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.

JP Morgan, RBC on post-Covid Retirement trends

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A couple of recent surveys from J.P. Morgan Asset Management and RBC shed a fair bit of light into recent Retirement trends in North America in the wake of the ongoing Covid-19 pandemic. Summarized in the October 2021 issue of Gordon Wiebe’s The Capital Partner newsletter, here are the highlights:

First up was J.P. Morgan on August 19 in a study focused on de-risking for investors approaching retirement and about to draw down on Retirement accounts.

The study was quite comprehensive, drawing on a data base of 23 million 401(k) and IRA accounts and 31,000 Americans. 401(k)s and IRAs are similar to Canada’s RRSPs and RRIFs.

De-risking is quite common, with 75% of retirees reducing equity exposure after “rolling over” their assets from a 401(k) to an IRA. These retirees also relied in the mandatory minimum withdrawal amounts.

Of those studied, 30% received either pension or annuity income, and the median value of Retirement accounts was US$110,000. The median investable assets were roughly US$300,000 to US$350,000, with the difference coming from holdings in non-registered accounts.

Not surprisingly, the most common retirement age was between 65 and 70 and the most common age for commencing the receipt of Social Security benefits was 66. (Coincidentally, the same age Yours Truly started receiving CPP in Canada.)

The report warns that retirees who wait until the rollover date to “de-risk” or rebalance portfolios needlessly expose themselves to market volatility and potential losses: they should consider rebalancing well before the obligatory withdrawal at age 71.

The newsletter observes that 61-year-olds represent the peak year of baby boomers in Canada and cautions that if they all retire and de-risk en masse, “Canadian equity markets will likely undergo increased downward pressure and volatility. Retirees should consider re-balancing or ‘annualizing’ while markets are fully valued and prior to an increase in capital gains or interest rates.”

The report includes several interesting graphs, which you can find by clicking to the link above. The graph below is one example, which shows average spending (dotted pink line) versus average retirement income (solid green line.) RMD stands for Required Minimum Distributions for IRAs, which is the equivalent of Canada’s minimum annual RRIF withdrawals after age 71.

EXHIBIT 4: AVERAGE RETIREMENT INCOME AND SPENDING BY AGES Source: “In Data There Is Truth: Understanding How Households Actually Support Spending in Retirement,” Employee Benefit Research Institute & J.P. Morgan Asset Management.

RBC poll on pandemic impacts on Retirement and timing

Meanwhile in late August, RBC released a poll titled Retirement: Myths & Realities. The survey sampled Canadians 50 or over and found that the Covid-19 pandemic has caused some Canadians to “hit the pause button on their retirement date.” 18% say they expect to retire later than expected, especially Albertans, where 33% expect to delay it.

They are also more worried about outliving their money, with 21% of those with at least C$100,000 in investible assets expecting to outlive their savings by 10 years. That’s the most in a decade: the percentage was just 16% in 2010.

Sadly, 50% do not yet have a financial plan and only 20% have created a final plan with an advisor or financial planner.

Those near retirement are also resetting their retirement goals. Those with at least $100,000 in investable assets now estimate they will need to save $1 million on average, or $50,000 more than in 2019. 75% are falling short of their goal by almost $300,000 on average.

Those with less than $100,000 have lowered their retirement savings goal to $533,153 from $574,354 in 2019, and the savings gap is a hefty $472,994.

To bridge the shortfall, 37% of those with more than $100K plan stay in their current home and live more frugally, compared to 36% of those with under $100K. 31% and 36% respectively plan to return to paid work, 31% and 23% plan to downsize or move, and 3 and 5% respectively intend to ask a family member for financial assistance.

 

 

7 ways Investors are capitalizing on Low Interest Rates

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What is one way you are capitalizing on low-interest rates?

To help you take advantage of low interest rates, we asked seven finance experts and business leaders this question for their best insights. From refinancing existing debts to looking into preferred securities, there are several suggestions that may help you benefit from the low interest rates in the current market. 

