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.

U.S. Fixed Income: Looking at U.S. High Yield, by Default

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Kevin Flanagan, WisdomTree Investments

Special to the Financial Independence Hub

Has the fixed income arena entered a new phase? While the lion’s share of attention has been given to interest rate developments for quite some time now, another topic for discussion has been where we are in terms of the U.S. credit cycle. Specifically, the debate has centered on whether the corporate bond market has entered the bottom of the ninth inning of the current cycle or whether the time frame is more akin to being in the sixth or seventh inning. Interestingly, in sticking with this baseball analogy, there does seem to be agreement that credit is not in the first few innings.

For this blog post, the focus will be on U.S. high yield (HY), particularly because if one was to see the first signs of stress, the argument could be made that this is the sector where investors should turn their attention. Over the last six months, investors have witnessed two episodes where HY spreads have visibly widened. The first of these episodes occurred during late October to mid-November of last year, when spreads rose 53 basis points (bps).1 The second occurrence was more recent, as HY differentials moved from more than a decade low of 311 bps on January 26 up to 369 bps two weeks later, representing a widening of 58 bps.2

U.S. Speculative-Grade Issuer Default Rate vs. Recessions

It is interesting to note that in both cases the widening trends were rather brief (two to three weeks) and of similar magnitudes. In addition, both times the sell-off was short-lived, as buyers re-emerged and compressed spreads back down.

Continue Reading…

Retirement Is not Rocket Science

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By Billy and Akaisha Kaderli

Special to the Financial Independence Hub

Getting your house in order for retirement or financial independence is not that difficult. Many investment professionals, journalists, and commentators seem to complicate the issue to the point that even we can’t understand it. Safe withdrawal rates, stocks, bonds, balanced funds, commodities, options, laddered portfolios, annuities, offshore accounts, hedge funds … are you kidding? No wonder some people are confused and scared!

What’s a person to do?

First, you need to recognize your needs. Let’s be realistic here. How much are you spending now? Not how much do you make a year, but how much are you paying out? With today’s computer tools, this is a very easy task to compute. Or you can do what we did: Create a chart on a piece of paper and add to it daily.

Date Cumulative spending Day# Cost/p/day Times 365
1/1/2018 $24.00 1 $24.00 $8760
1/2/2018 $99.00 2 $49.50 $18,068
1/3/2018 $144.00 3 $48.00 $17,520
1/4/2018 $244.00 4 $61.00 $22,265
1/5/2018 $314.00 5 $62.80 $22,922

(These figures are for illustrative purposes only.)

The longer you keep track of current consumption, the more confident you’ll become of your future spending habits.

Once you know your expenditures per year, take a look at where that money is going. If it’s to pay credit card bills or other consumer debt, you need to pay that off first. It’s fine to use credit cards as long as you completely pay off your balance monthly. And stay out of debt. I know this is not easy, but it’s your future, and the money you were paying in interest can now be invested.

With your debts paid off, you can commit to financial independence. Analysts say a guideline of 25 times your annual capital outlay should be enough to sustain your current lifestyle. With the data you’ve collected in your chart, you can easily calculate a target amount. It’s really that simple.

How do you get there?

Continue Reading…

Retired Money: Reflections on turning 65 and transitioning into Retirement

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Well, I’m officially “old” if you go by the federal Government’s eligibility date for receiving Old Age Security (OAS) benefits. The traditional retirement age has long been age 65, a milestone I reached on April 6th. As I have previously written, I had a hockey tournament to play that weekend so the party my wife and I host every 5 years or so was postponed to late May, by which time we calculated my first OAS cheque should have been deposited into our joint account. (There appears to be roughly a six-week gap between turning 65 and the first payment, even if you set up the process a year ago: Ottawa invites you to start the OAS process rolling when you turn 65. See the “Related Articles” links at the bottom of this blog for some articles on this.)

In any case, my latest MoneySense Retired Money column goes into my (mixed) feelings about reaching this milestone. You can retrieve the full column by clicking on the highlighted headline: I’ve just turned 65: Here’s how I’m transitioning into Retirement.

Regular readers of this site or my books will know I see Retirement as a gradual process rather than a one-time sudden event more likely to generate what Mike Drak and I call “Sudden Retirement Syndrome.” My contraction for Financial Independence (Findependence, coined in the title of my financial novel, Findependence Day) is not meant to be synonymous with full-stop Retirement. Shortly after I left my last full-time journalism job four years ago (almost to the day!), I was happy to co-author a book with Mike and go with his chosen title, Victory Lap Retirement.

Four years into my “Victory Lap”

So I’ve been on my Victory Lap for four years now. That doesn’t mean 65 isn’t a significant milestone: as it tacks on another (albeit modest) stream of income, it means I can slow down a bit, if it’s possible to slow down when you’re running a website like this with daily content.

I described in an earlier piece in the FP how I am still working “some semblance” of a 40-hour week, although a good third of that time consists of errands or activities like Yoga or going to the gym, all the subject of the Younger Next Year 2018 Facebook group that a group of us launched late in 2017. Younger Next Year is a New York Times bestselling book that has been around for years but didn’t come to my attention until late in 2017 when regular Hub contributor Doug Dahmer gave me a copy.

