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.

3 books I just read that Retirees DIYing their pensions need to read

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Amazon.ca

My latest MoneySense Retired Money column looks at a must-read new book on Retirement as well as two related books on DIY stock-investing. You can read the full column by clicking on the highlighted headline: Who you gonna trust: Barry Ritholtz or Jim Cramer?

The must read and main focus of the MoneySense column is William Bengen’s A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More. If that sounds familiar it should: Bengen’s original book on the 4% Rule is considered the bible of retirement, with his famous “SAFEMAX” guideline of 4% a year being an annual amount of withdrawals that should be “safe” for retirees to continue for a full 30 years, even after inflation. The original book,  titled Conserving Client Portfolios During Retirement, was first published in 2006.

Never mind that even Bengen considers 4.7% be a more universal SAFEMAX. The original book was aimed at financial advisors and professionals while the new one ostensibly is aimed at retail investors and retirees. I say ostensibly because I was a little disappointed with it and found the plethora of complicated charts and tables a bit much for lay investors. Still, there’s a lot of common sense there: Inflation is big long-term threat to retirees as are bear markets. Withdrawing too much from portfolios can be disastrous if you are unfortunate enough to retire just as a bear market hits and/or inflation starts to bite.

On the other hand, sticking with the old 4% rule or even the smaller amounts of 3% or even 2% advocated by some cautious souls, could result in you withdrawing less than you really need to enjoy retirement, although the tax department and any heirs might commend your caution and frugality.

How to make money in any market

Amazon.ca

While it’s rare for me to buy new hardcover books because I receive so many “free” review copies of financial books, I actually did buy A Richer Retirement as soon as it was available on Amazon. Plus, unusually, I also bought two other brand new books on the related topic of investing and stock-picking.

One was Jim Cramer’s How to make money in any market, by the sometimes revered but often maligned host of  CNBC shows Mad Money and Squawk on the Street. It’s fashionable for some financial journalists who believe in efficient markets and indexing to diss Cramer but I am not in that crowd. In fact, Cramer recommends that newcomers to investing put the first US$10,000 into an S&P500 index fund or ETF.

However, for seasoned investors and even retirees, Cramer suggests putting half a portfolio in index funds and the other half in individual stocks. Where we part company is his recommendation that the bucket of stocks be restricted to just five names, which would mean 10% in each. For my money, that’s way too concentrated and risky, even though he often brags about how he is often accosted by Nvidia Millionaires who tell him they bought that stock as soon as he announced on air that he had renamed his dog Nvidia.

How NOT to invest

Amazon.ca

Finally, regulars to this site may already have read Michael Wiener’s review of Barry Ritholtz’s How NOT to invest, which appeared here in this blog a few weeks after appearing on his Michael James on Money blog.

To be sure, those who are fond of disparaging Jim Cramer might quip that should have been the title of his own book, seeing as there are actually ETFs out there that try to profit by shorting Cramer’s picks. As of this writing, my copy has arrived but I have not yet finished reading it, as it’s a bit longer than the other two.

But based on the book blurbs and Michael’s review, I have no doubt it will be worth reading, whether for younger investors or seasoned ones and/or retirees.

Finally, while I only just received my review copy, I note that David Chilton is publishing a new edition of his classic financial novel, The Wealthy Barber, which any young person just starting to invest should acquire.  I look forward to revisiting it.

 

 

 

The common mistakes made by Retirees

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By Dale Roberts, CutTheCrap Investing, Retirement Club

Special to Financial Independence Hub

We all make mistakes. There is no such thing as the perfect portfolio. In the accumulation stage we usually have time to recover from mistakes and hopefully we’ll learn from those mistakes. Learning from mistakes will usually move us towards a more passive global core index-based portfolio. In retirement, we don’t always get a second chance. It is crucial to be aware and avoid any retirement pot holes. Kyle at the Canadian Financial Summit asked me to discuss and outline some of the key and common retirement mistakes. Of course, they are too many to mention in a 45-minute interview. Below, I will outline more of the common mistakes in retirement.

