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.

Preparing for Retirement: Understanding new spending patterns

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BoomerandEcho.com

Last time we talked about boosting retirement savings during your final working years. In an ideal world you’ll have the double-effect of being in your peak earning years while your largest financial obligations are in the rear-view mirror.

In the real world, however, many Canadians are faced with an uncertain retirement because they lack adequate savings, don’t have a company pension plan, they’re still carrying a mortgage, line of credit, or even (gasp!) credit card debt, or they’re still providing financial support to their adult children.

Preparing for Retirement

Much like preparing for a new addition to the family, or for one spouse to stay home with the children full-time, preparing for retirement is about understanding new spending patterns.

If your final working years aren’t spent in savings overdrive mode, perhaps there’s time to test out your retirement budget in the year or two before you retire. You might as well try living on 40 – 60% of your income while you’re still working to see if it’s realistic.

If it’s not, there’s still time to adjust course by altering your income expectations, working longer (and saving more), or revisiting your investment strategy. Speaking of which …

Investing in Retirement

One of the biggest worries for retirees is outliving their money. That’s why it’s crucial to have a proper investment strategy in retirement. Investors don’t simply sell their stocks and move to bonds, GICs and cash once they retire. Canadians are living longer and our portfolios need to be built to last.

One strategy to consider is the bucket approach. The idea is that while retirees need cash flow, they also need a diversified portfolio of stocks and fixed income. Your first bucket is for immediate needs and should contain one or two years’ worth of living expenses in easy-to-access cash. Bucket two is for medium-term needs and is filled with bonds or GICs. Bucket three is meant for long-term needs and so it’s typically filled with stocks, ETFs, or index funds.

Also read: A better way to generate retirement income

Understanding CPP and OAS benefits

Whether you think you’ll rely on government benefits or not, it’s important to understand how CPP and OAS benefits work and how they might impact your retirement income plan.

The maximum monthly payment amount for CPP in 2020 is $1,175.83 [if taken at 65], but the average monthly amount for new beneficiaries is actually $696.56. You can take CPP as early as 60, but the amount is reduced by 0.6% for every month you receive it before 65.

Alternatively you can delay taking CPP until as late as age 70. In this case your pension amount will increase by 0.7% for each month you delay receiving it up to age 70. Continue Reading…

Boosting Retirement Savings during your final Working years

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BoomerandEcho.com

Whether you’re a late starter or seasoned saver, the five years or so leading up to retirement might be the most crucial time to get your finances in order. Here’s how to take advantage of your final working years.

Most retirement readiness checklists suggest your final working years is a time to double-down on retirement savings. The idea being that major financial burdens, such as paying down the mortgage and raising children, should be behind you and those savings can be parlayed into big contributions to your retirement nest egg.

High-income earners should look to their unused RRSP contribution room and contribute as much as possible in their final working years. This has the added benefit of generating big tax returns, which can be reinvested into your RRSP or used to pay down any outstanding debts.

Procrastinators have a final chance to break any bad spending habits and set their finances straight. The first step is to draw up a financial plan. Make it a top priority to pay down any remaining debt and get spending under control. You should then have a rough idea when debt-freedom is in sight and from there decide how long to continue working to meet your retirement savings goals.

Retirement income target

The often-used retirement income target is 70% of your final pay, meaning if you earned a $100,000 salary in your final working years then you should aim for a retirement income goal of $70,000 per year. But a more realistic retirement income target may be closer to 50%.

Regardless, you’ll need to find YOUR retirement number and determine whether you can reach your income goals through some combination of workplace pension, personal savings (RRSP, TFSA, non-registered investments), CPP, OAS, and/or GIS.

Piecing that puzzle together takes a lot of planning (and still plenty of guess work). No wonder choosing a retirement date can seem like such a daunting challenge!

Taking advantage of your final working years

According to a Tangerine survey, one-quarter of Canadians nearing retirement age don’t understand how their personal finances will work in retirement. I think that number may be understated.

With that worrying statistic in mind, here’s a retirement planning checklist for your final working years:

1. Determine where you stand – Take stock of your current financial situation by listing your assets and liabilities and analyzing your current income and expenses. Identify any opportunities to save more.

2. Define future needs – How will your expenses vary in retirement? Remember, you’ll no longer be paying into programs like CPP and EI, but your retirement bucket list might need to include money for travel and new hobbies. Add up your expected CPP payments and OAS benefits, plus any workplace pension plans, and determine the gap between your income and expenses. That gap will need to be filled from your personal savings.

3. Ramp up savings – Take advantage of unused RRSP or TFSA contribution room and boost your retirement savings into overdrive. Your final working years are a chance to make up for lost time; make sure to maximize your full employment income to have the most impact on your retirement savings. Continue Reading…

Top 7 things to know about Social Security

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By Michael Morelli

Special to the Financial Independence Hub

When you are thinking about early retirement to fully enjoy retirement living, or thinking of postponing retirement, you need to know how and when it is best to take your Social Security benefits. When dealing with something as important as Social Security, you must make sure that you are receiving as much as possible. Comprehending the program will help to secure your future to a great extent. In this article, we have mentioned several essential things regarding Social Security that you ought to know.

