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Avoiding the big retirement mistakes

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By Mark Seed, myownadvisor

Special to Financial Independence Hub

In a few posts on my site over the years, I’ve shared some big retirement mistakes to avoid. This becomes even more important now that we’re entering a new chapter in our lives: semi-retirement / work on own terms.

Are we ready? Can we avoid some big investing and related retirement mistakes that experts share?

In that spirit as part of new pillar post I hope to update annually and anchor my progress around, here are some of the ways I hope to avoid some big retirement mistakes.

I certainly won’t be perfect but I’ll do my best based on this infographic and more below:

20-common-investing-mistakes - Visual Capitalist November 2023

Attribution/thanks to Visual Capitalist. @VisualCap

1. Expecting too much

I believe I/we have reasonable long-term return and inflation assumptions. Our projections include at the time of this post:

  • 5% annualized returns from a 90% equity/stock + 10% cash/cash equivalents portfolio (excluding my small workplace pension), and
  • 3% sustained inflation. 
  • Some go-go spending years from now until age 79/80 give or take.

I’ll link to my latest Financial Independence Budget update at the end of this post to support any planning assumptions you might have.

What are your key assumptions?

2. No investment goals / 3. Not diversifying

I think we should be good:

  1. We remain invested in our Canadian and U.S. individual stocks near-term, although I could see a near-term day in 2025 or 2026 whereby I sell off all remaining/handful of U.S. individual stocks we own and just put all ex-Canada stocks into a low-cost ETF like my favourite to date: XAW. I would however keep my existing 25 Canadian stocks for income and growth for now; to avoid capital gains in our taxable accounts.
  2. We are not focused on short-term returns since we remain 90% equities. That said, short-term, we are hopefully setting aside enough cash/cash equivalents in 2025 to draw down said cash in 2026 and 2027. Planning for 2028+ has not started yet but we have time to organize ourselves …
  3. We have our long-term drawdown plan: NRT which means a mix of living off dividends from our Non-Registered Accounts (N) with corporation withdrawals, drawing down our RRSPs (R) over time, and therefore leaving our TFSAs (T) until the end.

Our hybrid investing approach using a mix of stocks and ETFs is not going to change:

  1. We own a number of Canadian dividend-paying stocks (with some U.S. stocks for now) for income and growth.
  2. We own a few low-cost ETFs for extra diversification.

4. Focusing on the short-term

Fail!

I’m looking forward to the short term!

We are looking forward to our semi-retirement years and seeing what opportunities may appear in the coming years. I get what the infographic is saying though. 

5. Buying high and selling low

I can’t predict the future, can you?

I’m at a point in my investing life whereby if I have the money, sure, I will invest more but I don’t have to.

Besides, when you index invest, the best price is today’s price. The stock market is a forward looking tool.

“Someone is sitting in the shade today because someone planted a tree a long time ago.” – Warren Buffett

6. Trading too much

Nothing really to worry about here. I’m no longer 22-years-old and into penny stocks on this list!

Here are other ways to kill your retirement plan:

7. Paying too much in fees

No longer a problem via owning many individual stocks; no trading, I only do some periodic buying and we maintain low-cost ETFs for growth.

8. Focusing too much on taxes

In other articles on my site about investing mistakes, I’ve seen some expert concerns about dividend income in a taxable account and at the same time, I’ve seen the same experts say not to let the taxation tail wave the investing dog per se.

Mixed messages for sure.

When it comes to dividends, I continue to remain on record that dividends are not the be-all, end-all but work for us especially in our non-registered accounts in that:

  • any company that does not pay out a dividend, may alternatively provide other forms of shareholder returns: in the form of future capital gains, stock price increases, share buybacks, other.

This means dividends aren’t everything and never have been but they can be very good.

So I do like them. I will spend them. I hope to get more of them over time!

9. Not reviewing regularly

We review our portfolio every few months, in detail. We are good.

10. Misunderstanding risk

I like this one. I feel market volatility and risk while related are not the same.

Volatility:
  • Consider this like the price swings – how much an asset value fluctuates in price over time.
  • High volatility means prices swing up and down sharply, while low volatility suggests a smoother, more predictable up and down ride.

Risk:

  • Possibility of losing money over time, with many specific types of risk: stock market risk, credit risk and housing market risk and so on.
  • Risk can be framed as short-term or long-term, like “there is a risk of cash losing out to inflation over the next 2 years.”

Volatility isn’t the same as risk but they are related. Some stocks in some sectors might be highly volatile, like tech-stocks, but not all stocks nor all tech-stocks may carry the same risk.

