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.

Declutter the pesky nest egg

Posted By |

“Decluttering the pesky nest egg ranks high among investors. Now is a great time to snap into action.”

Investment clutter can easily develop from a variety of sources. The number of accounts opened, types of risks incurred, type of advice sought and style of adviser hired are just a few starting points that contribute. Some of the clutter often falls to the back of the closet, never to see the light of day again.

So I ask: “Is your investment closet cluttered with plenty of stuff?”

The stuff was likely purchased over several years and from multiple providers. The passage of time transformed it into a muddle that typically no longer serves its intended purposes. Perhaps, the investment closet has not been purged for longer than anyone cares to remember. If it feels like a mishmash, it probably is.

I keep tabs on portfolio requests seeking fresh opinions. The majority of cases hold 15 to 35 investments, primarily mutual funds and assortments of individual stocks. Keeping track of such selections is not easy for most investors. Overlap often makes its way into portfolios. The good news is that the best time to declutter the jumble is when stock prices are at or near their highs. Like now.

Spot the clutter

Accordingly, I highlight critical signs that recognize “cluttered investing”.If you spot any of these in your investment closet, you have some work to do: Continue Reading…

Should you withdraw the Commuted Value of your Defined-Benefit Pension?

Posted By |

By Michael J. Wiener

Special to the Financial Independence Hub

Should you withdraw the Commuted Value of your Defined-Benefit Pension?

No. There are some exceptions, but the answer is almost always no. In fact, if a financial advisor is pushing you to pull out the commuted value of your pension, that’s a sign that you’re likely working with a bad advisor.

There is almost no chance that your advisor will choose investments that outperform a pension fund, mainly because the total fees you pay with an advisor are so much higher than the fees charged within a pension fund.

Some advisors will tell you that you won’t pay any fees because the mutual funds pay the advisor. Don’t believe this. Mutual funds and advisors get paid out of your savings.

Further, defined-benefit pensions have the advantage of handling longevity risk. Pension funds can afford to pay you based on your expected life span, and they’ll keep paying if you happen to live long. With an advisor managing your money, you need to hold back on your spending in case you live long.

Where it might make sense to take the commuted value

There are some cases where it makes sense to withdraw your pension’s commuted value. Here are a few:

1. Poor health makes you likely to die much younger than average. In this case, taking the commuted value allows you to spend more now or leave a larger legacy. Continue Reading…

How to create a pension for the Average Joe: 65 with as little as $200K in Savings

Posted By |

By Billy and Akaisha Kaderli, RetireEarlyLifestyle.com

Special to the Financial Independence Hub

We know many of our readers are not “average.” However, if average Joe can support his retirement on as little as US$200,000 savings, imagine what you can do with the amount you have!

By reading the chart below, you can see that the average spending for retirement households age 65 – 74 is US$46,000.


It is tough to make that $46k amount with only Joe’s savings, so what should he do?

Social Security

The average recipient today (in the United States) collects US$1,461 a month, or US$17,532 a year. Joe’s SS check is average and he has a wife who also collects the average Social Security amount.

$17,532 times 2 (people) = US$35,000 per year.

Not quite the $46,000 that they need but getting closer.

Hopefully, Joe has his retirement money invested in VTI (Vanguard Total Stock Market) or SPY (S&P 500 Index) and is making market gains equaling around 10% annually.


Here you can see that since the 1950’s — about when Joe was born — the S&P 500 has had an annualized return of over 11%, dividends reinvested, but let’s use 10% as a more conservative projection.

Remember, Joe has to make up $11,000 to match his average spending ($46,000). But let’s give Joe an extra one thousand dollars per year so he can pamper Mrs. Joe with occasional gifts and dinners out.

So, he needs $12,000 out of the $200,000 in savings per year to make up the difference in spending. That’s an extra $1.000 per month.

Invested in the S&P 500 — based on 69 years of returns and using 10% as the annual return — after his first year he would have $220,000 minus $12,000 withdrawal = $208,000.

Now Joe has $47,000 in annual income: $35,000 from Social Security and $12,000 from investments.

Plus, his $200,000 has grown to $208,000, a 4% gain outpacing inflation at the current rate of less than 2% per year.