Here’s an AI outline of the Canadian Financial Summit.

The Canadian Financial Summit is an annual, free, virtual conference for Canadians to learn about personal finance and investing from Canadian experts. It covers topics like retirement planning, tax optimization, and investment strategies, with content tailored specifically for a Canadian audience to address Canadian-specific financial products and regulations. The goal is to provide practical advice to help attendees save money, invest better, and improve their financial literacy.

Canadian Financial Summit Speakers

The Summit begins on October 22 with headliners such as David Chilton (new Wealthy Barber book out in November), Rob Carrick, Jason Heath, Preet Banerjee and more. Here’s the list of speakers and topics.

My segment will air on October 24th. You can register through this Canadian Financial Summit link.

Once again, I am covering common retirement mistakes. Here’s the range of topics I had prepared for my discussion with Kyle. We touched on a few of these.

We have to start in the accumulation stage

Many retirement mistakes are born in the accumulation stage, and in the retirement risk zone.

Too much risk

Most investors take on too much risk. They are not investing within their risk tolerance level. That said, it has not been a problem since 2009: we have not been tested. But retirees and near retirees were certainly burned by the financial crisis and the dot com crash. For too many, their retirement was greatly impaired.

And of course, we can add in not taking on enough risk, for those who are risk averse. We need to take on the risk necessary to achieve our financial goals. All said, we always need to invest within our risk tolerance level.

The accumulation stage is dead simple

Go for growth while investing within your risk tolerance level. More money is “more better.”  More money will create more retirement income.

Paying ridiculously high fees

Fire your wealth-destroying high-fee mutual funds and the advisor they rode in on. Ditto for the retirement stage. You can do the research necessary, or look to an advice-only planner who specializes in retirement planning.

Don’t count the dividends

Don’t PADI – Potential Annual Dividend Income.

That’s like watching the oil gauge as you try to make the car go faster.

The dividends do not contribute to wealth creation. Dividends are a removal of value; that’s it. The share price drops by the value of the dividend. If you move the dividends back to your stock or ETF holding to buy more shares you are simply owning more shares at lower prices.

As Yogi Berra would ask: do you want your medium pizza cut into 8 slices or 6 slices?

You still have a medium pizza, no matter how you slice it.

Dividends are a tax drag in taxable accounts. You are paying tax on money you don’t need. You are paying tax on money that creates no value. It’s phantom wealth creation, but with real taxes.

Avoid covered calls and other specialty income

They underperform by design. That fact should be outlined in the prospectus.

Canadian home bias

This can be related to a fascination with Canadian dividends or Canadian Blue Chip stocks in general. For sure, building a portfolio of Canadian Blue Chips is known to greatly outperform the TSX Composite. But we need greater diversification to reduce risk.

A Canadian with severe home bias is putting all of their chips on a few sectors, one country and one currency. It’s not smart.

We should consider a global portfolio, at the very least a Canadian and U.S. portfolio.

Stock portfolios that are too concentrated

It’s common to see portfolios with just a few stocks. We need 15 to 20 stocks to mimic an index. You’re likely best to hold 20 or more.

We create severe company risk with a concentrated portfolio.

Clear your debt

Carrying debt into retirement is a common “mistake.”  A recent report suggested that 29% of Canadian retirees will carry a mortgage.

Consider the tax burden that it takes to create the income to pay the mortgage. Every extra dollar is at the top marginal rate. It’s a mortgage payment plus tax on top. A $3,000 monthly mortgage payment might cost you $4,000 or more when you consider taxes. It could also contribute to OAS claw back.

Consider the car payment as well. Try to enter retirement with a paid-off vehicle.

Not using spousal RRSP accounts

Use RRSP spousal accounts for tax advantaged income splitting in retirement.

This allows us to ‘split income’ before the age of 65. At age 65 we can then split income from your RRIF.

Ditto for setting up joint taxable accounts. Pay attention to attribution rules for taxable accounts.

The Retirement Risk Zone

Not preparing the portfolio (de-risking) for retirement before retirement is a common mistake. We enter the retirement risk zone several years before retirement. That was our topic last year for the Financial Summit.

