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Is early retirement in your future?

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By Scott Evans

Special to the Financial Independence Hub

We traditionally think of 65 years old as the standard age for retirement, but wouldn’t it be nice to make an earlier exit from the workplace? Many of us dream of an early retirement to be able to spend more of our valuable time with family, on hobbies, volunteering or on other pursuits.

One of the more unexpected outcomes of the pandemic has been a growing trend of younger retirees. Many Canadians have taken time over the past 18 months to think about and re-evaluate their priorities. Have you been thinking about your retirement goals and whether it is possible to retire earlier than you originally planned? If you are one of those people, read through for some tips on how to get closer to your goal.

1 .) Spend less to save more

The easiest way to increase savings is to cut back on your spending. The earlier you can start saving, the more you benefit from compounding returns over the long-term. Your future self will thank you! Cutting back on impulsive or discretionary purchases now, may be the trade-off for the financial independence you are seeking. It will also create better spending habits for your retirement years, and may in fact lead to a more fulfilling life.

2.)  Start Planning

Saving early only helps if you are generating a return on your savings. Keeping money under a mattress or in a savings account will result in you losing purchasing power to inflation each year. You will want to make sure you are not only investing using appropriate financial instruments for your goals, but also holding those investments in the appropriate accounts to maximize growth and to avoid losing money to taxes. To connect your savings with your early retirement goal, it’s essential to plan for how much you’ll need in order to retire and to have a plan on how to draw down those assets tax efficiently.

3.)  Play defense

Saving and investing are strategies that will help you grow your wealth; you will also want to consider strategies that can help protect your income and your savings. Insurance can protect you from unexpected health events that may otherwise cause a loss of income or significant expenses. Having an emergency fund set up is essential to help you get through job loss or another unexpected event that could derail your planning.

4.)  Be tax efficient

Investing inside a TFSA (Tax Free Savings Account) will allow your contributions to grow tax-free and be withdrawn without any tax consequences. This works differently than an RRSP (Registered Retirement Savings Plan) contribution, which is tax-deductible in the year you make the contribution but will be taxed on withdrawal (hopefully at a lower tax rate if you have planned well). Taking advantage of both of these plans with appropriate investments will play a big part in your success, as it will reduce the amount of tax you pay each year and allow your returns to grow tax sheltered. Be aware of your contribution limits for both of these plans and make your contributions early. Continue Reading…

The six phases of financial independence [Revisited]

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By Mark Seed, myownadvisor

Special to the Financial Independence Hub

I’ve recently updated this post to include more links to related content. I hope you enjoy it. 

The term “financial independence” has many meanings to many people.

To some, it means not working at all.

To others, financial independence covers all needs and many wants.

To others still, it means the ability to work on your own terms.

Where do I stand on this subject?

This post will tell you in my six phases to financial independence.

Retirement should not be the goal, financial independence should be

Is retirement your goal?

To stop working altogether?

While I think that’s fine I feel the traditional model of retirement is outdated and quite frankly, not very useful.

As humans, even our lizard brains are smart enough to know we need a sense of purpose to feel fulfilled.  Working for decades, saving money for decades, only to come to an abrupt end of any working career might work for some people but it’s not something I aspire to do.

With people living longer, and more diverse needs of our society expanding, the opportunities to contribute and give back are growing as well. To that end, I never really aspire to fully “retire” – cease to work.

Benefits of financial independence (FI)

In the coming years, I hope to realize my desired level of financial independence.

We believe the realization of FI will bring about some key benefits:

  1. The opportunity to regain more control of our most valuable commodity: time.
  2. Enhanced opportunities to learn and grow.
  3. Spend extra money on things that add value to your life, like experiences or entrepreneurship.

Whether it’s establishing a three-day work week, spending more time as a painter, snowboarder, or photographer, or whatever you desire – financial independence delivers a dose of freedom that’s hard to come by otherwise.

More succinctly: financial independence funds time for passions.

FI concepts explained elsewhere

There are many takes on what FI means to others.

There is no right or wrong folks – only models and various assumptions at play.

For kicks, here are some select examples I found from authors and bloggers I follow.

  • JL Collins, author of The Simple Path to Wealth, popularized the concept of “F-you money”. This is not necessarily financially independent large sums of money but rather, enough money to buy a modest level of time and freedom for something else. I suspect that money threshold varies for everyone.
  • Various bloggers subscribe to a “4% rule”* whereby you might be able to live off your investments for ~ 30 years, increasing your portfolio withdraws with the rate of inflation.

