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.

Rethinking Retirement (RIP) and FIRE

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

Today’s post will weave together retirement as seen in a more traditional sense and those who practice F.I.R.E. – an acronym for financial independence and retire early. In the Globe and Mail Brenda Bouw offered that the COVID pandemic is giving early retirees second thoughts, they’re going back to work. On FiPhysician, Dr. David Graham offers that traditional retirement is dead – RIP. The old approach will fall on its face. We might run out of money before we run out of time. We will also see how Justwealth has crushed mutual funds over the last five years. Enjoy. We’re rethinking retirement on the Sunday Reads.

We’ll start with rest in peace RIP retirement on FiPhysician. Or, is retirement an acronym? Of course on this site Dr. Graham inspired – how does the pandemic end?

Well, with the common cold.

We no longer work til we drop dead

That retirement piece shows how retirement risks have changed. We are no longer working until we drop dead Dr. Graham offers. We are living longer (generally are much more healthy) than past decades and centuries and we will spend decades in retirement. The traditional retirement funding approach used by our parents and grandparents will not get the job done. Traditionally, social security (CPP in Canada) a pension and home value would do the trick. That requires a re-think offers Dr. Graham.

For starters those government pension won’t keep up with ‘real inflation’ compared to what the government reports. Lots of fudging of ‘official’ numbers on that front.

So, with the three-legged stool of traditional retirement, you cannot keep up with inflation over longer periods of time. Retirement is an anachronism because you cannot fund it.

On the future of retirement and how we might best prepare …

Consider that which is currently changing the world of employment: smart phones and the gig economy.

You won’t retire in the future; you will monetize your hobby and have gigs from your smart phone. After all, we must move from a knowledge-based society to a wisdom-based one. Everyone has knowledge at the tip of their fingers all the time. Who has all the wisdom?

So funny, as I am personally living that now, and by design. I am living proof as are many in today’s new normal for “retirement”. I have the portfolio, I monetize any knowledge or wisdom that might have value. Any gov pension will be a bonus that will not be counted on in any meaningful way. We have real estate.

Protect the portfolio from inflation

I am also of the school that we can protect our portfolio income assets from inflation. And research shows that we need the true inflation fighters such as gold and other commodities and real assets. Continue Reading…

How the Asset Allocation in your ETF can help drive Returns  

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By Kevin Prins, BMO ETFs

(Sponsor Content)

“Diversification” is a word that gets thrown around a lot these days: and for good reason. A diverse and balanced portfolio can help provide more consistent returns versus individual securities. The asset allocation of your exchange traded funds (ETFs) is of paramount importance to help provide more consistent returns and targeting an appropriate portfolio risk level.

The good news is that ETF providers have provided choice in a range of all-in-one portfolios that are delivered as an ETF on the exchange. Now you can choose from a diverse mix of both domestic and foreign equities and fixed income.

Coupled with your specific investment goals and tolerance for risk, you can rather easily determine which ETF is a good fit for you by considering its strategic asset allocation relative to your needs.

Strategic Asset Allocation vs. Chasing the Asset Class with the highest return

Predicting the top performing asset class year to year is extremely difficult and, when poorly executed, can lead to disappointing results for your portfolio.

But with a diversified Asset Allocation ETF, you can take all the guesswork out of investing.

In other words, your portfolio’s fortunes aren’t tied to a single asset class, making it far more resilient, while simultaneously increasing your chance of having exposure to markets when they have bull runs.

Many investors who try to do it themselves will rely on friends, market research, or maybe even an investment blog to help them pick the securities that will comprise their portfolio.

But this can be time-consuming and risky. Not to mention that these portfolios tend to be under diversified.

You’ll gain exposure to both fixed income and equities with a balanced asset allocation ETF. What’s more, you can avoid one of the common pratfalls of overweighing your portfolio with Canadian securities and instead take a global approach, again helping improve your portfolio’s balance.1

You’ll also be exposed to both cyclical and defensive sectors, ensuring that your portfolio is designed to perform well in a variety of economic conditions.

The fixed income/equity balance is of importance, as this has the potential to bolster your portfolio with both security and reliable income, while also adding growth potential and inflation protection.

 

It’s worth stating that a portfolio’s strategic asset allocation will more than likely have a higher impact on its performance than even the individual stock selection, as the graphic above indicates. 2

That’s because opting for a conservative, balanced, and or growth portfolio and investing in asset classes based on your preferences will play the determining role in how to allocate your investment.

Whatever your investment goals, an approach predicated on strategic asset allocation can help you reach them.

8 Reasons to look at Asset Allocation ETFs 

  1. Simplified Investing: An all-in-one investment solution that provides instant market exposure
  2. Broad Diversification: Holds a basket of ETFs that in themselves hold many securities
  3. Professionally Constructed: Leverage the asset allocation experience of industry professionals
  4. Automatic Rebalancing: This keeps one’s investment portfolio on track to risk and return objectives Continue Reading…

New Decumulation option on the horizon in Canada

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By Andrew Gillies

Special to the Financial Independence Hub

Employees with a workplace pension plan are part of a lucky minority. In the Canadian private sector, less than 25% of workers currently have an employer pension plan.  Most often, the plan offered is a Defined Contribution (DC) arrangement.

DC plans are appealing to employers because they pose few legal or financial risks. Within a typical DC scenario, both the employee and employer contribute money into the employee’s individual account. Come retirement, the onus is on the employee to figure out how to convert these pension savings into steady income.

