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.

8 experts on the first step in Retirement Planning

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There are many articles about retirement planning written by qualified financial planners and advisors.

But what about the first step in retirement planning? Where should you even begin? And, what do people like you (small business owners, business professionals) have to say in addition to the advice from a financial planner?

We asked hundreds of people the same question: What is the first step in retirement planning? Here are some of the best tips and answers we received to the question.

Create a Retirement Budget

Retirement planning is about determining how much you need to live the life you want. A smart first step in retirement planning is creating a retirement budget. You’ll need to identify the amount of money you’ll have coming in during retirement, how much it will cost to enjoy the retirement you have in mind and the amount of debt you have. The last thing you want is a financial surprise in retirement, and creating a retirement budget is one healthy step to putting a solid plan in place. — Carey Wilbur, Charter Capital

Determine Retirement Age

In order to set yourself up for success, you should start planning for retirement early. By extending your runway, you can start saving money early and investing that money in areas that will make retirement even more comfortable for you. The best place to start is by determining what age you want to retire and how much money you will need each year to maintain your retirement. — Blake Murphey, American Pipeline Solutions

Get Curious

Reading The Richest Man In Babylon at 19 years old inspired me to start thinking about money. Next came books like Think and Grow Rich by Napoleon Hill, I Will Teach You To Be Rich by Ramit Sethi, The Millionaire Next Door, and many more. I think the first step in retirement planning is getting genuinely curious about the topic. Many people will labor over compound interest calculators and investment decisions, but if you can find something that ignites your interest, doing the hard stuff like saving and sacrificing becomes a little easier. — Brett Farmiloe, Markitors

Figure out where you are now

When planning for retirement, figure out where you are now, or your starting point. Far too many people focus solely on the endpoint (their retirement number) without fully examining where they are today. Imagine you’re taking a road trip and want to get to Kansas. How you get there depends a lot on where you’re starting. If you’re starting in New York, the route will be a lot different than if you’re starting in Montana. The same is true with finance. Overspending, not contributing enough to retirement, contributing to the wrong accounts, or paying too much in fees will add unnecessary headwinds to your trip. As uncomfortable as it may be, you need to examine your financial situation with cold objectivity. — James Pollard, The Advisor Coach LLC

Create Five-year Goals

The first step in planning for retirement is determining where you want to be financially once you hit your retirement age. Continue Reading…

Owning today’s Long-Term bonds is crazy

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By Michael J. Wiener

Special to the Financial Independence Hub

Today’s long-term bonds pay such low interest rates that it makes no sense to own them.  There is virtually no upside, and rising interest rates loom on the downside.  Warren Buffett called this “return-free risk.”  He was right.  Here I explain the problem and address objections.

As I write this, 10-year Canadian government bonds pay 0.623% interest.  If you invest $10,000, you’ll get a total of only $623 in interest over the decade, and then you’ll get your $10,000 back.  This is crazy.  Even if inflation stays at just 2%, you’ll lose $1237 in purchasing power.

Even worse are 30-year Canadian government bonds that pay 1.224% as I write this [late in October 2020.]  Your $10,000 would get a total of $3672 in interest over 3 decades.  This is a pitiful amount of interest over a full generation.  At 2% inflation, you’ll lose $1738 in purchasing power.  Even a portfolio that only beats inflation by 2% per year would gain $8113 in purchasing power over 30 years.

All investments have risk, but there has to be some potential upside to justify the risk.  Where is the upside for long-term bonds?  The only upside comes if we have sustained deflation.  It’s crazy to risk so much just in case the prices of goods and services drop steadily for the next decade or three.

Some investors mistakenly think they can always sell bonds and collect accrued interest.  That’s not how it works.  With a 30-year bond, the government is promising to pay you the tiny interest payments and give you back your principal after 3 decades.  If you want out, you have to sell your bond to someone else who will accept these terms.  You don’t get accrued interest; you get whatever another investor is willing to pay.  Counting on selling a bond is hoping for a greater fool to bail you out.  If future investors demand higher interest rates on their bonds, your bond will sell at a significant capital loss.

