often, we walked or biked to grocery stores and various locations. Rarely using our vehicle at that time, the insurance company gave us a discount for having such low annual mileage. Weather – other than the super-hot summers – was pleasing and since there were tennis courts in the resort and friendly neighbors, we had assorted low-cost entertainment options.

These days we’re settled back in Mexico where the exchange rate is as good as it gets.

Travel

As our readers know, we still travel quite a bit even though Covid has kept us mostly in Mexico.

We have upgraded our lodging and choose more comfortable ways to get from place to place. Intra-country flights are very affordable here in Mexico, with a one-way ticket from Guadalajara to Puerto Vallarta costing less than $50USD per person. One time we flew from Guadalajara across the country to Merida for $38USD each. There is no need to stay at home when a week away is so attractively priced.

Because we have permanent residence status here in Mexico, we are entitled to an INAPAM card offering us 50% discounts on buses. Therefore, our transportation expenses for a bus trip to the beach is 2-for-the-cost-of-one. For example, we go to Chacala Beach, Nayarit, Mexico for 538Pesos for the 2 of us. This is about $13USD each on a luxury, air-conditioned bus.

This INAPAM card also gives us free entry into museums and certain public areas that charge a fee.

Rent

Our apartment, showing the upgrades we just finished

Our rent is $300USD monthly, or the Peso equivalent. This amount allows us to live in a gated garden complex, where we have a roomy one-bedroom apartment centrally located. Shopping, restaurants and doctors are easily within walking distance. There is no pressure to own a car in a foreign country with all the expenses like maintenance, licensing, fuel and insurance that are involved.

Recently we remodeled our kitchen with new counter and backsplash tile plus paint, costing 13,800 Pesos, about $690USD. Continue Reading…

How to crush your RRSP contributions next year

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Many high-income earners struggle to max out their RRSP deduction limit each year and as a result have loads of unused RRSP contribution room from prior years.

While we can debate about whether it’s appropriate for middle and low income earners to contribute to an RRSP or a TFSA, the reality for high-earning T4 employees is that an RRSP contribution is the best way to reduce their tax burden each year.

The RRSP deduction limit is 18% of your earned income from the prior year, up to a maximum of $29,210 in 2022, plus any unused RRSP room from previous years. An employee earning $125,000 per year could contribute $22,500 annually to their RRSP. While that’s straightforward enough, coming up with $1,875 per month to max out your RRSP can be a challenge. An even greater challenge is catching up on unused RRSP room from prior years.

Related: So you’ve made your RRSP contribution. Now what?

Let’s say you live in Ontario, earn a salary of $125,000 per year, and you want to start catching up on your unused RRSP contribution room. Your gross salary is $10,416.67 per month and you have $2,858.92 deducted from your paycheque each month for taxes, leaving you with $7,557.75 in net after-tax monthly income.

Your goal is to contribute $2,000 per month to your RRSP, or $24,000 for the year. This maxes out your annual RRSP deduction limit ($22,500), plus catches up on $1,500 of your unused RRSP contribution room from prior years. Stick to that schedule and you’ll slowly whittle away at that unused contribution room until you’ve fully maxed out your RRSP. Easy, right?

Unfortunately, you don’t have $2,000 per month in extra cash flow to contribute to your RRSP. After housing, transportation, and daily living expenses you only have about $1,200 per month available to save for retirement.

No problem.

That’s right, no problem. Here’s what you can do:

T1213 – Request To Reduce Tax Deductions at Source

Simply fill out a T1213 form (Request to Reduce Tax Deductions at Source) and indicate how much you plan to contribute to your RRSP next year. Submit it to the CRA along with proof –  such as a print out showing confirmation of your automatic monthly deposits. The CRA will assess the form and send you back a letter to submit to your human resources / payroll department explaining how they should calculate the amount of tax they withhold for the year.

Note that you’ll need to fill out and submit the form every year. It’s best to do so in early November for the next calendar year so you have time for the form to be assessed and then you can begin the new year with the correct (and reduced) taxes withheld. That said, the CRA will approve letters sent throughout the year – it just makes more sense to line this up with the start of the next calendar year.

T1213 Form

Reducing taxes withheld from your paycheque frees up more cash flow to make your RRSP contributions. It’s like getting your tax refund ahead of time instead of waiting until after you file. Let’s see how that would work using our example from Ontario.

You’ve signalled to CRA that you plan to contribute $24,000 to your RRSP next year. In CRA’s eyes, that brings your taxable income down from $125,000 to $101,000. This will make a significant difference to your monthly cash flow.

Recall that you previously had $2,858.92 in taxes deducted from your monthly paycheque. After your T1213 form was assessed and approved, the taxes withheld from your paycheque each month goes down to $1,990.67 – freeing up an extra $868.25 in monthly cash flow that was previously being withheld for taxes. That’s an extra $10,419 that you can use to crush your RRSP contributions next year. Continue Reading…

What to do about crazy Stock valuations

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By Michael J. Wiener

Special to the Financial Independence Hub

The last time I had to put a lot of effort into thinking about my finances was back when I retired in mid-2017.  I had ideas of how to manage my money after retirement, but it wasn’t until a couple of years had gone by that I felt confident that my long-term plans would work for me.  I had my portfolio on autopilot, and my investing spreadsheet would email me if I needed to take some action.