11. Not knowing your performance

I monitor our portfolio performance often but I’ve largely given up on detailed benchmarking since it makes no sense to obsess over benchmarking if you are not meeting your objectives.

As long as you are meeting your goals, that’s good. That’s the priority.

Obsessing over a benchmark and feeling the need to meet an index because some expert said it was a good idea, is not.

12. Reacting to the media

Guilty.

I mean, recent tariff wars have been terrible for many reasons. While I have not yet adjusted my portfolio due these wars, I do find all the annexing of Canada rhetoric both very problematic and very concerning.

13. Forgetting about inflation

See above.

I use 3% higher spending per year in my projections.

Is that enough I wonder? You? Continue Reading…

Should investors be more concerned about the ongoing US Shutdown?

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Deposit Photos

By John De Goey, CFP, CIM

Special to Financial Independence Hub 

[Editor’s Note: this piece was written shortly before Friday’s meltdown of U.S. stocks following Trump’s announcement of still-higher Tariffs on China.]

One evening at midnight, as September turned to October, various elements of the U.S. government were shut down. This has happened before, most recently in 2018 under the same President, but this time, everything feels more ominous.

In fairness, markets were indifferent to the news and have even reached new highs since the announcement. My view is that this turn of events is yet another canary in the coal mine where authoritarianism is lurking just around the corner. The question for many investors is: “What does this mean for my portfolio”? So far, the answer is, “nothing at all.”

Worrisome that investors don’t seem worried

It has been said that financial markets climb a wall of worry. I have said on multiple occasions that one of my biggest worries is that people don’t seem worried: that optimism bias has led to lazy complacency. Stated differently, my perception is that there’s a degree of casual acceptance of macro-level circumstances that has taken hold among investors throughout the western world.

My concern about valuations has been reiterated on multiple occasions for many quarters, if not years. What I have not said explicitly until now is that there is a considerable political risk that is proceeding apace: concurrent with the valuation risk.

To my mind, this is a double uncertainty. The first question is when the bubble of multiple asset classes hitting all-time highs will burst. The second question is when Donald Trump will drop the mask and all pretense of adherence to democratic principles. He was elected a year ago next month.  In the nine and a half months since he has taken office, the destruction of centuries-old political norms has proceeded at a breakneck pace. Continue Reading…

Safe Retirement Withdrawal Rate Strategies in Canada

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By Kyle Prevost 

Special to Financial Independence Hub

 

The concept of a safe withdrawal rate (and the 4% rule) is a key planning tool for Canadians of all ages.  After all, if you don’t have a general withdrawal plan, how can you know how much you need to save in the first place?

If you have been reading MDJ for years, you already have an idea of how to use a Canadian online broker account to DIY-invest your way to a solid nest egg.

Now you’re planning for retirement (whether it’s 20+ years away or next year) and you’re wondering how to take money out of that nest egg.  Perhaps hoping that there is a rule for how much you can take out each year in retirement, and never go broke.  That concept is generally referred to as a safe withdrawal rate, and we’ll go into detail on how this works in just a second.

We’ll even look at how to incorporate multiple accounts, such as your TFSA, RRSP, and a non-registered account into your safe withdrawal rate – as well tax rules surrounding the withdrawal of investments from those accounts.

And finally, we’ll seek to answer the question you probably really want answered: How do I turn my nest egg into a usable stream of money that I can depend on and spend as I look forward to retirement? 

Surprisingly, when it comes to discussing Canadian safe retirement withdrawal rates, and talking to folks who have retired at all ages, spending their retirement savings represents a massive mental strain for them.  I guess (as someone who has never retired or sold investments to pay for retirement) that I always thought that saving for retirement would be the hard part.

Isn’t spending supposed to be more fun than squirreling away?

It turns out that once you get into that savings mindset, it can be hard to flip the switch back to enjoying spending the fruits of your labour.  This is especially true for folks who are looking at retirement withdrawal strategies for an early retirement because they are much more likely to have been super-aggressive savers during their time in the workforce.

I didn’t go into the topic of safe withdrawal rates for retirement expecting the topic to be so deep and full of variables! After all, the concept seems simple enough, right?

How much can I take out of my investment portfolio each year, if I need that nest egg to last for 30, 35, 40, or even 50 years?

Is your Retirement Savings on Track?

Each year BMO does a retirement survey that asks Canadians a wide range of questions.

Are You Saving Enough for Retirement?

A graph showing the increase in how much Canadians need to retire

Canadians Believe They Need a $1.7 Million Nest Egg to Retire

Is your Retirement on Track?

Become your own financial planner with the first ever online retirement course created exclusively for Canadians.

