Inflation

Inflation

Do you need Two Million Dollars to Retire?

Billy and Akaisha on the Pacific Coast of Mexico; RetireEarlyLifestyle.com

By Billy and Akaisha Kaderli

(Special to Financial Independence Hub)

We like to keep informed about the topic of retirement from the perspective of money managers and those in the financial fields.

You might have read some of these articles also, you know, the ones that say Americans have not saved enough to retire.

Many of these pieces proclaim that you must save enough in your investments to throw off 80% of your current annual salary so that you can afford a comfortable life away from a job. Lots of them will say that you need US$2 million in investments (or more) and woe to the person who thinks they can do it on less.

Approximately 10% of the households in the U.S. have a net worth of one million dollars or more. What are the other 90% supposed to do? Not retire? What kind of common sense does this make?  Expecting the regular “Joe”to meet this $2 million dollar mark is not realistic.

As you know, we have over three decades of financial independence behind us. And while everyone’s idea of a perfect lifestyle sans paycheck is different, we can tell you that for these 33-years, we have kept our annual spending around $30,000.

The secret: Living within your means

In all of our years of retirement and travel we cannot recall one retiree who regrets their decision to retire. In fact, most have told us that they wished they had done it sooner.

The Society of Actuaries (SOA) recently conducted 62 in-depth interviews of retired individuals across both the U.S. and Canada. These people were not wealthy and had done little to no financial planning. But the vast majority of them shared that they had adapted to their situation and live within their means. Translation: they have adjusted their spending to the amount of money they have coming in every month.

So basically, it’s really that simple and this is why we say if you want to know about retirement, Go to the Source.

It doesn’t have to be complicated

In our books and in our articles about finance, we say over and over that there are four categories of highest spending in any household. We personally have made adjustments in all four of these categories, and have therefore reaped the benefits of having done so. We discuss these four categories in more depth below.

The financial guys and gals will have you tap dance all over the place with investment products, and a certain financial goal you must achieve. They will press upon you the seriousness of the decision to leave your job for a couple of decades of jobless living. We say it doesn’t really have to be that complicated, but it’s very important to pay attention to these four categories.

Listen up

Housing is THE most expensive category for you to manage. It’s not just the house itself, it’s the maintenance, the property taxes, the insurance, and any updating you might want to do to a place where you are going to be living for years down the road.

If you want to rebuild that boat dock to the lake where your boat is parked during the summer, that takes money. If you are tired of the style of faucets, sinks, tile and tub areas of your bathroom and want to upgrade, that is a large expense. Now that you are retired and want a more modern kitchen, more counter space, better lighting, prettier cabinet covers – Ka-Ching! You are hearing the cash register tallying up the cost.

If you have a hot tub, an extensive garden, or if you want to build a deck to connect the house to the garden, or put in a Koi pond … Well, you get the idea.

I understand that for some people, their home is their castle, and those homes are gorgeous and a comfortable place to stay. All we are suggesting is that homes will never say no to having money poured into them.

If you want to travel or to snow bird part time, then you will find yourself paying twice for housing – the one you have left in your first location, and the hotel or the vacation home in which you will spend part of the year.

If you are not vigilant, this one category will suck the life out of your retirement. We just want you to know that you have a choice.

Downsizing in retirement is not a bad thing. Relocating to a state or country with less taxation is a smart move. You could move to an Active Adult Community where you could choose to own the land or lease it. Here a variety of social activities are offered and the maintenance of your front yard is taken care of in your lifestyle fees.

When you travel, you could choose to house sit. Or take advantage of better pricing for apartments or hotels that rent for the month and include utilities, WiFi, and a maid. You could try AirBnB for less than a hotel room, and live like a local instead of a tourist.

Do you know how much your home (including the taxes, insurance and utilities) costs you per day? It is a figure that might startle you.

Transportation is the second highest category of expense. Now we realize that especially in the States, it is a bit more challenging to wrap your mind around the idea of not owning a car, or just having one for your household instead of three.

According to the latest AAA’s report on car ownership in 2023, it costs an average of $12,182 every year — $1,015.17 every month — to drive for five years at 15,000 miles per year.

So then, in the category of transportation, if you decide you want to fly to an island for a vacation, you must add in the cost of the flight… and any boat trips you might take, and any taxis from the airport to your hotel, and the price of a car rental for the week or two that you will be vacationing.

It all adds up and it’s all a part of this category. Continue Reading…

Happy New Year … and a few links on inflation indexing

Deposit Photos

Hoping readers have a pleasant and profitable 2024. Retirees should be cheered by the fact CPP and OAS payments rise 4.7% as of today  as explained here.

And of course, as of today, you can add another $7,000 to your Tax-free Savings Accounts or TFSAs.

And there’s other inflation-related good news on tax brackets, the OAS clawback threshold and contribution limits on other tax-sheltered retirement plans, as outlined in my last MoneySense Retired Money column, which you can find here.

The Hub will resume its regular blog scheduling this time tomorrow. In the meantime, time to make that TFSA contribution, even if you can’t actually invest it until markets re-open Tuesday.

Stocks for the Long Run: Review of 6th edition

Amazon.ca

By Michael J. Wiener

Special to Financial Independence Hub

Jeremy Siegel recently wrote, with Jeremy Schwartz, the sixth edition of his popular book, Stocks for the long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies

I read the fifth edition nearly a decade ago, and because the book is good enough to reread, this sixth edition gave me the perfect opportunity to read it again.

