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.

Thinking about retirement? Here are 2 two key income sources to expect

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By Scott Ronalds

Special to the Financial Independence Hub

If you’re at the point where you’re starting to think seriously about retirement, you’re probably wondering how much money you’re going to need to enjoy life after work, and where it’s going to come from.

Everybody’s wants and needs are different, so there’s no magic number as to how much you should have saved by a certain age. Plus, the face of retirement has changed significantly, with many people working part-time into their seventies and eighties, and others hanging it up in their fifties.

That said, by making a few assumptions, we can give you a rough estimate of what you can expect from government sources and your portfolio when you decide to retire.

The basics

To keep it simple, we’ll use a scenario which assumes you’re 65 and plan to fully retire from your job this year. A few other assumptions:

  • You don’t have a pension plan with your employer.
  • You’re eligible for full Canada Pension Plan (CPP) and Old Age Security (OAS) benefits.
  • You have an RSP that you plan to convert to a RIF this year, and you plan to take the minimum required payments (which will start next year) from your account. (Note: you aren’t required to convert your RSP to a RIF until the calendar year you turn 71, but you can convert at any age before 71 if you choose).
  • You don’t have any other investments or sources of income.

First off, let’s look at what you’ll get from the government. You can expect monthly CPP payments of roughly $1,114 ($13,370/year) and OAS payments of about $578 ($6,936/year). In total, you can plan on collecting about $1,690 a month, or just over $20,000 a year. These amounts are indexed to inflation. You can decide to defer taking CPP benefits until you’re older, or take them earlier, in which case your benefits will be increased or decreased, respectively. You can also defer taking OAS to receive a larger monthly benefit.

More than likely, this isn’t going to cover your living expenses or fund the lifestyle you want in retirement. So you’re going to need to rely on your portfolio to cover the shortfall.

RIFing it

Converting your RSP to a RIF means your minimum withdrawal next year will be equivalent to 4.0% of your portfolio’s year-end market value. This figure is based on your age, 65, at the end of the current calendar year. Continue Reading…

The downsizing dilemma: 39% of homeowners skeptical it will save money

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By Joyce Wayne

Special to the Financial Independence Hub

For older Canadians considering selling a home to retire to a smaller living space or a more affordable community, downsizing might sound like a financial bargain, but in a recent Ipsos survey commissioned by HomeEquity Bank, 39 per cent of current homeowners are skeptical that downsizing will actually save them money.

More than a decade ago, I faced the downsizing dilemma and I now wish I’d been as skeptical as these savvy consumers. I put a considerable down payment on a condo in downtown Toronto, purchasing it from builder’s plans. At the time, I wished to retire from my long-time position as a college professor to launch a new career as a writer.  Selling my home, cashing in on the equity I’d accumulated, while moving to smaller digs, made sense to me.

Yet as 27 per cent of downsizers shared with the Ipsos survey, the costs were more than expected. Expenses from downsizing can add up quickly.

Originally I was attracted by the lure of improving my cash flow to support a new career, but downsizing didn’t net out that way after factoring in all the closing costs and moving expenses along with the disruption to my lifestyle.

Moving away felt like starting all over again: this time in my sixties. The weight of condo living took its toll.

After living in my condo for two years, facing unexpected changes to the original building plan, loud nocturnal noise from other condo dwellers, endless fire drills and my terrace furniture burning up with cigarette butts dropped on my balcony from above, I put the unit on the market.  Once again I was faced with real estate and closing costs. When I purchased a home in my former neighbourhood, I was forced to negotiate a mortgage.

According to an earlier Ipsos survey commissioned by HomeEquity Bank in July 2018, half (51 per cent) of those aged 75+ say it’s important to stay in their current home because they want to keep close to family, friends or their community, while four in ten (40 per cent) say emotional attachment and memories are what’s behind the importance of staying put in their current home during retirement.

What I’d do differently if considering downsizing: Continue Reading…

What to consider before converting your RRSP to a RRIF

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By David Mortimer

(Sponsored Content)

Congratulations, you’ve retired! After many years of working and saving, the time has finally come for you to travel, spend more time with family, or do any number of activities you may not have had time for when working 40+ hours per week.

One of the first decisions you now need to consider is when to convert your RRSP to a RRIF? Technically, you are required to do so by December 31stof your 71styear, but many retirees find themselves wondering if they should do so early. Here are some things to consider before making the conversion from RRSP to RRIF.

Am I retired for good?

It’s important for people to consider whether they’ve retired for good before converting their RRSP to a RRIF. Remember it may not be so easy to turn back  after making the conversion from RRSP to a RRIF so if you are planning to return to work, even part time, you may find yourself with a tax problem if you’re working and taking an income through your RRIF. The taxes you end up paying could easily wipe out any financial gains you would make from working part time, not to mention it would not allow you the option to continue contributing to your RRSP (once converted to a RRIF), which will further reduce your taxes – providing of course you are under the age of 72!

Thinking you might like to keep busy with a part time job? Consider supplementing your finances with your tax-free savings account and non-registered investments before touching your RRSP. If you draw these out first while still working, there will be fewer tax consequences. You may also be better off taking money from your RRSP on a short-term basis rather than officially converting to a RRIF right away.

