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.

A Q&A on FIRE and Geo-Arbitrage between FindependenceHub.com & RetireEarlyLifestyle.com

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Global early retirees Billy and Akaisha Kaderli

Almost since the Hub’s inception in 2014, the principals behind the popular RetireEarlyLifestyle.com have provided in-depth coverage of global travel and the tips to achieve early Financial Independence they used themselves to “retire” in their early 30s.

The following email interview was between myself and Billy and Akaisha Kaderli.  Our intention is to publish it on both sites. Here’s the link to their version, which ran Dec. 14th. 

So without further ado:

JC Q1: Akaisha and Billy, you are about the same age as myself and my wife Ruth and apart from being American and Canadian, we appear to have several things in common: we both run sites focused on Financial Independence, have written some books on same, and continue to be working at least on our own terms even though we have achieved Findependence years ago: more than 30 in your case, seven in ours. One difference is you travel a lot more, while we are content to stay in our Toronto home near Lake Ontario and take just a few weeks abroad, preferably if it’s a business expense. So let me start with the provocative statement that I think travel is expensive and over-rated. I have no doubt you can rebut that!

A&B: First, let us clarify that the time we spend on our website is what we consider to be our volunteer time. Yes, there are products that we sell, but 99% of our information is free because we are passionate about teaching financial literacy to those who want to learn.

In regards to your comment about travel being expensive and over-rated, it depends.

We think that there are differing styles of travel. There are tourists, visitors and travelers. There is no one-right-way to journey around, and we love it that people get out and about, expanding their minds.

Tourists tend to go on vacation for a week or two, spending a good deal of money on lodging, transport, entertainment and meals. Every day must be “perfect” and if the weather doesn’t cooperate or if service is not great, then there is this sense of disappointment. They tend to go to resorts or even exotic locations, but the lodging and amenities have a sense of Disneyland unreality, and are often over-priced.

Sure, there might be a water buffalo in some rice fields, with “workers” wearing a “traditional clothing uniform” but the real locals are miles away. Tourists will pay $10 or more for a beer that the residents of the area would purchase for about a buck.

Also, Tourists might like the idea of a vacation or might not. Mostly, they like the comfort and routine of home, and a vacation is an interruption in their experience of the familiar. Many times, it borders on the feeling that “this is a waste of time. I’d rather be home.” They don’t know any local phrases in a foreign language except maybe Yes, No, Thank you, Bathroom and Beer. Tourists have more of a passive approach to their excursion and want to be entertained. Then they rate their experience with their friends when they return home.

In order to go on this vacation, they stop their mail, perhaps have a house sitter or family member/friend water their plants or watch their pet. They have probably cleaned out their refrigerator and have to stock up once again when they return home. And it all seems to be a hassle. “Would have been easier to just stay at home in the first place. Plus, now we have this credit card bill and all these souvenirs to give to friends.”

Visitors on the other hand stay in a location for a bit longer – maybe even a month or so. They know some survival phrases in the local language and choose lodging that is more middle range than a resort option. About half the time, they will eat outside of big chain restaurants with well-known names and take a chance on a local restaurant.

They are a bit more self-guided in their entertainment choices, perhaps utilizing Google maps or a local tour of the area to become familiar with their surroundings. They may select local transportation or hire a driver to go from archaeological ruins and museums or they might take a self-directed walking tour.

Using a daypack, they bring their own drinking water and perhaps some snacks to munch on as they go from place to place in their day.

Traveling for them is not necessarily a “vacation” but more of an experience, or a sabbatical. They could take cooking classes, language classes, painting courses and the like and they interact with the local people.

After their time away from home, their lives have altered in some way, perhaps expanding their perspectives or dropping an outworn routine. They look forward to their next adventure.

Then you have Travelers.

Billy and Akaisha at Chacala Beach, Nayarit, Mexico

These are the people who go from place-to-place with no itinerary other than their own style of meandering. They usually buy only one-way tickets, figuring out how to return – if they do –  at another time. They communicate with the native inhabitants in their own language, purchase food, clothing and travel equipment from markets in the area and will often eat street food or dine in local restaurants.

These people travel for months, sometimes years at a time and rent apart-hotels, AirBnBs, house sit or bargain for a hotel room for a monthly rate. They may or may not have a home base for when they return from their wandering.

