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.

How world travellers are adapting to Covid restrictions

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Japan Airlines flight crew departing from Dallas in March, 2020. Dale Knight is in blue, without the mask.

By Billy and Akaisha Kaderli

Special to the Financial Independence Hub

The COVID restrictions have been very difficult for those of us world travelers in the Early Retirement Community. We have had friends stuck for months in Europe, The Philippines, and Peru, among other countries.

We who travel as a lifestyle have found our footloose approach to life… encumbered, to say the least!

Here we have a travel update from one of our World Traveling Buddies, Dale Knight.

Take a look.

RetireEarlyLifestyle: You have been a world traveler now for decades, Dale. How have these COVID travel restrictions affected your traveling lifestyle?

Dale Knight: It’s been devastating, as I’m sure it has for anyone who is passionate about travel.

Since March, I’ve had to cancel six trips previously booked through the end of 2020. I had plans to travel to SE Asia, then Australia and New Zealand…  a Europe trip in August that included London, the Balkans and Paris… German Christmas markets in November, skiing in Japan in December.

All cancelled.

It’s as if a year of my life has been snatched away.

RetireEarlyLifestyle: Where were you when COVID started to shut the travel world down?

Cherry blossom season in Kyoto, Japan

Dale Knight: In mid-March, I flew to Japan with plans to spend four days visiting friends in Sapporo before continuing on to Thailand. I was in Sapporo when Thailand abruptly closed its border to all International arrivals.

What to do?

I flew to Tokyo for a couple of days, then took the train to Kyoto, where the cherry blossoms were in full bloom. Perfect timing! It was delightful, and everything at that time felt “normal” in Japan. People were out and about, bars and restaurants were open.

At the same time, the US was seeing a surge in COVID cases, and I began to hear from friends in Dallas about a strict lockdown. They warned that I might not be able to get back. I debated on whether or not to just stay in Japan but decided to return to Dallas.

That was not the best decision. In hindsight, I’d rather have spent more time in Japan.

RetireEarlyLifestyle: Have you done any traveling recently? Where have you gone?

Dale Knight: I tried a couple of road trips in the US  … The Oregon coast in June and Colorado in August. Those trips sort of scratched that travel itch, but in many ways it was still very frustrating. Hotels didn’t provide housekeeping services for one thing.

Traveling solo, I like to find a local bar or pub and chat with the locals. That is very difficult when everyone is behind a mask, and you have to sit off by yourself. The lone exception was in Laramie, Wyoming, where I happened upon a small friendly bar where nobody was wearing a mask. Some might think risky, but to me it was refreshing.

Twice I have gone to Mexico, meeting up with friends in Puerto Vallarta and then to the little beach town of Chacala to meet up with you and the Chapala gang. Just last week, I returned after a month in Mexico. – Two weeks with you and Akaisha and friends in Chapala. It was a wonderful time.

The gang’s all here in Chacala, Mexico

 

RetireEarlyLifestyle: Is the “whole world” shut down or only certain places?

Dale Knight: For Americans, it does seem like the whole world is shut down. Australia, New Zealand, and almost all of Asia are completely off-limits, probably through the end of the year. Same with most of Europe. There are a few exceptions like Croatia, Ukraine, Serbia, Belarus – each is open with different entry requirements, such as needing a negative COVID test within so many hours of your departure or arrival.

Turkey is also open to Americans, and Tanzania in Africa. Several Caribbean Islands are open as well as Brazil and Ecuador in South America. At the same time, many US states require quarantine for out-of-state visitors and Canada is closed to Americans.

It’s a constantly changing dynamic and I follow blogs as well as the IATA Travel Centre website to stay up-to-date.

RetireEarlyLifestyle: How do you see the future of travel?

Dale Knight: I’m afraid it will be a long time before we return to the way it was just six months ago.

