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.

Retired Money: 2 useful Retirement books have starkly different views of wisdom of deferring CPP and even OAS to age 70

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My latest MoneySense Retired Money column looks at two recently published books by two of the country’s top authors on Retirement Income Planning. You can find the full column by clicking on this highlighted headline: Near retirement without a Defined Benefit pension? Here’s what you need to know.

One of the new books is retired actuary Fred Vettese’s new revised edition of his book, Retirement Income For Life, which I first reviewed in 2018, and which you can find here. Vettese has revised and expanded the book to the spring of 2020, allowing him to look at the Covid-19 issue and how an extended Covid-related bear market could put further wrenches in retirement plans.

The book describes several “enhancements” to a base case of an average almost-retired couple with no DB pensions and roughly $600,000 in savings. This base case – Vettese dubs them the Thompson family — pay high investment management fees (on the order of 2%, typically via mutual funds).

Couples in his base case also tend to take CPP as soon as it’s on offer at age 60 and OAS as soon as possible at age 65. Vettese continues to pound the table about the value of these government pensions and recommends that people like the Thompsons delay CPP till age 70 if at all possible. Remember, in the absence of a DB plan, CPP and OAS are worth their weight in gold, being government-guaranteed-for-life sources of income that are inflation-indexed to boot.

Vettese is fine with ordinary average folk taking OAS at 65. However, and this seemed new to me, in a section for high-net worth couples (which he defines as having $3 million in investable assets), he suggests they should also delay OAS to age 70, along with CPP.

As an actuary, Vettese sees this enhancement as a simple case of transferring risk from a retiree’s shoulders to the government’s. Why worry about investment risk and longevity risk when the government can worry about it on your behalf?

Similarly, a related enhancement is to engage in the same type of risk transfer by converting a portion of registered savings to the shoulders of life insurance companies: he suggests 20% can be annuitized, ideally after age 70. That’s a bit less than the 30% his first edition he recommended immediately upon retirement.

One of Vettese’s enhancements to the base case is simple enough: to cut investment management fees. Larry Bates devoted an entire book to this theme: Beat the Bank, which I reviewed two years ago here.

Try the free PERC calculator

There are two other less compelling enhancements: knowing how much income to draw and having a backstop. Knowing how much income can be figured out with a free calculator that Vettese twigs readers to: PERC or the Personal Enhanced Retirement Calculator, available at perc.morneaushepell.com. Continue Reading…

Have you considered retiring later?

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By John DeGoey, CFP, CIM

Special to the Financial Independence Hub

There are countless pieces of advice regarding retirement planning out there.  Some of them deal with lifestyle issues (How will you fill your day?  Are you sure your spouse shares your vision of how time in retirement will be spent?  What will you do to stay sharp now that you’re no longer working?), but most deal with the financial aspects of retiring.  For people who are nearing retirements (i.e. those in their 50s and early 60s), there really are only four choices that can be manipulated to help maintain a suitable cash flow for your autumn years:

  • Save more
  • Invest more aggressively
  • Accept a lesser lifestyle in retirement
  • Retire later than you planned to

There is a long list of resources and pundits who offer input on the first two items … and virtually no one wants to talk about the third item, because it is seen as a last resort.  What about the fourth item?

Retiring later is not always an option, but for those people who have some discretion, it merits serious consideration.  To begin, there are plenty of experts who can attest to ‘staying involved’ as a pathway to staying young, vigorous and mentally sharp.  Not everyone feels this way, but many people working a bit longer (even if only part time) can attest to the fact that doing so helps in their retaining a sense of worth, identity, belonging and contribution.

Taking my own advice

At this point, I need to disclose that I am planning on taking my own advice.  Less than a decade ago, I told friends I’d retire at 65.  Then, when the age for full OAS was raised to 67, I told people I’d work to that age.  More recently, even as the age for full OAS has been lowered back to 65, I am thinking of staying in the workforce longer – until age 70, perhaps.  Once again, I really enjoy my work – this option isn’t for everyone! Continue Reading…

Is Retirement in your Future?