Travelers are more flexible mentally and are willing to have their routines interrupted. If the weather pattern is not to their liking, they might move on, or hunker down till the cold, heat, or rain stops. They do not live their traveling life as in “Today is Tuesday so it must be Belgium.” They speak with other travelers to get insight into their possible next stop.

Travelers employ digital equipment and apps to communicate with family and friends. They utilize email, sending digital photos or videos taken of their experiences, and they travel lightly. They throw their daypacks onto a bus or carry them on an affordable inter-country flight. Getting their cash in the currency of the country they are living in, they work the ATMs with a debit card that pays the withdrawal fee back.

They manage their lives online and have been receiving paperless mail for a long time. Photos are placed up in the cloud and they take care of business via Skype, WhatsApp or Signal, benefitting from medical tourism for their health care.

Travel does not cost them “more.” In fact, if they were spending their time “at home” they would still have a baseline of expenses – lodging, food, transport, entertainment for instance. But now they have incorporated these same expenses along with globe-trotting which creates memories for a lifetime and stories to share.

In general, travel has broadened their minds, giving them a unique perspective of the world and a confidence and self-reliance that pervades daily living.

We think it’s important to know one’s traveling style and enjoy who you are. There is not a one-size-fits-all, and we recognize that travel isn’t for everyone.

Someone has to stay home, attend the roses and mow the lawn!

Hub CFO Jonathan Chevreau

How does extensive travel differ from short vacations from full-time employment?

JC Q2: To clarify, we enjoy travel too; was just playing devil’s advocate. Before we switch to Findependence, do you think there’s a big difference between the expensive two-week vacations many salaried employees take, and actually renting a house or suite abroad for 3 or 4 months at a time in Semi-retirement?

A&B: Yes, there is a big difference, actually.

When one is still working, vacations are stress busters. Work hard, play hard.

These holidays tend to be results of pent up demand for luxury; things we have denied ourselves during our working life like splurging on fine meals out, visiting an exotic place far from home, a ski vacation, or a safari. Continue Reading…

Moshe Milevsky Q&A part 2: Longevity Insurance for a Biological Age

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Amazon.ca

On Friday, the Hub republished the first part of a two-part Question-and-Answer session between finance professor and author Dr. Moshe Milevsky and Gordon Wiebe of The Capital Partner [TCP]. This is the second and final instalment:

TCP: I wanted to turn to your Book, Longevity Insurance for a Biological Age. Your thesis is that we should be  looking at our biological age and using that to calculate and project our income and how much we should be drawing from our savings.

M.M.  And, more importantly than that, making decisions in our personal finances, right?

You know, somebody is trying to figure out at what age they should take C.P.P. Should I take it at 60? 65? 70?I don’t think they should use their chronological age to do that.

Trying to figure out when to retire? Stop using your chronological age.

I mean there’s a whole host of decisions that you have to make based on age and I’m saying we’re using the wrong age metric. It should be based on your biological age.

Now, at this point, biological age sounds like this funny number that comes out of some website, but sooner or later we’ll all have it. And, it’s going to be faster than you think. Your watch will tell you your biological age. And, then in a couple of years, people will stop associating themselves with their chronological age.

They will just stop using it.

And you’re going to sit down with your antiquated compliance driven forms that say, “I need to know my client’s age. Oh, you’re 62.”

And, the client says, “Ha, ha. That’s chronological age. We don’t use that anymore, buddy. I use biological age. Sixty-two, that’s not my age.”

It’s about preparing people for the world in which age is not the number of times we circle the sun.

TCP: What metrics do you think we’ll lean towards to measure biological age? Telemeres? Others?

M.M. There’s a whole bunch of bio-markers that can be used. Some people use telomeres or something called “DNA methylation” or epigenetic clocks. There are about fifty of them, but eventually they’ll all coalesce into a number called “biological age.”

There will be a consensus on how to measure it and you’ll go to your doctor and your doctor will say, “your chronological age is 50, but your biological age is 62.” You’re doing something wrong.

Then a financial advisor will use that information differently when you build a retirement plan.

TCP: That makes sense, but trying to achieve a consensus and getting everyone to use the same metrics from a compliance standpoint or trying to get pension plans and policy makers to agree would be a challenge, wouldn’t it?