What is Social Security?

Social Security happens to be the foundation of numerous Americans’ financial security, including disabled individuals, retirees, and families of the retired. Approximately 170 million Americans pay Social Security taxes at present, while 61 million individuals collect monthly benefits. Approximately one household in every 4 gets income from Social Security.

One can consider Social Security to be a pay-as-you-go scheme. This implies that today’s workers pay Social Security taxes into the program, and cash flows back out to the beneficiaries as monthly income. Social Security is not the same as company pensions, which happen to be “pre-funded” out there. The money will be accumulated beforehand in pre-funded programs such that it can be paid out to the workers of today once they retire. It is essential to fund the private plans beforehand to safeguard the employees provided the company shuts down or becomes bankrupt.

1.) Full Retirement Age (FRA)

The following paragraph mentions the full retirement age when you might be eligible to get full Social Security retirement benefits.

Here we have mentioned the year in which you were born and what will be the Full Retirement Age in that case.

1937 or before – 65

1938 – 65 + 2 months

1939 – 65 + 4 months

1940 – 65 + 6 months

1941 – 65 + 8 months

1942 – 65 + 10 months

1943 – 1954 – 66

1955 – 66 + 2 months

1956 – 66 + 4 months

1957 – 66 + 6 months

1958 – 66 + 8 months

1959 – 66 + 10 months

1960 or later – 67

2.) You can work while getting Social Security

You will have the option of taking Social Security so long as you happen to be 62 years of age. Yearly earning limitations have been set by the SSA – in case you have been getting Social Security benefits prior to your full retirement age, and you are earning in excess of the limit, there will be a reduction in your benefit payments temporarily depending on how much you are earning. Suppose you are earning $8,000 over the limit, your benefits will be minimized by $4,000. In case you can earn $12,000 over the limit, it will be reduced by $6,000.

However, the good thing is that you will not lose your benefits permanently in case they are reduced. On the other hand, your payment account will be calculated once again, such that you will get the withheld cash as soon as you reach your full retirement age)

3.) Social Security benefits may be Taxable

As per the SSA, several Social Security beneficiaries are going to pay taxes on their Social Security benefits. It will depend on how much you make listed on the income tax return. In case you file with an excess of $25,000 as an individual (or $32,000 jointly), it will be imperative for you to pay the federal income taxes on the benefits. However, the regulations for state income taxes differ from one state to another.

4.) Your payments can help your family

Let us suppose the monthly benefits, according to your Social Security card, happen to be more than that of your spouse. Continue Reading…

Determining your Financial Independence number

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By Mark Seed, MyOwnAdvisor

Special to the Financial Independence Hub

Passionate readers of this site have long understood I’ve never been fully convinced about the “retire early” element in the Financial Independence Retire Early (FIRE) movement.

I mean really, what 30- or 40-something is never going to work for any money ever again??

(Answer = you know it.)

Surely some of them will hustle a blog, a course, a book, a podcast or other at some point. The list goes on.

Such FIRE-seekers and very early retirees are not likely misleading people on purpose: some are just simply entrepreneurs …

Forget “RE”, “FI” is the worthy goal

While I couldn’t care less about the retire early part of FIRE, I am working towards the FI part and have been doing so for at least a decade now.

I think most people should absolutely strive for FI instead of early retirement. (See this 2019 blog, Strive for Financial Independence, not Early Retirement).

How much do you need to save for any comfortable retirement?

“It depends.”

According to Fidelity, to be on track for a healthy retirement:

  • You should have x1 your annual salary saved up for retirement by age 30.
  • You should have x3 your annual salary saved up for retirement by age 40.
  • You should have x6 your annual salary saved up for retirement by age 50.
  • You should have x8 your annual salary saved up for retirement by age 60.
  • You should have x10 your annual salary saved up for retirement by age 67.

As a 40-something, according to the pros we should have at least x3-x6 of our annual savings in the bank.

I’m glad I don’t listen to Fidelity. We’re beyond that milestone and we’ll be better off financially (sooner) because of it.

Here in Canada, MoneySense did some similar work on this a while back:

 

MoneySense - how much is enough

Do you really need this much? $1 million or $1.5 million? More?

“It depends.”

I can’t tell you unfortunately: since that answer comes with a complex set of income needs and wants and everyone’s spending goals are very, very different.

I can say with a rather firm set of certainty that if any Canadian or U.S. citizen that amasses this much portfolio value by age 65 and has modest spending needs they will be far better off financially than most.

Our FI number

For years, I’ve pegged our FI number to be around the $1 million portfolio value mark not including any home equity (and our soon-to-be debt-free home: we have to live somewhere!), excluding our workplace pensions, and excluding any future government pensions such as Canada Pension Plan or Old Age Security.

