Longevity & Aging

No doubt about it: at some point we’re neither semi-retired, findependent or fully retired. We’re out there in a retirement community or retirement home, and maybe for a few years near the end of this incarnation, some time to reflect on it all in a nursing home. Our Longevity & Aging category features our own unique blog posts, as well as blog feeds from Mark Venning’s ChangeRangers.com and other experts.

Inflation in Retirement

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By Billy Kaderli, RetireEarlyLifestyle.com

Special to the Findependence Hub

First things first, what is inflation? Inflation is when too much money is competing for a finite number of goods. This causes a general increase in prices and a fall in the purchasing value of money.

The US Real-Estate market is a prime example, and we have all witnessed the rising home values. Translate this to food and energy, and this is the effect we are feeling today.

Current inflation numbers

Recent inflation numbers came in at 8.5% year-over-year. The producer price index (PPI) came in higher at 11.2% which means it is costing more for the producers to manufacture products.

These increases get passed on to you and me, the consumers, and we are going to be feeling these increases now and on into the future.

How can you protect yourselves in retirement?

Perhaps you are living on a fixed income such as Social Security. [or in Canada: CPP and Old Age Security.]  Your annual Social Security adjustment doesn’t keep up with grocery and fuel costs; thus, you are slipping backwards.

This is not a good position to be in.

One answer is to own equities. Continue Reading…

Investment fads and other destructive behaviours

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By Steve Lowrie
Special to the Findependence Hub

Chasing Investment Performance results in far more losers than winners

Would you like to improve your investment game?

Counterintuitively, you don’t necessarily need to master more fancy moves; it may be a more powerful play to simply reduce your biggest investment mistakes. It’s those false moves that usually cost you the most gained ground.

In particular, I’ve commented before on two common and costly behavioural mistakes, both of which stem from reacting to recent returns instead of patiently positioning your portfolio for future market growth.

  1. The first such blunder is to give in to a sense of gloom and doom, and sell out at low prices during down markets.
  2. On the flip side, many investors seem to love chasing after expensive trends in frothy markets. I’ve seen a lot of that behaviour lately, so let’s revisit why that typically doesn’t end well.

Fleeting Passions and Expensive Fashions

Admittedly, it’s tempting to chase investment fads when they are playing out in real time. Unfortunately, it’s only obvious in hindsight which lucky few will be long-run winners, and which of the far greater majority will end up as costly illusions, conjured up by an intoxicating brew of performance-chasing and FOMO (fear of missing out).

Here are four points to help you avoid following fads:

1.) Success stories abound. There is always a good story behind every hot investment trend. We humans are remarkable at devising new technologies, ground-breaking opportunities, and out-of-the-box ideas. A few of them pay off handsomely, especially for investors who manage to get in at the beginning of the run. However …

2.) By the time it’s in the popular press, it’s usually too late to profit on the news. Once a success story has gone mainstream, it’s too late to get in on its past exceptional performance. You end up buying high and hoping it will go even higher, despite the odds that it won’t.

A recent Canadian example was the full legalization of cannabis with huge amounts of fanfare on October 17, 2018. Trying to capture this trend, Horizons ETFs launched the Marijuana Life Sciences ETF (HMMJ) on April 4, 2017, holding a basket of North American stocks active in the marijuana business. From the initial $10/share price, the EFT skyrocketed to over $24 by September 2018. From there it declined to $22 by the October 17, 2018 legalization date, and then dropped further to $15 by the end of 2018. Currently, this ETF is trading just over $5. Its past performance is horrendous, –53% over the past 12 months, –32% for the past 3 years, and –5.63% per year since inception. So much for following what was garnering the most attention in the media!

3.) It’s easy to forget that there are a lot more market losers than winners. Think you can pick the ones with room to grow? Although markets in aggregate have delivered premium returns over time, those returns tend to come from a tiny minority of securities. For example, in a recent report on pursuing individual stock returns, JP Morgan looked at U.S. stock performance from 1980–2021. They found about 10% of stocks across all sectors proved to be “mega winners,” but 66% failed to outperform the Russell 3000 Index, and 42% delivered negative absolute returns. In sharing this and other data, Wall Street Journal columnist Jason Zweig observed:

“Winners like Walmart are vivid … Failures fade as if they were written in invisible ink — but they are much more common than successes.”

4.) Your investment attention is up for sale. Despite these points, Bay Street and Wall Street are always looking to capitalize on the next big investment trends. Trade brokers and product manufacturers are no fools. When they see opportunities to make easy money by selling hot hands, they’re happy to “help.” Whether you win or lose they can feast on fat commissions and tasty trading revenues.