MM: It would be. In fact, that’s exactly where I’m headed now. I’m giving a speech in Madrid and that’s exactly what regulators from a number of different countries want me to talk about.

They want to know, “is this feasible? We want to implement this in our pension system. We don’t want wealthy people retiring at the age of 65, they’re going to live forever and bankrupt our system. We want people to retire at a biological age.”

TCP: Let’s talk about that a little more. Advisors typically use a 4% draw on savings as a benchmark withdrawal rate. But, if we use our biological age, there would then be a range. I assume somewhere between 3-6%?

Adjusting the 4% Rule

M.M. You’re absolutely right. That’s where I would go with this. You have to use your biological age and the 4% rule has to be adjusted.

But, what I’m saying is more than that. That rule has to change. It’s not just about the number or percentage. It’s how the rule is applied.

I really don’t like the idea of fixing a spending rate today and sticking to it for the rest of your life no matter what happens. Your spending rate has to be adaptable.

What you have to tell people is, “look, this year we can pull out 6.2%. Next year, it really depends on how markets  behave. If markets go down, we may have to cut back. If markets go up, we can give you a bit more.”

I think the 4 per cent rule is really what I call a one-dimensional rule. It’s not that four is one dimensional. Any one number is one dimensional: just telling them a per cent.

It’s got to be at least two dimensional. Meaning, this is what it is now, but next year if this is what happens we’ll do that. ..

Three dimensional is to go beyond that is to go beyond that and say let’s take a look at what other income and assets you have.

“Oh! You’ve got a lot more income from guaranteed sources, you can afford more than four per cent, this year.”

TCP: It’s a dynamic scenario, a moving target.

M.M. That’s the key word, dynamic versus static.

The threat of rising Interest Rates

TCP: Canadian investors currently have over two trillion invested in mutual funds. Over half is invested in balanced funds or fixed income and we’re in a horrible position where fixed income is concerned. We’ve had declining rates for the past forty years. At best, bonds will stay flat. At worst, bonds could lose up to thirty per cent of their value.

You talk about the importance of the sequence of returns and how that affects income potential. Have you or your students run scenarios with higher interest rates and the impact it could possibly have?

M.M.  I haven’t thought about it beyond what you’re noting. The obvious scenario is as interest rates move up, these things are going to take a big hit.

And, retirees who feel they’ve been playing it safe by putting funds in bonds will suddenly realize there’s nothing safe about bonds in a rising interest rate environment.

I think they’re confusing liquidity and safety with interest rate risk. It’s liquid and its safe. Government is not going to default but boy, can it lose its value.

We’ve become accustomed to this declining pattern. Anybody who is younger than forty doesn’t even understand what higher interest rates means. It’s never happened in their lifetime. They don’t believe it. Understand it. Never felt it. You show them graphs going back to the 1970s. That’s not how to convince them. They’re empiricists. They’ve never lived it themselves, they don’t believe you. Continue Reading…

How did the Pandemic Portfolio hold up?

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

I was the first investment blogger to ‘jump on’ the investment risks that might be created by the coronavirus. In fact, when I first penned on the subject in February of 2020, the virus was not then known as COVID-19. And we were not yet in a global pandemic. New cases were just starting to move around the globe, and most felt that the strange new coronavirus would be contained. Today, I can’t claim that I knew it would result in the first modern pandemic. But I did address the risk, and I did offer some thoughts on how an investor might prepare, if they needed to protect their wealth. Let’s have a look, how did the pandemic portfolio perform?

Here’s the original post from February of 2020.

How to prepare your portfolio for the coronavirus outbreak.

Do nothing, stay the course

That almost goes without saying. You don’t fix a ship in a hurricane offers our friends at Mawer Investments. If you have a solid investment plan, and you are investing within your risk tolerance level —

Image by S K from Pixabay

De-risk your portfolio

This suggestion is controversial to some, but to me it is common sense. Fear was mounting in February of 2020, and the stock markets were offering a minor hissy fit. It is safe to say that most investors are not safe. They are investing outside of their risk tolerance level. These market scares offer the opportunity to discover that you are investing outside of your comfort level.

The timing from February of 2020 to de-risk was still quite favourable.

