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.

Three times you might want to change your asset allocation

Posted By |

By Steve Lowrie

Special to the Financial Independence Hub

2018 was a tough year for many investments: including equities, which delivered negative returns.”  As we covered here, periodic negative returns are nothing new. But it’s been a while since they’ve lined up with a calendar year: not since 2011 here in Canada.

I suppose it’s human nature to want to try to avoid the dive by heading for higher ground. So, when markets trend down, this FAQ heats up: Is it time to change my asset allocation?

In past posts, like this one here at the Hub, I’ve generally advised sticking with your investment plans, including your asset allocation, rather than reacting to market volatility. But that doesn’t mean you can’t ever change your asset allocation. Today, let’s cover three times you may want to.

1.) If you’ve built your portfolio on shaky ground

If your current “allocation” is actually just a random assortment of investments, there’s never a bad time to establish an underlying plan to guide the way, and to alter your allocations accordingly. Especially if your current portfolio is high-priced and premised on active management (trying to dodge in and out of winning/losing markets or securities), the sooner you can transition into a solidly built portfolio, the better. In this piece, I covered how to determine and document your asset allocation with an Investment Policy Statement.

2.) If your financial circumstances have changed

What if you receive a financial windfall such as an inheritance, or you encounter a hardship such as losing your job? If your financial “landscape” changes, it makes sense to revisit your asset allocation and adjust it if needed, to reflect any changes in your personal financial goals, and any increased or decreased capacity to take on investment risks.

3.) If your life has changed

Even if your financial circumstances haven’t changed, your life may. Marriage, divorce or widowhood; the birth of a child; a career change or retirement. These are the sorts of events that might call for a fresh look at whether your current asset allocations continue to reflect your evolving needs.

You may have noticed a theme here: If particulars in your own life change, it can make good sense to alter your asset allocation to reflect your revised circumstances.

The flip side of this coin holds true too: Avoid changing your asset allocation just because the markets are heading up, down or sideways.

So, if your annual performance reports had you seeing red at year-end, please ask yourself: Has anything in your own life changed, or are you reacting to market mood swings? If you’ve built a plan and it still reflects your goals, your best bet is to stick with it. That still doesn’t guarantee success, but it still gives you your greatest odds.

Steve Lowrie holds the CFA designation and has 25 years of experience dealing with individual investors. Before creating Lowrie Financial in 2009, he worked at various Bay Street brokerage firms both as an advisor and in management. “I help investors ignore the Wall and Bay Street hype and hysteria, and focus on what’s best for themselves.” This blog originally appeared on his site on Dec. 1, 2018 and is republished here with permission. 

How to build the best long-term stock portfolio for retiring in Canada

Posted By |

 

Diversification, RRSPs, and compounding interest are important topics for investors building portfolios for retiring in Canada

Long-term stock investment strategies aren’t built to make a fast dollar. They are built to prosper over time, and most important, teach you how to pick the right stocks. Retiring in Canada can be easier if you follow our tips for building a long-term stock portfolio.

Retiring in Canada: Diversify your holdings to create a long-term retirement portfolio

One of our key rules for successful investing is to maintain a diversified stock portfolio. This means spreading your money out across most, if not all, of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities.

Here are some additional suggestions to prepare investors for retiring in Canada:

  • When it comes to a diversified stock portfolio, stocks in the Resources and Manufacturing & Industry sectors expose you to above-average share price volatility.
  • Stocks in the Utilities and Canadian Finance sectors entail below-average volatility.
  • Consumer stocks fall in the middle, between volatile Resources and Manufacturing companies, and the more stable Canadian Finance and Utilities companies.

Most investors should have investments in most, if not all, of these five sectors. The proper proportions for you depend on your temperament and circumstances.

Conservative or income-seeking investors may want to emphasize utilities and Canadian banks for their high and generally secure dividends.

Long-term value investing is a key part of building a balanced and diversified portfolio

The core of the long-term value investing approach is identifying well-financed companies that are established in their businesses and have a history of earnings and dividends. They are likely to survive any economic setback that comes along, and thrive anew when prosperity returns, as it inevitably does.