Quacking Ducks

Who me, cynical? I’ve covered most of these points in my 2018 piece, Investing fads: Quack like a duck and you may get plucked. I described how there’s even a saying for these sorts of popular feeding frenzies: “When the ducks quack, feed them.” As one source described, “when investors want to buy something … that something is offered for sale. It doesn’t make any difference if Wall Street knows in its heart of hearts that that something (such as an IPO) is overpriced.” Continue Reading…

Rethinking the 4% Safe Withdrawal Rate

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By Fritz Gilbert, TheRetirementManifesto

Special to the Financial Independence Hub

The 4% safe withdrawal rule is a well-known “rule of thumb” for those planning for retirement.

One thing it has going for it is that it’s simple to apply.

If you have $1 Million, the 4% safe withdrawal rule says you can spend $40,000 (4% of $1M) in year one of retirement, increase your spending by the rate of inflation each year, and you’ll never run out of money.

Simple, indeed.

But, I’d argue that simplicity comes at a potentially very serious cost.  Like, potentially running out of money in retirement.

Today, I’ll present my argument against the 4% safe withdrawal rule given our current economic situation, and propose 3 modifications I’d recommend as you determine how much you can safely spend in retirement.

Rethinking the 4% Safe Withdrawal Rule

I read a lot of information on retirement planning, and lately, I’ve been seeing more content challenging the 4% safe withdrawal rule.  I agree with those concerns and felt a post outlining my position was warranted.

As a brief background, the 4% Safe Withdrawal Rule is based on the “Trinity Study,” which appeared in this original article by William Bergen in the February 1998 issue of the Journal of the American Association of Individual Investors.  For further background, here’s an article that Wade Pfau published on the study.  I’ll save you the details, you can study them for yourself at the links provided.

The conclusion, based on the study, is summarized below:

“Assuming a minimum requirement of 30 years of
portfolio longevity, a first-year withdrawal of 4 percent,
followed by inflation-adjusted withdrawals in
subsequent years, should be safe.”

My Concerns With The 4% Safe Withdrawal Rule

In short, some key factors about the study are relevant, especially as we “Rethink The 4% Safe Withdrawal Rule”

  • It’s based on historical market performance from 1926 – 1992.  

My Concern:  Relying on past performance to predict future returns can mislead the investor, especially given the unique valuations in today’s markets (more on that below).  This point is driven home by this recent Vanguard article that projects future returns based on current market valuations:

4% safe withdrawal rule assumptions

If you think the Vanguard outlook is depressing, check out this forecast from GMO as presented in this Wealth of Common Sense article titled “The Worst Stock and Bond Returns Ever”:

stock and bond forecast

  • Note the VG forecast is nominal (before inflation) whereas the GMO is real (after inflation).

Why Are Future Returns Expected to Be Below Average?

The biggest driver for the projected below-average returns is the high valuation in today’s equity market (particularly in the USA), and the fact that interest rate increases would negatively impact bond yield.  In my view the CAPE Ratio is one of the best indicators of market valuations.  Below is the current CAPE ratio as I write this post on November 16, 2021:

CAPE Ratio

The reason current valuations matter is the fact that they’re highly correlated to future returns, as indicated from this concerning chart that I saw last weekend on cupthecrapinvesting:

CAPE ratio correlation to future returns

Based on today’s CAPE ratio, the historical correlation suggests the forward total returns over the next 10 years could be close to 0%.  Scary stuff for someone who’s planning on equity growth to pay for their retirement expenses.  Scary stuff for someone who’s committed to the 4% safe withdrawal rule.

In addition to the bearish outlook for US equities, bonds could be negatively impacted if when interest rates increase.  To get a sense of how low the US 10-year Treasury yields are now compared to long-term averages, below is the current chart of 10-year yields from CNBC:

4% safe withdrawal rate rule - bond impact

Bond prices are inversely related to interest rates, so as rates go up, bond prices go down.  So, if you’re holding 60% stocks and 40% bonds, it’s possible that you could see decreases in both asset classes.

As cited in this Marketwatch article, The Fed has begun signaling that interest rates are “on the table” for 2022, especially if the current bout of inflation proves to be less than a transitory event (for the record, I suspect it will be more than transitory, but what do I know?).