That would have allowed an investor to move to their risk tolerance level before the market corrected by nearly 35%. While that move to a lower risk portfolio might create lesser returns over time, it can remove the greater risk of permanent losses. Investors are known to too-often sell out in fear near the bottom of the market declines. Of course that’s the complete opposite of – buy low and sell high.

And a typical balanced portfolio would have delivered about 21% to 22% to date, from February of 2020. That’s a greater return compared to the Canadian stock market from that date.

Pandemic portfolio construction

I had suggested that investors consider two of the greater risk-off assets. Risk-off will refer to the defensive investments that protect your portfolio. And typically, investors run to these assets in times of trouble. That influx of dollars can drive up prices.

Gold is known as a safe haven asset.

Gold was the lead image on the original post on how to prepare your portfolio for the pandemic. The precious metal did shine in the pandemic, when needed.

I had suggested that investors consider U.S. long term treasuries. They punch above their weight as risk mangers (keeping an eye on those unruly stock markets.

You’ll find those long term treasuries in the Permanent Portfolio post.

And mostly, at the core is a sensible and well-balanced portfolio. From the original post …

. the best investment strategy is to diversify across geographic locations, asset classes and currencies to protect against the unknowns.

Ray Dalio

That said, one of the beautiful all-in-one balanced asset allocation ETF portfolios would have performed wonderfully. It’s the same story if you held a balanced ETF portfolio.

If an investor had shaded in some gold and long term treasuries, they would have experienced some greater returns, and would have been treated to better risk-adjusted returns.

The pandemic portfolio performance

For demonstration purposes I used the asset allocation offered on the ETF Portfolio page, for a balanced model. You certainly could have (successfully) held a conservative, balanced growth or all-equity model through the pandemic. But for those with a balanced model that holds some risk-off assets, the inclusion of gold and treasuries would have helped the cause. Continue Reading…

How to invest for retirement when time is no longer your friend

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By Mark Seed, myownadvisor

Special to the Financial Independence Hub

 

Save early, save often.

Time in the market is your friend.

Get started, stay invested.

Let’s face it: easy to say, hard to do.

How to invest for retirement when time is no longer your friend?

Read on in today’s post, including answering a reader email on this very subject.

Time in the market 

Cutting to the chase: time in the market, as opposed to timing the market, works because it does not involve short-term predictions or any guesswork at all. This strategy proves that time and patience in the market is better than a quick sale. For example, when a person has a stock or ETF for many years, the power of compounding simply tells us that investment growth will do all the heavy lifting for us. Patient investors will gain larger profits by allowing their investments to grow over time.

“The wonderful magic of compounding returns that is reflected in the long-term productivity of American business, then, is translated into equally wonderful returns in the stock market. But those returns are overwhelmed by the powerful tyranny of compounding the costs of investing. For those who choose to play the game, the odds in favor of the successful achievement of superior returns are terrible. Simply playing the game consigns the average investor to a woeful shortfall to the returns generated by the stock market over the long term.” – John Bogle, founder of Vanguard Group.

John said things better than I did. Most investors should consider investing as a multi-year long-term endeavour.

The secret sauce therefore is spending time in the market – staying invested – and not diving in and out.

I’ve seen this play out myself, in real time, with my dividend investing journey. See the chart below. Sure, I’ve added new money over the years but going forward, my portfolio will continue to grow and is likely to double every 10 years or so even if I don’t add another five cents.

My Own Advisor Dividend Income Update

Further reading: read more about my progressive dividend income journey here.

Waiting for growth can be painful. Or maybe life throws a curveball at you and you simply can’t invest as much as you’d like. Life happens.

I’ve been on record to say if you haven’t saved a cent by age 50, for any retirement at all, you might be kissing any middle-class retirement lifestyle away. With inflation running higher, that might be more true than ever.

But it is never too late to right the ship. It’s never too late to learn something new. It’s never too late to get started with investing: you can invest for retirement when time is no longer your friend.

How to invest for retirement when time is no longer your friend – reader question

Here is the reader question, adaptedly slightly for the site for today’s post:

Hi Mark,

I appreciate all that you do. I recently sold a property and I’m starting all over.

I’m newly self-employed. I have a new rental apartment, but starting from scratch. I’m 55 and have an empty TFSA. I would like to max it out with investments that will act as my long-term account. I don’t need to touch that money for probably 15 years. I hope to put any savings, about $77,000 in there next year.