The problem is that most Canadians don’t really understand how their income and expenses will interact in retirement.  Are you saving enough? Find out for sure with the first online course for Canadian retirees (click here for more details).

The 4% Retirement Withdrawal Rule

Ok, so let’s maybe start with the rule of thumb that advisors have used when looking at retirement drawdown plans for a while now.

Back in 1994 a financial advisor named William Bengen looked at the last 80 or so years of markets and retirement, did a bunch of math, and arrived at a concept we now call “The 4% rule.”

The basic idea of the 4% retirement withdrawal plan is that someone could safely withdraw 4% of their investment/savings portfolio each year and – assuming a 60/40 or 50/50 split of bonds/stocks in their portfolio – they would never run out of money.

This idea of withdrawing a certain percentage of your portfolio to fund your retirement is called the Safe Withdrawal Rate (SWR). The math behind this magic 4% figure means that if you have the nice round $1 Million investment portfolio that we all dream of, you could safely pull out $40,000 the first year, and then adjust for inflation and withdraw 4% plus inflation after that. (So if there was 2% inflation between year one and year two, you could now withdraw $40,800.)

Bengen, and another highly influential study took their rule and retroactively applied it to retirees from every single year from 1926 to 1994. They found that nearly 100% of the time (depending on what was in the investment portfolio) people could retire, and withdraw 4% of their portfolio for 30 years of retirement: and not run out of money.

In fact, over half of the time, if retirees followed the 4% rule, they not only didn’t run out of money, they finished life with more money than when they started retirement!

Keep in mind, these authors didn’t worry about OAS or CPP, or a workplace pension, or even the tax implications of different types of withdrawals. They were simply trying to come up with a useful rule of thumb for how much a person could safely withdraw from their retirement portfolio.

What the 4% Rule Means for your Magic Retirement Portfolio Number

If you can safely withdraw 4% of your portfolio to fund your retirement, then the simple math tells us that if you can accumulate 25x your annual retirement budget, you no longer have to work.

Here’s the breakdown:

  • Jane looks at her budget and realizes that once she retires she will have a lot less spending demands.  She carefully weighs the numbers and believes she’ll need $40,000 per year to quit her 9-to-5.
  • Consequently, Jane needs the magical “4% of her portfolio” to equal $40,000 per year.
  • For a 4% withdrawal to equal $40,000, Jane will need a $1,000,000 portfolio.
  • If Jane reassesses and realizes she needs $60,000 per year in retirement, Jane would need 25 times $60,000 (because 4% goes into 100% twenty-five times) which is $1.5 Million.
  • Jane might not need anywhere close to $1.5M if she intends to do a little part-time work in retirement, and is willing to use some math + research strategies to help herself out a bit when it comes to managing her nest egg!  But more on that later…

4% Safe Withdrawal Rate for Retirement: Potential Problems

Up until the 4% rule became a thing, when financial advisors were asked about safe withdrawal rates, the only thing they could really say is, “it depends.” Continue Reading…

How NOT to invest (Book Review)

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Amazon.ca

Special to Financial Independence Hub

 

Before reading Barry Ritholtz’s book How Not to Invest, I wondered if the “Not” in the title was a sign it would be filled with gimmicky ways of giving investment advice.

It isn’t.  Investing well is simple enough, but the world tries to push us towards many types of poor choices that lose us money.  The best advice is a list of the many things to avoid when investing.  This book gives readers the benefit of Ritholtz’s extensive experience with staying on the simple path to investing success.

The book is organized into four parts: Bad Ideas, Bad Numbers, Bad Behavior, and Good Advice.

Bad Ideas

Part of what makes it so easy to push investors toward bad ideas is that we believe secret ways to create wealth exist when, in fact, they don’t exist.  “We don’t like to admit it, but nobody knows anything about the future — not just you and me, but the so-called experts too.”

I’ve had the experience of getting people to agree that the future is unknown, and then they immediately ask what I think will happen with interest rates.  It’s hard to get people to really believe the future is unknown.  Ritholtz does an excellent job of going through some high-profile examples of the futility of forecasters.  Instead of searching for the right seer, he suggests having a “financial plan that is not dependent upon correctly guessing what will happen in the future.”  “Don’t predict what will happen, but rather, assess the range of possible outcomes — what could happen.”

So much of the information we see about investing is just noise.  Ian Cassel said “The maturation of every investor starts with absorbing almost everything and ends with filtering almost everything.”

It is freeing to admit we don’t know what will happen and to plan for a range of possible outcomes.  What too many people do is “Make predictions, then marry those forecasts.”  If they’re wrong, “This usually leads to catastrophic results.”

