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.

6 steps to avoiding a bear market near Retirement

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By Fritz Gilbert, TheRetirementManifesto.com

Special to the Financial Independence Hub

Did you know a looming Bear Market Crisis is approaching?!

I just read it on the internet, so it’s got to be true!

To make matters worse, I just retired a month ago.

Uh Oh!  (Am I screwed?)

Today, some reality about Bear Markets, along with 6 steps to consider as you structure your retirement portfolio.

A Looming Bear Market

Ok, I’m having a bit of fun with the “read it on the internet” line, but the reality is that a Bear Market WILL happen. I’m not being prophetic, just stating the facts.  Since before the days of the tulip mania in 1637, bear markets have always been will us, and they always will.  We’ve benefited from a very nice bull run. We’re being naive if we think that it will never end.

Since 1900, we’ve had 32 Bear Markets, defined as a correction of 20% or more.  Do the math, and that averages out to a Bear Market every 3.7 years.  The average bear market lasts 367 days (the longest was 34 months!). Here’s what they look like graphically:

The Looming Bear Market Will Drive A Retirement Crisis

I actually did read an article on the internet about the looming bear market crisis.  In “The Next Bear Market In Stocks Will Drive A Retirement Crisis,“ the author states:

“A recession could decimate even substantial retirement portfolios.”

Further, the author goes on to say that Social Security and Medicare, and the resulting increase in taxes, increase in eligibility age and reduction in benefits “would be a disaster” for those dependent on the safety net.

Add to that the Voices Of Worry over the global debt pile up and the underfunded status of many state & local pension funds and things could get really, really ugly.

Maybe I shouldn’t have retired early. 

Too late now, I guess I’d better get to work on building a Bear Market Crisis Prevention Plan.

The Looming Bear Market Crisis

We all know a Bear Market is coming. It’s been an increasing theme in the blogosphere, with even the esteemed Financial Samurai taking risk off the table. America’s wealthy are moving to cash.  Ben Carlson of A Wealth of Common Sense has 36 Obvious Investment Truths to remind folks that you should protect yourself.

I’m not a panic-driven investor, screaming a scare tactic headline to drive traffic (tho, if you’re reading this, I guess it worked, right?).  Rather, I’m reminding folks of the reality of how the markets work and encourage you to think about it as you develop your retirement portfolio strategy.  Yes, stocks have historically outperformed over the long-term, and will likely continue to do the same.  Just recognize that the road can be bumpy, and plan accordingly to avoid getting bitten by a bear when you can least afford it.

A Bear Market Crisis Contingency Plan

The reality is that bear markets have always been with us, and always will.  Unfortunately, we never know when that snake is going to strike, so it’s best to wear snakeproof boots along the path of retirement.  Following are some steps I’m taking, as an early retiree, to defend our portfolio against the risk of a bear attack.  View them as suggestions, and pick and choose as appropriate for your situation.

6 Steps To Bear Market Protection Continue Reading…

Is typical retirement advice good? – Testing popular Retirement rules of thumb

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By Ed Rempel, CMA, Fee-for-Service Planner

Special to the Financial Independence Hub 

You want to retire soon. How should you set up your retirement income?

You talk with some friends, read about it on the internet, and talk with a financial advisor. Are you actually getting good advice?

When it comes to retirement income, most financial advisors rely on a few rules of thumb handed down from one generation of advisors to the next. The rules appear to be common sense and are usually accepted without question.

Do these rules of thumb actually work?

Before giving clients this advice, I tested them with 150 years’ history of stocks, bonds and inflation. I wanted to see if these rules were reliable for a typical 30-year retirement. (The average retirement age is 62. In 50% of couples that reach their 60s, one of them makes it to age 92.) 

These five rules are the “conventional wisdom” – the advice typically given to seniors:

  1. “4% Rule”: You can safely withdraw 4% of your investments and increase it by inflation for the rest of your life. For example, $40,000 per year from a $1 million portfolio.
  2. “Age Rule”: Your age is the percentage of bonds you should have. For example, at age 70, you should have 70% in bonds and 30% in stocks.
  3. “Sequence of returns”: Invest conservatively because you can’t afford to take a loss. You can run out of money because of the “sequence of returns.” You can’t recover from investment losses early in your retirement.
  4. Don’t touch your principal. Try to live off the interest.
  5. Cash buffer: Keep cash equal to 2 years’ income to draw on when your investments are down.

The results: NONE of these rules of thumb are reliable, based on history.

Let’s look at each to understand this.

1.) “4% Rule”: Can you safely withdraw 4% of your investments plus inflation for the rest of your life?

Based on history, the “4% Rule” was safe for equity-focused investors, but not for most seniors.

In the results shown in the graphic at the top of this blog, the blue line is the “4% Rule,” showing how often in the last 150 years a 4% withdrawal plus inflation provided a reliable income for 30 years.

The “4% Rule” only works with at least 50% in stocks.

The “4% Rule” worked only if you invest with a minimum of 50% in stocks. Even safer is 70-100% in stocks. It is best to avoid a success rate below 95% or 97%. They mean a 1 in 20 or 1 in 30 chance of running out of money during your retirement.

Most seniors invest more conservatively than this and the 4% Rule failed miserably for them.

A “3% Rule” has been reliable in history, but means you only get $30,000 per year plus inflation from a $1 million portfolio, instead of $40,000 per year.

These results are counter-intuitive. The more you invest in stocks, the safer your retirement income would have been in history.

