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.

My FP Down to Business podcast on the Crash of 2020 and how to deal with it

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The Financial Post has just published a podcast about the market impact of coronavirus, via a conversation between me and FP transportation reporter Emily Jackson, host of the weekly podcast Down to Business. You can find the full 19-minute interview by clicking the highlighted text: How Coronavirus market chaos compares to 2008. 

While I have been posting almost daily commentaries on the crisis right here on the Hub from various experts, thus far I have refrained from comment myself, but the podcast pretty much covers my views. One thing that came out of the interview was that there may be big generational differences in how this market crash is viewed.

For baby boomers who are retired or thought they were close to it (read “me!”) this crash has been a traumatic experience, especially for those who didn’t pay much attention to risk management and appropriate asset allocation. At our age (I’ll be 67 in a few weeks), we presumably have finished accumulating our nest egg and our time horizon to recoup any losses is shrunken: young people are in quite a different situation: they have less money to lose and have several decades to get it back.

Worried retirees should be at least 50% in fixed income by now

Fortunately, we have been quite conservative: my own advisor has long counselled being somewhere between 50 and 60% fixed income and — having been reminded of the downside risk of the market yet again — I have been selling a few winners where we can find them with the goal of getting our total cash and fixed income to about two thirds of our total portfolio.

We took some profits as the 11-year bull market raged, although of course hardly enough to dodge the storm entirely.  As with most investors, Covid-19 was a “Black swan” that seemingly came out of the blue. I guess I was lulled into believing that the US president would keep the markets aloft at least until he was re-elected, by leaning on the Federal Reserve chairman and various other levers he possesses. Fooled us again, Donald!

Some readers and at least one advisor I correspond with probably think 67% fixed income is too conservative, but that’s right in line with the conservative rule of thumb that fixed income should equal your age. That leaves about a third in (mostly) non-registered stocks, although we also hold US dividend paying stocks in our RRSPs, along with fixed income (bond ETFs and laddered strips of GICs). Our selling inside our RRSP has been more along the lines of selling half of big winners and “playing with the house’s money,” a phrase our daughter has happily adopted too.

Emily Jackson, host of Down to Business; BusinessFinancialPost.com

On the other hand, as I remarked to Emily, it’s much less of a disaster for younger people: in fact, I’d argue it’s almost good news, financially speaking (not of course from a health perspective). Finally, younger investors have an opportunity to buy stocks and equity ETFs at reasonable prices, and at the same time as interest rates fall, they are getting a break — or soon will — on variable-rate mortgages.

Certainly if I were 20 years younger I’d be itching to buy at current prices, although even then I’d keep some powder dry just in case the bargains become even more tempting.

How bad could this get? In yesterday’s FP, David Rosenberg frankly raised the spectre of a depression and total losses in the Canadian market of 50% or more. See It’s time for investors to start saying the D-word — this economic damage could be double 2008.

Too late to ‘revaluate’ your risk tolerance?

A blog the Hub republished on the weekend from Michael James on Money suggested that now is not the time to reassess your risk tolerance. See It’s too late to ‘revaluate’ your risk tolerance. That blog generated a fair bit of discussion on Twitter. Again, this could fall along generational lines. If you believe markets are only half way down and you want some cash to deploy to scoop up bargains at the bottom, then you can sell down some non-registered winners and losers, ideally in equal proportions to make it net tax neutral. Massive up days like Tuesday are an opportunity to do that. Continue Reading…

Advice matters: Here’s why

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By Bernard Letendre

Special to the Financial Independence Hub

The investments landscape has witnessed seismic changes in North America and around the globe in recent years. Although the vast majority of customers are either satisfied or extremely satisfied with the services they receive from their advisor — based on The Investment Funds Institute of Canada and Pollara Strategic Insights 2019 Canadian investor survey –one narrative that has been gathering a lot of attention focuses narrowly on fees and goes as far as questioning the value of advice. Like all generalizations, this narrative oversimplifies things and can create misleading perceptions.

If you’re a seasoned investor, you know that picking individual securities to create a desired return isn’t a simple task. Investing to achieve a meaningful goal is even harder: it involves developing a good plan and focusing on outcomes rather than fees and performance alone. And that’s hard work.

That’s why I believe in the value of advice. Studies like the one conducted by CIRANO and the University of Montreal have shown that financial advice results in better outcomes: pure and simple. In fact, findings revealed that investors who worked with an advisor over a 15-year period accumulated 3.9 times more assets than those who invested on their own during the same period. Another interesting finding revealed that the difference in outcomes wasn’t mostly due to investment performance (Alpha) but to other factors such as discipline and increased savings rate associated with the advice received by investors: grouped under the concept of Gamma by the study’s authors.