Mistakes in Retirement

Not running a retirement cash flow calculator

This is a must for every retiree. A retirement calculator will help you discover the most optimal (and tax efficient) order of account harvesting. That is when, and how much, to remove from your RRSP / RRIF, Taxable accounts, and TFSAs, working in concert with pensions, other amounts plus, CPP and OAS. It can help us create tax efficiency and manage OAS claw backs.

Most Canadians will benefit from the RRSP / RRIF meltdown strategy. It involves delaying CPP and OAS for the massive increases in pension-like, inflation-adjusted income.

Check out Retirement Club for Canadians

From age 65 to 70, CPP increases by 42%, OAS increases by 36%.

To delay CPP and OAS we often use the RRSP / RRIF accounts (and at times a slice of TFSA or Taxable) to bridge the gap during those years. That is, we spend more heavily from the RRSP / RRIF while we wait for increased CPP and perhaps OAS.

It’s different for everyone, the retirement cash flow calculators will help you uncover the right approach for you. Only the software knows.

There are many retirement calculator options that are free use, or available at a very low fee. We are reviewing many of them at Retirement Club.

Examples: MayRetire, Milestones, Adviice, Perc-Pro from Frederick Vettese, optiml.ca, PWL Capital also offers a retirement calculator.

Not spending, not enjoying their money

We might embrace a U-shaped spending plan. We spend more in the early years: the go-go years. It might dip in the slow-go years, and then increase again in the later no-go years as health care cost, living in place, or retirement home plus assisted living costs increase greatly.

We might call that a ‘you-shaped’ spending plan. Continue Reading…

Is it Work or Is it Passion?

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Billy and Akaisha Kaderli, RetireEarlyLifestyle.com

By Billy and Akaisha Kaderli

RetireEarlyLifestyle.com

Special to Financial Independence Hub

While taking a break from the sun and surf, relaxing in my hotel room in a tiny beach town on Mexico’s rugged Pacific Coast, my cell phone rang.

‘Howdy, Beautiful!’ my friend of four decades shouted from snow country, thousands of miles away. “Been watchin’ your website for years and I read all your stories. Love ‘em. But I thought you were retired!“

How many times over the decades since we left the conventional work force have we heard that challenge? Our responses have ranged from surprised silence to justification of our volunteer work, to just laughing out loud.

We run a popular website, photograph our travels and share our lifestyle adventures with people like you. Some think that by doing this, we have somehow become unfit to call ourselves “retired.”

Today I would like to pose this question to you: “Once you leave the mainstream labor-for-paycheck world and become financially independent, aren’t you free to choose what you do with your time? When is something considered work, and when are you pursuing a passion?“

Receiving Monetary Compensation

Most people with whom we have this conversation have one particular definition of retirement: You are not retired if you are receiving money for work performed.

Well I guess that rules out all of the Wal*Mart Greeters… but seriously, we’d like to counter this simplistic point of view.

If you are a landlord with several rentals that bring in monthly retirement income, can you ever be considered retired? Do you not have to oversee the properties, be responsible for making repairs, pay for maintenance and upkeep and search for qualified tenants? At the very least you must concern yourself with your manager.

What if you are like a friend of ours who discovered he had a latent talent for making sculptures, and now sells his bronze statues all over the eastern seaboard at Toney art shows? He receives funds from his commissioned work, but he couldn’t be happier following his passion. What does he care if someone doesn’t think he is retired?

Other friends whom we know well sold their accounting firm and moved to a working ranch – a dream come true for them. Instead of pushing paper and tax forms, they now raise horses, scoop poop, grow grapes to make award-winning wine, and cultivate boutique vegetables which they sell at local farmers markets. Is that work? No question about it. However, they are undoubtedly following a passion and their lives are enriched because of it.

A friend of ours is a domestic goddess with unmistakable artistic flare, and her husband is an adventurous handyman. They purchase old Victorian homes, renovate them room-by-room and then sell them at profit. Sure they receive income from their labors, but this income isn’t what sustains their portfolio. And why not utilize your talents and implement your dreams at this time of life that should be yours?