Here are seven tips for capitalizing on low-interest rates:   

  • Work with a Finance Broker
  • Get into Commercial Real Estate
  • Refinance Existing Debts
  • Consider FHA Loans
  • Maximize your Return on Investment
  • Set up a Line of Credit
  • Look into Preferred Securities 

Work with a Finance Broker

As a commercial finance broker, we work with our clients to make sure they can take advantage of low interest rates based on a thorough financial analysis of their company. By analyzing your credit and financial health, we act as an advisor to clients for the best financing options available. We also build leases and loans that are competitively priced and intelligently structured for an optimal plan that works for the client and incorporates the best rates possible.  — Carey Wilbur, Charter Capital

Get into Commercial Real Estate 

If you’ve been wondering whether or not to buy commercial real estate, I think it is time to take advantage of the “perfect storm” of low borrowing rates. You’ll save a lot of money on interest payments long term. Now is the perfect moment to acquire real estate for assets as an income-generating resource. So whether you need a warehouse, brick-and-mortar store outlet, or even commercial property to place on the rental market, this might be one of the best times to get in the market. Renting your commercial property will provide you with consistent income, and you might also benefit from tax advantages on depreciation and capital gains, to name a few. — Allan J. Switalski, AVANA Capital

Refinance Existing Debts 

I suggest you consider refinancing your small business loan, mortgage, or student debt, which entails paying off your existing loan by taking out a new one. The new loan will have a reduced interest rate. Ideally, opt for a fixed-rate loan to lock in the lower rate. To qualify, you’ll need strong credit, but if you do, you’ll save a lot of money on interest fees. — Sundip Patel, LendThrive

Consider FHA Loans

FHA Loans are a great low-interest lending option that is offered by the Federal Housing Administration. These loans are intended to increase homeownership access to those who may not have the ideal credit score required by other financing options. This can be a great option for prospective real estate investors. — Than Merrill, FortuneBuilders

Maximize your Return on Investment

When interest rates are low, borrowing is much more convenient. Continue Reading…

Retired Money: What is the Rule of 30?

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ECW Press

My latest MoneySense Retired Money column reviews actuary Fred Vettese’s new retirement book: The Rule of 30 (ECW Press).

You can find the full column by clicking on the highlighted headline here: What’s the Rule of 30? And what does it have to do with Income and Retirement?

Never heard of the Rule of 30? Neither had I, nor Fred himself until he invented it.

In a nutshell, it’s a rule of thumb financial planners can use to guestimate how much young couples starting off on their financial journeys need to save for Retirement. Rather than flatly state something like save 10 or 12 or 15% of your gross (pre tax) income each and every year, the Rule of 30 sees retirement saving as occurring in tandem to Daycare and Mortgage Repayment.

From the get go Vettese suggests young couples allocate 30% of their gross or after-tax income to the three expenses of Retirement saving, Daycare and Mortgage paydown. However, in the early years they may save less in order to handle Daycare and the mortgage. Since daycare expenses usually fall away after a few years (depending on how many children a couple has), once it has gone you can ramp up the mortgage paydown and/or retirement savings. And if – ideally five years before retirement – the home mortgage is paid off, then couples can kick their retirement saving into overdrive by allocating a full 30% or more solely to building their nest egg.

Wealthy Barber style fictional format

In a departure from his previous books — Retirement Income for Life and The Essential Retirement Guide among them — The Rule of 30 uses the tried-and-true quasi-fictional “story” pioneered by David Chilton’s The Wealthy Barber. That road has been ploughed by many subsequent financial authors, including Yours Truly in Findependence Day. 

As Vettese told me in an interview mentioned in the column, he didn’t plan it that way initially. “I did a first chapter using that format and then realized it’s a lot easier to write this way and it’s not as dry: it’s somewhat easier to read and to write. When you get a problem, a character chimes in.”

The main characters are a couple, X and Y, and — conveniently — the neighbour next door who happens to be an actuary with time on his hands.

No doubt it would have worked either way, but Vettese’s dialogs are readable enough and he even works in a minor subplot involving the actuary and his estranged daughter.