Recall the rule:

*Based on research conducted by certified financial planner William Bengen who looked at various stock market returns and investment scenarios over many decades. The “rule” states that if you begin by withdrawing 4% of your nest egg’s value during your first year of retirement, assuming a 50/50 equity/bond asset mix, and then adjust subsequent withdrawals for inflation, you’ll avoid running out of money for 30 years. Bengen’s math noted you can always withdraw more than 4% of your portfolio in your retirement years however doing so dramatically increases your chances of exhausting your capital sooner than later.

In some ways, the 4% rule remains a decent rule of thumb.

Are there levels of FI?

For some bloggers, the answer is “yes”:

  • Half FI – saved up 50% of your end goal (e.g., $500,000 of $1M).
  • Lean FI – saved up >50% of your end goal; income that pays for life’s essentials like food, shelter and clothing (but nothing else is covered).
  • Flex FI – saved up closer to 80% of your end goal (e.g., $800,000 of $1M). This provides financial flexibility to cover most retirement spending including some discretionary expenses.
  • Financial Independence (FI) – saved up 100% of your end goal, you have ~ 25 times your annual expenses saved up whereby you could withdraw 4% (or more in good markets) for 30+ years (i.e., the 4% rule).
  • Fat FI – saved up at or > 120% of your end goal (in this case $1.2M for this example), such that your annual withdrawal rate could be closer to 3% (vs. 4%) therefore making your retirement spending plan almost bulletproof.

There is this concept about “Slow FI” that I like from The Fioneers. The concept of “Slow FI” arose because, using the Fioneers’ wording while “there were many positive things that could come with a decision to pursue FIRE, but I still felt that some aspects of it were at odds with my desire to live my best life now (YOLO).”

They went on to state, because “our physical health is not guaranteed, and we could irreparably damage our mental health if we don’t attend to it.”

Well said.

My six phases of financial independence

With a similar line of thinking related to Slow FI, since we all have only one life to live, we should try and embrace happiness in everything we do today and not wait until “retirement” to find it.

After reviewing these ideas above, among others, I thought it would be good to share what I believe are the six key phases of any FI journey – including my own.

Phase 1 – FI awakening. This is where there is an awareness or at least an initial desire to achieve FI even if you don’t know exactly how or when you might get there.

FI awakening might consider self-reflection questions or thoughts like the following:

  • I would love to retire early or retire eventually…
  • I can never seem to get off this credit card treadmill…
  • I wish I had some extra money to travel…
  • Wouldn’t it be nice to buy X guilt-free?

(I had my awakening just before I decided to become My Own Advisor, triggered by the financial crisis of 2008-2009.)

Phase 2 – FI understanding. This is the phase where people are getting themselves organized; they start to diligently educate themselves on what their personal FI journey might be.

In this phase, they might set goals or get a better handle on what goes into their financial plan. Even if your plan is not perfect, it’s a start.

They might start asking some deeper questions like:

  • Why is money important to me?
  • What is my money for?
  • How do I know I’m doing it right?

I would say it took me until my mid-30s to get my financial life in order through more financial education and improved financial literacy. It was a process that took a couple of years although I’m always continuously learning and improving. I don’t pretend to know it all.) Continue Reading…

How much is your Home Country Bias costing you?

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

Investors around the globe are known to invest ‘too much’ of their portfolio in their home country. It is called a home bias. Canadian investors are guilty of that home bias. Many estimates suggest that Canadians hold about 60% of their portfolio assets in Canada.

Meanwhile Canadian stock markets represent only about 3% of the global total. That home bias increases portfolio concentration risk (in one country and in just a few sectors). There has also been a cost; lower returns due to the underperformance of the Canadian market vs the U.S. market and at times the International developed markets. It is an important consideration. What is the cost or your Canadian home bias?

As a backgrounder, in 2019 I suggested that you say goodbye to your Canadian home bias.

I recently posed the question on Twitter:

Please feel free to jump on that tweet as well and offer your home bias. Don’t be shy, we are all guilty, for the most part. If you read through that thread you’ll see that investors offered that they were largely overweight Canada. Most are holding 50% to 70% Canadian stocks.

From the table in that tweet, you can see the drastic underperformance of Canadian stocks vs U.S. stocks over the last 3-, 5-, 10-years or more.