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Billy and Akaisha Kaderli in Chapala, Mexico

By Billy and Akaisha Kaderli

Special to the Financial Independence Hub

The perfect time for retirement doesn’t exist.

This is what we have learned in our almost three decades of financial independence. Things change, and sometimes radically. There simply are no guarantees.

From our point of view, a full and rich retirement is still possible for many people right now. Sometimes it takes personal flexibility in how one’s retirement is defined, as well as self-discipline and commitment to making one’s dream happen.

Many potential retirees will find themselves working part time to supplement their retirement lifestyle and perhaps to obtain a medical insurance plan. They may work from home in a virtual style of employment, make money from their hobby, or take advantage of a less stressful second-career opportunity.

Medical tourism will become more commonplace, as corporations look for financial alternatives to providing health care for their employees. As this idea becomes more familiar, retirees and potential retirees will consider this type of health care as a viable option if they are underinsured or if their own health care plan is lacking or if it’s too expensive to maintain.

Moving to more affordable countries

Moving to more affordable countries such as Mexico, Panama, Ecuador, The Philippines, Costa Rica, or Thailand will also become more attractive to those whose portfolios have been compromised for one reason or another. One can live a reasonably comfortable lifestyle in these countries for far less than in the United States or Canada.

Grander retirement dreams may be scaled back, but that is not necessarily a bad thing. Less can be more when one’s retirement money is spent for living rather than for maintaining things.

If one’s future retirement life is based upon the idea of keeping the same level of spending after there is no longer a paycheck coming in, you could be in for a shock. But if you have learned to live below your means, have kept your monthly expenses reasonably low, and have not loaded up with huge amounts of consumer debt, then the road of retirement ahead will not pose a threat. Continue Reading…

Should I take the Commuted Value of my pension?

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By Mark Seed, MyOwnAdvisor

Special to the Financial Independence Hub

Breaking up is hard to do.

Or is it – when it comes to your employer?

Whether that is voluntary leave or involuntary leave, at some point, some people are faced with a very important financial decision: should I take the commuted value of my pension?

This post will hopefully provide some insights, based on a reader question, including my own situation with my pension to share any considerations as food for thought!

Pensions 101

I already have a very detailed post on pensions including the introductory basics on my site so I won’t repeat all details here, but I think it’s very important to understand there are two main types of pensions that we’ll talk about today:

  • Defined Contribution (or DC for short), and
  • Defined Benefit (DB).

The difference?

Think of your DC plan just as the words sound – your contribution is defined but ultimate pension value is not. Meaning, there are no promises. You’ll get what you’ll get based on what you invest in and the returns of what you invest in over time.

Think of your DB plan this way – your (pension) benefit is defined – meaning your pension value at the end of the line is known, usually based on a formula with your company that goes something like this:

Best Average Five Years’ Salary x Benefit Percentage x Years of Plan Membership = Annual Pension Income

So, using real numbers it could be this for some:

$60,000 x 1.5% x 25 = $22,500

Here is a quick pension comparison summary worth noting:

  Defined Contribution (DC) Plan Defined Benefit  (DB) Plan
Philosophy  Assisting employees accumulate retirement savings during their career. Rewarding long-service employees with a lifetime retirement income.
Investment Decision Employees decide how contributions are invested in (usually) a limited number of funds. Professional money managers look after investment decisions based on strict guidelines.
Investment Risk Employee bears the investment risk (since they selected the investments). Employer bears the investment risk.
Income at retirement  Based on employer and employee contributions and investment performance. Based on a formula that includes your annual earnings and years of service.
Valuing Your Pension Simple, as employees have their account balance readily available. Difficult, the commuted value is not readily available for most pension plans (except at termination). Actuaries help calculate.
Other notes My wife has this plan. I have this plan 🙂

What happens when you leave the organization and you have a pension?

