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.

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

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Retired Money: Reflections on turning 65 and transitioning into Retirement

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Well, I’m officially “old” if you go by the federal Government’s eligibility date for receiving Old Age Security (OAS) benefits. The traditional retirement age has long been age 65, a milestone I reached on April 6th. As I have previously written, I had a hockey tournament to play that weekend so the party my wife and I host every 5 years or so was postponed to late May, by which time we calculated my first OAS cheque should have been deposited into our joint account. (There appears to be roughly a six-week gap between turning 65 and the first payment, even if you set up the process a year ago: Ottawa invites you to start the OAS process rolling when you turn 65. See the “Related Articles” links at the bottom of this blog for some articles on this.)

In any case, my latest MoneySense Retired Money column goes into my (mixed) feelings about reaching this milestone. You can retrieve the full column by clicking on the highlighted headline: I’ve just turned 65: Here’s how I’m transitioning into Retirement.

Regular readers of this site or my books will know I see Retirement as a gradual process rather than a one-time sudden event more likely to generate what Mike Drak and I call “Sudden Retirement Syndrome.” My contraction for Financial Independence (Findependence, coined in the title of my financial novel, Findependence Day) is not meant to be synonymous with full-stop Retirement. Shortly after I left my last full-time journalism job four years ago (almost to the day!), I was happy to co-author a book with Mike and go with his chosen title, Victory Lap Retirement.

Four years into my “Victory Lap”

So I’ve been on my Victory Lap for four years now. That doesn’t mean 65 isn’t a significant milestone: as it tacks on another (albeit modest) stream of income, it means I can slow down a bit, if it’s possible to slow down when you’re running a website like this with daily content.

I described in an earlier piece in the FP how I am still working “some semblance” of a 40-hour week, although a good third of that time consists of errands or activities like Yoga or going to the gym, all the subject of the Younger Next Year 2018 Facebook group that a group of us launched late in 2017. Younger Next Year is a New York Times bestselling book that has been around for years but didn’t come to my attention until late in 2017 when regular Hub contributor Doug Dahmer gave me a copy.

The Hub’s subsequent review in the last post of the year led to the creation of the Facebook group, with the lead taken by Vicki Peuckert Cook, who is based in Rochester, but who I hope to meet this weekend for the infamous OAS party at our home in Toronto. For more on the genesis of the group, read member Fritz Gilbert’s blog republished on the Hub late in March: Do you want to be younger in 2018 than in 2017?

The group has already attracted more than 450 members on both sides of the border, including the co-author of the book, Chris Crowley, and his coauthor on Thinner This Year, Jennifer Sacheck.

Certainly the 6-day a week regime recommended in Younger Next Year is more doable if you’re retired or semi-retired/Findependent. Most of the Facebook group appears to be in that category, although there are a few dedicated younger folk still juggling full-time careers with raising a family and doing what they can on the exercise/nutrition front.

Continue Reading…