Canadian vs U.S. stocks

And here’s the returns comparison in chart form. The charts and tables are courtesy of Portfolio Visualizer.

 

And the returns over various time frames, in table format.

For the above comparison, we use the TSX 60 ETF, ticker XIU that you’ll find suggested for core Canadian stocks on the ETF Model Portfolio page.

It appears that there may have been no home bias opportunity cost if you had been invested from the year 2000. Keep in mind that is a static start date measuring the investments (with dividend reinvestment) from the year 2000. The picture will change when we start adding monies ($1,000 per month) on a regular basis.

There is then a meaningful outperformance for the U.S. stocks.

Incredibly, the U.S. stock portfolio generated 46% more money to create retirement income. The TWRR stands for time weighted returns. MWRR refers to the money weighted returns, taking into account the effect of the regular contributions.

The above chart simply shows the outperformance of U.S. stocks vs Canadian stocks. That’s not to suggest that an investor should go all-in on U.S. stocks — though U.S. investors are also known to suffer from an extreme case of investor home bias.

We should not forget the lost decade for U.S. stocks. That was a period when U.S. stocks delivered no real return (inflation adjusted) for a decade or more. And that period begins at the start date for our above charts.

The home bias is of consideration for Canadians, Americans and investors around the globe.

What’s the right mix?

I don’t think you have to be perfect in this regard. And perhaps there is no perfect geographic allocation. But we certainly want a nice mix of Canadian, U.S. and International stocks. We’ll usually add bonds as well when we enter the retirement risk zone, and also in retirement.

U.S. markets certainly fill the holes of the Canadian stock market. And the U.S. multi-nationals that dominate the S&P 500 do offer significant international exposure. That said, an investor should seek greater diversification by way of international developed and developing nations outside of North America.

In the Advanced Spud (couch potato portfolio) section for MoneySense, I offered that investors might seek equal representation from developed and developing markets. There are favourable growth patterns and favourable demographics within the developing markets. As they say: demographics is destiny.

As always, this is not advice, but ideas for consideration.

Global stocks vs U.S. stocks

Here’s global stocks (the rest of the developed world) vs the U.S. market from 1996.

We see global stocks outperforming towards the end of the financial crisis (2008-2009) and then the U.S. market takes over.

We can also see the drastic difference in returns with regular investments. The U.S. stock market and U. S. companies continue to be global leaders with incredible growth prospects. You can’t blame investors for wanting to overweight the U.S. market.

The global cap weighted index

Many portfolio managers would suggest that the most passive investment approach would be to follow the global cap weighting index. That simply takes into account the value of each stock market relative to the total global markets. The stock markets with greater value receive a greater weight.

Here’s the current weighting by way of Vanguard’s (U.S. dollar) Global ETF – VT.

Within that global mix Canada is less than 3%

The U.S. market dominates the global markets. It has largely earned that position by way of earnings and revenue growth, but keep in mind that the global cap weighting method will reward momentum (and hence emotion and unbridled enthusiasm). That momentum ‘got it wrong’ in the late 1990s for U.S. stocks. Is the enthusiasm for U.S. stocks misplaced in 2021? Perhaps partially ‘wrong’? Continue Reading…

Wealth and Happiness, Part 1: The importance of managing and using your money wisely

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By Warren MacKenzie, for Canadian Moneysaver

Special to the Financial Independence Hub

Retirees should remember that money only has value to the extent that it can be used to increase happiness. Unfortunately, some retirees who already have sufficient wealth may miss an opportunity because they mistakenly believe that greater wealth leads to greater happiness. In this three part series we discuss the relationship between money and happiness.

In his book, The Art of Happiness, the Dalai Lama says, “The purpose of life is Happiness” Aristotle has said, “Happiness is the meaning and the purpose of life, the whole aim and end of human existence.”

Wealthy individuals have absolutely no reason to feel guilty for using their wealth to maximize
their happiness. Whether rich or poor, going to a job we hate, or to the fridge for a snack, the reason we do something is always the same: we do what we do because we believe we’ll be happier by doing it. In this regard, rich and poor people are alike.

… one big difference between a poor person and a rich person is that the poor person believes that his or her problems will disappear with more money. Wealthy people know that this is untrue.

