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.

Learn why you should Buy This, Not That

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By Mark Seed, myownadvisor

Special to the Financial Independence Hub

Let’s face it, saving and investing should be simple.

  1. Save, automate your savings to buy stocks.
  2. Invest in stocks and/or low-cost products that invest in stocks to avoid mutual fund salespeople.
  3. Disaster-proof your life by having some cash stashed.
  4. Rinse and repeat.

But simple is not easy.

All too often, we humans love to make things far more complex than things need to be.

We’re wired that way unfortunately. Egos often get in the way. 

Given many people continue to struggle with personal finance, every day, there are tens of thousands of books published out there on this subject – building and maintaining a responsible investment portfolio is only part of the personal finance success equation…

Learn why you should Buy This, Not That

Sam Dogen (aka Financial Samurai) knows a thing or two about personal finance success.

Sam founded FinancialSamurai.com in July 2009 during the depths of the global financial crisis.

Sam’s goal through that site was to deliver and share a cathartic way to make sense of the chaos at the time. Fast forward to today, more than 90 million people have visited Financial Samurai, and tens of millions more have read his work on publications such as CNBC, Yahoo Finance, and Business Insider.

Sam was previously at Goldman Sachs and Credit Suisse for 13 years – but he’ll share more details below!

When Sam is not writing or playing with his kids, you can find him on a tennis court or softball field in San Francisco, or on My Own Advisor giving away a book!

Sam is a graduate of The College of William & Mary and received his MBA from UC Berkeley.

I got a chance to chat with Sam recently about his new book: Buy This, Not That – How to Spend Money Your Way to Wealth and Freedom.

Here is our interview below before Sam:

Sam, welcome to the site – I know you’ve left a few comments over the years and nice to see you back!

Mark, a pleasure. I enjoy reading about your personal finance independence journey in Canada and seeing you help others with their journeys at the same time as well!

Sam, maybe not everyone is aware of your financial journey and Financial Samurai beginnings. Can you share a bit of your bio with my readers? Where do you live, what have you invested in, and “how did you get here” to writing this book?

Sure thing, Mark.

I grew up in The Philippines, Zambia, Japan, Taiwan, and Malaysia before coming to America for high school and college at William & Mary. My parents were in the U.S. foreign service.

After college, I joined Goldman Sachs in NYC in their international equities department. It was a dream job, except for the fact I had to get in at 5:30 am and often leave after 7 pm! As a result, I decided to save and invest 50% of my after-tax paycheck so I could one day have options to escape.

In July 2009, I started Financial Samurai and helped kickstart the modern-day FIRE movement. It’s been great to see so many people embrace their financial independence journey since then. My definition of financial independence is having enough passive investment income to pay for your basic living expenses.

I decided to write Buy This, Not That because I felt it had to be written. When I started Financial Samurai, there weren’t a lot of personal finance bloggers with finance backgrounds. I noticed when I first got my book offer in early 2020, there weren’t many finance authors with finance backgrounds either! So, I decided to fill this hole and provide my perspective.

Instead of scratching the surface, I decided to go deep into many financial topics. I then tackled some of life’s biggest dilemmas many of us all face.

Learn why you should Buy This, Not That! Sam Dogen

Great stuff.

Sam, in your book, you wrote:

“My first hope with Buy This, Not That is to help you let go of the fear of making a wrong financial choice. Let that sink in: there are no wrong money choices, just as there are no perfect choices, only optimal or suboptimal.”

Talk to me about your investing and wealth-building journey. What mistakes did you make? What successes did you have? What did this teach you and what do you hope to pass along to others in the book?

Mark, I made the suboptimal choice of buying a vacation property I didn’t need in 2007. I got it for 15% off, but it ended up declining by another 40% during the financial crisis! Luckily, most of its value has recovered and I’ve been taking my kids there since 2018.

Not extrapolating my income into the future was my biggest lesson learned. I was paid very well in 2007 and thought my income was just going to go higher. Life is full of ups and downs. Therefore, please be conservative with your income and return forecasts.

One of the key takeaways from the book is to encourage readers to think in probabilities, not absolutes. Don’t think you need 100% certainty to make a choice. Otherwise, you’re going to miss out on a lot of great opportunities.