I largely arrived at this number by using a rather standard FI formula.

Financial Independence means:

  1. earning enough passive income from my assets such that my asset-producing passive income is > general expenses, and/or
  2. amassing a portfolio value such that reasonable withdrawals will be > general expenses for many decades on end.

What are reasonable withdrawals???

You could argue the birth of any reasonable and therefore any safe portfolio withdrawal formula was originated by U.S. financial advisor William Bengen.

4% rule

You can read about his genesis for the 4% rule and why it still makes sense by reading this blog from earlier this year: Why the 4% Rule is (still) a decent rule of thumb.

Following Bengen and largely reinforcing his work, three professors at Trinity University published a paper about safe retirement withdrawal rates.

Those professors looked at stock and bond data from the mid-1920s through to the mid-1970s and their conclusion was that essentially over any 30-year investment period in that range, a retiree could safely withdraw 4% of their total assets per year without much fear (meaning barely any fear) of running out of money. Only in a handful of cases, the very worst cases in any 30-year period, would the portfolio go to absolute zero.

So, let’s look at that context when it comes to our goals:

If we managed to enter retirement with our desired $1 million goal of invested assets (along with no debt of course), then we could reasonably expect to assume we could withdraw $40,000 per year for our living expenses from that portfolio with very little fear of running out of money.

Henceforth, the study by those three professors from Trinity University, The Trinity Study, have set the framework for a gazillion FI number crunching exercises to this day and likely the same number into the future …

Determining your FI number 

Here are some options to crunch your math. Continue Reading…

10 ideas for a Mini-Retirement lasting 6 months to 2 years

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Working a nine-to-five routine can be draining. The practice of taking time away from work for an extended period of time has become increasingly popular among employees. This “mini-retirement” can help professionals recharge and provide a much-needed break from a strenuous daily routine.

Although you may not be planning on taking a mini-retirement, brainstorming ideas of what you’d want to achieve during this period may help you align your purpose and goals within your professional career.

Below, we asked 10 thought leaders to share their ideas for things to enjoy during a mini-retirement.

Explore a new industry

Leave your normal career to explore investing or real estate. Choose something that you might not have the chance to focus on while working full time as a great way to spend a mini-retirement. Diving into topics that you are interested in and really taking the time to research and learn more about these topics could prove to make you money in the long run. – Rex Murphey, Montauk Services

Do something Book Worthy

My barometer for doing anything is considering whether the endeavor is worthy of a book. If I had six to 24 months to do anything, I’d first think about what the topic or title of the book would be. Then, I’d outline the table of contents. After the outline, I’d live out each chapter idea to the extent that I could fill the pages about the desired topic. That framework could be applied to any retirement idea from “The Ultimate Guide To Tapas in Spain” to “Everything To Know About Making a Documentary In a Third World Country.” But, as long as the mini-retirement idea is book-worthy, then I’m guaranteeing myself that the topic is deep enough to keep me continuously engaged and satisfied. — Brett Farmiloe, Markitors

Pursue knowledge

I love learning but due to my hectic work schedule, I usually don’t find time to study. So I’d want to learn and focus on self-development during my mini-retirement. I’d want to apply for a scholarship to fund my postgraduate program. Other than that, I’d want to learn new languages and travel. Maybe I’d go abroad for studies as it’ll give me a chance to travel as well. — William Taylor, VelvetJobs

Take an extended Holiday

Plan a holiday that you have been waiting for. This could be to a domestic location or an international destination. Make sure your finances are sorted and that the holiday fits into your current budget. Set aside enough money to last during this time, then take some time to focus on getting your career back up before the mini-retirement is over. — Joe Flanagan, GetSongbpm

Take a Road Trip in an RV

Retirement would lead to a few exciting travel options. The most exciting would be buying a Cruise America refurbished RV and traveling the United States.  Pack and unpack once for a journey of a lifetime and stay as long as you want in each location.  I think a one year trip around North America would be one of the most bucket list items one could experience and imagine all the amazing places you could visit and the memories that would be created. — Randall Smalley, Cruise America

Switch to freelance or part-time Work

A good way to do this is to either freelance or work as a consultant on a part-time basis. The main benefit of doing this is that, in most fields of work, you’re able to do this online. This means you’ll be able to work from wherever you wish to enjoy life for some time. Whether it be a beach in southeast Asia or in an RV around Europe, working in this way gives you the flexibility to enjoy your time off from full-time work. It also lets you choose just which assignments to accept during this period, allowing you to work as much or as little as you want. Is your budget running a bit low? Maybe it’s time to ramp up your hours. Alternatively, are you about to go off the grid for some time? Close your laptop and off you go. — Anna Barker, LogicalDollar

Revisit your childhood interests

I would dust off my childhood fantasies about what I liked to do. One recurring theme on the Rock Your Retirement podcast is that many of us are not prepared mentally for retirement. We need to have a purpose in life. Continue Reading…