The Hub’s subsequent review in the last post of the year led to the creation of the Facebook group, with the lead taken by Vicki Peuckert Cook, who is based in Rochester, but who I hope to meet this weekend for the infamous OAS party at our home in Toronto. For more on the genesis of the group, read member Fritz Gilbert’s blog republished on the Hub late in March: Do you want to be younger in 2018 than in 2017?

The group has already attracted more than 450 members on both sides of the border, including the co-author of the book, Chris Crowley, and his coauthor on Thinner This Year, Jennifer Sacheck.

Certainly the 6-day a week regime recommended in Younger Next Year is more doable if you’re retired or semi-retired/Findependent. Most of the Facebook group appears to be in that category, although there are a few dedicated younger folk still juggling full-time careers with raising a family and doing what they can on the exercise/nutrition front.

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Pension decisions: 6 six keys to a great retirement

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By Ermos Erotocritou, CFP, CPCA

Special to the Financial Independence Hub

You’ve undoubtedly thought a lot about the shape of your retirement but whether your plans include traveling, volunteering, starting a new career, or a myriad of other retirement dreams, the most important thing is having sufficient finances to ensure all of them become reality. If you are a member of an employer-provided pension plan, now is the time to make some important decisions that will have a strong impact on the amount and length of your pension.

Decide when your pension payments will begin

If you have a defined benefit pension (DB) plan, your annual benefit may be reduced if you retire before reaching a certain age or before completing a minimum service requirement. However, your plan may have a bridging benefit to offset an early retirement pension reduction that is paid from the date of early retirement up to age 65 when it will stop.

Decide whether or not your pension benefit transfers to your spouse when you die

You can usually: Elect to receive a life-only pension that ends when you die. It will deliver a higher monthly benefit to you than a joint and last survivorship pension but will not provide a continuing benefit for your spouse after you die. The plan member’s spouse will need to sign a waiver to take this option.

Select the joint and last survivorship option. While your monthly benefit will be lower, the “joint and last survivor” option is usually better unless your spouse has his or her own pension, Registered Retirement Savings Plan, non-registered assets and/or adequate insurance coverage. Factor in the expected life expectancy for you and your spouse.

Choosing the survivor benefit

Not all plans allow you to do this: check the details of your plan. In most jurisdictions, the “standard” survivor benefit is 60% of the pension that was being paid to you prior to death; however, some plans will include other options such as 66 2/3%, 75% and 100% survivor benefits. If your goal is to leave an estate to your beneficiaries, commuting your pension could make sense.

Do you have the option of receiving your pension benefit for a guaranteed minimum number of payments? Continue Reading…

Retired Money: Seniors prefer term Guaranteed Lifetime Income to Annuities

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Annuities continue to get short shrift from those nearing or in Retirement, but if you describe them with a different label — like a Guaranteed Lifetime Income — they are viewed much more favourably, according to a study released Tuesday. I summarize the main results of the Canadian Guaranteed Lifetime Income Study in my latest MoneySense Retired Money column, which you can access by clicking on the highlighted headline: Guaranteed Income is a No Brainer: Just Don’t Call it an Annuity.

The study was conducted by Greenwald & Associates and CANNEX for two Canadian insurance companies, Great West Life and Sun Life in February with 1,003 Canadians aged 55 to 75 with financial assets of at least $100,000 (not counting a home. It found only 45% are highly confident they will be able to maintain their standard of living in retirement, assuming a life expectancy of 85.

I’d argue that the majority who ARE confident are probably the beneficiaries of employer-sponsored Defined Benefit pension plans, ideally the kind of inflation-indexed ones that many public servants enjoy. They are of course becoming much less common in the private sector.

This site and my various columns have long argued that, to paraphrase Pensionize Your Nest Egg co-author Moshe Milevsky, DB pensions and Government-provided equivalents like CPP and OAS can be regarded as REAL pensions, because they provide a guaranteed stream of income for as long as you live.

By contrast, investment portfolios comprising RRSPs, TFSAs, group RRSPs and Defined Contribution plans do not in themselves constitute the kind of “real” pension that Milevsky says should be one part of a diversified retirement income strategy. It’s up to retirees to convert their retirement nest eggs into real pensions and one of the most common ways to do this is to buy annuities.

Consider that investors hoping to live on RRSP/RRIF interest, dividends and capital gains have no guarantee their money will last as long as they will. With still-low interest rates and the possibility of stock-market losses, and the constant spectre of rising inflation, longevity risk and the possibility of outliving your money is a real concern.

The study lists several perceived positives and negatives of annuities and segregated funds. And it found the percentage of Canadians who rate GLI as a “highly valuable” supplement to government retirement sources like CPP and OAS has jumped from 60% in 2015 to 80% today.

Note too that Longevity and outliving savings is a particular concern for women, along with not being able to afford long-term care expenses. It’s a fact that women have longer life expectancies,  and the study shows their retirement worries are greater as a result.

Women more concerned about running out of money in old age

The study conducted by CANNEX and Greenwald & Associates found 34% of women are highly concerned about not being able to maintain their standard of living once they retire, compared to only 17% of men. Continue Reading…