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 generate Passive Income 

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Image Credit: Pixabay

By Mike Khorev

Special to the Financial Independence Hub

Many of us strive for financial security; luckily, passive income investments open up the opportunity to make extra money on the side. 

All you need is the willingness to put in some fundamental groundwork: you don’t necessarily need savings to kickstart your investment. There are plenty of options when it comes to generating passive income that go far beyond the realms of compound investing. Here are some fresh ideas to get you started.

1.) Investments

Exchange-traded funds (ETFs)

Exchange-Traded Funds, known as ETFs, are a great way to invest in the stock market without needing to research individual companies. Investing in ETFs provides both capital gains and dividends. Diversify your investments to receive the maximum benefit. ETFs are rather low maintenance and yield a lower risk than regular equities.

Dividend-paying stocks

Feel the benefits of dividend stock investments with a range of stocks yielding up to 5% dividends. The hardest part is knowing which stocks are worth investment. The best way to generate larger profits is to choose dividends that come with franking credits. Stock market unpredictability is no secret, be willing to face a sudden rise and fall in value or cut dividends altogether.  

Robo-advisors

If you’re looking for an affordable financial advisor to manage your investments, Robo-Advisors could be for you. They personalise automated trading decisions based on your financial targets, limits and time frames for a fraction of the cost. They are one of the most passive forms of income. 

2.) Real estate

Rental income

Rental yield can be one of the most profitable forms of passive income. Experts state that small apartments containing 1-2 bedrooms have more success on the market generating returns of over 8%. Real Estate Agents will handle legal documentation, rent collection, and advertise your property for a recurring fee of 5-12% of the monthly rent.

Airbnb

Airbnb is a thriving marketplace with host’s estimated monthly earnings sitting at $924 per month. While properties are free to list, hosts are charged a 3-5% service fee and are liable to income tax. Many hosts invest earnings into outsourced housekeepers to maintain passiveness. 

Real estate investment trusts (REITs)

REIT investments are perfect for those who are interested in real estate without the responsibility of sustaining individual properties. Typically, REITs support non-residential buildings such as offices, apartment complexes, and retail centres. Commercial buildings are famous for yielding large profits, passive income will be paid in the form of dividends.

3.) Content creation and advertising

Affiliate marketing

Affiliate links are more negotiable than ever, not only do they support affiliate businesses, they are also a manageable form of passive income. Invest some time into digital content creation that generates healthy volumes of traffic. Aim to recommend products you truly believe in to build a trusting relationship with your audience and boost clicks.  Continue Reading…

Is everyone thinking of Retiring?

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By Dale Roberts, Cutthecrap investing

Special to the Financial Independence Hub

It’s just a coincidence perhaps. But much of my blog and reads for the week research landed on that retirement theme. Everyone’s thinking of retiring or writing about retirement. And why not? That is a big end goal for most of us; some form of financial freedom. This Sunday Reads post offers a nice slice of retirement thinking, from the emotional to the money side of things. And of course, there’s some non-retirement ‘stuff’ in here as well.

This is a very good topic and post on My Own Advisor – the emotional side of retirement. In fact on this site I wrote an article that offered that waiting for your spouse was the hardest part of retirement.

Mark offers up on that period after the retirement honeymoon stage (after year one) …

At this point in retirement, the honeymoon is over and potentially it isn’t as enjoyable for some as they may thought.

Maybe some folks go back to work – as part of FIWOOT [Financial Independence: Work on own Terms]. There are only so many rounds of golf you can play …

I’ve read feelings of disenchantment can set in for some. Even depression. That’s certainly something I wish to avoid. By maintaining some form of work into my routine (may or may not be daily), it is my hope that I can stay active (socially, physically, cognitively) to support my health in early retirement and far beyond.

We certainly have to take greater care when we design our life in retirement. We need to be busy and we have to have purpose – from my life experience and from many studies. Having the money to retire in some form is just the half of it, or less.

The waiting is the hardest part

In my post link above, I touched on my first taste of semi-retirement experienced alone. My wife still works and will likely work for a a few more years. I also took off down east to be with my daughter as I launched this blog …

That said, I got a good taste of that ‘waiting’. And as Tom Petty (RIP) sang ‘The Waiting Is The Hardest Part’. While I have a very generous amount of loner in me I was surprised at how uncomfortable a feeling that was – that working alone and being alone for many hours on end. I couldn’t wait for my daughter to finish work and head up to the cottage for dinner and a walk along the beach.

I may have got a taste of what if feels like to make that transition.

The Boomers Retire

On the retirement front Jonathan Chevreau takes a look at a new edition of The Boomers Retire. The book is co-authored by Alexandra Macqueen, a Certified Financial Planner who co-authored Pensionize Your Nest Egg with famed finance professor Moshe Milvesky. David Field is an investment advisor and financial planner and co-creator of the CPP Calculator.