I won’t repeat comments from my first review.  I’ll stick to material that either I chose not to comment on earlier, or is new in this edition.

Bonds and Inflation

“Yale economist Irving Fisher” has had a “long-held belief that bonds were overrated as safe investments in a world with uncertain inflation.”  Investors learned this lesson the hard way recently as interest rates spiked at a time when long-term bonds paid ultra-low returns.  This created double-digit losses in bond investments, despite the perception that bonds are safe.  Siegel adds “because of the uncertainty of inflation, bonds can be quite risky for long-term investors.”

The lesson here is that inflation-protected bonds offer lower risk, and long-term bonds are riskier than short-term bonds.

Mean Reversion

While stock returns look like a random walk in the short term, Figure 3.2 in the book shows that the long-term volatility of stocks and bonds refutes the random-walk hypothesis.  Over two or three decades, stocks are less risky than the random walk hypothesis would predict, and bonds are riskier.

Professors Robert Stombaugh and Luboš Pástor disagree with this conclusion, claiming that factors such as parameter and model uncertainty make stocks look riskier a priori than they look ex post.  Siegel disagrees with “their analysis because they assume there is a certain, after inflation (i.e., real) risk-free financial instrument that investors can buy to guarantee purchasing power for any date in the future.”  Siegel says that existing securities based on the Consumer Price Index (CPI) have flaws.  CPI is an imperfect measure of inflation, and there is the possibility that future governments will manipulate CPI. Continue Reading…

The Revival of the Balanced Portfolio

Photo via BMO ETFs: AI generated by Pixlr

By Alfred Lee, Director, BMO ETFs

(Sponsor Blog)

The 60/40 portfolio has been long considered the prototypical balanced portfolio. This strategy consists of the portfolio investing 60% of its capital to equities and the remaining allocation of 40% in fixed income.

The two segments in the portfolio each have its unique purpose: equities have provided growth and fixed income has historically provided stability and income. When combined, it allowed a portfolio to have stable growth, while generating steady income.

In the last decade, however, the 60/40 portfolio has been challenged on two fronts. The first has been due to the lack of yield available in the bond market, as interest rates have grinded to all-time lows. As a result, many looked to the equity market to generate higher dividends in order to make up for the yield shortfall left by fixed income.

The second shortcoming of the 60/40 portfolio has been the higher correlation between bonds and equities experienced in recent years, which has limited the ability for balanced portfolios to minimize volatility.

However, the resurgence of bond yields in the recent central bank tightening cycle has breathed new life into the 60/40 portfolio. Suddenly, bonds are generating yields not seen since the pre-Great Financial Crisis era. A higher sustained interest rate environment also means a slower growth environment; that means equity risk premiums (the expected excess returns, needed to compensate investors to take on additional risk above risk-free assets) will be lower. This means fixed income may look more attractive than equities on a risk-adjusted basis, which may mean more investors may allocate to bonds in the coming years. Fixed income as a result, will play a crucial role in building portfolios going forward and its resurgence has revived the balanced portfolio.

Investors can efficiently access balanced portfolios through one-ticket asset allocation ETFs. These solutions are based on various risk profiles. In addition to the asset allocation ETFs, we also have various all-in-one ETFs that are built to generate additional distribution yield for income/dividend-oriented investors. Investors in these portfolios only pay the overall management fee and not the fees to the underlying ETFs.

How to use All-in-One ETFs  

  • Standalone investment: All-in-one ETFs are designed by investment professionals and regularly rebalanced. Given these ETFs hold various underlying equity and fixed income ETFs, they are well diversified, and investors can regularly contribute to them over time. Continue Reading…

Retired Money: Some upsides of inflation for retirees

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My latest MoneySense Retired Money column looks at one unexpected upside of inflation; the government’s indexing to inflation of tax brackets, retirement savings limits and OAS thresholds. You can find the full column by clicking on the link here: Inflation a scourge for retirees? Ottawa’s silver lining(s)

TFSA room rises to $7,000

Fans of the popular Tax-free Savings Account (TFSA) will experience this as early as Jan. 1, 2024, when the annual maximum contribution room rises to $7,000, up from $6,500 in 2023. As of January 2024, someone who has never before contributed to a TFSA now has cumulative contribution room of $95,000.

In November Kyle Prevost’s weekly Making Sense of the Markets column included an item titled Make inflation work for you.  “We shouldn’t ignore or discount the more advantageous aspects of inflation, such as increased government benefits and more contribution  room in our RRSPs and TFSAs.”

Prevost linked to a spreadsheet posted on X (formerly Twitter) by financial advisor Aaron Hector, posted late in October, after the CPI announcement that Ottawa’s official inflation indexing rate for 2024 would be a sizeable 4.7%. While below 2023’s 6.3% indexation rate, it’s well above 2022’s 2.4% and 2021’s 1%.

Also quoted in the MoneySense column is Matthew Ardrey, wealth advisor with Toronto-based TriDelta Financial. “One of the main benefits is paying less taxes.” Income tax brackets increase with inflation each year. For example, in 2021 the lowest tax bracket in Ontario ended at $45,142 of income. “Starting in 2024, this lowest tax bracket now ends at $51,446. This is a 14% increase over just a few years.” Continue Reading…