If the interest rate on 30-year bonds goes up over time, that’s actually bad for current bond owners, because they have to live with their lower rate instead of receiving the new rate.  If 30-year bond interest rates go up by 1%, you immediately lose 30 years of 1% interest; you can’t just sell to avoid the loss because other investors wouldn’t happily take these losses for you.

Let’s go through some objections to this argument against owning today’s long-term bonds:

1.) Stocks are risky

It’s true that stocks are risky, but I’m not suggesting that investors replace long-term bonds with stocks.  Short-term bonds and high-interest saving accounts are safer alternatives.  A decision to avoid long-term bonds doesn’t have to include a change in your asset allocation between stocks and bonds.  For anyone willing to look beyond Canada’s big banks, it’s not hard to find high-interest savings accounts paying at least 1.5% and offering CDIC protection on deposits.  If long-term bond interest rates ever return to historical norms, it’s easy to move cash from a savings account back into bonds.  So, you don’t have to live with a measly 1.5% forever.

2.) Investors need to diversify

The benefit from diversifying comes from owning assets with similar expected returns that aren’t fully correlated.  However, the expected returns of today’s bonds are dismal.  We don’t really own bonds for diversification these days.  The real reason we own bonds is to blunt the risk of stocks.  It doesn’t make sense to try to reduce portfolio risk by buying risky long-term bonds.  Flushing away part of your portfolio with long-term bonds isn’t a reasonable form of diversification.  Short-term bonds and high-interest savings accounts do a fine job of reducing portfolio volatility without adding significant interest rate risk.

3.) Long-Term bonds have higher interest rates than short-term bonds

Historically, long-term bonds rates usually have been higher than short-term rates.  Today, however, high-interest savings accounts pay more interest than long-term government bonds.  But that’s not the only consideration.  Interest rates will change over the next 30 years.  If you own short-term bonds, your returns will change too.  However, if you buy 30-year bonds, your interest rate won’t change for three decades.  If interest rates rise, new short-term bond rates will be higher than your old 30-year rate.  Continue Reading…

Retired Money: 2 useful Retirement books have starkly different views of wisdom of deferring CPP and even OAS to age 70

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My latest MoneySense Retired Money column looks at two recently published books by two of the country’s top authors on Retirement Income Planning. You can find the full column by clicking on this highlighted headline: Near retirement without a Defined Benefit pension? Here’s what you need to know.

One of the new books is retired actuary Fred Vettese’s new revised edition of his book, Retirement Income For Life, which I first reviewed in 2018, and which you can find here. Vettese has revised and expanded the book to the spring of 2020, allowing him to look at the Covid-19 issue and how an extended Covid-related bear market could put further wrenches in retirement plans.

The book describes several “enhancements” to a base case of an average almost-retired couple with no DB pensions and roughly $600,000 in savings. This base case – Vettese dubs them the Thompson family — pay high investment management fees (on the order of 2%, typically via mutual funds).

Couples in his base case also tend to take CPP as soon as it’s on offer at age 60 and OAS as soon as possible at age 65. Vettese continues to pound the table about the value of these government pensions and recommends that people like the Thompsons delay CPP till age 70 if at all possible. Remember, in the absence of a DB plan, CPP and OAS are worth their weight in gold, being government-guaranteed-for-life sources of income that are inflation-indexed to boot.

Vettese is fine with ordinary average folk taking OAS at 65. However, and this seemed new to me, in a section for high-net worth couples (which he defines as having $3 million in investable assets), he suggests they should also delay OAS to age 70, along with CPP.

As an actuary, Vettese sees this enhancement as a simple case of transferring risk from a retiree’s shoulders to the government’s. Why worry about investment risk and longevity risk when the government can worry about it on your behalf?