From Jonathan’s post on MoneySense …

“That’s just responding to the reality of retirement income planning for the growing numbers of the ‘pensionless’,” Macqueen says. “If you don’t have lifetime income, you’ll need to create it or take your chances. Whatever you decide, here’s a collection of the relevant facts, principles and issues you’ll need to take into consideration when you’re making your plan.”

While the book is written for advisors and planners, it is also a good read for the rest of us offers Jon.

Of course Alexandra is no stranger to this site. A retirement and pension expert Alexandra penned one of the most read (and most important) posts on this site.

Must read: Defined benefit pension planning. Bad advice could cost you your retirement.

And the Maple Money Podcast is on point this week as well with how to design your retirement lifestyle, with Mike Drak. Mr. Drak is a co-author of retirement heaven or hell, which will you choose? Continue Reading…

Lack a DB pension? Pros and Cons of the Purpose Longevity Fund

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By Mark and Joe

Special to the Financial Independence Hub

Hello readers of the Financial Independence Hub! We are the founders of CashflowsandPortfolios.com,  a free resource dedicated to helping DIY investors in getting started with their portfolio right up to planning efficient withdrawal strategies during retirement.

We are honoured to have been invited by Jon Chevreau to contribute a piece on a new income product for retirees: the Purpose Investments Longevity Fund.

If you are close to retiring or already a retiree, you’ve likely thought a lot about the following questions:

  1. Did I save enough for retirement?
  2. How will I generate sufficient income for my retirement?
  3. How long will my money last?

If you are lucky enough to have worked for a Government entity for 25-30 years, then you are probably not too worried about funding your retirement.  However, for the rest (most) of us, we need to save and invest on our own over the long-term. If that’s not enough, we then need to figure out ways to decumulate our savings as efficiently as possible.

For DIY investors, there is not much in the form of “forever” payments until death, except of course Canada Pension Plan (CPP) and Old Age Security (OAS). We consider these as one of the three pillars of retirement income for Canadians.

Another common source of “forever” income that acts like a government defined benefit (DB) pension are annuities: which are guaranteed by insurance companies. With annuities, investors are trading their capital for a steady income stream, which is essentially a DB pension.

Why aren’t annuities more popular? For DIY investors, it’s likely because of the fact that you are giving up your capital for a yield (currently around 4-5%) that can be obtained by your own DIY portfolio (see below for an example).

So what if there was a product out there that would provide:

  1. Income for life
  2. A yield higher than annuities
  3. An option to “sell” the product to regain some of your invested capital if needed?

That’s the opportunity and challenge that Purpose Investments has taken on with the creation of their latest mutual fund: The Longevity Pension Fund.

There has been a lot of buzz about the Purpose Investments Longevity Pension Fund and for good reason:  it solves a number of big problems that retirees face.

What is the Longevity Pension Fund and what are the pros and cons of owning such a fund?

Pros and Cons of the Longevity Pension Fund

At a high level, the Longevity Pension Fund is a cross between a balanced index mutual fund (47% equities/38% fixed income/15% alternatives), an annuity, and a defined benefit pension. While the fund does offer income for investors, a solid yield, and an option to “sell” the product if needed, these potential benefits must be considered with some drawbacks. As always with financial products, the devil is in the details.

With the basics out of the way, what are the PROS and CONS of the fund?

PRO – Reduces longevity risk (i.e., outliving your money) by offering income for life, but without the guarantees

As mentioned, the Longevity Purpose Fund is a mutual fund that any investor will be able to buy. Once purchased, and the investor is 65 or older, the fund will pay a distribution for life (at least that is the plan). Purpose Investments has stated that the 6.15% yield may sound high, but to maintain that yield they would only need to achieve an annual return of 3.5% net, which is well below historical returns for a common 60/40 stock/bond balanced portfolio.

Combined with mortality credits (investors who die sooner than expected, leaving their money invested in the fund for other investors), Purpose Investments has stated that 6.15% is conservative and can possibly go higher in the future.

PRO – You can get some of your investment back

With annuities and defined benefit pensions, you don’t typically get your contributions back. With this Longevity Fund, if you sell the fund you will get your initial investment minus any income payments. For example, if you have invested $100k into the fund, and have been paid out $10k, then you get back $90k if you sell. At a yield of 6.15%, essentially you can get some capital back up to 16 years of being invested in the fund. After that point, co

nsider yourself invested for life.

PRO – The taxation of the distributions will be tax efficient

While the fund is available for all kinds of accounts — including tax-free savings accounts (TFSAs) and registered retirement income funds (RRIFs) — potentially the best home for this fund could be in a taxable account. That is because monthly income distributions in the first year are expected to be roughly half a return of capital (RoC) with the remainder from capital gains, dividends and interest. This means that in a taxable investment account, the distributions will be tax-efficient (much more so than a defined benefit pension payment).

PRO – No Binding Contract

A key feature of this Longevity Pension Fund is a script from the annuity playbook: mortality credits. Similar to an annuity, you are participating in a pool of credits: those that die. When you die, your estate gets your initial contribution minus the total amount of income payments. The investment gains generated by your investments over the years stay in the fund and are used to top up monthly payments for everyone else.