When you look for stocks that are undervalued, it’s best to focus on shares of quality companies that have a consistent history of sales and earnings, as well as a strong hold on a growing clientele.

Here are three of the financial ratios we use to spot them:

  • Price-earnings ratios
  • Price-to-sales ratios
  • Price-cash flow ratios

A long-term investment strategy for retiring in Canada maximizes compound interest

Compound interest — earning interest on interest — can have an enormous ballooning effect on the value of an investment over the long-term. It can be considered the mother of all long-term investment strategies. This tip is especially important for young investors to learn. The benefits of this stock trading tip apply to both dividend-paying stocks and fixed-return, interest-paying investments such as bonds. When you earn a return on past returns, the value of your investment can multiply. Instead of rising at a steady rate, the number of dollars in your portfolio will grow at an accelerating rate.

To profit from this tip, you need to pay attention to steady drains on your capital, even seemingly small ones: like high brokerage commissions. If you’re losing (or missing out on a profit of) even 1% a year, it can have an enormous draining effect on your investments over a decade or two.

Registered Retirement Savings Plans as an option for retiring in Canada

Registered Retirement Savings Plans, or RRSPs, are a form of tax-deferred savings plan. RRSP account contributions are tax deductible, and the investments grow tax-free. When you begin withdrawing funds from your RRSP, they are taxed as ordinary income. RRSPs are the best-known and most widely used tax shelters in Canada.

Bonus tip: If you’re retiring in Canada soon, you should switch your RRSP to a registered retirement income fund (RRIF)

Why should you switch your RRSP to a registered retirement income fund (RRIF) if you’re retiring soon in Canada: as opposed to other options?

If you have one or more RRSPs, you’ll have to wind them up at the end of the year in which you turn 71. We think converting your RRSP to a RRIF (registered retirement income fund) is the best option for most investors. You have three main retirement investing options:

  • You can cash in your RRSP and withdraw the funds in a lump sum. In most cases, this is a poor retirement investing option, since you’ll be taxed on the entire amount in that year as ordinary income.
  • You can purchase an annuity.
  • Proceed with the RRSP to RRIF conversion.

Converting your RRSP to RRIF is the best retirement investing option for most investors. That’s because RRIFs offer more flexibility and tax savings than annuities or a lump-sum withdrawal.

Like an RRSP, a RRIF can hold a range of investments. One convenient thing to note about the RRSP-to-RRIF conversion process is you don’t need to sell your RRSP holdings when you convert: you simply transfer them to your RRIF.

Retiring in Canada can be easier if long-term strategies are used. Have you employed any short-term investment strategies to prepare for retirement, and if so, how have they performed for you?

If you’ve already retired, what investment tips would you offer to those just planning their retirement finances?

 

Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books. This article was originally published in 2017 and is regularly updated, most recently on July 10, 2018. It is republished on the Hub with permission. 

The touchpoint: on being “Packaged” out from the Corporation

Posted By |

By Kevin Press

Special to the Financial Independence Hub

Since being restructured out of my 14-plus-year, rather comfortable position with a global insurance company, I’ve been asked one question more than any other.

Did you see it coming? The answer in my case is yes. I suspect that’s true for most 50- or 60-somethings who’ve found themselves accepting an invitation to “the touchpoint” from their boss, only to find that it’s been moved from their office to HR at the last moment.

Of course, if you’re anything like me (which is to say that you go to work every day like a Jimmy Stewart character in a Hitchcock movie) then nothing comes as a surprise.

I had two thoughts in quick succession when I received my summons. First, what day is it? Tuesday. Dreaded dead-man-walking Tuesday.

Second, how many documents can I email home between now and zero hour? (Nothing sensitive of course, for the record.)

It’s at this point that things began to turn a bit darkly comic. On my walk to HR, I’m stopped to commiserate with a colleague about the dumb email she just got from her boss. Smile and nod.