Similarly, a related enhancement is to engage in the same type of risk transfer by converting a portion of registered savings to the shoulders of life insurance companies: he suggests 20% can be annuitized, ideally after age 70. That’s a bit less than the 30% his first edition he recommended immediately upon retirement.

One of Vettese’s enhancements to the base case is simple enough: to cut investment management fees. Larry Bates devoted an entire book to this theme: Beat the Bank, which I reviewed two years ago here.

Try the free PERC calculator

There are two other less compelling enhancements: knowing how much income to draw and having a backstop. Knowing how much income can be figured out with a free calculator that Vettese twigs readers to: PERC or the Personal Enhanced Retirement Calculator, available at perc.morneaushepell.com. Continue Reading…

Have you considered retiring later?

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By John DeGoey, CFP, CIM

Special to the Financial Independence Hub

There are countless pieces of advice regarding retirement planning out there.  Some of them deal with lifestyle issues (How will you fill your day?  Are you sure your spouse shares your vision of how time in retirement will be spent?  What will you do to stay sharp now that you’re no longer working?), but most deal with the financial aspects of retiring.  For people who are nearing retirements (i.e. those in their 50s and early 60s), there really are only four choices that can be manipulated to help maintain a suitable cash flow for your autumn years:

  • Save more
  • Invest more aggressively
  • Accept a lesser lifestyle in retirement
  • Retire later than you planned to

There is a long list of resources and pundits who offer input on the first two items … and virtually no one wants to talk about the third item, because it is seen as a last resort.  What about the fourth item?

Retiring later is not always an option, but for those people who have some discretion, it merits serious consideration.  To begin, there are plenty of experts who can attest to ‘staying involved’ as a pathway to staying young, vigorous and mentally sharp.  Not everyone feels this way, but many people working a bit longer (even if only part time) can attest to the fact that doing so helps in their retaining a sense of worth, identity, belonging and contribution.

Taking my own advice

At this point, I need to disclose that I am planning on taking my own advice.  Less than a decade ago, I told friends I’d retire at 65.  Then, when the age for full OAS was raised to 67, I told people I’d work to that age.  More recently, even as the age for full OAS has been lowered back to 65, I am thinking of staying in the workforce longer – until age 70, perhaps.  Once again, I really enjoy my work – this option isn’t for everyone! Continue Reading…

Is Retirement in your Future?

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Billy and Akaisha Kaderli in Chapala, Mexico

By Billy and Akaisha Kaderli

Special to the Financial Independence Hub

The perfect time for retirement doesn’t exist.

This is what we have learned in our almost three decades of financial independence. Things change, and sometimes radically. There simply are no guarantees.

From our point of view, a full and rich retirement is still possible for many people right now. Sometimes it takes personal flexibility in how one’s retirement is defined, as well as self-discipline and commitment to making one’s dream happen.

Many potential retirees will find themselves working part time to supplement their retirement lifestyle and perhaps to obtain a medical insurance plan. They may work from home in a virtual style of employment, make money from their hobby, or take advantage of a less stressful second-career opportunity.

Medical tourism will become more commonplace, as corporations look for financial alternatives to providing health care for their employees. As this idea becomes more familiar, retirees and potential retirees will consider this type of health care as a viable option if they are underinsured or if their own health care plan is lacking or if it’s too expensive to maintain.

Moving to more affordable countries

Moving to more affordable countries such as Mexico, Panama, Ecuador, The Philippines, Costa Rica, or Thailand will also become more attractive to those whose portfolios have been compromised for one reason or another. One can live a reasonably comfortable lifestyle in these countries for far less than in the United States or Canada.

Grander retirement dreams may be scaled back, but that is not necessarily a bad thing. Less can be more when one’s retirement money is spent for living rather than for maintaining things.

If one’s future retirement life is based upon the idea of keeping the same level of spending after there is no longer a paycheck coming in, you could be in for a shock. But if you have learned to live below your means, have kept your monthly expenses reasonably low, and have not loaded up with huge amounts of consumer debt, then the road of retirement ahead will not pose a threat. Continue Reading…