I was fortunate that I happened to retire into a huge bull market.  I got the upside of sequence-of-returns risk.  The downside risk is that stocks will plummet during your early retirement years, and your regular spending will dig deep into your portfolio.  Happily for me, I got the opposite result.  My family’s spending barely made a dent in the relentless rise of the stock market.

However, stock prices have become crazy, particularly in the U.S.  One measure of stock priciness is Robert Shiller’s Cyclically Adjusted Price-Earnings (CAPE) ratio.  In the U.S., the CAPE ratio is now just under 40.  The only other time it was this high in the last 150 years was during the dot-com boom in the late 1990s and early 2000s.  Just before the 1929 Black Tuesday stock market crash, the CAPE was only about 30.

Outside the U.S., prices aren’t as high, but they are still elevated.  My stock portfolio’s blended CAPE is a little under 32 as I write this article.  Even if stock prices were cut in half, this would just bring the CAPE close to the average level over the past century.  To say that these thoughts made me think hard about whether I should change how I manage my portfolio is an understatement.

A change in thinking about high stock prices

For a long time, my thinking was to ignore inflated stock prices and just rebalance my portfolio as necessary to maintain my chosen asset allocation percentages.  I have a planned “glidepath” for my stock/bond mix that has me about 20% in bonds at my current age and increasing as I get older.  My bond allocation consists of cash and short-term bonds, and the rest is spread among the world’s stock indexes.  I saw no reason to change my plan as my portfolio grew.

Then a question changed my thinking.  If the CAPE rises to 50, or 75, or even 100, would I still want such a high stock allocation?  It’s not that I expect the U.S. or much of the rest of the world’s stocks to become as overvalued as Japanese stocks in 1990, but I should be prepared for how I’d respond if they do.

At a CAPE of 50, I wouldn’t want more than about half my money in stocks, and at 100, I wouldn’t want much in stocks at all.  So, even though I’m comfortable with 80% stocks at a blended CAPE of 32, something would have to change if the CAPE were to rise from 32 towards 50.

A first attempt

Once I realized I definitely would reduce my stock allocation in the face of ridiculously inflated markets, I had to work out the details.  I started with some rules.  First, I don’t want any sudden selloffs.  For example, I don’t want to hold a large stock allocation all the way up to a blended CAPE of 39.9 and suddenly sell them all if the CAPE hits 40.  A second rule was that I don’t want any CAPE-based adjustment to apply unless the CAPE is above some threshold level.

As the CAPE kept climbing, I felt some urgency to choose a plan.  My first attempt was to change nothing if the CAPE is under 30, and when it’s above 30, I multiplied my bond allocation by the CAPE value and divided by 30.  I implemented this idea in my portfolio as an interim plan before I analyzed it fully.

Another adjustment I made a little earlier was to reduce my expectation for future stock returns.  When the current CAPE is above 20, I now assume the CAPE will drop to 20 by the end of my life.  This doesn’t directly affect my portfolio’s asset allocation, but it reduces the percentage of my portfolio I can spend each year during retirement.  When stocks rise and the CAPE rises, my portfolio grows, and this increases how much I can spend.  But then this new rule reduces my assumed future stock returns, and reduces my safe spending percentage somewhat.  Increasing stock prices still allow me to spend more, but this rule slows down the increase in my spending.

A new simpler rule for adjusting my stock allocation based on high CAPE values

I’m still happy with the way I’ve adjusted my expectation for future stock returns when the CAPE is high, but I’ve changed the way I adjust my bond allocation to the CAPE.  I now have a simpler rule I named Variable Asset Allocation (VAA) that better matches my thinking about what I’d want if the CAPE got to 50 or 100.

VAA: If the CAPE is above 25, I add CAPE minus 25 (taken as a percentage) to my age-based bond allocation.

For example, without VAA my current bond allocation based on my age is about 20%.  The current blended CAPE of my portfolio is about 32, so I add 32–25=7% to my bond allocation.  So, I’m currently 27% in bonds and 73% in stocks.

This might not seem like much of a bond allocation adjustment in percentage terms, but it’s a bigger adjustment in dollar terms.  Consider the following example.  Suppose a $500,000 portfolio with a 20% bond allocation sees a jump in the CAPE from 25 to 32.  This is a 28% increase in stock prices.  So, we started with $100,000 in bonds and $400,000 in stocks, and the stocks jumped in value to $512,000 for a total portfolio size of $612,000.  When we adjust the bond allocation to 27% in accordance with VAA, we have $165,000 in bonds and $447,000 in stocks.  Of the $112,000 jump in stock value, we shifted $65,000 over to bonds, and left only $47,000 of it in stocks.  Although the bond allocation went from 20% to 27%, a 35% increase, the dollar amount in bonds rose 65%.  This is a substantial shift, and it leaves a healthy bond buffer if stock prices subsequently crash. Continue Reading…