Decumulation game not easy to win

The name of this game is “Decumulation.”  It’s not an easy game to win. Retirees of DC plans are at risk of burning through their savings too quickly, leaving them without sufficient income in their later years. Conversely, financially conservative retirees may spend too little of their pension savings at the expense of a comfortable retirement.

One foolproof decumulation option DC retirees have is to buy an annuity from an insurance company. An insured annuity is a financial product that retirees can transfer some or all of their pension savings to in order to receive regular, guaranteed payments until death. The downside? This guarantee doesn’t come cheap. The average retiree who purchases an insured annuity can expect to forfeit as much as 20-30% of their pension savings to pay for the promise of predictable lifetime income with no future upside.

More affordable lifetime annuities

Fortunately, a new more affordable type of lifetime annuity will soon be offered through registered DC plans in Canada, and it’s a game changer. The Variable Payment Life Annuity (VPLA) was recently proclaimed into law and is poised to provide an excellent decumulation option for members of registered DC pension plans.

Within a VPLA framework, investment and mortality risks are pooled amongst many retirees, rather than insured at the individual level. This cooperative approach makes the VPLA significantly less expensive, while still delivering reasonably predictable lifetime retirement income.

The trade off, of course, is the “variable” element of the VPLA as payments may fluctuate due to market volatility or mortality experience within the pool. Still, without an insurance company taking large profits, a VPLA will generally pay out a monthly pension substantially greater (20-30% greater) than a traditional insured annuity while retaining future upside potential. Continue Reading…

Retired Money: Is “Core & Explore” too dangerous for retirees and near-retirees?

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My latest MoneySense Retired Money column revisits the topic of Core & Explore. You can find the whole column by clicking on the highlighted headline here: Rethinking Core & Explore.

If the image on the left looks familiar, it’s because we used it last week to illustrate a republished blog on Explore by Michael J. Wiener, the blogger behind the popular Michael James on Money blog.

Go back to a couple of my Retired Money columns the last year and you’ll see I touch on the topic of speculation for retirees more than once, usually couched in the context of Core & Explore.

See for instance these pieces: Should Retirees Speculate? and How to Master Core & Explore.

“Core” is the prudent long-term strategy inherent in the MoneySense ETF All-Stars: low cost, diversified across geographies and asset class. Fully takes advantage of the “only free lunch:” that of broad diversification.

“Explore” on the other hand, is the polar opposite. The theory is that if you’ve taken care of 80 or 90% of your “Core” or Serious Money, you can go crazy with the other 10 or 20%, by “scratching the itch” of taking flyers on all those crazy things we’ve seen lately, like SPACs, cryptocurrencies etc., nicely surveyed by CFA Steve Lowrie in this recent blog: SPACS, NFTs and another Tech-inspired Silly Season.

Of course, as long as markets keep soaring, it’s hard not to love assets like Bitcoin or Ethereum, which may have tripled or quadrupled in a matter of months. Anyone who bought Tesla a year or two ago, or the ARK ETFs that were roughly 10% in Tesla and many comparable high flyers, was looking like an investing savant by the end of 2020, including Yours Truly. Continue Reading…

What the Olympics can tell us about managing Retirement portfolios

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Adrian Mastracci, “fiduciary” portfolio manager at Lycos Asset Management touches on applying Olympian wisdom to your retirement portfolio.

Let’s reflect on the Olympians who recently competed at Tokyo. They deserve praise for braving years of preparation, training, commitments and pandemics.

Striving and competing to be best in their chosen pursuits. Regardless of outcomes.

I especially appreciate long distance events like cycling, running, swimming and rowing. They demand a wealth of endurance and perseverance, much like retirement portfolios.

Athletes often have to reach down deeper to muster more bursts of adrenalin. Just when it seems there is little, if anything, left in the tanks.

My top takeaways

Investors can draw some parallels from hard working Olympians. Wisdom from the Olympiad is relevant and applicable, particularly to long-term investing.

I summarize my top takeaways. Successful athletes require:

• Much dreaming and sketching out of personal goals.

• Setting specific, well thought out strategies.

• Disciplined game plans that realize on their dreams.

• Patience for the roller coaster of setbacks and achievements. Periodic tweaking of their action plans.

• Time horizons to learn and master their quests.

Olympians make wonderful ambassadors for the investing profession. I encourage investors to take a few moments and apply Olympian wisdom to the precious nest egg.

Athletes make choices and sacrifices along the way in their quest for Olympic goals. Investors balance choices between spending for the moment and saving for the long haul.

Risk is an inevitable part of the Olympics, as it is in long term investing. Athletes try different training plans, much like investors try a variety of strategies.

Investors can improve their long term portfolios with these four pearls of wisdom:

  •  Pay attention to issues that you can control:  risks, diversification, asset mix and investment quality.
  •  Ensure that no investment can cause serious portfolio damage: losses are typically your biggest destroyers of wealth.

Buy and sell methodically over time – timing the markets is a low percentage strategy.

Always expect the unexpected – a positive mindset is best for making portfolio decisions. Stick to simpler game plans. Skip the fancy moves.

All the very best to the athletes. May they treasure the accomplishments and cherish the memories.

 

Adrian Mastracci, Discretionary Portfolio Manager, B.E.E., MBA started in the advisory profession in 1972. He is portfolio manager with Vancouver-based Lycos Asset Management Inc.  

 

 

 

Information provided is intended for educational purposes only. Copyright ©2021, Adrian Mastracci. All rights reserved.