Bad Numbers

This part of the book starts with a good section on economic innumeracy that discusses denominator blindness, survivorship bias, mathematical models, and the fact that we respond better to anecdotes than data.

Part of what makes this book a pleasure to read is Ritholtz’s optimism.  Paul Volker once said “The only useful thing banks have invented in 20 years is the ATM,” but the author lists 20 useful financial innovations, including index funds, ETFs, low costs, fast trade clearing, and cash-sending apps.  The challenge for investors is to benefit from these innovations rather than lose money with them.

The author sees bull and bear markets as secular periods characterized by either high price-to-earnings (P/E) ratios or low P/E ratios.  I’m not sure how he thinks investors should use this information.  In my case, I use P/E levels to make modest formulaic adjustments to both my asset allocation and my expectations for future stock returns.

Sometimes people overestimate how much the news of the day will affect markets.  Some industries were devastated by Covid-19.  However, it turns out that these industries represent a small fraction of overall markets.  If in “mid-2020, the 30 most economically damaged industry categories were delisted, it would have shaved off just a few percentage points from the S&P 500.”

There is a winner-take-all tendency in many areas, including stocks.  “Just 1.3% of the public companies listed in the United States account for all the market gains during the last three decades.”  We can “find the best-performing stocks by buying them all” in an index fund.

“Simplicity beats complexity every time.  A portfolio of passive low-cost indexes should make up the core of your holdings.  If you want to do something more complicated, you need a compelling reason.”

Bad Behavior

“Bad behavior leads to bad investing outcomes.”  Ritholtz categorizes bad behaviour into ten areas, and he illustrates some of them in an amazing story about a billionaire family called the Belfers.  They lost money with Enron, Madoff, and then FTX!  “Has there ever been a greater, more unholy trifecta than this?”  Even billionaires make some terrible choices.

“If only we made better decisions, we would all be so much better off.”  If we could eliminate all investing mistakes for everyone, we might be better off on average, but there is a zero-sum aspect to investing mistakes.  Your loss is someone else’s gain.  The main overall benefit of eliminating all investing mistakes is that those employed exploiting such mistakes would move on to do something useful for society. Continue Reading…

Q&A with John De Goey

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John De Goey, courtesy MoneyShow

The following is a question-and-answer session conducted via email with advisor John De Goey following his recent talk at the MoneyShow in Toronto, which we reported here.  Some of the questions and answers also appeared in my recent MoneySense Retired Money column here.

Jon Chevreau, Findependence Hub:  How defensive do you think low-volatility ETFs (i.e., BMO’s, iShares, Harvest) are?

John De Goey: Let’s say the market pulls back by 25%. If you can handle that, then you don’t need a low-volatility ETF. In short, low-volatility products are more defensive than market  (cap)-weighted products, but it all depends on how investors react and behave when things go south.

Chevreau Q2.) Most of those are overweight utilities, consumer staples and healthcare stocks. Do you advocate that investors do this themselves with sector ETFs?

De Goey – I generally don’t recommend buying utilities as a stand-alone product/strategy. That said, if you already own cap-weighted products and want to be more conservative, it would likely be more tax effective to simply add utilities rather than sell cap-weighted products in order to buy low-vol products. Same net result, but less tax on the way.

Jon Chevreau, courtesy MoneySense

Chevreau Q3.)  If U.S. stocks are so richly priced, do you advocate owning a Value U.S. ETF to compensate, or simply sell down some U.S. or and add more International/Canada? Or other factor funds?

De Goey – I recommend getting out of the U.S. entirely. If you cannot do that then, at the very least, I’m worried that there’s an AI bubble much like what we saw with .com a quarter-century ago.

Chevreau Q4.) What range of asset allocation do you recommend for retirees, especially those who are middle-of-the-road and risk-averse?

De Goey: I think all portfolios should have alternatives. Pension plans like CPP, OMERS and HOOP all have over 33% in alternatives. But for MOR retail investors, I’d opt for something like 20% alternatives, 30% income, and 50% equity.

Chevreau Q5.)  Can investors and especially retirees rely on global Asset Allocation ETFs to keep them out of too many over-valued U.S. stocks?

De Goey: I wouldn’t use the word ‘rely.’ Such products will soften the blow, but right now the U.S. represents almost 2/3 of global stock market capitalization. So, if all your stocks were in a single global ETF or mutual fund with a cap-weighted mandate, you’d have massive exposure to a massively over-valued market.

Chevreau Q6.)  What about annuitizing a portion of an RRSP/RRIF? Continue Reading…