One of the people acknowledged by Vettese at the back of the book is fellow actuary and retiree Malcolm Hamilton. In an email, Hamilton said “I have always believed that middle class Canadians who marry, buy a house and have children cannot reasonably expect to save much for retirement until after the age of 45,” Hamilton told me via email, “There just isn’t enough income to cover mortgage payments, the cost of raising children and Canada’s heavy tax burden (with child care expenses and mortgage payments generally non deductible for those with incomes that suggest they need to save.”

All in all, a useful rule of thumb for young couples setting out on family formation, home ownership and ultimately Retirement. Note that Vettese says that once you are within five years of your hoped-for Retirement age, you should strive to be mortgage free. And around 55, you should move from the Rule of 30 to using a Retirement calculator like the free one Vettese developed for Morneau Shepell: PERC, or the Personal Enhanced Retirement Calculator.

PS: I am now Investing Editor at Large for MoneySense

Alert readers who got to the bottom of the column and read the author blurb will see a slight change in my status at MoneySense. In addition to writing the monthly Retired Money column I am now also the Investing Editor at Large for the site, a fact that’s also divulged in my Twitter profile.  I will continue to publish Hub blogs every business day: so much for Retirement!

 

 

 

Why we took Social Security at age 62

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By Billy and Akaisha Kaderli

Special to the Financial Independence Hub

We decided to take Social Security at age 62. We know there are as many ways to consider this decision as there are days in a year. And many experts advise against taking social security “early” so that you get a bigger check at full retirement age. It is hard to argue against that.

We have always lived an unconventional lifestyle and the fact that so many experts agree on waiting for payment gives us pause for thought. Here is our logic.

First, the S&P 500 index has averaged over 8% per year, plus dividends, since we retired in 1991. If we take social security early and invest it, we won’t be losing the 8% per year the experts claim is the annual increase of waiting – although one is guaranteed and the other is not. Maybe the markets will trend sideways or go down or even up, no one knows. For the last 30 years we have lived off of our investments through up and down markets, so investing the monthly check is definitely an option. More likely, we will just not spend our stash and look for opportunities in the markets as our cash positions grow. Plus we have control of the money at this point, adding to our net worth.

Next let’s look at some numbers

For easy math, say at 62 you are going to receive $1000.00 per month in benefits, but if you wait until you are 66, your payment will be $1360 ($1000 x 8% for the four years you have waited). Sounds great, right? However, you would have missed receiving $48,000 dollars in payments from the previous 48 months. Continue Reading…

Our early withdrawal strategies: How to keep more money

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By Bob Lai, Tawcan

Special to the Financial Independence Hub

As many of you know, we have been busy adding new capital and buying dividend paying stocks over the last few years. During the COVID-19-caused short recession last year, our portfolio was down as much as $250,000. We didn’t panic and liquidate our portfolio. Instead, we saw the recession as an opportunity to buy discounted stocks and we added $115k to our dividend portfolio.

I’m a believer in time in the market, rather than timing the market. Therefore, we try to be fully invested in the stock market as much as we can. We use our monthly savings to add new shares and take advantage of any downturns. We also strategically move any long term savings for spending account to buy dividend paying stocks whenever there are enticing buying opportunities. We then “put back” money in the LTSS account over time.

Although we are in the accumulation phase of our financial independence retire early journey, I have done a few calculations and scenarios to plan out our early withdrawal strategies and plans. But they are what the names suggested – strategies and plans. Nothing is written in stone and things can certainly change by the time we decide to live off our dividend portfolio.

Recently Mark from My Own Advisor appeared on Explore FI Canada to discuss FI Drawdown Strategies. Since Mark is a few years ahead on the FIRE journey than us, or FIWOOT (Financial Independence Working on Own Terms) as Mark calls it, it was great to hear about what Mark is thinking and the considerations he has.

Speaking of living off dividends and early withdrawal strategies, it was really awesome to be able to pick on Reader B’s brain on this topic:

After listening to the Explore FI Canada episode, I thought about our early withdrawal strategies. Are there effective ways to minimize taxes so we get to keep more money in our pocket?

For Canadians, we can receive CPP and OAS when at age 65. I have not included CPP and OAS in our FIRE number calculation because I always considered them as the extra income and didn’t want to rely on them during retirement. Having said that, are there things we can do to receive the full CPP and OAS amounts without clawbacks?

