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 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…

Wealth & Happiness, Part 2: Happiness is a Thought and can be changed

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By Warren MacKenzie, for Canadian Moneysaver

Special to the Financial Independence Hub

In Part One of this series we mentioned how ‘living in the moment’ — that is being free of ideas of self and the things we wish for — is an opportunity for happiness.

In this part we will first explain how happiness comes from our thoughts, not our financial circumstances, and how making money usually generates more happiness than spending it does. We will then look at how money can buy happiness when you give it away, and how it’s not enough to manage money wisely: we also have to use our money wisely.

For example, let’s imagine two people with the same size investment portfolio living in almost identical apartments. In one case, the individual who may have experienced a windfall is overjoyed to be living on his or her own, while the other person, who may have suffered a financial loss, is sad and embarrassed to now be living in such a small apartment. One person is happy and one is sad. The difference is not based on their different circumstances it is entirely based on their thoughts about their situation.

In his book, The Art of Happiness, Dalai Lama says, “Once basic needs are met – the message is clear: We don’t need more money, we don’t need greater success or fame, we don’t need the perfect body or the perfect mate – right now, at this very moment, we have a mind, which is all the basic equipment we need to achieve complete happiness.”

Overcoming challenges

For most successful people, it’s their accomplishments that gives them the greatest happiness, whether that includes looking after their family, accumulating wealth, or showing resilience and problem solving through difficult situations. Successful people know that a happy life is not a life without problems or negative circumstances: rather it is one where we have the opportunity to overcome challenges and problems.

It’s important to realize that most often, the greater the challenge, the greater the happiness that comes from overcoming it. If parents make things so easy for their children that they never have to work hard and learn to overcome challenges, (including financial challenges) their children may not develop the positive self-image and confidence that comes from solving problems and creating their own financial security. Continue Reading…

The Case for Bonds

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Outcome Metric Asset Management

By Noah Solomon

Special to the Financial Independence Hub

Historically, investors have held bonds to diversify and mitigate the volatility of their portfolios. Conventional portfolios have sufficient allocations to low-volatility bonds to weather periodic bear markets in stocks. During the tech-wreck of 2000-02, the global financial crisis of 2007, and the Covid-crash of early 2020, bonds not only held up well relative to stocks, but actually produced gains, mitigating the pain investors experienced from large declines in stocks.

Over the past few decades, bonds have not only provided ample protection from bear markets in equities but have also provided reasonable returns for the privilege. During the 40 years from 1982 to 2020, 10-year U.S. Treasuries produced an average annualized real return of 4.71%.

The Ugly Truth

By any measure, the bond market’s one-two punch of healthy returns and portfolio insurance over the past several decades has been impressive. However, this experience has been highly anomalous from a long-term historical perspective.

The 4.71% annualized real return of 10-year U.S. Treasuries over the 40 years from 1981 to 2020 compares favorably to the corresponding return of only 1.36% for the 80 years beginning in 1941. Their returns over the past four decades look even more out of place when compared to -1.89% annualized real return for the 40 years from 1941 to 1980.

Bonds can also be less stable than stocks and just as vulnerable to extreme losses. Since 1928, the maximum peak-trough loss in real terms of 10-year U.S. Treasuries was -54.3% vs. -56.5% for stocks. Over the same time period, the worst rolling 10-year annualized real return for 10-year Treasuries was -4.7% as compared to -4.06% for the S&P 500 Index.

Bond bear markets can also last longer than those of stocks. Investors who bought Treasuries at the end of 1940 had to wait 51 years before they broke even in real terms. By contrast, the lengthiest period in which stocks remained underwater was the 13 years following the peak of the technology bubble in late 1999.

The current near-zero yields on bonds are likely to be an excellent indicator of what investors can anticipate for future returns. John Bogle, founder of The Vanguard Group, pointed out that since 1926, the yield on 10-year U.S. Treasury notes explains 92% of the annualized returns investors would have earned had they held the notes to maturity and reinvested the interest payments at prevailing rates.