One explanation for those better outcomes could be that in creating a financial plan, an advisor will ask their clients important questions that DIY investors may not think about: or wish to ask themselves. Secondly, once a plan is put in place, an advisor can play a unique role in holding clients accountable towards their own goals, which may result in better financial outcomes compared to people who rely on self-discipline to keep themselves in check.

When it comes to navigating the big moments in life, like passing down a business to the next generation, recognizing early signs of mental health issues that come with age, or handling the death of a spouse, the complexity of such precarious situations often requires a human touch. Investors need someone with the expertise, emotional intelligence and compassion who goes above and beyond to help them every step of the way. Advisors do that.

Advisors focus on more than just Asset Allocation

As is clear by now, advisors focus on more than just asset allocation to help clients achieve their goals. They’re able to support them with a more holistic approach, which could include advice around tax planning, estate planning, insurance planning and more. This is why investors who benefit from the support of an advisor often achieve better outcomes than if they were to try and do it themselves. Continue Reading…

Retired Money: The trouble with playing with FIRE

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My latest MoneySense Retired Money column looks at the trouble with playing with FIRE. Click on the highlighted headline to retrieve the full column: Is Early Retirement a realistic goal for most people?

FIRE is of course an acronym for Financial Independence Retire Early. It turns out that Canadian financial bloggers are a tad more cynical about the term than their American counterparts, some of whom make a very good living evangelizing FIRE through blogs, books and public speaking.

The Hub has periodically republished some of these FIRE critiques from regular contributors Mark Seed, Michael James, Dale Roberts, Robb Engen and a few others, including one prominent American blogger, Fritz Gilbert (of Retirement Manifesto).

No one objects to the FI part of the acronym: Financial Independence. We’re just not so enthusiastic about the RE part: Retire Early. For many FIRE evangelists, “Retire” is hardly an accurate description of what they are doing. If by Retire, they mean the classic full-stop retirement that involves endless rounds of golf and daytime television, then practically no successful FIRE blogger is actually doing this in their 30s, even if through frugal saving and shrewd investing they have generated enough dividend income to actually do nothing if they so chose.

What the FIRE crowd really is doing is shifting from salaried employment or wage slavery to self-employment and entrepreneurship. Most of them launch a FIRE blog that accepts advertising, and publish or self-publish books meant to generate revenue, and/or launch speaking careers with paid gigs that tell everyone else how they “retired” so early in life.

How about FIE or FIWOOT or Findependence?

Some of us don’t consider such a lifestyle to be truly retired in the classic sense of the word. Continue Reading…

How bad advice on Defined Benefit plans could cost you your retirement

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The following is a guest post by financial planner, author and pension expert Alexandra Macqueen, which originally ran on Dale Roberts’ Cutthecrapinvesting blog on Feb. 26, 2020. Because they both consider it such an important subject, they have given us permission to re-publish on the Hub. While an overview, it can serve as the ultimate guide to defined benefit pension planning. And mostly, Alexandra outlines the pitfalls and the importance of finding a true and qualified pension expert.

By Alexandra Macqueen, CFP

Special to the Financial Independence Hub

If you’re a Canadian facing a decision about staying in or leaving your defined-benefit pension plan, it might be one of the highest-stakes choices you’ll ever make: the amounts you’re considering can be high – worth as much as your house, or even more – the timeline short, the tax consequences significant, the details complex, and the outcome irreversible.

Over the course of my financial planning career, I’ve encountered, unfortunately, more than one pension decision gone wrong. Just how many ways can a pension decision go off the rails? Here are five “pension pitfalls,” drawn from real-live cases that have crossed my desk in the last year or so, along with the lessons Canadians who are facing this decision can glean.

Pitfall Number 1: Unbalanced advice

It is widely understood that defined-benefit pension plans cover what’s called, in the financial planning world, “longevity risk” – or the chance of living longer, even much longer, than you expect. Defined-benefit pension plans protect against the risk of living very long by providing lifetime income.

In exchange for covering off this risk, however, if you die sooner than expected, the pension payments may stop (depending on whether you have a surviving spouse or other beneficiary, and whether your plan provides guaranteed payments for a specified term).