In The Psychology of Money, Morgan Housel wrote effectively:

You don’t have to be a perfect investor. Getting wealthy and staying wealthy is “about consistently not screwing up.”

I agree with this/have always agreed with this and this aligns nicely to your 70/30 decision making philosophy. Can you explain that for readers and why is that framework so important to you to convey in the book when it comes to investing and wealth-building?

Use my 70-30 decision-making framework to build wealth and make more optimal choices. The framework states that if you believe there’s a 70% probability or greater your choice is the correct one, go for it, while having the humility knowing that 30% of the time, you’re going to get it wrong. And when you do, you will learn from your mistakes and get better.

Once you start approaching everything with a probability matrix in mind, you’re going to gain a tremendous competitive advantage compared to those who don’t.

I like that.

Sam, I personally equate the definition of Financial Independence (FI) as your investments generate enough passive income to cover your day to day living expenses. I’m not into this Barista FIRE, etc. What’s your take? Agree? Disagree? Why?

Yes, since 2009, I’ve stated that being financially independent means having enough investment income to cover your basic living expenses. However, I think Barista FIRE is a reasonable stop gap where you can earn extra income and receive subsidized health care while working a traditionally lower-wage job.

But at the end of the day, don’t fool yourself. If you still need to work, then you are probably not financially independent.

When I left work in 2012 at age 34, I had about $80,000 a year in passive investment income. I knew I wouldn’t starve, but I also wasn’t 100% confident I was doing the right thing. Therefore, I had my wife, who is three years younger than me, keep on working until age 34. If everything worked out with my new adventure, she could join me. In 2015, she was also able to negotiate a nice severance and hasn’t been back to work since.

So, when did you realize FI (Financial Independence)?

In 2012 when I was 34. At the time, I had a net worth of about $3 million that generated about $80,000 a year in passive income. But the biggest catalyst was negotiating a severance that paid for 5-6 years’ worth of regular living expenses. My severance paid all my deferred cash and stock compensation over the next three years. I also had a private investment made in 2010 that wouldn’t come due until 2017 that was fully paid out. Continue Reading…

The 5 most important factors In your Decision to Retire

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By Fritz Gilbert, TheRetirementManifesto

Special to the Financial Independence Hub

A few years ago, I was working through my decision to retire. I was pretty obsessive about it and documented the many factors I was evaluating on this blog (stored in chronological order for your convenience).  After doing my homework, I decided to make the jump in June 2018.

In the four years since I’ve never regretted my decision.

The decision to retire is complicated and there are many factors to consider.  Consider them you must, however, so I’m listing the factors I consider most important and one which I consider essentially irrelevant.  To make your best decision on when to retire, it’s important to recognize all of the things that matter, as well as those that don’t.  Under each factor, I’ve included links to relevant posts for those of you who’d like to dig deeper.

The Most Important Factors

1.) Do you have Enough Money?

The first thing most people think about when they’re making the decision to retire is whether they have enough money to last for the rest of their lifetime.  Fair enough, and I’ll concede it’s way up on the list.  I’d warn, however, that having enough money is a necessary factor, but far from sufficient.

I’ve written many articles on evaluating whether you have enough money to retire.  Below are four that I’d recommend:

2.) Are you Mentally Prepared for Retirement?

Almost everyone thinks about money when they’re making the decision to retire, but far too few consider the non-financial factors.  If I were to choose one point to make from all the things I’ve learned in the 7 years of writing this blog, it’s that the non-financial factors are the most important for putting yourself on track for a great retirement. Important enough that I wrote an entire book on the topic.

If you’re thinking about retirement, the best advice I can give you is to spend time thinking about what you want your life to be in retirement.  Think about it at least as much as you think about the “money stuff.”  Once you’ve retired, I suspect you’ll realize #2 is actually the more critical factor.

If you’re married, have you and your spouse talked about your mutual expectations for your life in retirement?  How are you addressing any misalignments?  Trust me, you have some.  Take the time to find them now, and discuss how you’re going to work together to live the best years for both of you in retirement.

What Purpose is going to fill your days when you no longer have a boss telling you what to do?  Where are you going to live?  What are you going to do?  Important stuff, all, and a topic on which I’ve dedicated thousands of words.  If you’re still working, do yourself a favor and take a “mini-retirement” to think about the things that really matter before you take the plunge.