A few things to note before I go any further…

  1. We plan to live off dividends and only sell our principal if we absolutely have to.
  2. We plan to pass down our portfolio to our kids, future generations, and leave a lasting legacy.
  3. Ideally it’d be great to be able to pass down our portfolio to future generations. But we also don’t want them to take money for granted. Therefore, we are also not against the idea of not passing anything to future generations.
  4. I’d love to write a million dollar cheque and donate it to a charity.

Our Investment Accounts

Our dividend portfolio comprises the following accounts:

  • 2x RRSP
  • 2x TFSA
  • 2x taxable accounts

I also have an RRSP account through work. Every year I have been moving my contribution portion to my self-directed RRSP at Questrade. I can’t touch my employer’s contribution portion until I leave the company.

Neither Mrs. T nor I have work pensions so that may make the math slightly simpler.

The only complication I need to consider is what to do with income from this blog. This blog now makes a small amount of money. For tax efficiency, it might make sense to consider incorporating. Many bloggers I know have gone down this route for tax efficiency reasons. This is something I will have to consult with a tax specialist in the near future and crunch out some numbers to see what makes the most sense.

Shortcomings of RRSP

As the name suggests, the RRSP is a great retirement savings vehicle. But there are three important caveats people often skim over:

  1. RRSPs must be matured by December 31 of the year you turn 71. You can convert an RRSP into a RRIF or purchase an annuity. Most people convert their RRPs into RRIFs.
  2. A RRIF has a mandatory minimum withdrawal rate each year.
  3. The minimum withdrawal rate increases each year (5.4% at age 72 and jumps to 6.82% at age 80).
  4. RRSP and RRIF withdrawals are counted as normal income and taxed at your marginal tax rate.

Personally, I don’t like the restrictive nature of the RRIF. Imagine having $500,000 in your RRIF and having to withdraw a minimum of $27,000 at 72. If your RRSP/RRIF has a bigger value, it means you are forced to make a bigger withdrawal!

By plugging the amount currently in our RRSPs into a simple RRSP compound calculator, assuming no more contributions and an annualized return of 7%, I discovered that we’d end up with more than $2M in each of our RRSP!

Holy moly!

At 5.4% minimum withdrawal rate, that means we’d have to withdraw at least $108,0000 each. This would then put both of us into the third federal tax bracket. More importantly, we’d get hit with OAS clawback (more on that shortly).

Therefore, it makes sense for Mrs. T and me to consider early RRSP withdrawals and perhaps consider collapsing our RRSP before we turn 71.

CPP Clawbacks

Contrary to many Canadian beliefs, there are no clawbacks for CPP.

You pay into the Canada Pension Plan (CPP) with your paycheques. Each year that you contribute to the CPP will increase your retirement income. Therefore, the amount of CPP you will receive at 65 depends on your contributions during your working life.

In 2021, the maximum CPP benefit at age 65 is $14,445.00 annually or $1203.75 monthly. The CPP benefit is taxed at your marginal tax rate.

But not everyone will get the maximum CPP amount since it is based on how long and how much you pay into the CPP.

  • You must contribute to CPP for at least 83% of the CPP eligible contribution time to get the maximum benefit. You are eligible to contribute to CPP from 18 to 65, so 83% would mean you need to contribute to CPP for at least 39 years.
  • In addition, you also need to contribute CPP’s yearly maximum pensionable earnings (YMPE) for 39 years to qualify for the maximum CPP amount. For 2021, the YMPE is $61,600.

Not many people can meet these two requirements, hence the average CPP payment received in 2020 was $689.17 per month or $8,270.04 annually.

Since we plan to “retire early” eventually, it’s unlikely that we will qualify for the maximum CPP benefits.

OAS Clawbacks

Unlike the CPP, there are clawbacks or a pension recovery tax for OAS. If your income is over a certain level, the OAS payments are reduced by 15% for every dollar of net income above the threshold. In 2021, the OAS clawback threshold starts at $79,845 and maxes at $129,260. So, if you’re making over $79,845, you will receive reduced OAS payments. And if you’re lucky enough to have a retirement income of over $129,260, you get $0 OAS payments. Continue Reading…