In 2019 a record 1.5 billion people worldwide traveled internationally. This year, the numbers have fallen off a cliff, with estimates of up to 80% decline. Countries that are heavily dependent on tourism such as Thailand, have made the choice of safety over the economy. They are being overly cautious about reopening borders.

I think we may have to accept COVID testing and quarantines as part of our traveling future. If a vaccine is ever developed, you might have to carry a card much like the Yellow Fever vaccination card, to show you are ok.

RetireEarlyLifestyle: Is it easier in some places to get around versus other locations?

Dale Knight: When I was in Japan, it was easy to get around. Flying to Mexico and getting around Mexico is easy.

However, within the US, right now I cannot go to several states — mainly in the Northeast — without quarantining for 14 days. Before embarking on a road trip, I had to check each state’s restrictions to make sure I wouldn’t have to isolate in a hotel room. Attempting to go to Europe is difficult and even to those handful of countries allowing Americans, it requires planning, testing and possible quarantine.

RetireEarlyLifestyle: How has it been in the airports you have flown? What is different? Both flying into Puerto Vallarta, Mexico and out of Guadalajara, Mexico.

Dale Knight: Airports are pretty busy. People are flying and going places. The main difference is that the wearing of masks is strictly enforced both at airports as well as on the aircraft. Food and beverage service is minimal — or not at all — with the US airlines. My most recent flight was with the Mexican airline Volaris, from Guadalajara to Dallas Fort Worth. Flight attendants come through the cabin with a cart of beverages and snacks. Immigration was a breeze at both Puerto Vallarta and Guadalajara. Continue Reading…

Retired Money: How Vanguard’s 4% targeted payout on VRIF makes it easier for retirees to draw income

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My latest MoneySense Retired Money column looks at Vanguard Canada’s new targeted 4% annual payout vehicle for retirees and near-retirees, provided by its new VRIF ETF. You can find the full article by clicking on the highlighted headline: The lowdown on Vanguard’s Retirement Income ETF: can you rely on its 4% payout target?

The Vanguard Retirement Income ETF Portfolio [VRIF/TSX] started trading Sept. 16th and offers retirees and near-retirees a 4% targeted — as opposed to guaranteed — payout. See also the Hub’s republication of Robb Engen’s preview on VRIF that appeared first on his BoomerandEcho site.

Positioned as a “Decumulation” product for retirees and near-retirees, it’s probably no coincidence that the 4% target is nicely in line with the long-established 4% Rule discussed on the Hub and MoneySense earlier this summer.

While a targeted return is NOT a guarantee – unlike the guaranteed but puny rates paid by GICs these days – Vanguard expects it will attract a fair amount of money from income-oriented investors suffering sticker shock when their GICs mature. Currently, many 1-year GICs pay around 0.5%, ranging from as little as 0.3% to no more than 1.1%. Even going out to 5-year terms, they’re typically paying only 1.4%, ranging from under 1% to 2% in the best case.

Technically, those GIC returns are “guaranteed”  but a cynic might say they’re guaranteed to lose money on an after-tax, inflation-adjusted “real return” basis. Based on recent statements by the Bank of Canada and US federal reserve, this is not likely to improve before 2023. In the UK there are even renewed whispers of negative rates.

Of course, to achieve the 4% targeted payout, investors still have to bear some stock-market risk. VRIF consists of eight existing Vanguard stock and bond ETFs with an asset mix of roughly 50% stocks and 50% bonds.

VRIF has much lower fees than comparable income mutual funds and income ETFs

Monthly income mutual funds and ETFs have been around for years but as is typical, Vanguard aims to be the low-cost leader in the category. With such tiny returns from the fixed-income component, those costs are an important determinant of how much money is left for investors. The full MoneySense article recaps the fees relative to existing income mutual funds and income ETFs. Continue Reading…

Vanguard’s VRIF: Your new single-ticket Retirement Income Solution

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Two years ago, Vanguard launched a suite of asset allocation ETFs that changed the game for DIY investors in their accumulation years. These balanced ETFs provide low-cost, global diversification, and automatic rebalancing with just one fund.