3.) Have you made a Realistic Spending Estimate?

In its rawest form, the decision to retire is a simple math problem.  Multiply your assets times a safe withdrawal rate, add any expected income, and see if the total covers your expected level of spending.  Given the importance of getting the correct answer to that formula, it’s critical that you spend some time developing a realistic spending estimate for your retirement years.  Since you’ve thought about what you’re going to be doing in retirement (#2), it’s a necessary exercise to track your pre-retirement spending for as long as feasible (I did 11 months), then make any adjustments for how you think it will change post-retirement.  Too many people “take a swag” on this one, but I strongly encourage you to resist that temptation and give it a lot of focus as you’re making your decision to retire.

Best Canadian stocks are usually well-established Blue Chips with history of Stability & Dividend Payments

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Good Canadian stocks of blue chip companies can give investors an additional measure of safety in volatile markets. And the best ones offer an attractive combination of moderate p/e’s (the ratio of a stock’s price to its per-share earnings), steady or rising dividend yields (annual dividend divided by the share price) and promising growth prospects.

We feel most investors should hold the bulk of their investment portfolios in blue chip investments. And most of these stocks should offer good “value” — that is, they should trade at reasonable multiples of earnings, cash flow, book value and so on. Ideally, they should also have above average-growth prospects, compared to alternative investments.

Find a middle ground with p/e’s  

One of the biggest mistakes investors make is buying low p/e stocks, thinking that will ensure they’re getting a “bargain.” Sometimes that’s true, but sometimes a low p/e stock is a sign of danger.

As for high-p/e stocks, we generally only recommend them as buys if we feel they have above-average investment appeal and deserve an above-average p/e.

Rather than focusing on low p/e stocks and avoiding high p/e stocks, you will generally make more money in the middle ground. That is, invest mainly in well-established stocks that have an appealing long-term growth record — and a moderate p/e. These are the stocks we favour in our Successful Investor approach. In our experience, they provide above-average returns in the long run. That’s because they provide nice gains in rising markets, and they also tend to hold up well when the market declines.

Buy shares in banks, which have a history of stability 

On the whole, the best Canadian banks to invest in trade at attractive share prices. Because they are growing, yet cheaper in many respects than other stocks, they give conservative Canadian investors a near-ideal combination of pluses: above-average dividend yields and track records; low to moderate per-share price-to-earnings ratios; and above-average long-term capital gains.

That’s why we’ve continually recommended buying Canada’s top five bank stocks since the 1970s. It’s also why that advice has paid off so nicely.

Canadian bank stocks have long been one of our top choices for growth and income, and we recommend that most Canadian investors own two or more of the Big-Five Canadian bank stocks — Bank of Nova Scotia, Bank of Montreal, CIBC, TD Bank and Royal Bank. That’s in large part because of their importance to Canada’s economy.

Canadian banks stocks have been some of the best income-producing securities.

  • Look for Canadian bank stocks with consistent dividends.
  • And remember bank stock dividends are a sign of investment quality.
  • They also can grow.

Look for value stocks with a history of success to add good Canadian stocks to your portfolio

At the core of the value investing approach is the ability to identify well-financed companies that are well-established in their businesses and have a history of earnings and dividends. Continue Reading…

Wrapping our Heads around Income

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Image: Franklin Templeton/iStock

By Franklin Templeton

(Sponsor Content)

For those who depend on investments to provide a portion of their yearly income, 2022 has been a tough slog, to say the least; but take heart: it’s almost over.

Of course, no one can say with certainty that 2023 will be better. Persistently high inflation, ongoing central bank monetary tightening and the increasing likelihood of a recession have made for volatile markets, and this uncertainty could continue well into next year.

Under the circumstances, it’s not surprising that weary investors have poured money into GICs (guaranteed investment certificates) and other cash equivalents. Even with today’s higher interest rates, however, returns remain well below the inflation rate, and unless held in registered accounts, they are fully taxable. Liquidity can also be problematic as most GICs require a locked-in period, with penalties for redeeming before maturity. If you need flexibility, you’ll pay for it with lower returns.