I’ll also be putting another $150,000-$200,000 into my new business. Day trading? Kidding.

Back to my biggest question – most articles and advice I’ve read about is focused on long-term investing that caters to a younger person whose age allows them to exploit compound interest – I know you write about that too. Because I’m not in that category, I thought I’d reach out and see what you can help with. What is possible? 

Please accept my request or send me any articles on your site that address investing for someone older, with limited funds like myself for the TFSA. 

Thanks so much for your time and consideration.

Thanks for your email and readership.

Well, a few thoughts and I’ll put them in order of what I would consider myself, based on my personal lessons learned as your food for thought.

How not to invest for retirement when time is no longer your friend

I’ll cover how much wealth you can still generate with your TFSA in a bit, but I think it’s important for me to call out that based on market history, because equity markets can be volatile in the short term but rather predictable over the long-term (they rise), an investor who stays invested is probably going to win the race.

Case in point.

Did you predict this massive fall, and rise, in our pandemic-era?

If you’re being totally honest with yourself, I doubt it. I know I didn’t see this comeback coming but I’m sure glad it happened ….

The Cash Wedge

So, whether you invest in stocks, bonds, real estate or more speculative plays like Bitcoin, you should know that you’re mainly rewarded with returns for your exposure to just one thing: risk.

Risk, on the whole, is difficult to define and measure, especially at the personal level but essentially it comes in two main flavours: short-term and long-term.

Short-term risk might be easier to relate to. Stocks, bonds, and other assets can lose money in the short-term. See above!

But investing history consistently tells us for any short-term headaches, by staying invested, “this too shall pass.”This means that an investor who stays in the market (and does not trade) generally speaking has a much higher probability of long-term success than one who tries to pick the perfect time to get in and out.

Further reading: I used to sabotage my portfolio. Don’t repeat my mistakes!

How not to invest for retirement when time is no longer your friend

Another concept I want to bring up is the fact that at any age, there is one major piranha you need to avoid for successful, more predictable wealth-building: the investment industry itself.

Did I just call out all the entire wealth industry? Only some to a point! Continue Reading…

Retired Money: Is the dream of Retiring Abroad still alive in the Covid era?

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My latest MoneySense Retired Money column, just published, looks at the commonly held dream of many in the FIRE community (Financial Independence/Retire Early): that of geo-arbitrage and retiring outside Canada to an exotic location with a much lower cost of living. Click on the highlighted text for the full column: Has the Pandemic ended the dream of Retiring Abroad?

As I note in the piece, places like Mexico, the Far East or parts of Europe have such a relatively low cost of living that average Canadians might be able to retire early just on the strength of CPP and OAS. Add in any employer pensions and registered or unregistered savings and that would be gravy.

The column looks in particular at two locations in Mexico that are quite popular with both American and Canadian expatriates seeking nicer weather and a lower cost of living. One is Lake Chapala, the subject of a new edition of a book by regular Hub contributors Akaisha and Billy Kaderli. The book, pictured on the left, is titled The Adventurer’s Guide to Chapala Living.

“Chapala isn’t the only town/city where living in Mexico is wonderful. There are so many from which to choose,’ Akaisha told me via email, “ We believe retiring abroad is still feasible, without a doubt.”

At one point my wife and I seriously considered leaving the Land of Snow and High Taxes (aka our Home and Native Land) for Mexico. We took one trip to Chapala and nearby Ajijc, and a few years later the more inland and mountainous San Miguel de Allende, more on which below.

However, as the years went by and we neared our Findependence Day (i.e. Semi-Retirement), we concluded that there was too much crime in Mexico for our liking and that we are for the most part quite content to live in our current home in Long Branch, Ontario, just steps from Lake Ontario.

Even so, and as the MoneySense column relates in more depth, we do know a couple who actually took the plunge and sold their Toronto home to start a new life in San Miguel de Allende. Five years ago, the Hub recalled that trip and how we ran into a former Financial Post colleague of mine, Dean Cummer, and his partner.

They visited Toronto recently and I got the chance to catch up over lunch with Dean, who became one of the main sources for the MoneySense column: my editor wanted to know whether the dream of Retiring Abroad is still alive in the Covid era. Continue Reading…