If you have left your Monday-through-Friday job but own a diverse portfolio which you must manage, or if you are trading stocks or receiving dividends, does this monetary compensation for your lifestyle disqualify you out of the official definition of being retired? What if you find the world of finance riveting? Are you supposed to stay away because someone somewhere will think you are disingenuous or not “really” retired?

If you are working you are not retired

Some people believe that if you do any sort of activity that would be considered in any fashion to be work, or if it takes any effort whatsoever, you have become unsuitable to wear the “I’m retired” label.

Yet we know all sorts of single retired women who raise dogs to sell, train rescue dogs for animal shelters or have a modest dog-walking “business” that they run in their neighborhoods. How many older retired men have we met over the years and in numerous communities who will fix your plumbing for a pittance or trade, solve an electrical problem or put down some flooring in your home? What if you want to write music, direct a play or act in one? All of this takes effort, focus and work.

What if you wanted to build a boat, restore old classic cars and sell them, or play in a jazz band for the clubs in your town? Are you back to the working grind – or engaging your passion?

Volunteering or mentoring

One may or may not receive compensation for donating time and expertise. Teaching English as a second language could get you out of the house and add dimension to your day, or it could defray the cost of airline tickets to a foreign country. If you allow this skill to enhance your travel budget have you transgressed against The Rules of Retirement?

I taught Thai massage in Mexico for free and created a note card business for the local women in my neighborhood. Billy coached a women’s basketball team to the finals, imported an electronic scoreboard for the city gym and built tennis courts in this same Mexican town. Was this work? Definitely. We both put in more hours than we want to know, but the return was making friends and having personal satisfaction for helping others. Continue Reading…

When is the right time for Retirees to Consider Annuities?

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Image by Arthur A on Pexels.com

Retirement planning experts suggest current market conditions may present an opportune moment for retirees to consider annuities. With potentially higher yields available in today’s interest rate environment, strategic approaches like partial annuitization and laddered purchases offer ways to enhance retirement security. Financial advisors emphasize the importance of weighing tax implications and long-term income stability before making decisions about annuities in a changing economic landscape.

 

  • Ladder Annuity Purchases to Capture Peak Rates
  • Favorable Market Creates Opportunity for Retirement Security
  • Strategic Timing for Annuities in High Rates
  • Consider Tax Implications before Rushing to Annuitize
  • Tax Strategy matters more than Current Rates
  • Lock in Higher Yields while Maintaining Diversification
  • Balance Security and Flexibility with Partial Annuitization
  • Act Now before Rate Cuts Lower Lifetime Income

Ladder Annuity Purchases to Capture Peak Rates

Through my work with United Advisor Group helping advisors serve elite clients, I’m seeing a critical window right now for partial annuitization that most people are missing. The current 5-6% immediate annuity rates are the highest we’ve seen in over a decade, but here’s what’s different from typical advice.

I’m recommending clients ladder their annuity purchases over 12-18 months rather than going all-in immediately. We’re working with carriers like Lincoln Financial where a Phoenix client recently locked in 5.4% on a $300K immediate annuity in January, then waited until rates hit 5.8% in March for another $200k portion. This staging approach captures rising rates while securing baseline income.

The sweet spot I’m seeing is 30-40% annuitization for near-retirees, not the 20% most advisors suggest. With our four-custodian structure at UAG, we’re tracking how this higher allocation actually reduces overall portfolio risk more than expected. A Scottsdale couple we work with annuitized 35% at current rates and can now be more aggressive with their remaining assets.