When it comes down to it, don’t collapse your RRSP into a RRIF until you’re fully retired, and have considered all your potential income streams and their potential tax consequences.

What income streams are available to you?

When making the decision on when to convert your RRSP to a RRIF, it’s important to look at how you will be funding your retirement. Do you have a workplace pension you will be receiving? What about Old Age Security (OAS) or Canada Pension Plan (CPP)? Keep in mind that your OAS has certain claw-back provisions once your income exceeds a certain threshold. Continue Reading…

Why we are taking Social Security at age 62

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By Billy and Akaisha Kaderli

Special to the Financial Independence Hub

We decided to take Social Security at age 62. We know there are as many ways to consider this decision as there are days in a year. And many experts advise against taking social security “early” so that you get a bigger check at full retirement age.

It is hard to argue against that.

We have always lived an unconventional lifestyle and the fact that so many experts agree on waiting for payment gives us pause for thought. Here is our logic.

First, the S&P 500 index has averaged over 8% per year, plus dividends, since we retired in 1991. If we take social security early and invest it, we won’t be losing the 8% per year the experts claim is the annual increase of waiting – although one is guaranteed and the other is not. Maybe the markets will trend sideways or go down or even up, no one knows.

For the last 27 years we have lived off of our investments through up and down markets, so investing the monthly check is definitely an option. More likely, we will just not spend our stash and look for opportunities in the markets as our cash positions grow. Plus we have control of the money at this point, adding to our net worth.

Next let’s look at some numbers.

11 years to break even

For easy math, say at 62 you are going to receive $1000.00 per month in benefits, but if you wait until you are 66, your payment will be $1360 ($1000 x 8% for the four years you have waited). Sounds great, right?

However, you would have missed receiving $48,000 dollars in payments from the previous 48 months. How long is it before you make that money back? Using this example it would take 133 months or a little over 11 years ($48,000 divided by $360) and that would put us at 77 years of age, just to break even. In that time frame, the Social Security we are receiving plus our investments should grow far outpacing the extra money received by waiting.

For some people deferring until their full retirement age could make sense, especially if they do not have the assets to support themselves, are poor at handling money or if they are still working. However, this is not our situation and therefore we decided to take the money and run.

It’s really a question of who you think can handle your money better; You or Uncle Sam?

Update: The illustration above shows the return of the S&P 500 Index since we took Social Security at 62.

Billy and Akaisha Kaderli are recognized retirement experts and internationally published authors on topics of finance, medical tourism and world travel. With the wealth of information they share on their award winning website RetireEarlyLifestyle.com, they have been helping people achieve their own retirement dreams since 1991. They wrote the popular books, The Adventurer’s Guide to Early Retirement and Your Retirement Dream IS Possible available on their website bookstore or on Amazon.com.
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The two main types of Financial Independence

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By Vicki Peuckert Cook

Special to the Financial Independence Hub

If you are financially savvy and on your way to a secure retirement, you may already know the steps you should take to work toward financial independence. Maybe you’re already there.

But if you are climbing out of debt and just taking control of your money, financial independence (aka “Findependence”) might seem entirely out of reach. If you have kids, focusing on solving your own money problems may be complicated by your concern about their financial future too.

Financial independence means two different things at two different points in life. And they are both significant milestones. You and your adult children may even be working toward them at the same time!

Here are explanations of both kinds of financial independence and actions to consider to make the path to “FI” attainable, no matter where you are starting from.

Becoming Financially Independent from your parents

Adult children who no longer require any monetary support from their parents are financially independent. This doesn’t mean that a parent can’t provide some kind of financial aid if they choose, it means a child can meet their financial obligations without parental help.

With money concerns including five-figure student loans, rising rents, and considerable consumer debt, many young adults face an uphill battle when trying to leave their parents ‘financial’ nest. And parents may also be “sandwiched in” – helping their kids and providing support for aging parents while trying to save for retirement.

For the benefit of everyone involved, parents and adult children have a responsibility to each other to focus on changes and develop a plan to make financial independence a priority.

What can young adults do?

They can learn how to track expenses and make (and stick to) a budget. Making choices like sharing housing with friends and buying used cars or taking public transportation can also help 20-somethings tackle debt.

Over time, increased income from second jobs paired with making frugal choices like cooking at home, can provide the money adult children need to minimize and finally eliminate the need for parents to provide financial support.

What should parents do?

Parents should start setting limits on the assistance they provide their children. And they should work closely with them to create a plan to end all financial support over a set period of time. Parents need to realize they may actually be harming their kids by enabling their kids to make decisions that aren’t always focused on them becoming financially secure.

If a parent always steps in with a solution, their kids may not learn the importance of meeting their needs while putting off wants for the future. And this will only lengthen the time needed to reach financial independence.

Providing advice, emotional support, and helping adult children problem solve money troubles shifts the financial relationship to adults talking, rather than a parent instructing their child on what to do.

Becoming Financially Independent from Work

The other definition of financial independence is one that’s sometimes debated. But there is little argument that it should be a future goal of everyone. In general, reaching financial independence means you have enough income to pay for your living expenses for the rest of your life without having to work. Continue Reading…