On Wednesday (Sept 16), Vanguard announced another evolution in the asset allocation ETF space with a new product aimed at retirees in the decumulation phase. The Vanguard Retirement Income ETF Portfolio, or VRIF, uses global diversification and a total return approach to provide steady monthly income at a target payout rate of 4% per year.

ETF TSX Symbol Management fee Target annual payout
Vanguard Retirement Income ETF Portfolio VRIF 0.29% 4%

Saving for retirement is by far the number one objective for investors and Vanguard believes that space is well covered with their now flagship products like VEQT, VGRO, and VBAL. An investor in his or her accumulation phase could simply move down the risk ladder, switching from VEQT to VGRO to VBAL as they get closer to retirement age.

But what to do with your ETF portfolio in retirement? It’s a question I get every time I mention the benefits of investing in asset allocation ETFs. Prior to today, the answer was to sell ETF units as necessary to meet your spending needs or rely on smaller, quarterly distributions of around 2% per year.

With VRIF, investors get a predictable monthly income stream (targeted at 4% per year) to help meet their regular spending needs and not have to worry about rebalancing and/or selling ETF units.

Indeed, you could think of VRIF as the retirement equivalent of VBAL.

Vanguard Retirement Income ETF Portfolio (VRIF)

VRIF is a single-ticket income solution. It’s a wrapper containing eight underlying Vanguard ETFs that offer global exposure to more than 29,000 individual equity and fixed income securities.

Related: Top ETFs and Model Portfolios in Canada

Here’s a look under the hood of VRIF:

Asset class ETF Weight
Canadian equity VCN 9.0%
Canadian aggregate fixed income VAB 2.0%
Canadian corporate fixed income VCB 24.0%
Emerging markets equity VEE 1.0%
U.S. fixed income (CAD-hedged) VBU 2.0%
U.S. equity VUN 18.0%
Developed ex North America equity VIU 22.0%
Global ex U.S. fixed income (CAD-hedged) VBG 22.0%

Here is the geographic breakdown of VRIF’s holdings:

  • Canada – 35%
  • United States – 20%
  • Developed ex North America – 44%
  • Emerging markets – 1%

VRIF focuses on a total return approach using an approximate asset allocation of 50% equity and 50% fixed income. This approach allows the portfolio to payout from capital appreciation in years when the portfolio yields fall below the target.

A total-return approach is more tax-friendly because VRIF can distribute from capital appreciation. In that case, only the difference between the cost basis and the sale price is taxed. Meanwhile, the full dividend distribution from underlying securities is taxable.

Vanguard highlights the transparency of VRIF and its underlying holdings, saying because its building blocks are clear, you always know what you’re investing in and why, adding that regular monitoring and rebalancing helps maintain exposures across key sub asset classes and risk levels.

VRIF’s 0.29% management fee (before taxes) is roughly one-third the cost of any comparable monthly income mutual fund in Canada. Costs matter, especially to retirees with sizeable portfolios who are looking to keep more of their returns and protect their investment base. Continue Reading…

Preparing for Retirement: Understanding new spending patterns

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BoomerandEcho.com

Last time we talked about boosting retirement savings during your final working years. In an ideal world you’ll have the double-effect of being in your peak earning years while your largest financial obligations are in the rear-view mirror.

In the real world, however, many Canadians are faced with an uncertain retirement because they lack adequate savings, don’t have a company pension plan, they’re still carrying a mortgage, line of credit, or even (gasp!) credit card debt, or they’re still providing financial support to their adult children.

Preparing for Retirement

Much like preparing for a new addition to the family, or for one spouse to stay home with the children full-time, preparing for retirement is about understanding new spending patterns.

If your final working years aren’t spent in savings overdrive mode, perhaps there’s time to test out your retirement budget in the year or two before you retire. You might as well try living on 40 – 60% of your income while you’re still working to see if it’s realistic.