Young HR person hands me “The Package”

Turn the corner and my fears are realized. The boss is sitting with a too-young member of the HR team, both sporting the kind of sympathetic look that makes you wish you’d forgotten your glasses. I’m told I’ve “had a good run,” which makes me feel a good deal older than my 52 years. Continue Reading…

Retired Money: Whether you’re a stock or a bond may determine when to take CPP/OAS

Posted By |

When to take CPP/OAS? My latest MoneySense Retired Money column passes on a fresh perspective on the old topic of whether you should take CPP or OAS early or late. You can find the full piece by clicking on the highlighted text here: Why aggressive stock investors should consider taking CPP early.

One of the main sources cited in the piece is fee-for-service financial planner Ed Rempel, who has contributed guest blogs to the Hub in the past. See for example Should I take CPP early? Some Real Life Examples or Delay CPP and OAS till 70? Some case studies.

Ed Rempel

When he recently turned 60, Rempel opted himself to take CPP himself because of course he considers himself primarily a “stock” when it comes to investing (using the concept from Moshe Milevsky’s book, Are you a stock or a bond?). He figures he can get good enough returns by investing the early CPP benefits that he will more than make up for the higher payouts CPP makes available for waiting till 65 or 70. Same with OAS, which he figures even balanced investors should take as soon as it’s on offer at age 65.

The corollary of this is that if you consider yourself primarily a fixed-income investor, then you should probably take CPP and perhaps OAS too closer to age 70. Compared to taking CPP at 65, taking it at 70 results in 42% more payments, while OAS is sweeter by 36% by delaying the full five years.

The MoneySense piece also quotes retired financial advisor Warren Baldwin, who chose to take CPP himself by age 66. Like Rempel and most financial advisors, Baldwin has a healthy exposure to equities. But he also cites a couple of other reasons for his decision. Baldwin, (formerly with T. E. Wealth), figures the value of the CPP fund to pay you the pension at age 65 is at least $250,000: more if you factor in its inflation indexing. The latter is an important consideration, especially for those (like Yours Truly), whose Defined Benefit pensions are not indexed to inflation.

Baldwin took his own CPP at 66, a year after his final year of full-time employment income. He did so “mainly for the cash flow and portfolio maintenance.”  But Baldwin has other reasons too. “I do not want to leave the CPP too long into the future in case the government changes the terms on it or the rate of income tax might rise … Look at how many changes they have made in the last 20 years.”

If a retiree’s marginal tax bracket jumped from 35% to 45%, Baldwin says deferred CPP would face a heavier tax load, while if benefits are taken earlier they would be taxed at more modest rates. And if retirees also have significant sums accumulated in RRSPs and RRIFs, the extra income might push up their Marginal Tax Bracket.

CPP survivor benefits also need to be considered

Warren Baldwin

Finally, Baldwin considers the “estate value” of CPP. “If two spouses have the maximum CPP and one dies, the survivor will not get much from the ‘survivor-ship’ aspect of CPP … So, if the ‘value’ of the CPP at 65 is in the range of $300,000, then if you die before you collect, there is quite a loss. Continue Reading…

The 4% Rule conflates Asset Accumulation with Income Stream

Posted By |

De-accumulation blogger Edward Kierklo

By Edward Kierklo

Special to the Financial Independence Hub

Nothing has worked more effectively for the financial industry to justify asset accumulation or AUM (Assets Under Management) than the theoretical underpinnings of the 4% “rule” or “guideline.”

There are innumerable articles on how individuals will require one million dollars or more for retirement based on this dubious principle.

Certainly it is crucial to save but to focus on any particular threshold misses the point that what counts in retirement is a regular, dependable stream of income for a lifetime.

Motley Fool does not debunk the 4% rule explicitly but offers lots of caveats in this piece.

Take this recent article on Marketwatch saying that one million is not enough.

Balancing lifestyle and longevity

There are two factors in retirement to balance: lifestyle and longevity. Any 4% or otherwise rule is irrelevant if longevity is uncertain. Most people want to maintain a certain quality of life in retirement as well as living healthy.

Here is a hypothetical question: would you take Social Security if it were offered as a lump sum or continue to collect it monthly for the rest of your life (with the bonus of inflation adjusted payouts)? Continue Reading…