The perils of investing in bonds are well summarized by legendary investor Warren Buffett, who in his 2012 annual letter to Berkshire Hathaway shareholders warned:

They are among the most dangerous of assets. Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal …. Right now, bonds should come with a warning label.

History also cautions against relying on bonds to mitigate portfolio losses when stocks decline. Notwithstanding that bonds provided much needed gains during the tech-wreck of 2000-2002, the global financial crisis of 2008, and the Covid-crash of 2020, stocks and bonds have been positively correlated in 55% of the 93 years from 1928 to 2020.

Putting history aside, the simple fact is that with current short-term rates at zero and 10-year Treasuries yielding 1.5%, it will be difficult for bonds to provide the same degree of protection (if any) in the next bear market. The math just doesn’t work!

From the beginning of 1928 through the end of last year, the annualized real return of the S&P 500 Index was 6.64%, as compared to 1.94% for 10-year Treasuries. Had you invested $1 in the S&P 500 at the beginning of 1928, by the end of 2020 it would have had an inflation-adjusted value of $396.03 vs. only $5.96 had you invested the same $1 in 10-year Treasuries. Put simply, the opportunity cost of maintaining a permanent allocation to bonds cannot be overstated.

Does this mean Bond Investors are Irrational?

The massive drag on portfolio returns over the long-term caused by a permanent allocation to bonds does not necessarily imply that investors who hold them are irrational.

Many investors may not have a sufficiently long investment horizon to weather crushing losses in bear markets and/or may be emotionally incapable of enduring large losses that can occur in portfolios that are heavily weighted in stocks. Continue Reading…

Can Dynamic Pension Pools strengthen Canadians’ Retirement Income Security?

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Image courtesy National Institute on Ageing

A new report published by the National Institute on Ageing (NIA) and the Global Risk Institute (GRI) being published today aims to help overcome the $1.5-trillion Decumulation Disconnect in the Canadian Retirement Income System.

Titled Affordable Lifetime Pension Income for a Better Tomorrow, the report makes the case for how Dynamic Pension (DP) pools can strengthen retirement income security for millions of Canadian seniors. Here is the link to the full report.

The urgency is apparent when you consider that 10 million Canadian baby boomers are now entering retirement: with longer life expectancies and a greater dependency on private savings to sustain them. As the report’s authors write, “it’s more important than ever to find solutions that will help retiring Canadians turn their accumulated savings into low-cost lifetime pension income.”

Bonnie Jeanne MacDonald/Ryerson/National Institute on Aging

Lead author Dr. Bonnie-Jeanne MacDonald, Director of Financial Security Research at the NIA, says fears that retiring Canadians’ savings won’t sustain them in retirement are “legitimate …  Financial markets, inflation and health expenses are just some of the big unknowns that retirees will need to face over 10, 20, 30 or even 40 years.”

According to the report, Dynamic Pension [DP henceforth] pools have the potential to transform the Canadian retirement landscape. Their goal is simple: to help people optimize their expected lifetime retirement income while ensuring they never run out of money. In other words, gurantee that they won’t run out of money before they run out of life.

Pooling Longevity Risk

While protecting individuals from outliving their savings (i.e., longevity risk) can be prohibitively expensive, the same protection becomes affordable when spread across a large group. Pooling longevity risk allows retirees to spend their savings more confidently while they are alive, says the report.

In a DP pool, pension amounts are not guaranteed but may fluctuate from year to year. This means retirees can stay invested in capital markets and benefit from the higher expected returns.

DP pools have a risk-reward profile that is fundamentally different from current options and products available for older Canadians: such as guaranteed annuities purchased through insurance companies or individually managing and drawing down savings from personal retirement savings accounts, says another of the report’s authors, Barbara Sanders, Associate Professor at Simon Fraser University,  “Retirees who are comfortable with some investment risk can stay invested in equity markets and reap the associated rewards, which is important in today’s low-interest and high-inflation environment.” Continue Reading…