If it’s not, there’s still time to adjust course by altering your income expectations, working longer (and saving more), or revisiting your investment strategy. Speaking of which …

Investing in Retirement

One of the biggest worries for retirees is outliving their money. That’s why it’s crucial to have a proper investment strategy in retirement. Investors don’t simply sell their stocks and move to bonds, GICs and cash once they retire. Canadians are living longer and our portfolios need to be built to last.

One strategy to consider is the bucket approach. The idea is that while retirees need cash flow, they also need a diversified portfolio of stocks and fixed income. Your first bucket is for immediate needs and should contain one or two years’ worth of living expenses in easy-to-access cash. Bucket two is for medium-term needs and is filled with bonds or GICs. Bucket three is meant for long-term needs and so it’s typically filled with stocks, ETFs, or index funds.

Also read: A better way to generate retirement income

Understanding CPP and OAS benefits

Whether you think you’ll rely on government benefits or not, it’s important to understand how CPP and OAS benefits work and how they might impact your retirement income plan.

The maximum monthly payment amount for CPP in 2020 is $1,175.83 [if taken at 65], but the average monthly amount for new beneficiaries is actually $696.56. You can take CPP as early as 60, but the amount is reduced by 0.6% for every month you receive it before 65.

Alternatively you can delay taking CPP until as late as age 70. In this case your pension amount will increase by 0.7% for each month you delay receiving it up to age 70. Continue Reading…

Boosting Retirement Savings during your final Working years

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BoomerandEcho.com

Whether you’re a late starter or seasoned saver, the five years or so leading up to retirement might be the most crucial time to get your finances in order. Here’s how to take advantage of your final working years.

Most retirement readiness checklists suggest your final working years is a time to double-down on retirement savings. The idea being that major financial burdens, such as paying down the mortgage and raising children, should be behind you and those savings can be parlayed into big contributions to your retirement nest egg.

High-income earners should look to their unused RRSP contribution room and contribute as much as possible in their final working years. This has the added benefit of generating big tax returns, which can be reinvested into your RRSP or used to pay down any outstanding debts.

Procrastinators have a final chance to break any bad spending habits and set their finances straight. The first step is to draw up a financial plan. Make it a top priority to pay down any remaining debt and get spending under control. You should then have a rough idea when debt-freedom is in sight and from there decide how long to continue working to meet your retirement savings goals.

Retirement income target

The often-used retirement income target is 70% of your final pay, meaning if you earned a $100,000 salary in your final working years then you should aim for a retirement income goal of $70,000 per year. But a more realistic retirement income target may be closer to 50%.

Regardless, you’ll need to find YOUR retirement number and determine whether you can reach your income goals through some combination of workplace pension, personal savings (RRSP, TFSA, non-registered investments), CPP, OAS, and/or GIS.

Piecing that puzzle together takes a lot of planning (and still plenty of guess work). No wonder choosing a retirement date can seem like such a daunting challenge!

Taking advantage of your final working years

According to a Tangerine survey, one-quarter of Canadians nearing retirement age don’t understand how their personal finances will work in retirement. I think that number may be understated.

With that worrying statistic in mind, here’s a retirement planning checklist for your final working years:

1. Determine where you stand – Take stock of your current financial situation by listing your assets and liabilities and analyzing your current income and expenses. Identify any opportunities to save more.

2. Define future needs – How will your expenses vary in retirement? Remember, you’ll no longer be paying into programs like CPP and EI, but your retirement bucket list might need to include money for travel and new hobbies. Add up your expected CPP payments and OAS benefits, plus any workplace pension plans, and determine the gap between your income and expenses. That gap will need to be filled from your personal savings.

3. Ramp up savings – Take advantage of unused RRSP or TFSA contribution room and boost your retirement savings into overdrive. Your final working years are a chance to make up for lost time; make sure to maximize your full employment income to have the most impact on your retirement savings. Continue Reading…