What makes this timing unique is the Federal Reserve’s clear signalling about holding higher rates through 2024. Unlike previous cycles where advisors played wait-and-see, the current economic indicators we track suggest these annuity rates have more staying power, making the decision timeline less pressured than typical rate environments. — Ray Gettins, Director, United Advisor Group

Favorable Market creates Opportunity for Retirement Security

Annuities aren’t flashy: but in today’s rate environment, they’re finally getting their moment.” With interest rates at multi-year highs, this is one of the most favorable environments we have seen in a long time for retirees to consider annuitizing or partially annuitizing. Higher rates mean better payout terms, especially for fixed annuities, giving retirees more predictable income in retirement. But timing is still very important. The decision to annuitize should still be in line with your personal retirement goals, risk tolerance & need for guaranteed income. Partial annuitization provides a great balance for retirees, allowing them to create a stable income stream to cover essential expenses and still have portfolios flexible enough for legacy planning and growth. It’s much more than a response to market conditions. It’s a calculated move towards peace of mind.

— Harold Wenger Jr., Partner and Wealth Manager, Kingsview Partners

Strategic Timing for Annuities in High Rates

Now might be the smartest time in 15 years to consider annuitizing.

It’s actually quite a favorable time for retirees to annuitize, partially or fully, considering the interest rates today that are at their highest levels since before the Great Financial Crisis. Higher interest rates essentially mean stronger payouts than what we have seen over the past decades. This makes them a more attractive option for those looking for a guaranteed lifetime income. Having said that, I still recommend retirees to think of annuitization the same way they think about diversification, strategically, not emotionally. While having a steady stream of income for essential expenses can provide peace of mind, I would never recommend anyone to put all their eggs in one basket.

Employing a blended approach — one that combines annuities with passive real estate investing or dividend-generating assets — can be a much smarter way to go. It’s the right time now to explore annuities as part of a broader retirement strategy. Just make sure that it aligns with your lifestyle goals, risk tolerance, and legacy planning. — Lon Welsh, Founder, Ironton Capital

Consider Tax Implications before Rushing to Annuitize

After working with retirees for 19 years through my accounting firm, I see this timing question differently than most financial advisors. The real issue isn’t just interest rates: it’s the massive tax implications that nobody talks about.

I had a client couple from North Carolina who were considering annuitizing $300K of their retirement savings when rates hit 5.8% last year. Before they pulled the trigger, we ran the numbers on their overall tax strategy. That annuity income would have pushed them into a higher bracket and made 85% of their Social Security taxable instead of 50%.

Instead, we structured a business strategy where they started a simple consulting venture based on his 40 years of manufacturing experience. Now they’re deferring some retirement income, writing off business expenses that were previously personal costs, and timing their annuitization for when they can control their tax bracket more effectively.

The current rate environment is tempting, but I’m seeing retirees lock themselves into higher lifetime tax bills. Run the tax projections first: sometimes waiting 2-3 years while implementing proper business structures saves more money than chasing today’s rates. — Courtney Epps, Owner, OTB Tax

Tax Strategy Matters more than Current Rates

I believe the decision to annuitize in today’s higher-rate environment is more complex than most retirees are told. The bigger question isn’t just the interest rate, it’s how the IRS will tax that income stream over time. Continue Reading…

Avoiding the big retirement mistakes

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By Mark Seed, myownadvisor

Special to Financial Independence Hub

In a few posts on my site over the years, I’ve shared some big retirement mistakes to avoid. This becomes even more important now that we’re entering a new chapter in our lives: semi-retirement / work on own terms.

Are we ready? Can we avoid some big investing and related retirement mistakes that experts share?

In that spirit as part of new pillar post I hope to update annually and anchor my progress around, here are some of the ways I hope to avoid some big retirement mistakes.

I certainly won’t be perfect but I’ll do my best based on this infographic and more below:

20-common-investing-mistakes - Visual Capitalist November 2023

Attribution/thanks to Visual Capitalist. @VisualCap

1. Expecting too much

I believe I/we have reasonable long-term return and inflation assumptions. Our projections include at the time of this post:

  • 5% annualized returns from a 90% equity/stock + 10% cash/cash equivalents portfolio (excluding my small workplace pension), and
  • 3% sustained inflation. 
  • Some go-go spending years from now until age 79/80 give or take.

I’ll link to my latest Financial Independence Budget update at the end of this post to support any planning assumptions you might have.

What are your key assumptions?