The Importance of both Managing and using your money wisely

The main focus of the financial services industry is to increase the size of investment portfolios. However, in many cases investors would be happier if, in addition to having a larger investment portfolio, they also had a better understanding of the relationship between wealth and happiness so they get to enjoy the pleasure that comes from using their money wisely.

Don’t mistake joyful events for a Happy Life

We all want a happy life so it’s important to understand the difference between a joyful event and true happiness. Examples of joyful events include buying your first new car, weddings, purchase of one’s first home, or a spectacular vacation. But we’re lucky if we experience a few joyful occasions each year. For a happy life we also have to be able to experience happiness as we participate in the routine activities that take up most of our days.

Regardless of our level of wealth, we all spend most of our days doing routine activities such as watching the news, checking emails, or speaking to family and friends. For a happy life we need to find happiness during these routine activities. The secret is to live in the present moment, to focus intently on our activities, and by so doing we may find happiness as we do the things we need to do each day.

Unconditional happiness is when you’re so absorbed in what you’re doing that you temporarily forget about who you are or how the time is passing by. You’re not thinking about yourself and instead you’re 100% focused on what you’re doing. You may be working or watching your favorite TV program, or you’re focused on a friend or spouse. And since you’re not thinking about yourself you have no wants or unfulfilled desires, financial or otherwise, which are the only source of unhappiness.

Unconditional happiness is also known as ‘living in the moment’ or being ‘in the zone’ or a ‘flow state’. As an example, imagine you’re watching your favorite TV comedy show and it’s the funniest show you’ve ever seen. You’re laughing almost hysterically and you’re thinking of nothing except the TV show and you’re unaware of the time passing. Now you’re living in the moment! Now you’re experiencing unconditional happiness.

In the next moment, your mind kicks into gear and you start thinking, and wishing your friend was here to enjoy the show. Now the spell is broken and you’ve lost the moment of unconditional happiness. You have an idea of yourself as a friend and you wish your best friend was there to share this experience. Now you’re no longer living in the moment, instead you’re conscious of yourself and your unfulfilled desire for your friend to be with you.

We all have the same opportunity for moments of unconditional happiness and our experience is the same regardless of the size of our income or investment portfolio.

Conditional happiness is when we’re happy because of something that you’ve acquired, or some experience you’ve enjoyed. These external events might include receiving an unexpected income tax refund, enjoying a new home, when our investment portfolio increases in value, or as our candidate wins the election.

When it comes to conditional happiness, wealthy individuals have the potential to acquire more material goods and experience more travel and adventures. Therefore, in this area, they have an advantage over less wealthy people.

It’s also interesting to note that happiness research shows that, in terms of conditional happiness, there is greater long term enjoyment when we spend money on experiences such as a cruise or climbing a mountain than spending the same amount on new toys or material goods.

Recognizing opportunities for Happiness by knowing when it’s as good as it gets

Regardless of one’s wealth, similar activities usually give about the same amount of pleasure. For example, if you enjoy a cup of coffee in the morning, you should know that no amount of wealth will increase the enjoyment of your morning coffee. Continue Reading…

RIP Mihaly Csikszentmihalyi: author of the ground-breaking book, Flow

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Mihaly Czikszentmihalyi (YouTube.com)

Late in October, bestselling author and pyschologist Mihaly Csikszentmihalyi passed away in California at age 87. You can read the obituary in the Washington Post here.

Czikszentmihalyi — pronounced “chick-SENT-me-high” — was a university professor who built a mini empire around the nebulous concept of Flow. See this Wikipedia entry for more on his life and work.

Back in 2015, the Hub reviewed the original Flow as well as Creativity and Flow in 2016. He explored this further with Finding Flow: The Psychology of Engagement With Everyday Life.  It has the virtue of brevity when compared to the earlier two books on Flow: it runs just 180 pages, or 147 if you don’t count end matter.

Implications for Encore Careers

As noted in the earlier reviews, I’m intrigued by the concept of Flow as it applies to Encore Careers and life after corporate employment. As many blogs in the Hub’s Victory Lap section have pointed out, aging baby boomers still have a potentially long and creative period ahead of them that lies between the traditional career and what used to be called Retirement.

So it seems to me that if late-bloomer Boomerpreneurs are going to make a success of this new stage of life, they’d better tap into the concept of Flow. It’s all tied in with passion and mastery, which is why I went to the well one last time with Czikszentmihalyi.

He begins with a quotation from W.H. Auden: Continue Reading…