Reliable income requires diversification

Without doubt, GICs have their place: but the proverbial advice about placing all your eggs in one basket still applies. Diversification is as important for income portfolios as it is for equities, and the sources of income should be as uncorrelated to each other as possible. One way to easily bump up the level of income diversification is through a managed program (sometimes referred to as a wrap account) which bundles together different investment vehicles, strategies, styles and portfolio managers in one or more “umbrella” portfolios directed by a governing team of portfolio managers.

20 years of income generation

One of the earliest programs managed in Canada was Franklin Templeton’s Quotential program; in fact, this year marks the program’s 20th anniversary. Of its five globally diversified, actively managed portfolios, the aptly named Quotential Diversified Income Portfolio (QDIP) is designed to generate high, consistent income from multiple uncorrelated sources. Canadian and international fixed income assets form the core of the portfolio, but for added flexibility and performance enhancement, about one-quarter of the portfolio is invested in blue-chip Canadian and international equities selected for their income-generating  dividend yields and long-term growth potential.

“T” is for Tax Efficient

Reliability solves much of the income puzzle, but an important missing piece is the tax burden. Taxes can eat away at the income generated from investments, especially if you are still earning a salary or receiving significant income from other sources. All Quotential portfolios are available in Series T, which offers a predictable stream of cash flow through monthly return of capital (ROC) distributions. From a tax perspective, ROC is treated more favourably than interest or dividend income. The tax efficiency also extends to the tax deferral of capital gains that can help you better plan for when you pay tax. For snowbirds and others who spend extended periods south of the border, distributions from Series T are available in U.S. dollars for a number of funds, including Quotential Diversified Income.

It’s important to stress that with Series T, capital gains taxes are deferred, not eliminated. Continue Reading…

Retirement Case Study: Marcus and Lee

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Photo by SHVETS production

by Patricia Campbell, Cascades Financial Solutions

(Sponsor Content)

Ages: 60 & 55

Province: Ontario
Professions: Capital and Facilities Planning Director & Senior Data Analysist

Primary Goal: Determine annual retirement income, save taxes, and plan for travel.

Marcus and Lee were on track for retirement in 5 years, but an early retirement offer from Marcus’ company prompted them to consider retirement earlier than originally planned. We investigate their concerns in this retirement planning case study using Cascades Financial Solutions.

The Issues

Unexpectedly, Marcus was forced into retirement by his company due to a severe downturn in business. The couple thought they had at least five more years before they would need to make a decision regarding retirement.

Over their careers, Marcus and Lee prioritized saving money each year in their Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA). In addition, they both had a joint savings account, and Marcus had a defined benefit pan but, was it enough?

Their Concerns

How much retirement income will they have? Did they have enough money for Marcus to retire early? Lee will continue working until she is 60 but was depending on Marcus to have 5 more years of income and savings. 

How could they minimize the taxes on their retirement? The couple would like to explore tax efficient strategies and are unsure how to approach this.

Will they be able to travel? By retiring early Marcus is concerned about their future travel plans.

The Plan

Marcus and Lee realized that this was a critical time and needed help from someone with extensive experience in retirement income planning.

Marcus and Nicole decided to seek financial planning advice. The financial planner they found uses Cascades Financial Solutions.

The Cascades financial planning process included the below steps:

Gather fact find data. This included the details of each RRSP, TFSAs, defined benefit plan and any joint savings, their investments large purchases they plan on making in the future.

Consider ages for CPP and OAS options. The next step was to run a few retirement income scenarios which included adjusting the start age to receive CPP and OAS.

Choose a winning strategy. After running a few scenarios which included receiving CPP at 60 vs. receiving at 70 they were able to determine a sustainable withdrawal plan and maximize taxes savings over the course of their retirement.

Execute the plan. Finally, it was time to start putting the new retirement income strategy in place. Seeing the plan on paper, gave the couple the confidence and financial security they needed to be at ease.

The Results

Marcus was delighted retiring early knowing their hard work and saving for a rainy day paid off. While Lee wasn’t quite ready to retire, she was happy Marcus can enjoy a few years of retirement before she did. When they are both retired, they plan to take two international trips each year and spend plenty of time with family.

The financial planning process helped Marcus and Lee in several ways: Continue Reading…