When leaving your employer, if you have a DC plan, things are rather straightforward.

If you own a DC plan, the full market value of that plan at the time of your leave can be transferred to a personal Locked-In Retirement Account (LIRA).

I won’t go into too many details on LIRAs since as you guessed it, I also have other blogposts about that subject including how I manage my LIRA. (I used to have a DC plan when I worked and lived in Toronto. I moved my DC plan money into a LIRA when I left my former employer. I’ve had this LIRA ever since.)

With a DB plan, it’s a bit more complex to say the least. Which brings us to our reader case study for today and my thoughts and comments on that.

Reader Case Study (questions and information adapted slightly for the site):

Hi Mark!

I really enjoy your blog! 

I also really like your concept of hourly passive income wage – it’s something I’m now tracking myself!

Thoughts on this for us although I know you can’t offer specific advice but your perspectives would be good given I have read you have a pension as well. Continue Reading…

Horizons Asset Allocation ETFs for better asset allocation

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By Dale Roberts, Cutthecrapinvesting

Special to the Financial Independence Hub

Yes that is an ironic headline. While many of the asset allocation or one ticket ETFs are quite similar, Horizons asset allocation ETFs stand out. For starters as you may know, the ETFs used within these portfolios are held within a corporate structure that do not pay out taxable distributions. They primarily use swap-based ETFs to create the portfolios. That will enable greater tax efficiency with respect to withholding taxes on foreign dividends.

With the shackles of unwanted tax hits removed Horizons TRI (Total Return Investments) one ticket ETFs can create the most efficient mix of Canadian, US and International equities and bonds. They do not have to worry about how an over weighting to US equities might create those tax inefficiencies.

I had the pleasure of chatting with Mark Noble, the Executive Vice President, ETF strategies for Horizons. The general topic was building the Balanced Portfolio for the times. Will the traditional Balanced Portfolio be able to cut it moving forward? Certainly the classic 60/40 portfolio model is built upon studies from decades past. We’ll get to that later in this post.

I had also looked at the subject and offered the New Balanced Portfolio. Not surprisingly, you’ll find mention of Horizons asset allocation ETFs in that post.

The 70/30 is the new 60/40.

It might all start with the stock to bond ratio. With bond yields so low, their contribution is likely to be much less compared to the last few decades. Good bonds might be there as risk managers but their total contribution is likely to be quite muted. How low can yields go? The question might end up being ‘how negative’ can rates go? While lower rates might deliver some higher prices, the bonds would then paint themselves into a corner with no yield to offer. It’s a Catch-22.

We might need a greater allocation to growth – more stocks.

Horizons Balanced Portfolio is 70% stocks and 30% bonds. Here’s the make up of that portfolio – ticker HBAL.

On September 10, 2020 the breakdown (rounded figures) …

  • 40.8% US stocks
  • 19.6% International stocks
  • 10.0% Canadian stocks
  • 19.7% Canadian bonds
  • 9.7% US bonds (treasuries)

The target stock to bond ratio for the Balanced Portfolio (HBAL) is 70/30.

Mark had explained how the largely embraced 60/40 model is built on studies and data from the 70’s and 80’s. The portfolio design was based on looking at the long term Sharpe ratio (risk/return profile) of owning equities from many decades past.

Over the last 20 years the optimal risk return mix has moved closer to 70% stocks and 30% bonds. HBAL offers a 70/30 allocation vs. Vanguard’s VBAL of 60/40. It results in a better return trajectory. And once again, those lower yielding bonds add another reason to slightly stretch the stock allocation if we want or need to eke out some greater gains. Keep in mind that you will be taking on some greater equity risk.

I have long been a proponent of the Balanced Growth Portfolio model. I describe that as the sweet spot, delivering ‘optimal’ risk adjusted returns. Continue Reading…