Image by Gerd Altmann from Pixabay

One of the most misleading financial plans I ever encountered – it was just one page, and written in Comic Sans font – outlined the “pros and cons” of staying in a defined-benefit plan. Under “cons,” the planner had listed “mortality risk,” which they defined as the risk of dying relatively shortly after starting to receive monthly pension income.

Here’s what they meant by “mortality risk:” Let’s say you’re facing a pension decision between, say, receiving a lump sum of $750,000 if you “commuted” your entitlement under the plan today, versus $3,500 per month for as long as you’re alive – and you’re wondering about what happens if you die a few years after starting the pension. (“Commuting” your pension entitlement means taking the assets out of the plan as a lump sum today, typically to manage on your own.)

In this situation, and with “mortality risk” presented by the advisor in this way – as equally balanced with the probability of living a long time – it can be very tempting to think that the best option is to “take your money and run.” Maybe you’ll die “early,” you might think – and if you do, you’ll leave an estate!

However, this “financial plan” simply listed “pros and cons” of staying in the defined-benefit plan, without considering the probability of either outcome. If we use the projection assumptions provided for Certified Financial Planners® to reference in preparing financial plans, we can see that a woman aged 65 today has a 50% chance of living to age 91, and a 25% chance of living to age 97, while a man aged 65 today has a 50% chance of living to age 89, and a 25% chance of living to age 91 (see page 13 of the linked document).

Longevity risk vs mortality risk.

Instead of this guidance, however, in this plan the chance of “living” (longevity risk) and “dying” (mortality risk, although you won’t be able find anyone else using this term in the way this advisor did) were presented as equally-weighted possibilities, with no discussion of the likelihood of living to an advanced age.

While a discussion of the impact of dying “early” on pension outcomes is appropriate, this probability should be contextualized – not simply listed as a “con” of staying in a defined-benefit plan, and implicitly characterized as “just as likely” as living to an advanced age.

Pitfall Number 2: Inexpert advice

In this case, a member of a “gold-plated” pension plan (think large sponsoring organization and top-of-the-line pension plan features, such as inflation protection) was going through a divorce, and needed to find a way to equalize assets with a soon-to-be-ex-spouse.

As is not unusual for members of defined-benefit pension plans, the member didn’t have significant other assets. In order to meet his financial obligations, and guided by a financial advisor, he decided to commute his plan entitlement and use the freed-up cash to make an “equalization payment” to his ex.

Unfortunately, neither he nor the advisor really understood the tax consequences of this choice. Because of the size of the plan’s commuted value, the client was unable to shelter much of the paid-out lump sum from immediate taxation, meaning he had a very significant tax bill when tax time rolled around. (That’s because the amount of the commuted value was well in excess of the Maximum Transfer Value set by the Income Tax Act, which specifies how much of that commuted value can be sheltered from immediate taxation.) Continue Reading…

How much is enough? Retirement Calculators and Rocket Science

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By Doug Dahmer

Special to the Financial Independence Hub

How much is enough? This is the number we all want to know as we strive to determine how much needs to be set aside to fund our aspirations for freedom of life after work. The industry’s tool of choice, to answer this question, is the retirement calculator.

While these calculators provide a rough guideline for those early on in their accumulation years; once the count down for retirement begins (around ten, nine, eight years before retirement lift-off), you need to shift your attention from the rough guestimates of retirement calculators to a more disciplined planning process. Failure to do so robs people of the retirement they dream of and keeps them from achieving the security they deserve.

Reality Oversimplified

I recently re-watched the movie Apollo 11: a film that focuses on the spaceflight that first landed humans on the moon.

While Commander Neil Armstrong and pilots Buzz Aldrin and Michael Collins garnered most of the headlines, as I watched the mission unfold, it occurred to me that the unsung heroes of this mission were really the 100+ engineers back in Cape Canaveral. These were the people tasked with planning and then monitoring every single detail of the flight.

Complex? Unquestionably. Yet, this mission did have a pre-planned duration (8 days), a known destination (the lunar surface), a highly-researched flight plan and the ability to pre-determine fuel consumption: prior to lift-off.

Those approaching or currently living in retirement should be envious of the simplicity of this type of mission. Why? Because baby boomers face a much more daunting mission. A journey of unknown duration (often 11,000+ days), to an (all too often) poorly defined destination, along an uncharted course (Baby Boomers are redefining retirement), while constantly worrying and wondering if they will run out of fuel (money) before their journey’s end.

Unfortunately, the guidance system offered by the financial services industry is based upon the simple math of retirement calculators. Google “Retirement Calculator” – you will find every financial planning institution has an on-line version readily available. Continue Reading…