Their Social Security payment is also indexed to inflation so as inflation rises, so will their Social Security. Continue Reading…

Which came first: the Chicken or the Egg?

Posted By |
By Kevin Flanagan, WisdomTree Investments
 
Special to the Financial Independence Hub
A funny thing happened recently when I walked into the office. No, this is not the setup for some joke; rather, I’m referring to what I heard regarding movement in the stock and bond markets. Specifically, the narrative was that the decline in U.S. equities resulted from the drop in the U.S. Treasury (UST) 10-Year yield.
Because I’ve been a “bond guy” for quite some time now, the rhetoric was fascinating to me and brought to mind this age-old question: Which came first: the chicken or the egg?

In my experience, the bond market typically reacts to developments in the stock market, not the other way around. Being a baby boomer (right at the tail end, mind you), I thought: Am I missing something here? Could the paradigm have shifted? Thus, I decided to do a little bit more investigating, and what I found was that, in my opinion, no, the paradigm had not shifted. The recent decline in the UST 10-Year yield had its genesis in the latest sell-off in the stock market, which began in early May and continued throughout the month.

Dow Jones Industrial Avg. vs. UST 10-Year Yield

UST vs Stock Market

Take a look at the graph. The UST 10-Year yield was essentially straddling the 2.50% threshold in the opening days of May until the Dow Joes Industrial Average (DJIA) took a nearly 475-point nosedive on May 7. This began the downward trend in which we find ourselves now. Remember, that trend was in response to the breakdown in U.S./China trade talks and the attendant escalation in “tariff talk.” Then round 2 hit as the DJIA plunged 617 points on May 13, leading the UST 10-Year to break through the 2.40% level, ultimately falling down to 2.37% —which, at that time, matched the 2019 low watermark set back in March. Notice how stocks rebounded somewhat after this episode: and what did the 10-Year yield do? That’s right, it moved back up as a result. Continue Reading…

Retired Money: What to do about falling GIC rates

Posted By |
PWL Capital’s Ben Felix

My latest MoneySense Retired Money column has just been published. It looks at the reversal the past year in interest rates, which impacts seniors who had started to look forward to at least half-decent GIC rates near 3%. You can find the full piece by clicking on the highlighted headline: Are GICs right for retirees looking for Fixed Income? 

Short of embracing high-yielding dividend paying stocks, the more palatable alternative for conservative retirees might be fixed-income ETFs. The article focuses on a recent video by CFA Charterholder Benjamin Felix, an Ottawa-based portfolio manager for PWL Capital. Felix argues that at a minimum such investors should have a mix of both fixed-income ETFs and GIC ladders.

The latter let you sleep at night because they are invariably “in the green” in investment accounts. But while in the short term fixed-income ETFs can be in the red — just like equity ETFs — Felix makes a compelling argument for the higher potential returns of bond ETFs.

Felix believes that what really matters for investors is total return: “Holding a lower-rate GIC after a rate increase still results in an economic loss.” Bond returns consist of principal, interest payments and reinvested interest, so focusing only on return of principal misses the point. Individual bonds are not ideal for individual investors, as they require extensive research, are relatively expensive and tricky to trade.

Short-term GICs miss out on the term premium

But short-term GICs miss out on the term premium, which is substantial over time. Going back to 1985, Felix says short-term bonds returned 6.51% annualized versus 7.97% for the aggregate bond universe (which includes some short-term bonds).  This shows how much mid- and long-term bonds bring up the overall return. To be clear, this period captures one of the greatest bond markets in history but Felix says it is still reasonable to expect a relationship between riskier longer-term bonds and higher expected bond returns. Risk and return should be related.

GICs are also illiquid, so even if an investor chooses to include GICs in a portfolio, they will generally also include bond ETFs, which – like stock ETFs – can be sold any trading day. Nor do GICs provide exposure to global bonds.

Of course, a nice alternative are those asset allocation ETFs we have often discussed on this site. See for example this excellent overview by CutthecrapInvesting’s Dale Roberts: Which All-in-One, One-Ticket Portfolio is right for you? 

The Felix video can be found at his Common Sense Investing YouTube series here.