2. No investment goals / 3. Not diversifying

I think we should be good:

  1. We remain invested in our Canadian and U.S. individual stocks near-term, although I could see a near-term day in 2025 or 2026 whereby I sell off all remaining/handful of U.S. individual stocks we own and just put all ex-Canada stocks into a low-cost ETF like my favourite to date: XAW. I would however keep my existing 25 Canadian stocks for income and growth for now; to avoid capital gains in our taxable accounts.
  2. We are not focused on short-term returns since we remain 90% equities. That said, short-term, we are hopefully setting aside enough cash/cash equivalents in 2025 to draw down said cash in 2026 and 2027. Planning for 2028+ has not started yet but we have time to organize ourselves …
  3. We have our long-term drawdown plan: NRT which means a mix of living off dividends from our Non-Registered Accounts (N) with corporation withdrawals, drawing down our RRSPs (R) over time, and therefore leaving our TFSAs (T) until the end.

Our hybrid investing approach using a mix of stocks and ETFs is not going to change:

  1. We own a number of Canadian dividend-paying stocks (with some U.S. stocks for now) for income and growth.
  2. We own a few low-cost ETFs for extra diversification.

4. Focusing on the short-term

Fail!

I’m looking forward to the short term!

We are looking forward to our semi-retirement years and seeing what opportunities may appear in the coming years. I get what the infographic is saying though. 

5. Buying high and selling low

I can’t predict the future, can you?

I’m at a point in my investing life whereby if I have the money, sure, I will invest more but I don’t have to.

Besides, when you index invest, the best price is today’s price. The stock market is a forward looking tool.

“Someone is sitting in the shade today because someone planted a tree a long time ago.” – Warren Buffett

6. Trading too much

Nothing really to worry about here. I’m no longer 22-years-old and into penny stocks on this list!

Here are other ways to kill your retirement plan:

7. Paying too much in fees

No longer a problem via owning many individual stocks; no trading, I only do some periodic buying and we maintain low-cost ETFs for growth.

8. Focusing too much on taxes

In other articles on my site about investing mistakes, I’ve seen some expert concerns about dividend income in a taxable account and at the same time, I’ve seen the same experts say not to let the taxation tail wave the investing dog per se.

Mixed messages for sure.

When it comes to dividends, I continue to remain on record that dividends are not the be-all, end-all but work for us especially in our non-registered accounts in that:

  • any company that does not pay out a dividend, may alternatively provide other forms of shareholder returns: in the form of future capital gains, stock price increases, share buybacks, other.

This means dividends aren’t everything and never have been but they can be very good.

So I do like them. I will spend them. I hope to get more of them over time!

9. Not reviewing regularly

We review our portfolio every few months, in detail. We are good.

10. Misunderstanding risk

I like this one. I feel market volatility and risk while related are not the same.

Volatility:
  • Consider this like the price swings – how much an asset value fluctuates in price over time.
  • High volatility means prices swing up and down sharply, while low volatility suggests a smoother, more predictable up and down ride.

Risk:

  • Possibility of losing money over time, with many specific types of risk: stock market risk, credit risk and housing market risk and so on.
  • Risk can be framed as short-term or long-term, like “there is a risk of cash losing out to inflation over the next 2 years.”

Volatility isn’t the same as risk but they are related. Some stocks in some sectors might be highly volatile, like tech-stocks, but not all stocks nor all tech-stocks may carry the same risk.

11. Not knowing your performance

I monitor our portfolio performance often but I’ve largely given up on detailed benchmarking since it makes no sense to obsess over benchmarking if you are not meeting your objectives.

As long as you are meeting your goals, that’s good. That’s the priority.

Obsessing over a benchmark and feeling the need to meet an index because some expert said it was a good idea, is not.

12. Reacting to the media

Guilty.

I mean, recent tariff wars have been terrible for many reasons. While I have not yet adjusted my portfolio due these wars, I do find all the annexing of Canada rhetoric both very problematic and very concerning.

13. Forgetting about inflation

See above.

I use 3% higher spending per year in my projections.

Is that enough I wonder? You? Continue Reading…