Unlike an annuity though, you can get out of the fund: it’s not a one-way binding contract.

From Purpose:

“Unlike many traditional annuities or other lifetime income products, the Longevity Pension Fund is not meant to feel like a binding contract. You can change your mind and access the lesser of your unpaid capital** (i.e., your invested capital less the distributions you’ve received) or current NAV. Your beneficiaries are entitled to the same amount if you pass away. Once your cumulative distributions surpass your invested capital, there will no longer be any redeemable value left. Please speak to your advisor or see the prospectus for further details.”

The fund is also designed similar to many pension plan funds or funds of funds:  a balanced mix of stocks, bonds and other investments that should* meet their income obligations to unitholders.

*Target income is just that. This fund does not offer an income guarantee.

CONS – The fund does not pass onto heirs

As mentioned above, the mortality credits are how this fund will sustain its yield into the future, which also means that the fund and its payout do not pass onto your spouse/heirs. For investors with a spouse/heirs, this is one of the largest drawbacks of the Longevity Pension Fund.

CONS – The distributions are not guaranteed

The monthly payments seem juicy right now but the Longevity Pension Fund is not like an annuity whereby income is guaranteed for life; the 6% or more income target is just that: a target. Continue Reading…

Misguided thinking about Dividend Investing

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I’ve received an uptick in emails and comments from investors about dividends and so I thought I’d address some common misconceptions around dividend investing.

One reader in particular wanted to know if he should take the commuted value of his pension ($750,000) and put it all in Enbridge stock because it was yielding around 6.5%. That reminds me of the reader who, several years ago, asked if he should borrow money at 4% to buy Canadian Oil Sands stock that was paying an 8% dividend yield.

Related: How did that leveraged investment work out?

I shouldn’t have to tell you why it’s not sensible to put your entire retirement savings into one stock – dividend payer or not.

Most comments were much more sensible and reflected what I perceive to be some misguided thinking about dividend investing.

Dividends + Price Growth = Magic?

Some companies pay a dividend to shareholders. Some do not. Investors shouldn’t have a preference either way.

Amazon doesn’t pay a dividend, focusing instead on reinvesting their profits back into their business for more growth opportunities.

Apple, on the other hand, is awash in cash thanks to the tremendous success of the iPhone and decided to start paying a dividend in 2012. It likely cannot reinvest or grow fast enough to keep up with its cash flow and so it returns some of that cash to shareholders.

Investors shouldn’t prefer Apple to Amazon just because of Apple’s dividend policy.

But what happens when a dividend is paid? The value of the company decreases by the amount of the dividend. That must be true, since the dividend didn’t just appear out of thin air – it came from the company’s earnings.

Company A and Company B are worth $10 each. Company A pays out a $1 dividend, while Company B does not.

Company A is now worth $9, and its shareholders received $1. Company B is still worth $10 and its shareholders received $0.

But some investors do seem to think the dividend comes from thin air and that it does not reduce the value of the dividend paying company.

Consider this example: Let’s say expected stock returns are 8% per year. The average dividend yield from all stocks (both non-dividend payers and dividend payers) is around 2%. That leaves 6% to come from the increase in share prices or capital gains.

Shopify doesn’t pay a dividend. You could consider its expected annual return to be 8% (ignoring the extreme dispersion of possible outcomes for a single stock), but all 8% would come from increases to its share price.

Enbridge has a dividend yield of 6.5%. Should we expect its price to also increase by 8%? Of course not. It would be more reasonable to expect price growth of 1.5% (again, ignoring the extreme dispersion of possible outcomes).

Here’s a more diversified example featuring Vanguard’s VCN (Canadian equities, represented by the yellow line) versus iShares’ CDZ (Canadian dividend aristocrats, in blue):

VCN vs CDZ

My review of The Boomers Retire

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My latest MoneySense Retired Money column reviews the new fifth edition of The Boomers Retire by certified financial planners Alexandra Macqueen and David Field. Click on the highlighted headline here to retrieve full article: Fresh takes on the challenges facing baby boomers as they approach retirement.

As I note in the column, the original edition of The Boomers Retire (which I read at the time) was by Lynn Biscott and was published back in 2008.

Macqueen and Field are both CFPs and the book is aimed at both financial advisors as well as their clients, as indicated in the book’s subtitle.

Clearly, retiring boomers constitute a massive potential readership. I myself co-authored The Wealthy Boomer, way back in 1998. At that time, baby boomers may have started to worry about Retirement but most, including myself, would have been squarely in the Wealth accumulation camp.

Wealthy Boomers now well on way to transition to Decumulation

Here in 2021, Decumulation is the emerging financial focus of Baby Boomers, many of whom will already be retired or semi-retired, and considering new decumulation solutions like the Purpose Longevity Fund, which this site has looked at more than once. (here via Dale Roberts and here via another MoneySense Retired Money column.) Continue Reading…