This brings us to the next concern …

My Other Big Concern With The 4% Safe Withdrawal Rule:

In addition to my concern above (the risk of an extended period of below-average market returns), I don’t like the part of the rule which states you should “increase your spending the following year based on the rate of inflation.”  As most of you know, inflation has been on a bit of a tear lately, as demonstrated in this chart from usinflationcalculator.com:

Based on the 4% Safe Withdrawal Rule, you would be increasing spending next year based on the higher inflation rate, which could well be the same time you’re seeing lower than expected returns.

I don’t know about you, but that doesn’t sit well with me.

Suggested Modifications to the 4% Safe Withdrawal Rule

It wouldn’t be fair to cite my concerns with the 4% Safe Withdrawal Rule without suggesting an alternative. Following are the 3 modifications I’d suggest for your consideration.  I’m applying all 3 of these modifications in our personal retirement strategy. Continue Reading…

Promoting the Health of Older Adults: a worthy read for all

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By Mark Venning, changerangers.com

Special to the Financial Independence Hub

As an everyday person taking a fast read of the title of the new book – Promoting the Health of Older Adults: The Canadian Experience – you wouldn’t exactly get the sense of what to be surprised by or expect what content would be covered within. In the first place, unfortunately, it’s not likely that this book will make it into the hands of everyday people any time soon.

You might ask, what are we promoting, what’s so specific for older adults – eat a nutritional diet of foods, exercise to stay fit, keep your brain active and get your proper sleep? Isn’t that what anyone through their life course should be doing? Yes, maybe. But that’s not at all exactly what you will get here.

Appreciating focus, as the writers in the preface state, the book’s main purpose is for knowledge building on issues related to older adults and their care, primarily for target audiences such as, “undergraduate and graduate students in gerontology and aging, health promotion… and other fields….” and the five groups identified include, educators, learners, policy makers, researchers and practitioners and leaders working with older adults in civic society organizations.

While that may sound too academic, after reading this book my belief is that the general public of everyday people, older adults and others younger, will also benefit greatly from an education presented here on this important subject. If you do flip through this 600-plus page tome, you might think of it at first as “insider dialogue” on health promotion; but not so fast, don’t put the book down.

Serving to heighten knowledge & awareness to engage in social health dialogue.

Choose as many words as you want; for me, Promoting the Health of Older Adults is a social health dialogue, inclusive for all Canadians – interconnected subject areas, holistic, comprehensive, diverse. The arrival of this book is timely, to promote conversation with friends and family, considering our collective journey through the COVID world to date has heightened our awareness of the workings of our own health and our social and healthcare systems.

Briefly, on the structure of this book; it certainly is more of a study text book on over thirty topic areas in seven well laid out parts. However nothing I’ve read talks over the heads of readers, and if facilitated well in a real time group discussion format, there is a set of critical thinking questions at the end of each chapter that would further serve to heighten knowledge and awareness of readers, enough to make you want to be a more engaged in this social health dialogue. Continue Reading…

When did Retirement Income Planning get so complicated?

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Photo by Gustavo Fring from Pexels

By Ian Moyer

(Sponsor Content)

Retirement planning used to be easy: you simply applied for your government benefits and your company pension at age 65. So, when did it get so complicated?

Things started to change in 2007 when pension splitting came into effect. While we did have Canada Pension Plan (CPP) sharing before that, not too many people took advantage of it. Then Tax Free Savings Accounts (TFSA) came along in 2009. At first you could only deposit small amounts into your TFSA, but in 2015 the contribution limit went to $10,000 (it’s since been reduced to $6,000 per year). Accounts that had been opened in 2009 were building in value, and the market was rebounding from the 2008 downturn. Registered Retirement Savings Plan (RRSP) dollars were now competing with TFSA dollars and people had to choose where they were going to put their retirement money.

In 2015 or 2016 financial planners suddenly started paying attention to how all of these assets (including income properties) were interconnected. There were articles about downsizing, succession planning, and selling the family cottage. This information got people thinking about their different sources of retirement income and which funds they should draw down first.

Of course, there is more to consider, such as the Old Age Security (OAS) clawback. When, where, and how much could this affect your retirement planning? People selling their business are often surprised that their OAS is clawed back in the year they sell the business, even if they’re eligible for the capital gains exemption. Not to mention what you need to do to leave some money behind for your loved ones. Even with all this planning, the fact that we pay so much tax when we die is never discussed, although the final tax bill always seems to be the elephant in the room. We just ignore it, and hope it’ll go away.

Income Tax doesn’t disappear at 65

Unfortunately, income tax doesn’t disappear at age 65, and you need time to plan ahead so you can reduce the amount of tax you pay in retirement. A good way to do this is to use a specialized software that takes all your sources of income and figures out the best strategy to get the most out of your retirement funds. Continue Reading…