To understand this, it is important to understand that stocks are risky short-term, but reliable long-term. Bonds are reliable short-term, but risky long-term. Why? Bonds get killed by inflation or rising interest rates. If either happens during your retirement, you can easily run out of money with bonds.

The chart below illustrates this clearly. It shows the standard deviation (measure of risk) of stocks, bonds and cash over various time periods in the last 200 years. Note that stocks are much riskier short-term, but actually lower risk for periods of time longer than 20 years.

Stocks are more reliable after inflation than bonds after 20 years.

Ed’s advice: Replace the “4% Rule” with “2.5% +.2% for every 10% in stocks Rule.”  For example, with 10% in stocks, use a “2.7% Rule.” If you invest 70% or more in stocks, then the “4% Rule is safe.

2.) “Age Rule”: Your age is the percentage of bonds you should have. For example, at age 70, you should have 70% in bonds and 30% in stocks.

Continue Reading…

FP: A look at three retirement income planning software packages

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My latest Financial Post column looks at a few retirement income planning software packages that help would-be retirees and semi-retirees plan how to start drawing down from various income sources: Click on the highlighted text to retrieve the full article: How you draw down your retirement savings could save you thousands: this program proves it.

There may be as many as 26 distinct sources of income a retired couple may encounter, estimates Ian Moyer, a 40-year veteran of the financial industry and creator of the Cascades program described in the article.

When he started to plan for his own decumulation adventure, five years ago, he felt there was very little planning software out there that was both comprehensive and easy to use. So, he hired a computer programmer and created his own package, now called Cascades.

While the main focus of the FP article is on Cascades, (available to financial advisors for $1,000 a year; do it yourself investors can negotiate a price directly), the article also references a couple of other programs we have looked at previously here on the Hub: Doug Dahmer’s Retirement Navigator and BetterMoneyChoices.com, the latter currently nearing the end of beta testing.

Dahmer has been writing guest blogs on decumulation here at the Hub almost since this site’s founding in 2014. See for example his most recent one, or the similar articles flagged at the bottom: Top 10 Rules for Successful Retirement Income Planning.

Dahmer says he’s pleased that others are waking up to the need for tax planning in the drawdown years: “Cascades provides a very good, easy-to-use introduction to these concepts.”

Planning for peaks and valleys in spending

Retirement Navigator’s Doug Dahmer

However, Dahmer would like an approach that doesn’t assume yearly spending remains relatively static: his Better Money Choices(available on line for $108 a year) allows for the “peaks and valleys” of spending as retirees pass through their Go-go to their slow-go and finally their “no-go” years.  Most retirees have to plan for sporadic large purchases like renovations or replacement of roofs or furnaces, plus of course vacations with widely varying price tags. Each spending peak represents a tax challenge, while the valleys are where the tax planning opportunities exist. Dahmer likens Better Money Choices to a gym monthly membership and Retirement Navigator to a personal trainer.

Personally, I found going through both firm’s programs a fascinating exercise, very much like putting together a jig saw puzzle. For me, Better Money Choices helps you visualize the final picture you’re trying to assemble, showing how much money you’ll need and when you’ll need it. Cascades provides vivid yearly snapshots of your year-by-year progress in putting the pieces together.

Accidental Death Insurance: What you must know before buying it

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By Lorne Marr, CFP
Special to the Financial Independence Hub

Some insurance products are quite straight-forward (e.g. term life insurance), but others were created when insurance companies saw an opportunity in the market to increase their sales while reducing their own risk of needing to pay the claims. Accidental death insurance (often called accidental death and dismemberment) is one of these products.

Think of this product this way:

“If you look for a simple explanation, imagine all life insurance products to be cars. Your accidental death insurance is a car that you can drive only 30 minutes a day and only in one particular neighbourhood …”

Now, let’s understand this product better …

What is accidental death insurance?

Accidental death insurance is a life insurance policy (or an addition to an existing policy) that pays a claim only in particular cases: when the cause of death is an accident. In other cases, this insurance will pay nothing.

An important statistic to know is that only ~5 per cent of all deaths in Canada originate from accidents. That means that, in 95 per cent of cases, the policyholder will not be paid.

What is accidental death and dismemberment insurance?

Accidental death and dismemberment insurance is an insurance policy that pays a claim only if a death or a dismemberment (such as the loss of a particular body part, like a leg, hand, finger, etc.) occurred due to an accident. Typically, an accidental death and dismemberment insurance contract will define what amount will be paid in case of death and certain different types of dismemberment. Claim coverages associated with heavier dismemberments (e.g. a lost leg) are normally higher than claim coverages associated with smaller dismemberments (e.g. loss of a finger).

Is accidental death insurance worth it?

The quick answer is that, in most cases, it is not worth it. Continue Reading…

The reverse mortgage pitfalls you need to know about

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Canadian seniors may borrow on their home equity in the form of a reverse mortgage — but should they?

Money lenders are always coming up with innovative ways for you to borrow money. One such innovation is the reverse mortgage. Interest in reverse mortgages is rising with an aging population and low interest rates on savings accounts. As a result, we hear from our Inner Circle members periodically asking whether a reverse mortgage would be a good way to tap into the equity they have built up in their homes.

Reverse mortgages in Canada let homeowners who are 55 years of age or older borrow on their home equity—the minimum age was 60 until a year ago. (For married couples, both spouses must be above age 55). Typically, the loan-to-value ratio is up to 40%. But depending on their age and property, some borrowers may qualify for a loan of up to 55% of the value of their home. The loan and accumulated interest are repaid only after the house is sold or from the proceeds of the homeowner’s estate.

Reverse mortgages are best seen as loans of last resort

Continue Reading…